Carrier Global Corp Stock

Very good. My name is Joe Kistler with Morgan Stanley. Joined today by Dave Gitlin, Patrick Goris, CEO, CFO of Carrier. Before we begin, a quick disclosure. If you have questions, please see the MS research disclosure website, www.morganstanley.com/researchdisclosures. If you have any specific questions, please feel free to reach out to your MS representative.

Dave, Patrick, as always, thank you guys for being here. We're grateful to have you. Dave, I'll kick it off to you to get us started.

Well, Joe, thank you so much. Thanks to Morgan Stanley for hosting us. Let me just start by saying that I have never felt more confident in our company's growth trajectory. We have record backlogs in our long-cycle businesses. We continue to drive double-digit aftermarket growth, and our resi and light commercial businesses in the Americas and Europe are rebounding. That combination sets us up very well.

Let me start with commercial HVAC. We are clearly winning more than our fair share. Our global CHVAC orders in the first half were up over 50% with exceptional growth in data center orders leading to total company record backlogs of about $8 billion, which for us, when we talk backlog, that excludes minimum volume commitments without POs.

We expect order intake to again be very strong here in Q3. Our CHVAC business is night and day versus when we spun. We invested significantly in our product portfolio to drive differentiation and win, and we are seeing that in the results.

Let me give you an example of differentiation. We recently committed to a hyperscaler to achieve specs for a new 3-megawatt air cooled chiller that exceeded the capabilities of our competitors. Three weeks ago, this customer witnessed the first-of-kind test for the state-of-the-art product. We passed with flying colors, meeting or exceeding all of the technical requirements, including chiller restart time and operating at full capacity at higher ambient temperatures, all contributing to our record backlog levels and expanded pipeline.

In addition to product differentiation, we continue to make great progress on QuantumLeap system offering. Our controls business continues to outperform and help us differentiate at a systems level. We have added a significant number of skilled technicians to our field network and our performance and tenacity to please our customers with great delivery, quality and responsiveness has been differentiating.

Given the very strong backlog, we are continuing to add capacity. We previously announced that we are building a new site in India, and we plan to announce a new site here in the United States in the next coming weeks, all to support customer demand in 2027 and beyond. We are expanding capacity not just for data centers, but also to support other key verticals such as high-tech manufacturing, renewable energy, higher education, health care, K-12 and infrastructure. And we like our balance between commercial and resi.

In the Americas, for example, we expect sales and commercial, in our commercial business to exceed our resi business just in the next couple of years. On the resi and light commercial side, our businesses here in the Americas has been recovering faster than we planned with now both expected to be up high single digits this year.

In Europe, the combination of very strong demand for heat pumps, air conditioning and system solutions, along with overall market starting to rebound towards traditional average levels has positioned us for this very strong growth that we expected when we purchased Viessmann.

Turning to the near term. We said on our last earnings call that we expect Q3 sales to be about $6 billion and adjusted EPS to be about $0.75. We expect to come in a bit higher on sales and we have -- as we have been working to balance sales between Q3 and Q4 to derisk Q4 while we remain on track for that $0.75.

So I remain very grateful to our team. We continue to control the controllables and position ourselves for very strong growth over these coming years. So Joe, with that, Patrick and I are happy to get into the questions.

Terrific. Thank you, Dave. Why don't we start on the data center topic. Outlook for the year is roughly $2 billion. Of that, $1.5 billion is sort of in the second half. Talk a little bit about what gives you confidence to deliver that volume in the back half of the year, especially given the puts and takes of project starts and stops and delays that are happening in that entire ecosystem.

Yes. The good news is it's fully in our control. We have the coverage -- we've derisked on the technical side because we fundamentally passed the key tests that we have to pass that are witnessed by the customers. I will say that usually, when you build your first units, it's hard to dual source or multisource the components until you kind of get past that first build.

So what we're doing in the process to derisk right now is we have started -- in some cases, there are some components where we'll have 4 sources. We're trying to dual source all of the key components. We're working on different stocking strategies in terms of parts where we pull inventory to have it when we need it. So we've gone at great length to make sure that we have the capacity in our lines.

We have fully trained technicians for every shift, those are all fine. We will not achieve the results because of our factories. We are very well positioned there. The thing we watch every day is supply chain challenges, but we have come a really long way. And when we look at our lines of balance from the suppliers, we look at where we stand quarter-to-date and what's in front of us, we feel very confident that we're going to achieve the $1.5 billion.

And look, anyone that's been through a ramp in operations, on any given Sunday, you wake up to a surprise from a supplier. So it's not a layup, but we're tracking to our commitments, and we feel good about the $1.5 billion in the second half.

And coming off of very meaningful volume in the second half of this year, how do you think about '27 and beyond?

Look, if we do $1.5 billion or once we do $1.5 billion in the second half of this year, you would assume that the minimum for next year between the pipeline that we have, the coverage that we already have for next year, the backlog that we have, that would be a minimum of $3 billion.

Obviously, when you look at the fact that we have built up a fair amount of capacity here in the Americas just over these last couple of years, we're going to announce this new site in either Texas or Alabama in the next few weeks. That new site doubles the capacity that we already have.

So you would think that we would be able to do at least 3, and we wouldn't be building the new site if we didn't have very strong pipeline and coverage. So we feel good about the growth for next year. As we get into the end of this year, early next year, we'll be more specific on that number.

Can you talk a little bit about your data center customer mix? Obviously, some people have real concentration with the hyperscalers. Some people have more diversification. How do you think about it across the carrier ecosystem? Do you see any risk to long-term demand just based on your customer mix today?

You can think about our data center business, first of all, it's about 70%, 80% or so is in the Americas. And of our business, it's about 50-50 hypers and colos. So we have kind of a nice mix there.

The other mix that we're driving is non-data center wins as well because we know that the data center business has been phenomenal. This year, we'll probably on the non-data center business, grow low single digits, but we've constrained ourselves. What we've been very purposeful about is as we build the new site and the existing sites we have, every single line, whether it's an air cooler or water cooled chiller, every line is going to be mixed model, so we can flow data center and nondata center product through those lines.

The other thing is we built for fungibility. This hyperscaler that we've just signed a significant deal with, the product that we developed, we developed in a fraction of the time. Sometimes it would have taken 18 months. We've done it in closer to 6. And one of the reasons is we built these in modular concepts. So we can customize it, whether it's for a data center customer, higher education, semiconductor fabs. So we've designed for fungibility where our factories are being built for fungibility. And we've really just constrained ourselves.

When we have this additional capacity in either Texas or Alabama here by the end of the first quarter of next year, which we need to support the demand for next year, we're going to be able to put a lot more of our selling resources on the non-data center business as well.

Dave, talk a bit about how QuantumLeap fits in, both with your data center customers with your kind of regular way commercial and industrial customers. How do you see that being a point of differentiation across both those cohorts?

Look, we see systems differentiation as a key theme you're going to hear a lot from us at Carrier. So QuantumLeap is -- and by the way, this is part of our internal strategy is to win by digital, win by things like system differentiation.

So I'll answer, Joe, obviously, the QuantumLeap question. But when you think about the United States, the combination of traditional heating and cooling with domestic hot water. That's a very interesting area, and there's no reason that we should not be the ones to win there.

The combination of carrier, our channels, our brands and you combine that with the technology of a Toshiba and Viessmann and you think about the capabilities that we have in our portfolio and the brands we have, that's a very interesting thing. We would call that systems differentiation. If you think about QuantumLeap for data centers, we have a controls business, the BMS business, which is kind of the heart of the building. And then you combine that with chillers, you combine it with liquid cooling. We've made a lot of advances with our CDU organic build on that portfolio.

This company that we have in the U.K. that we bought a few years ago called Nlyte that does DCIM, the QuantumLeap ability to have all of these systems interact and interact these what were formerly disparate cooling loops into a more efficient solution for the customer. And what's happening as you go more to colos and to some of our kind of edge customers as well is they're looking for more modular concepts, not only things that technically interact, but things that are built previously built on a skid. And that's an area that we've been winning.

I'll tell you that I haven't been thrilled with some of the wins that -- the win rates in Europe CHVAC, but that's turned a corner. We feel really good about the wins that we're having in Europe. We're seeing nice wins in places like India. Even in the midst of the war, we've had nice wins in Saudi Arabia. And of course, the United States has been through the roof. So we feel really good about 3Q orders.

We feel great about our backlog going into next year. So that's -- in the prepared remarks, what I was trying to emphasize there is that you can look at this combination, we said at our Investor Day, 6% to 8% growth, and we were below that after we said it. Now you look at it and with the backlog on CHVAC and with resi and light commercial rebounding nicely in Europe and the United States, the growth is there. We know we have to drive price cost.

We had input costs come up this year a little bit more than we anticipated with tariffs and fuel and copper and steel and aluminum. And we've been pushing pricing. We're even getting more disciplined on pricing. I would say that we may need to look at additional pricing out-of-cycle announcements that we have to look at. But we know we have to manage that formula. The good news is that's a nicer problem to have than when you're chasing volume down, and we're going to be in a really good position on growth.

Let's shift gears, talk a little bit about U.S. resi. 2026 sales outlook is above your peers. Talk a little bit about the dynamics you're seeing in the market. What gives you confidence to be up high single digits for the year?

Well, look, part of it is we don't deserve too much credit because this year, we get the benefit from the absence of destocking, which a couple of our peers don't. So part of it is just -- we'll get about 10 points of benefit in the back half of the year from that.

What I think we've done really well is I think we're usually the first to drive price in a competitive -- in an aggressive way, and we've continued to do that. We've even put further pricing discipline in place, and we've been winning share. So on the new home construction, there was a narrative developing that we went chasing lower-margin new homebuilders. And what I can tell you for a fact that, that is not the case.

We did pick up new customers. We have a great new home construction builder customer base. We picked up a really exciting new customer last year. And we won not because of price, we won because of the relationship that they can rely on us with cost and with delivery and quality. And we're very happy with that piece of the business. And frankly, even though we've been aggressive on the pricing side, I would say we probably picked up 30 bps of share.

Our relationship with Watsco and our other channel partners is frankly, at all-time highs. And it's not just the resi business itself, it's -- we're now having discussions that are long overdue, but are very impactful around parts, how we make sure that we capture well more than just 25% of our own parts. So we're talking very strategically about the win-win opportunity on the parts business.

We're talking about how we think about end-to-end digital connectivity that's to the benefit of all of us. So I'll tell you, we're very excited about the resi business. There's this question that we get in some of the sessions this morning is the theory was in resi, you get some commodity headwinds, you just raise price.

Look, back in '22, we probably raised price 8% multiple times over the span of 18, 24 months. We're not in that world. We can't raise price 8% every 4 months. But we can and will continue to raise price. So I would say the resi business that those of you that have covered us for a long time, it's there. It's -- the industry, all of our peers are facing the same pressures that we are, we assume, on the input cost side, and they're going to make their own decisions, of course.

But people have to make rational decisions, and that's kind of what we've been seeing from the marketplace. And then you add on to things like Carrier energy, domestic hot water, the aftermarket business, we're excited about the resi business. It's far better this year than we guided. It's far better than we kind of were thinking internally.

And then as we go into -- because we guided a little bit conservatively because of the uncertainty. But as we go into next year, the momentum coming out of this year has been far better than we thought it was going to be.

That's great to hear. Let me ask you a question. You raised channel. There's obviously been some maybe new entrants would be the word. I'm thinking of Mingledorff's, I'm thinking of Home Depot. I'm thinking about some of the platforms being built around the manufacturers rep side of the house. How do you think about the channel? It sounds like you feel really good about it, but it's evolving. What are the implications for Carrier?

We look at -- Watsco is about half. And the relationship with A.J. and the rest of that team, I mentioned, it truly has never been better. We're not into discussions on zero-sum games. We're all into discussions. And I just had dinner with them a couple of weeks ago and Brian O'Mahony, who runs Carrier Enterprises. It's all about win-wins. How do we win and take share together, both improve margins together? How do we make it a win-win opportunity. And that is so -- that is great. It's really powerful.

Then to your point, the Home Depot subsidiary bought both the Mingledorff's space down in Atlanta and the Lohmiller's out in Colorado, 2 great distributors. DK with Lohmiller's and -- Tim Brooks with Lohmiller's and then DK with the Mingledorff's. Those are just great people, great teams. And the Home Depot, that's going to be a great partner. We're excited. We worked with Ferguson. We do work with Ferguson today. Home Depot coming in. We still have independents that are out there that we have phenomenal relationships with, but as you think about where the puck is going and combining electrical and plumbing, you're looking at new ways of getting parts to customers, new things around controls and real-time diagnostics and prognostics.

To have partners with the scale of a Home Depot with the parts network or the Watsco scale and their digital capabilities or Ferguson that we have in the Northwest, we see that as all positive while we retain the relationship with the Madden in Texas and the other folks that we have. It's all -- it's been very positive.

That's great to hear. How about a minute on light commercial, really strong first half of the year. Talk a little bit about what's driving that growth. How do you think about the second half of the year into '27? Obviously, there's a lot of negatives out there. Rates are high, rates may go higher. How do you think about that in that sort of segment of the market?

All right. I'll take this one and then whatever you ask next will transition to Patrick.

Light commercial surprised us to the upside as well, partly because of the market and partly honestly, because of the team's performance. Where we've done really well is some of the business that goes through our channel partners has done well. And some of it we go direct with national accounts with major retailers that you would know obviously very well. And we've had some phenomenal wins with some major big box retailers.

So that business, we came in thinking it would be down high single digits. It's now going to be up high single digits. It's about high single digits in the first half and the second half. We're tracking to it. The third quarter looks quite good. So the issue that the coverage is very strong. It's just all about executing in here in the third quarter. So -- it surprised us. I think what we're -- the fundamental, what's been interesting is when you look at headlines, they can be daunting.

When you look at a 30-year at 7.3 and you look at fuel prices and you look at consumer confidence and you look at this, those -- what we're seeing in the trenches every day is, a, a team performing; but b, the underlying factors that drive demand have outweighed the macro headlines. So we came into this year in resi. Remember, '24 was 9.2 million units. Then we went to 7.5 million. We thought this year would be around 6.5 million to 7 million, and it's going to be 7.5 million again. So you think about that, the market is materially better despite those macros being materially worse. Why? Because there's pent-up demand.

There's 4 million to 5 million too few homes in the United States. So there's pent-up demand. And if you're locked into a 2% to 3% mortgage and it's daunting to move into a new home and now suffer a 7% mortgage, I think at some point, you just end up moving. And we're fundamentally a replacement business. So that dynamic we saw last year of repair or replace, that has largely subsided.

So we're kind of in a space right now where the fundamentals are outweighing the macro headlines, and we're seeing the same in our light commercial, and we're out there introducing some new products and winning, which has helped as well.

Let's shift to other geographies. Patrick, maybe this one is for you if we shift to the Europe side and talk about RLC. Dave, you made in your opening comments, heat pump demand is accelerating. You're seeing a return to growth there. What's driving that when you think about sort of the dynamic in Europe with the situation with Russia, Ukraine, obviously, fuel and energy costs.

I think you mentioned the main elements there, but let me start by saying that the outlook we have for sales growth in Europe has never been better than where we are today. It's just not in resi and light commercial, but also in commercial HVAC, where we see very strong growth rates now, order intake also driven by data centers.

But back to resi. We're seeing really strong order intake broadly across Europe for heat pumps. You mentioned energy prices clearly playing a role. The war clearly has an impact on input costs. I mean, heating costs, people are switching and electrification is taking place. We don't see that changing. And boilers are dropping in volume, but not as much, frankly, as they did about a year or so ago. And so that helps because boilers, we still make a lot of money on these boilers.

The good thing in Europe also is we're launching new products. September 1, we launched a new heat pump family of products, tremendous uptake so far, actually at a product that's differentiated in terms of energy efficiency, in terms of noise at a little bit of a lower price point than we had before, and we had very strong order intake so far.

Hard to talk about Europe now and not talk about air conditioning. This was not a major element when we acquired Viessmann, but it was always in the back of our head that you know what, cooling will pick up in Europe at some point. Obviously, cooling is what we do not just in Asia, but also in the U.S. We are seeing tremendous growth now in cooling. You know what happened in Europe this summer with unfortunately, a lot of people dying during the extreme heat waves.

We are seeing demand for air conditioning pick up, including in Northern Europe, including in Germany. We're perfectly placed for that with existing products that we have. We sell them under the Toshiba brand, the Carrier brand. Viessmann, we will have under the Viessmann brand, a cooling unit that interacts with On-Base, meaning one home energy management system connected to the battery, to the PV, to the heat pump and the cooling units, all managed in one system.

So a very good growth outlook in Europe for now. The focus in Europe is now clearly also on how to convert an acceptable margins because our margins are still unacceptable. They're still in the high single digits there. I will tell you that we expect starting in Q3, those margins to be much closer to double digits or at double digits. And to get to the mid-teens range where we ultimately want to be in the next 2, 3 years, it's not going to be just volume.

Pricing and pricing discipline will be really important. Our new leadership in Europe has implemented some changes in terms of flexibility of local teams with respect to discounting where we maybe were a little bit too ambitious before, so meaning less discounting.

And then frankly, also on the cost side. There is more work to be done in Europe, not just on the SG&A side, but also from a footprint point of view. And we have the new leadership there in place, not just from the segment, but also from an operations point of view that is working on a plan to deliver that. And so we expect Europe to frankly deliver better results in Q3, better margins and margin improvements over the next several years with strong tailwinds from a, call it, from a demand point of view to benefit from. So a little bit lengthy, but that's our overview in Europe.

That's excellent. Thank you. Why don't we talk about Asia? First, just talk about the mix of the business, talk about the strategy across the business lines. And then you can't talk about Asia without China. So interest in your guys' perspective around a return to growth in China? What's the long-term strategy there?

Okay. Asia is really a story of 2 different places. One, China, especially on the residential side, quite challenging. And we've had now several years where residential in China is difficult from a sales performance point of view, but also from a pricing point of view.

Commercial in China generally performing better, although not strong growth. And China is about, call it, at this point, about 40% or so of the total segment. The other 60% of the segment, I have to tell you that several of the geographies there, we've seen tremendous growth. India, Southeast Asia, even we've had quarters in the Middle East with a very strong performance, but also Japan. You think of Japan as a low growth geography, but we've delivered some strong numbers there.

And so our leadership in the region and our general managers have done tremendous work there. Most of the growth driven by commercial HVAC, not just data centers, but also seeing good growth in VRF, which applies to residential and light commercial. So overall, strong growth ex China, but also within that region, input cost headwinds. And so pricing and productivity remains really important because that region generally has been always been a little bit more tricky in terms of price realization, especially in China. So they're also a much bigger focus now, not just on productivity, but on price realization because with what we're seeing in input cost headwinds, we need it.

Yes. Let's get back to the portfolio. One on the Transportation segment. Growth largely driven by the container business for the last several quarters. How do you guys think about that today? Obviously, we've had a really tough freight environment. Do you see global truck and trailer markets starting to improve? How do you think about the differentiation of that business vis-a-vis your kind of core peer out there?

The container business has, as you said, Joe, it's been far better than we had thought. We thought that the first half would be great and the second half would slow quite a bit, given the tough comps. And the second half will clearly be a lot better than we had planned. And it's a lot of it driven by the suboptimization driven by the war.

So the container business, we've picked up share. We've done well globally, and it's just outperformed. Truck trailer in Asia has done very, very well. Truck trailer in Europe is recovering. We haven't seen a turn yet in North America. There have been bankruptcies, which obviously no one roots for, but there has been too much capacity. So that should free -- that should clear up some of the excess capacity.

ACT has truck trailer up something like 30% next year. It's too early to call next year. But the balancing that we've had in transport is that we do have better margins in North American truck trailer than in container. North American truck trailer has been a little bit worse. Container has been better. So it impacts margins a little bit. I would say the good news is that even though we haven't seen the North American business turn, I will tell you there is so much pent-up demand after a few tough years there that it would be very surprising if we did not see some level of rebound in '27.

You asked about the differentiation also in that business. And clearly, on the truck and trailer side, electrification is something where we feel really good about in our position there. And so the ability to provide fully electrified units that we deliver by now, probably in 10-plus countries across the world.

And then, of course, there is the cold chain, the tracking system, our ability to track not only the performance of the unit, but also the content and the temperature at which the content of what has been moved across the cold chain has been tracked is a differentiator for us. And so that we call it our Lynx cold chain digital platform, but we think that is a differentiator. We have well over 1.5 million units, containers, truck and trailers that are out in the world.

Today, a little over 200,000 of them are connected. And so once they are connected, you can add services to them, recurring services for which you get paid. You can add additional services, remote monitoring and so on. And so there is still a tremendous opportunity there to monetize our installed base through our digital Lynx platform in the cold chain. We think that's a differentiator.

Thank you for that, Patrick. Dave, can you hit Carrier Energy for a minute. Talk about the progress you guys are making there. Obviously, there's been some announcements with the PG&Es of the world with Google. So it sounds like some exciting things in the background.

I'll tell you, it's really exciting. It goes back to our system strategy. So the whole concept was that if you integrate a battery into the heat pump, could you run the heat pump off of the battery during peak hours and return some of that capacity to the grid during peak, especially with increased demand driven by data centers. That strategy started as a concept, and it's now a reality.

So we did sign a deal just a few weeks ago with Google and PG&E. So that's one of -- we've been piloting the technology out in the field, frankly, at Carrier employees' homes and it's gone very well. We have this first case where Google and PG&E will be providing funding to prove out that technology in the San Francisco area.

The opportunity, if you think about -- there's other companies out there that have similar types of ideas that are already valued at things like $13 billion. So we looked at it and said, well, we're in nearly -- we're in about 30 million homes. We almost have 1/3 of the market here. There are very concentrated areas, especially in some of the data center heavy states, whether it's Virginia or Texas or elsewhere, where there is need to leave some of that tension on the grid. So the demand is there. The technology is being proven out. We're starting to implement it in places like San Francisco.

The thing that we have to ask ourselves is what's going to be the investment to really scale it. How do you actually collect money revenues through the utilities? And is this something that we want to own 100% or bring in a partner and maybe even potentially a majority partner. So we're looking at that now. We haven't made any decisions. We're assessing all of that.

But I'll tell you that as we've talked to advisers on what that business could become, it's very exciting to them. So we'll have to play that one out. I mean we're still in the first or second inning on it, but the team has done a wonderful job with that.

That's great. Let's hit portfolio transformation. You guys obviously have had your hands full. You've done a lot with the portfolio post spin. It feels like the heavy lift is likely behind us, but you had activity this year, 2 divestitures, Riello and Aersco. How do you think about the portfolio today? Is there more to come? Is it the business you want to have and operate going forward?

I think right now, we're in a phase of execution. As you said, Joe, we -- there were some pruning we did that we thought -- we did sell Riello, we did sell an Aersco. There's a couple of things that we would always assess internally, whether we have a lot of organic investments in front of us. We have this new site that is on the horizon.

And again, that new site is not just for data centers. It's for non-data centers because remember, when we spun, we had about 10% market share in North America. So our share has -- we've just kind of built up the infrastructure to keep with the developments we've made as a business. But given the really exciting organic growth in front of us, that organic growth does require some CapEx and other investments.

So we just always, as a business, have to prioritize. Where do we want to prioritize our capital allocation. So we might tweak a couple further things, but we're not looking at any major acquisitions today. We're not going whale hunting. We're really in a phase where all the work we've done over this past period of time has set us up for this moment.

Now we just got to execute. Like we got to execute. We got to execute on the top line ramp, and we got to drive the price cost discipline even in tough environments and that we get paid to do that. So that's a wonderful problem to have. We're in an execution phase. We're not looking at massive portfolio transformation right now.

I think we've got time for one more, Dave, and I'll leave you with this one. As you think about '27, everything you talked about, obviously, it's going to be an exciting second half. What would you leave the group with kind of one thought on '27 from an execution standpoint going forward from here?

The growth is there. Almost any math you do would tell you that the growth is there for '27 and quite good growth. And now it's just the thing that we have to do as a company is do what we've always done and be incredibly disciplined on productivity. And if you were in some of our meetings behind the scenes, you'd see that we're incredibly disciplined and tenacious on productivity and then make sure that we at least drive price to offset inflation. That formula works, drive very strong growth.

I can tell you for the first time at this time of year looking ahead, we've never felt this solid about growth. We know that's there, drive productivity, which is what we've always done and make sure that we're incredibly disciplined on price cost, and we have the leadership that is going to make sure that we do that.

Terrific. Gentlemen, thank you. Appreciate you being here.

Thank you, Joe. Appreciate it.

Good morning, and welcome to Carrier's Second Quarter 2026 Earnings Conference Call. I would like to introduce your host for today's conference, Michael Rednor, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to Carrier's Second Quarter 2026 Earnings Conference Call. On the call with me today are David Gitlin, Chairman and Chief Executive Officer; and Patrick Goris, Chief Financial Officer. Except where otherwise noted, the company will speak to results from continuing operations, excluding restructuring costs and certain significant nonrecurring items. A reconciliation of these and other non-GAAP financial measures can be found in the appendix of the webcast. .

We also remind listeners that the presentation contains forward-looking statements, which are subject to risks and uncertainties. Carrier's SEC filings, including our Form 10-K and quarterly reports on Form 10-Q, provide details on important factors that could cause actual results to differ materially.

With that, I'd like to turn the call over to Dave.

Thanks, Mike, and good morning, everyone. With strong orders, record backlog levels and first half results being better than expected, we are raising our full year guidance on sales, operating profit and EPS. 2Q orders were very strong, up about 40% with commercial HVAC up about 65%, driven by continued strength in data centers where orders were up 4x over last year. Our total company backlog, which excludes orders that we expect from long-term agreements with hyperscalers and colos is now over $8 billion, up about 40% versus last year and up 20% sequentially. Given the increasing demand for our differentiated commercial solutions, we have announced a new facility in India and are finalizing plans for a new site here in the U.S.

We are pleased that our resi businesses in CSA and CSE were both up high single digits, while CSA Light commercial was up 10%, a similar rate to the first quarter. Our strong free cash flow enabled us to continue to invest in growth, and we returned about $640 million to shareholders. We continue to remain proactive in optimizing our portfolio with the divestiture of Complete and the sale of Nuresco announced yesterday.

In terms of acquisitions, we are excited to welcome 75F to the carrier family as you see on Slide 4. This acquisition accelerates our path to creating intelligent and fully autonomous buildings. There are three primary benefits from this combination. First, 75F BMS platform is perfectly positioned for small- and medium-sized businesses and for international markets. Because our ALC BMS offering has primarily been focused on larger building applications in the U.S., 75F expands our TAM by about $20 billion.

Second, 75F will significantly enhance our BMS capabilities. It is AI-enabled and cloud native, which when combined with Carrier's platforms, enables agentic AI applications for autonomy and other critical features to drive reliability, uptime, grid interaction, comfort and energy optimization. Also, its wireless and auto commissioning capabilities enable faster and seamless installations for both new applications and retrofits.

And third, 75F plays an important role in our systems integration strategy nicely complementing our equipment portfolio and Light's data center infrastructure management offering, along with our digital tech stack enabled by a bound and ALC. Intelligent and autonomous buildings are the buildings of the future and carrier now enhanced by 75F is positioned to lead the way.

Turning to Slide 5. In 2026, we expect that nearly half of our portfolio, our commercial HVAC and aftermarket businesses will have their sixth year in a row of double-digit growth, and these businesses remain very well positioned for continued strong growth going forward. In addition, it is encouraging that our shorter-cycle RLC businesses in North America and Europe have returned to growth. Though the timing of the recovery in global truck trailer remains unclear, there is clearly pent-up demand as we head into 2027. So with the record backlogs in our longer-cycle businesses, combined with our shorter-cycle RLC businesses in the Americas and Europe turning, we expect the second half to be up mid-teens and are well positioned for strong growth to continue.

On Slide 6. Last quarter, we walked you through our transformational commercial journey since our spin. I am very proud that our team's strategic investments in great work are yielding such strong results. We are now increasing our full year data center sales outlook to about $2 billion which will be our second year in a row of doubling our sales in this important vertical. With our recent significant wins, our 2026 data center sales forecast is all in backlog, and we continue to partner with hyperscalers and colos to further strengthen our backlog for 2027 and beyond. We continue to gain market share and the rapidly increasing installed base that we are delivering today will drive attractive aftermarket growth over the long term.

Turning to CSA resi on Slide 7. Bottom line is that performance has been better than we expected with our 2Q sales up 9%. We now expect the market to be around 7 million to 7.5 million units this year, largely stable versus last year. Field inventory levels continue to remain healthy, ending 2Q down about 25% versus last year. We also continue to invest in differentiation, including building out our digital ecosystem, a key priority for us, leveraging Biesman's cutting-edge digital platform.

We now have about 55,000 channel partner technicians monitoring systems real-time, up about 35% from a year ago, driving customer loyalty and channel efficiency. We are now raising our full year expectations for CSA resi sales to be about -- to be up high single digits.

Resi sales in Europe are also improving, as you can see on Slide 8. Sales were up high single digits in 2Q with heat pumps up about 20% and boilers down high single digits. Market dynamics remain favorable with continued high prices for natural gas and Germany recommitting to subsidies. We also remain very encouraged by preorder activity for our new Vitocal 200 unit. This Wiesman branded offering has all the benefits that our customers have come to expect. High efficiency, low noise, great aesthetics and connectivity, along with lower product and installation costs. It will be a tremendous secondary offering for Germany and the primary offering for most other countries in Europe. We are on track to formally launch in the fall and expect this new product to significantly increase our TAM.

Though our European commercial sales were lower than we expected in the first half, our 20% 2Q orders growth and strengthening backlog give us confidence in the second half being up mid-single digits.

Segment margins in 2Q were disappointing. We are seeing the benefit from improved volume and price cost, but that was offset by unfavorable mix and selling investments. We will continue to drive strong growth initiatives and will take a more aggressive and structured approach to cost reduction and pricing discipline.

Last month, we appointed Thomas Donato as the new President of this segment. I am confident that Thomas and the team will take the right actions to get this business to mid-teens operating margins over the next few years.

Moving on to aftermarket on Slide 9. We remain on track for double-digit aftermarket growth. Through the first half, we are up high single digits, and we have the playbook team and plans in place to deliver double-digit growth for the full year.

On Slide 10, you see a lot more greens for our business units compared to our original guide, thus enabling us to raise our full year outlook for sales, operating profit and EPS and will serve us well as we head into 2027.

With that, I will turn it over to Patrick. Patrick?

Thank you, Dave, and good morning, everyone. Please turn to Slide 11. For the quarter, reported sales were $6.4 billion, adjusted operating profit was $1.1 billion, adjusted EPS was $0.86. Better-than-expected organic sales growth of 3% was driven by improving resi and light commercial end markets in the Americas and Europe. Adjusted operating margin of 17.2% was a bit better than expected. The year-over-year decline largely reflects the benefit of organic growth and strong productivity offset by unfavorable mix and increased input costs.

Adjusted EPS declined 7%, driven by lower operating profit and a higher effective tax rate partially offset by a tailwind from a lower share count. You will find the year-over-year adjusted EPS bridge on Slide 20. Free cash flow of $810 million was very strong.

Moving on to the segments, starting with CSA on Slide 12. Organic sales for the segment increased 4%. Dave already covered resi and light commercial. With respect to commercial, sales were down due to the timing of data center deliveries. We expect a significant, sequential and year-over-year pickup in Q3. Segment operating margin of 24.4% was ahead of our guidance. Compared to the prior year, the margin decline reflects stronger pricing, offset by unfavorable mix and increased input costs.

I will skip Slide 13, as Dave already covered the main points.

Turning to the CS AME segment on Slide 14. Organic sales grew 4%, ahead of expectations, reflecting continued strong performance in India, Southeast Asia and Australia with all three areas growing above 20% in the quarter. Driven by data centers, the Middle East delivered very strong sales growth of about 35% despite a very challenging operating environment.

Aftermarket continues to be strong in this region, up about 12%. Residential and light commercial in China remains the main drag for the segment. As expected, segment operating margin was about 12%.

Moving to the CST segment on Slide 15. Organic sales were flat. The container business had another very strong quarter with sales up 40%, offsetting continued pressure in global truck trailer which was down low teens. The decline in segment operating margin reflects the margin differential between container and truck trailer.

Turning to Q2 orders on Slide 16. Total company orders in the quarter were very strong, up about 40% with growth across all segments and most businesses. Our backlog is at record levels and supports an accelerating organic growth outlook for the balance of the year.

Moving on to Slide 17 and shifting to our updated 2026 organic sales outlook. We now expect full year sales to be roughly $23 billion with organic growth up mid- to high single digits and full year data center revenue of approximately $2 billion versus $1.5 billion prior guidance. We now expect CSA resi and light commercial sales growth of approximately high single digits and CSE resi light commercial sales growth in the low single-digit range compared to our prior outlook of down high single digits and roughly flat, respectively.

Note that our updated outlook now reflects about $125 million year-over-year revenue headwind due to the upcoming exit of NORESCO. So to summarize, we are increasing sales by over $1 billion organically versus the prior guide with about half of that related to improved sales and CSA, resi, light commercial and the other half related to increased data center sales.

About $200 million of sales will drop out of our outlook versus the prior guide from the NORESCO divestiture and relatively small changes across the other segments, which takes our sales outlook to about $23 billion for 2026.

Moving on to Slide 18, profit and cash guidance. We now expect adjusted operating profit of about $3.5 billion and adjusted EPS of about $2.90, up from our prior guide of $3.4 billion and 2.8 -- or $2.80 of EPS. Second half adjusted operating profit and EPS will both be up about 50% year-over-year with strong earnings conversion. Second half earnings growth is driven by favorable volume and net productivity, partially offset by investments mix and the $0.05 headwind in from the NORESCO exit and start-up costs related to the new U.S. site.

No change in outlook with respect to free cash flow as the impact of higher earnings is expected to be offset by about $100 million increase in CapEx related to the new U.S. site. We now expect full year CapEx to be about $600 million. Share repurchases are expected to remain at $1.5 billion for the year.

You will find full year adjusted EPS bridges on Slides 21 and 22. And as usual, additional guide items are on Slide 23.

Finally, let me provide some color on the third quarter. We anticipate Q3 revenues to be just below $6 billion, including about a $200 million year-over-year impact from Riello and NORESCO divestitures. Organic growth is expected to be about 10%, operating margin of about 16.5%, a 24% tax rate, leading to about $0.75 of adjusted EPS. The sequential decline in operating margin mainly reflects lower seasonal sequential resi and light commercial sales in the U.S. and significantly higher commercial sales globally.

With that, operator, please open the line for questions.

[Operator Instructions] Your first question comes from the line of Scott Davis with Melius Research.

Looked like a pretty good quarter overall. Just only -- it really is the margin decline issue. Can you go into a little bit more detail kind of the mix versus price cost, kind of the challenges that you had there, how much of that was perhaps timing? You mentioned a change in leadership. So perhaps a little bit of a different mandate as well, but maybe a little bit more detail helpful there.

We'll do, Scott. So operating margin -- operating profit and margin was down versus last year. Key elements, as I mentioned, favorable volume, price and productivity. We do have some unfavorable mix. I'll get to that in a little bit. And then, of course, there is also the timing of the tariff mitigation and lower JV income.

In terms of timing of the tariff mitigation, you may recall that the tariffs went into effect early April and the pricing associated to mitigate some of that went into effect at the end of the month. And so as expected, during the second quarter, the impact of tariffs and pricing associated with tariffs was a net negative, and that was a headwind to our margins in the quarter.

With respect to mix, within Europe, we had besides strong heat pump growth, good growth in battery and solar, which actually has quite lower margins within container -- within transportation. Container does well but has lower margins in truck and failure. And then within CSA, think of it as a new construction was a little bit higher mix than what we expected which drove down overall margins. Still good margin, new construction, just not as strong as a replacement. So those are some of the main elements, Scott.

Yes, Scott, on your second part -- go ahead.

No, go ahead. Please, David.

Yes. Scott, I was just going to say on the second part of your question on the leadership change, we're really excited to have Thomas Donato on board. We can't thank Thomas Him enough for everything he did. But in terms of this next chapter, we really have to do a better job of both pricing costs to state the obvious. So I think that Thomas brings a great experience from his days at places like Rockwell Automation and ABB and Bosch. And we're going to be a lot more disciplined on the price side, and there's a lot of costs that we have to take out, and that includes footprint, supply chain, G&A. So Thomas and the team know that the expectation that you have of us and that we have of ourselves is certainly to get to that mid-teen profit margin, and I'm confident we'll get there.

Okay. And just a real quick one, guys. On the 75F, what are you buying here? Are you buying the technology, you're buying an installed base? Is it an enhancement of your own BMS? I'm just trying to get a sense of what you're getting?

Technology primarily. They have their own -- 75F has its own BMS offering. It's primarily -- it's traditionally been targeted at kind of the smaller and medium-sized buildings. But we're buying great technology that not only enables us to attack that market here in the United States for small- and medium-sized buildings, but it's great for an international offering. We're buying a great team. They have 91 engineers. They have a great leader, Deep who's coming as well. So we're buying talent. We're buying technology and -- as I mentioned in the prepared remarks, it's really going to complement and make our ALC offering much better because it's cloud-enabled. They have a genetic AI built on top of it and it's wireless. So it's much, much quicker and easier to commission a building. If you think about the building that Patrick and Mike and I are in right now are headquarters, there might be 1,000 sensors, each one needs to be individually commissioned. With their wireless capabilities and auto commissioning, those can be all auto commissioned without human intervention. So it's a great digital tech stack that we can build on top of.

Your next question comes from the line of Jeffrey Sprague with Vertical Research.

Great to see the resi inflecting here. Dave or Patrick, I just wonder if you could -- maybe just give us a little bit more color on kind of where we're at. I guess the nature of my question is, did we see any sort of the 2-step effect in this quarter? Or are your volumes pretty close to kind of industry volumes this quarter? And then your industry outlook for the year, I would assume we got some effect in the back half of the year. So just maybe house movement, how is the channel, did we see any of those machinations in Q2 here?

We didn't really see them in 2Q. We see them in the back half. We'll get 10 points of that benefit from the absence of destocking in the second half. So if you think about the second half of this year, Jeff, we'll see sales up about 20% in the back half, of course, off of some relatively easy compares. But [ 10 ] of that will come from the absence of destocking. We expect movement to be up mid-single digits, and then we should get price in the mid-single-digit range. So we didn't see as much of it in 2Q. We get that benefit in the back half.

Great. And then, Dave, on the capacity, I assume it's all data center-related stuff. Although, I guess the question is -- are you looking at any resi incremental capacity in the U.S., any footprint shift there? And -- just give us a little bit of color on sort of the nature of the ramp. We've had a few companies that you may be seeing in electrical space and elsewhere sort of gagging on trying to catch up with this demand and getting capacity stood up. So how do you derisk that? What's the scope of the project? That sort of thing is the question.

Yes. So we're very excited about it. If you think about our data center exit rate leaving this year for next year, it would be around $2.5 billion. And when we look at our backlog and the kind of discussions we're having with the hyperscalers and colos, we just need more capacity. So we're all hands on deck.

We want the facility up and running by the end of the first quarter. We're primarily looking at Texas and Alabama. We hope to make a decision here in the next month or two and announce it so we can get the team rolling. We've already ordered some of our advanced lead time equipment and tooling that we're going to need for the facility. And it's going to be not only both air cooled and water cooled chillers some of the vertical integration with things like compressors.

And then if you think about the resi side, yes, we are looking -- we already have a great presence for resi in places like Colville, Tennessee and Indianapolis. We are looking at expanding some of our both ducted and ductless capabilities here in the U.S. Our primary focus for this new facility, though, is all things data centers. And the thing I'll say is that we have to accelerate building it for the demand that we see in '27 and beyond. The thing that gives me confidence is that, look, we started with very low share for commercial HVAC in the United States. Some of our peers started with much higher share. So as we build out the product portfolio, the capacities, the number of technicians that we have in the field, we're very well -- we've been gaining a lot of share in the data center space. And we're really well positioned as we think about '27, '28, '29, some really nice discussions that we're having with both hyperscalers and colos. Patrick, did you want to add anything?

The capacity we're building goes beyond just data centers. It can be used for other applications as well in commercial.

Your next question comes from the line of Nigel Coe with Wolfe Research.

Good to see the back to growth here. Patrick, I hate to ask the same question each quarter, but can you maybe just provide a bit more color on 3Q? I think you said plus 10% organic and margins, I think, 16.5%. Any color on the segments would be great.

Sounds good, Nigel. So for Q3, we expect a strong pickup in sales. I mentioned about 10% organic sales growth driven by a big step-up in commercial HVAC in data center deliveries, which will be up strong double digit. And then resi will be growing also because of the absence of the prior year destocking, of course. From an operating profit point of view, favorable volume and of course, also price cost, partially offset by some investments we're making.

From a margin point of view, margin of 16.5%, driven by strong productivity and volume leverage, partially offset by investments and of course, tariff-related pricing. We get pricing but it's there to offset tariffs. And so we don't really get a margin benefit from that. It's actually slightly a margin-dilutive impact.

From a sequential point of view, we're going from 17.2% to 16.5%. That's down about 70 bps, about $400 million or so lower sales. And a lot of that is, of course, because of the lower residential light commercial sales and significantly higher commercial sales. So there is a big mix.

Okay. I'm just wondering if you can -- sorry, please go ahead.

No, go ahead, Nigel.

I just want to say any color on Americas and Europe margins within 15.5%.

Yes. For the Americas, we'll be at around 22%, Europe will be about double digits, close to double digits. And then AME, a little over 10 -- mid-teens for transportation. And that gets you a total company at about 15.5%.

Okay. And then just my follow-on is really I think the Americas margins, I think you're looking for sequential improvement, Q-over-Q, sounds like price cost tariffs has been a bit more impactful a bit more drag there. So just wondering if you could maybe unpack how the Americas margin is moving?

No. The Americas margin sequentially will drop from 24.4% that we have in Q2. I didn't mentioned about 22% in Q3. And the biggest driver there is sequential sales down with a very large reduction sequentially in resi light commercial, which is the typical seasonal reduction, about $500 million, $600 million and then a strong pickup in commercial sequentially. So mix clearly is a big headwind sequentially. And then investments are up slightly sequentially as well. That's the main drivers of the sequential margin reduction in CSA.

Your next question comes from the line of Joe Ritchie with Goldman Sachs.

Could we maybe just dig into this capacity ramp a little further? Obviously, the data center market continues to grow pretty aggressively for you guys taking up the targets again. for the year. I'm just wondering like as you kind of think about the latent capacity you have that you're planning to build. Like I'm curious how far out you're going to go? Like what's the potential kind of revenue run rate of the new capacity? And if there's any other color that you can provide on that $8 billion backlog, how much of that is coming from data center today?

Yes. Joe, I'll start and let Patrick take the second part of that question. Look, we -- as I mentioned that we would be able to support $2.5 billion in data centers with the capacity that we've effectively built. Remember that we've basically repurposed an entire facility to both air cooled and water cooled chillers that we have in North America. We've expanded Charlotte by 50%. And it's clearly not enough to support the demand that we see for '27, '28, '29 and beyond. So we looked at it and said that we want to build, we want to build here in the United States. Both Alabama and Governor -- the governors in both Alabama and Texas have been very, very supportive. It's an investment that is kind of in the zone of what you would expect for a building of that size.

And it's the kind of thing that -- it's great as part of our expansion, but we're very careful not to get out over our skis if data center CapEx were to slow down the road because number one is that for someone like us, we would need to go from 10 to maintain share in the range of, say, 15 to 20, which we can and will do versus others that may have started at 30 would have to maintain if the overall volume slows, they would have to get share to something like 45. So we feel good about the investments we're making. We're trying to be very purposeful to make sure that our lines that we're setting up and that our product portfolio is as fungible as possible to nondata center applications. And I'm really proud that the kind of LTAs that we're establishing with both hyperscalers and some of the major colos give us tremendous contractual confidence in the kind of volume that we're going to see over these coming years. Patrick, in terms of the backlog?

Yes. Joe, our backlog, as I mentioned, it's actually north of $8 billion. Commercial backlog is about 2/3, 70% of that and 40% of that is data centers.

Got it. That's helpful, Patrick. Just one quick follow-up there. So you mentioned the data center delivery impact in 2Q. I'm just curious of that $2 billion that you're now expecting for this year how much came through in the first half versus the second half? Just basically trying to understand like what the impact was in 2Q?

Yes. So Joe, in the first half, we saw about $500 million. So of the $2 billion, $1.5 billion is the balance of the year with the huge ramp-up in the second half starting now.

Your next question comes from the line of Alexander Virgo with Evercore ISI.

I wondered if you could just help us a little bit with the margin dilution point, I guess. I just wonder if you can give us a sense of how much the impact was the investment in the quarter. Presumably, it's going to be a much bigger impact in the second half. And then I guess as we extend that into 2027. I'm just trying to get a sense for the moving parts on margins as commercial dilutes and resi is obviously accretive. But the sequential point I get, Patrick, so that's fair enough. But as we look at Q4 and then into 2027, that would be super helpful.

Okay. Let me first maybe go and say compared to the new guide for the full year, as I mentioned, our operating profit and adjusted EPS of about 50% year-over-year with strong earnings conversion. Compared to the prior guide, we're raising $1 billion in sales and $0.10 of EPS. The reason why there is not a stronger, bigger fall-through is the investments that I mentioned. And these are -- this year, there will be roughly in the $100 million range. And then I mentioned earlier, I talked the timing on the April 6 tariff change mitigation. I talked about that earlier when Scott asked the question. That's a timing point of view. So do we expect that to be a headwind next year. and then the one-off items that should not repeat, which is the $0.05 related to the NORESCO exits and the new U.S. facility. I do not expect next year to have an incremental onetime set of investments related to data centers on top of the $0.05 that we're referring to now for the new site and the investments for the new facility. So going forward, of course, the conversion -- the margin will all depend on what's the mix of resi versus commercial, but if both of them grow at a similar rate, I would expect us to remain in the 25% to 30% conversion for the total company.

Your next question comes from the line of Andy Kaplowitz with Citigroup.

Dave, Patrick, in CSE, maybe just an update on Visa, you told us heat pumps up 20%, blurs down high single digits. I think you modestly raised the forecast, mentioned German -- continued German subsidies. But maybe you can give us a little more color on what you're seeing in the market there? And then can you comment on the confidence level that you have in CSC commercial turning with that better orders that you mentioned?

Yes. Andy, I think the really good news is that we kind of finally have seen that inflection point on heat pumps to see that we had sales up 20%. Orders for resi in the quarter were also up 20%. We see very strong demand for heat pumps clearly in Germany, but it's pretty uniform following a little bit following the war that broke out that drove up natural gas prices. But also when you look at subsidy applications this year, we would expect -- in Germany, we'd expect those numbers to be kind of back in that 2022 kind of numbers, which were, of course, at all-time highs. So we're kind of inflecting up in heat pumps. And so we like this ratio of natural gas -- electricity natural gas below 3. We like that Germany has clarified the heating law. They've kept in place key elements and they've also kept in place subsidies.

We see that boilers will decline. Our model is typically said down around low to mid-single digits. They were down high single digits, which impacted us a bit. But we feel good with the overall formula with heat pumps up, boilers would be coming down a bit.

And then on the commercial side, our orders were in a little bit north of 20% in the second quarter. So we saw -- and frankly, that's kind of continued here in July. We saw some nice orders over these last few weeks. So we're pretty well positioned for commercial HVAC to be up in the mid-single-digit range in the second half. We feel good that things are turning on the resi side. And we also hear -- in the fall, we had this new product coming out that I mentioned in my prepared remarks on this Vitocal 200, that's really perfect because it maintains that Vesman brand and all the features that customers expect. But it's going to be at a price point that's not only at the premium, but just one layer below, which is very attractive for countries like Poland, Italy elsewhere. So I think that if you look at the macro dynamics, you look at the new product introductions, you look at the way the team's overall performing that we're really poised for some nice growth in Europe. The issue that we've had is that we should have been more aggressive on cost, and we're going to be aggressive on cost now.

Very helpful, Dave. And then maybe just your opinion on what's going on in like commercial and CSA. I mean, obviously, you've you changed your forecast pretty significantly here as well, much better outlook. Where is it coming from, Dave, like which markets are driving and confidence level there?

Yes. Look, the first half was clearly much stronger than we thought kind of up 10%. And then you look at what's stronger than we thought, we've won some really big strategic national accounts, especially in retail. I can't list the customers' names, but they're household names that you would that you would recognize right away, of course. So we've won some big national strategic accounts.

K-12 has been much better than we thought. Hospitality has been much better than we thought. And what I also was encouraged by is that field inventory levels are healthy. They ended 2Q down about 20%. Orders were strong. I think orders were up something like 30% in the quarter. So the team is performing well. Our coverage for 3Q is quite good. So it's largely going to be just like it is for commercial HVAC in the Americas, it's largely an execution issue, and we have a team that knows how to execute. So we feel pretty good -- we feel very good about where light commercial was in the first half and where we'll be for the second half. I think Q3 will be up mid-single digits. Q4 will be up in the mid-teens. So we'll end up high single digits, we expect for the full year.

Your next question comes from the line of Deane Dray with RBC.

Deane, before you ask your question, Patrick, Mike and I all want to wish you congratulations on your next phase, and we thank you -- you've been such an icon in the industry for so many years. So congratulations to you on your retirement.

Congratulations, Deane.

I really appreciate that. It's been my privilege to follow Carrier as a public company, but also in the days going back to UTC. And I really appreciate all the support and insight you and the team have provided me over the years. I wish you continued success. But I still have a couple of questions, if that's okay.

No, it's good talking to you, Deane. Go ahead.

I appreciate it. Really good start to the cooling season that mother nature helped you to a degree. Any surprises in the regional demand and your ability to supply sometimes that depending when you've got low channel inventory that can be challenging. It didn't sound like any of that happened. But maybe we can start there.

No. I would say the -- we have not had issues with ability to supply. It's been -- in terms operationally, we've had some big swings, right? We've -- but we purposely made the decision at the end of last year to keep the facilities moving. We knew we'd have a bit more inventory coming into the cooling season internally, not in our channel, but internally because we kept the factories running. So it helped our ability to supply clearly cooling degree days, we don't like to get into the weather. They were, I think, up something like 4%. So the heat did help not only here, but in places like Europe.

Europe, we saw air conditioning orders up 20%, which will position us as we go here into 3Q. But I think that things were a little bit strong in the Southeast and the South -- in the middle of the country, places like Florida and Texas. New home construction is probably going to be a bit better this year than we thought. We thought it would be flat to down a little bit. It's probably up low single digits. But other than that, I just think that at the end of the day, Deane, what we thought in the -- we thought when we came into this year that all of the headwinds that we saw in the second half of last year would continue throughout the year. And even though you're still dealing with higher interest rates, of course, and some pressure on the consumer. At the end of the day, there's pent-up demand in the United States for new homes there's pent-up demand to increase existing homes, and we're fundamentally a replacement business, and there's only so long a customer can repair or replace. So things turned out that those kind of outweighed some of the tension in the macros.

That's really helpful. Just if you could expand on that last point. I know it's not an exact science, but any changes in the replace versus repair trends that we've seen?

I think it's just less accentuated than it was last year. I think we're kind of returning to a replacement business. Like last year, you had some nuances with things like the canisters that was big in the second quarter. So our parts was down a little bit. That drove a lot of parts increase in the second quarter, and we saw some of that headwind this year. But fundamentally, it feels to us like we're getting back to basics and it's a replacement market, and we're heading back to it being a replacement market.

Your next question comes from the line of Chris Snyder with Morgan Stanley.

I wanted to follow up on some of the Americas margin discussion. Is there anything you could provide us around where Americas commercial margins are running as we kind of think about the headwind into the back half on the big data center ramp? But then presumably, that segment will continue to grow in the out years. And then kind of on that same topic, anything that we should be thinking about from the capacity expansion in the out years and what it could mean for margin? We've just seen a lot of companies invest capacity for great reasons, obviously, with the demand and all the success you and others are having. But just kind of wondering, are you able to drive normalized incrementals through that?

Sure, Chris. With respect to margins within CSA, this year, we expect the margins to be about flat overall, so in the -- between 20% and 21% or so. And the margins for commercial would be a little bit below that. So they would be in the mid- to high teens. And then the balance, of course, would be on the residential and light commercial site. And we don't see that changing with data centers. We've mentioned in the past that generally, margins with data centers are accretive to the overall commercial HVAC margins that we see, and that is the case as well within CSA. In terms of capacity expansion and margins, obviously, we look at this over several years. There is no indication we see that adding this capacity and especially given the expected volumes that we see over the next several years that we would see our incrementals be lower than they otherwise would be. The main driver of the incrementals, I think, will continue to be what is the growth from resi and light commercial versus commercial. If all of our growth comes from commercial, clearly, the incrementals will be somewhat less than if they come from resi and light commercial, but that's no different than what it is today. So depending on the mix resi versus commercial, that will impact whether the incrementals are closer to 30% versus 25%, but I don't see the new capacity alone having a big impact on this.

Yes. The thing I'd add, Chris, to what Patrick said is in terms of commercial margins, we mentioned in the last earnings call that if you think about where we were when we spun, our commercial margins generally were about 5%. We needed to invest in the portfolio, invest in capacity, invest in technicians out in the field, spec engineers. It's going to -- it's been a complete revamp of our commercial HVAC business. We mentioned that our margins have gone from mid-single digits to up in the mid-teens, and the margins in the commercial HVAC business in the Americas has been a bit even higher than that. So it's been a complete turnaround of that business. So these investments and the great work by the team, the customer relationships have really positioned us. And as we start to see that volume come through the capacity that we've invested in, we'd expect very nice absorption in the factories.

No, I appreciate all of that. It's really been an incredible revamping of the commercial business over the last 5 or so years. Maybe if I could follow up on resi. And it's great to see the 20% growth guide for the back half. But I guess kind of my question is, what gives you guys confidence that underlying demand in resi is getting better? Because up 20%, but they are comping down 30% and 40%. So it's not necessarily or just not showing improvement on a 2-year stack. So what do you guys see, whether it's antidotally or in the data that gives you guys confidence that the demand is turning and this market is back on a pathway to, I think, the $9 million like medium-term outlook that you guys called out?

Yes, Chris, we expect movement in the second half to be up mid-single digits. So when you kind of get past all of the year-over-year comps, and you get past the absence of destocking that's going to give us 10 points. At the end of the day, we're looking at movement up mid-single digits. We've been very careful on field inventory levels. I mentioned that we ended the quarter down 25% year-over-year. I think as we sit here today, we're down something like 20%. So we've been very -- working very closely with distributors. And we do things like track inbound calls into our dealers and distributors. And we're seeing that it's been healthier than we expected. After last year, we put work into refining some of the key indicators that we look at for our modeling calls, especially into our bigger dealers and distributors has been higher than we expected.

And I think at the end of the day, there's a sense that People are just getting a little bit more comfortable being uncomfortable with higher mortgage rates. There's some tension out there, of course, with higher fuel prices. But at some point, there's just too much pent-up demand for new home construction because we have 4 million or 5 million, to few homes in the United States. There's pent-up demand for existing home sales to increase because they've been at 20-year lows. So -- we think we're just at a turning point where people are getting -- accepting a little bit of the macros that have been a little bit headwinds. And Again, we're a replacement business. So some of the anecdotal information would support movement up mid-single digits in the back half.

Your next question comes from the line of Andrew Obin with Bank of America.

Just a question on Europe. Can you just talk about structurally what is taking place in Europe given the weather patterns because my understanding is just from a regulatory standpoint, there are barriers to putting HVAC units in schools and hospitals. And there is actually an ongoing discussion about changing it. But what is sort of legislative and regulatory goalpost we need to see to see more adoption to '27?

Yes, it's a surprising thing because there has been some reluctance in parts of Europe to put in air conditioning when we're seeing the kind of fatalities that we're seeing in countries like France and Germany it really makes no sense because you think about the boiler industry, it's essentially a fossil fuel industry. So -- and a lot of the -- of course, the air conditioning that we're putting in is electric. So I think we're starting to see some of the attitudes change in some of the key countries. There's been historical reluctance, but we're seeing attitude start to change given the extended heat waves that we've been seeing now for a number of summers in a row, and this one has certainly been fairly extreme. And now you're unfortunately seeing buyers in key in major countries.

So -- we have introduced great products. We, of course, have our Toshiba product line. We have both Wiesman and Carrier branded residential air conditioning that we've now introduced. We have a phenomenal channel. Our dealer or installer channels chopping at the bit to get more engaged. We have a traditional channel that we've used on the Toshiba side, and we have a great presence. So -- we do think that legislation will start to be more proactive in encouraging and not discouraging air conditioning, especially in schools where they're having to close schools down in the summertime for kids. We're seeing the key demand in hospitality. We're seeing demand in homes. So I do think that as unfortunate as the impact has been on Europe over these past months, I think it's going to drive an inflection point. And again, we saw it in our orders where air conditioning, residential orders were up 20% in the second quarter.

And just to -- just a follow-up question on data centers. So you said that it's going to be $2 billion for the year. I think you said $500 million in first half, $1.5 billion in the second half. But I think you also said that exit rate is going to be at $2.5 billion. And I'm just sort of trying to sort of do the math and it implies the third quarter in data centers could be stronger than fourth quarter. I'm clearly missing something. Could you just walk me through that? Just if you take $2.5 billion divided by 4, you just sort of get less than half of [ $1.5 ] billion.

Yes. Those numbers were from before the $1 billion of the new site. Q4 will be higher than Q3 in data centers. And so if you just take Q4, do that times 4, you get well north of $2.5 billion. That's why we need to...

Okay. So the exit rate is now $2.5 billion. Got you.

Your next question comes from the line of Varun Govindaraj with Bernstein.

Congrats on strong Perfect. So a quick question from my end. When you look at the back half of $1.5 billion of data center revenue, what's the big year of confidence over there? The reason I ask is because clearly, back weighted, but there's also been some chatter from some of your peers about customers putting out delivery and potential delays. Have you seen that in the first half? Any concerns over there? And if yes, how are you mitigating it?

Yes. Look, there's -- it's never a perfect science when you're trying to work with your customers on the exact week that they're going to take the delivery. So there's always a bit of perturbation from month-to-month. But what I'll tell you is that we're fully booked for the second half. There is huge demand from our customers. So -- they are pushing us to accelerate deliveries not risking pushing those out into '27. As we think about the back half, it's purely an execution issue. We moved a lot of additional resources into supply chain, into supplier quality, into the quality in our own factories.

Our commitment to our customers is to be perfect quality, perfect delivery. It's not easy with this kind of ramp that we're seeing, I've lived through ramps like this. So we have all hands on deck to ensure that -- we have the capacity in our own factories, but we're into a level of detail of making sure that we have the right number of brazing people on second shift. We have the right people on site at our key suppliers. So -- we're fully doing all the right things. Clearly, there's a ramp in the second half, but we're fully doing the right things to make sure that we achieve it and our customers want the product.

Understood. Very helpful. And then as a quick follow-up, when I look at Carrier's portfolio for data center, is heavily weighted towards tillers. Any concerns about things like double ordering over there, just given the amount of demand that you're seeing from customers? And then if yes, how are you sort of managing that facilities with anything else?

No, we're not concerned about double demand. I think what we're seeing is that we're building more strategic relationships with our customers. Where -- they're building almost think about it as kind of a pool that we're delivering to. And they want to make sure that in terms of speed to power, speed to market that they have the chillers that they need for their various sites. So we've built strategic relationships. We're building into -- we're delivering into a pool. They've established a certain amount of share that they expect to give us. So we feel that the supply -- the demand that we're receiving supports the demand that they need. We will see a continued increase in liquid cooling.

I will mention that the team is doing a great job on that. We have a 1.3 megawatt CDU that we've seen good demand for here in the United States in 2Q. We're going to be launching this quarter, our 2.5, 2.6 megawatt CDU. We'll be on track for our 5-megawatt CDU around the end of this year. So we've looked at acquisitions in this space. We've made the decision for now to focus on organic growth on liquid cooling. We've seen some nice demand there, and we'll continue to invest in that space as well.

Your next question comes from the line of Stephen Volkmann with Jefferies LLC.

Dave, can you just talk a little bit about price in the North America resi. It sounds like it's going to accelerate more in the second half. Are there more increases coming? How are you managing that?

Yes. We -- it's kind of moved around this year. We -- after the tariffs came out, we had said that we would increase price, the list price around 8% and expect to yield kind of in that 6% to 7% range. We then -- when the tariffs reduced from 25% for the [ 232 ] tariffs to 10% to 15% depending on your steel content. We reduced price a little a bit. What we ended up realizing with all of the perturbations in 2Q as I think in 2Q, we were around 3%. We do expect to get a little bit better price by a point or two in the back half of the year. And we're monitoring this very closely. We've actually been doing very well on share. I would expect when all is said and done this year, that we gained a tiny bit of share, but we want to at least maintain share. So that's kind of a balancing act that we always have to manage, but I would say that when all is said and done for resi this year, we should be in the probably 4% range, and we're managing our way through that.

Okay. Great. And then anything to say about China? Can that business kind of ever come back? How are you thinking about that?

Yes. I would bifurcate it between commercial and the residential business in China. We're well positioned on the commercial space. The team has been driving very good attraction from some key customers, some of the verticals, including here in July that we've seen some nice orders from -- the data centers electronics fab has been significant over there, some of the renewable space. So look, commercial HVAC is well positioned. We have a great partnership with Shanghai Electric that goes back decades. We have a good product portfolio, a good team and a good presence. So we feel good about the commercial HVAC business. Clearly, the other parts of that region have done very, very well. I mean, India up 35%; Southeast Asia was up north of 20%. And I just want to give a shout out to our team in the Middle East. In the Middle East, in last quarter, we were up 35% in the midst of a war. So hats off to the team there.

When it comes to the resi business in China, it's been soft for a while. And the housing market is very difficult in China. And what we have to grapple with as a team is what's the investment required to fundamentally improve the business? And how long will this housing headwind continue for this RLC business in China. And that's a question that we ask ourselves quite a bit.

This concludes our question-and-answer session. I will now turn the call back to David Gitlin for closing remarks.

Okay. Well, thank you all for your continued confidence in us. And I want to thank our 50,000 team members around the world. This team continues to show up every day, work as one Carrier and deliver for our customers. So a deep appreciation to our team. Thank you all.

This concludes today's call. Thank you for attending. You may now disconnect.

Over the course of the dialogue, but happy to call in anybody with a question. Dave, just starting things off, big picture, there are parts of the business poised to deliver pretty solid growth this year. There are other parts of the business that see some challenges and then things constantly evolving. And so maybe just in terms of where we are and kind of how you see things playing out.

Sure. Well, first, Joe, thanks to you for having us. Thanks to Wells Fargo. I think short term, what I would say is for the quarter, all good. We had said it'd be $6 billion in sales, $0.80 of EPS. We're not concerned about that. So we feel good about the quarter. Frankly, we feel good about the year. So all of the stuff that we expected. There's always some puts and takes, but the team is performing extremely well in a fairly -- in an environment with a lot of moving parts. So we feel good about how the team is executing.

When you step back and you look at the overall business, what's good has been phenomenal. You think about data centers, we're fully covered for the year. We said $1.5 billion. We could certainly exceed that, it becomes an execution issue. And the biggest problem that we have right now in data centers is just keeping up. If you think about the $1.5 billion this year, we're certainly pushing to exceed that and implies $1 billion in the second half. It means our exit rate for this, going into next year, that would be enough capacity for $2.5 billion for next year and our demand exceeds that.

So we -- as we start thinking about the setup that we have for '27, we are looking about making further investments to keep up with the data center demand. So we typically are CapEx around $500 million. That's probably closer to $600 million because these are incredibly compelling investments. We've been winning way more than our fair share.

If you look at our market share for the Applied business here in North America, our share for data centers is well in excess of our share for Applied. So don't be surprised to hear more from us on further investments in U.S. production here to support the demand we see for '27 through '29, and certainly beyond that.

And then our shorter cycle stuff, the CSA residential, light commercial businesses have both been performing better than we thought. The demand there has kind of exceeded our expectations. So that's been encouraging. So there's always some puts and takes. But as we start thinking about '27, the stuff that's good, commercial HVAC, controls, aftermarket sets up very well with very, very good demand going into next year.

And then our shorter-cycle stuff feels like it's hitting troughs and poised for a recovery. If I may, Joe, there's one other thing I did want to mention before we get into more specifics is that today that we have announced a leadership change in our European business, our CSE business. We've been very fortunate to have a phenomenal leader in Thomas Heim leading that business.

If you've ever been involved in integrations, they're complicated. And this integration with Viessmann Climate Solutions and Carrier has well exceeded our expectations, 100-year-old family-owned German company coming together with a century-old American public company.

Thomas has shown tremendous perseverance, leadership, focus on our customers, all the things that you would expect. And then you overlay that with a market that turned against us. And that made an integration even more complicated, but he has really done everything to set the table for the next leadership that's going to be coming in.

We've taken cost out of the system. We've consolidated footprint. We have a new product line coming in. We've innovated even product lines behind that. We've done a lot with our channel. We've introduced cooling only.

So he has really set the table both on the commercial side, but also the residential light commercial for the next leader coming in. And he's a gentleman by the name of Thomas Donato. He has great pedigree. He's going to be starting with us on Monday. Was with ABB, then Rockwell Automation for about 17 years, Patrick worked with him there. And then more recently, he's been leading the Bosch Power Tools business. So we could never thank Thomas Heim enough for everything that he's done for us, and we're excited to welcome Thomas Donato to the Carrier family.

Thank you. That's -- it's a great intro and then a number of areas that we want to dig into a little bit more.

Yes.

So let's start on the CSA and resi HVAC. And first, just kind of cycle because you've talked about a market where demand should average about 9 million units, 2026, where it could be 6.5 million units, this is an industry kind of shipments figure. Are interest rates the primary pressure point? Or how do you think about relief from there and the ability to do or the opportunity to do more than 6.5 million units in the industry?

Interest rates, of course, matter. We don't love the 30-year north of 6%. But I'll tell you, there's a lot of factors that go into it. It's just one of many. And when I look at the resi business here in North America, you have these 2 countervailing forces.

You have true underlying demand that you look at new home build, there's 4 million units or 5 million units too few homes in the United States. And when I talk to the CEOs at homebuilders, they're like cage Tigers ready to go. So that is compelling underlying demand. Existing home sales at a couple of decade lows, people are anxious to move into those new homes, and they've been putting off some of those purchases not only because of perhaps mortgage rates, but consumer sentiment, some general anxiety that's amongst the consumer base.

So underlying demand is there. And then you look at the fact that, as you said, Joe, usually, you're at 9 million units. We were a little above that from '20 to 2024. And then, of course, last year, it probably ended around 7.5 million units, maybe 7.6 million units. This year, we had said it could be 6 million. It's probably hard to do math that gets you to have it start with a 6 million units. It's going to want to start with the 7 million units. So we'll have to see where this year plays out. But certainly, it's hard to imagine it not starting with a 7 million units.

And then as you think about '27 and beyond, I don't think you'll see a rapid increase back to that 9 million units, but you're going to start to see, I believe, a trend back to that 9 million units because people have been putting off what's fundamentally a replacement business. So anyone that's been limping along with a repair over replace, you're going to see that demand come back.

The countervailing force is high mortgage rates and some of the consumer sentiment. So some of that shorter cycle stuff, input cost increases on the consumer like fuel, as that starts -- those countervailing forces play out, I think you start to see some of that demand come back, and it could get accelerated. We'll have to see as we get into '27. But yes, we said -- I think we said down 15% or so for 2Q. We certainly would say it's going to be better than that. Again, we're not changing the number at the Carrier level because there's always puts and takes in the system. But is there upside to that? For sure. And is there some upside for the full year on resi? Yes.

Yes. And just we are in that time of year. And as you get into cooling season, a lot of focus on what we're seeing in monthly trends, April, pretty warm, right? May, may be mixed. But just overall, what you've observed, I guess that would kind of feed into this idea that north of 7% just because what you're tracking right now is performing a little better on the demand side.

Yes, that's exactly right, Joe. I think April was quite strong. We did announce some pricing that came into effect in May. So you might have seen some people trying to beat the price increase. And as you said, weather always plays in. June is a big month. June started fine for us. We were happy with how June started. But June is a big part of the quarter and also kind of starts to set up.

Where we are, orders have been fine. We're focused a little bit more right now on 3Q than 2Q. I think we're kind of set up for where we expect to land in 2Q. We just got to execute for the remainder of the quarter. And I think that's just generally true. I think we have generally at Carrier, the coverage we need for 2Q.

It's just -- there's a lot of moving parts on execution and that -- because you think about even the longer cycle stuff with data centers, we are winning projects. We're designing them, we're producing them kind of all at the same time. So it puts a lot of stress in the system on our engineering and our operations organization. But our team, literally like this past weekend, nights weekends, we're driving to support our customers. So I feel really good about where we've been on demand. I wouldn't be -- don't be surprised to see good order rates on commercial HVAC this quarter, really focused on the second half of this year and then as we think about '27.

Yes. And then just the channel inventory side of things, you took some pain in the back half of last year, where you stand today, you feel like that's normalized to where you want it to be?

100%. Yes, we feel good about that. We ended the quarter at 35% down year-over-year for field inventory levels, which we like. I think I mentioned that April was -- we ended down 40%. We expect to end the quarter probably down 25%, 30%, and we're kind of in the 30%, 35% down year-over-year range today.

So we look very, very carefully at our ship-to-move ratio. We want to make sure that stays consistent with past years, even pre-COVID. So we've been very, very careful with our distributors at an SKU level to make sure that they have what they need to support the demand they're seeing, but not more than what they need. So we've been managing that very carefully. So we feel well positioned for where we should be, not only for right now, but as we start thinking about 3Q.

And then as tariff rates continue to change, we take last week's announcement effective this week. Just unpack for us a little bit what the impact of that is. I think we talked about on last quarter's call, maybe the tariffs at the time meant something like a high single-digit increase. Does this bring it down to mid-single, the timing of when you react and how those changes go into the market?

Well, first, let me thank President Trump, Secretary Lutnick, the entire administration because I'll tell you, this administration engages with the industry, wants to understand the impact of policy on American companies and on American consumers. And they've worked in a very constructive way, and we were very pleased with the change they made to the 232. It takes it from 25% to 15% with a path to 10%, depending on your percentage U.S. steel purchase. I think we'll end up with -- we're going to shoot for the 10%, but some of the SKUs may end up staying at 15%. So it'll be kind of a mix.

And then we'll have to see how the USMCA negotiations play out because that may trump all of the 232. So we'll have to continue to monitor all that. And then as I mentioned, we are seeing such strong demand for our data center offerings here in North America that I would expect us to be making further investments in our capacity in North America, and that's stuff that we know that the administration supports, and they've been very collaborative at a federal level, but in some of the states that we've been talking to at a state level as well.

So a very receptive environment to further investments in manufacturing in the United States. At a pricing level, yes, on the resi side, when the tariffs came in place, we went to high single digits. I think it favors mid-single digits going forward. And there's a big range there. And the key will be the realization rate. We have to work closely with our distributors to make sure that we get the realization that we expected.

When we announced high single digits, we said we expect to realize mid. Now we're saying mid. I'd still like to see it in the mid-range. So if it ends up announcing 6%, realizing closer to 4%, we'll have to see exactly where that lands. But what it means at a Carrier level, we came into the year saying 1% of price. Then we -- with the tariffs, we added 2%. So we went from 1% to 3%. And now you can think about it as minus 0.5%. So the 3%, minus 0.5%, puts you at like 2.5%. So we're probably looking at about $4.50 of price this year.

That's helpful. In terms of the thresholds around the steel and aluminum, is it like an 85% threshold? And do you think there's a path to hit that in some instances to get to the 10% tariff rate?

Yes. I think in some instances, the issue for us is not our desire or ability to buy U.S. steel. We try to maximize U.S. steel content. So the issue is with some of our suppliers, you may have certain engineered components that are spec-ed in such a way where the steel is actually not available in the United States. So now you're into a pretty significant redesign, and we just are going SKU by SKU to figure out what we do about those. So I think for the foreseeable future, we'll have some mix of the 10% and 15%.

Around the April 232 announcements, there was a fair amount of debate on manufacturing footprints and what that could mean from the competitive kind of balance and different pricing reactions. Did you see any evidence of that to the degree that it had kind of market share impact because different OEMs were forced to price in different ways in response to the tariffs?

Not materially so. I think, first of all, we are very proudly a U.S. company, and not everyone is. Number two is that we have done a lot to increase manufacturing in the United States. And I think what you end up looking at is a lot of the supply chain, and we do have production that we're proud of in Mexico, but I do think we're very proud of our U.S. manufacturing.

A lot of the supply chain is in Mexico, and everyone makes their own, of course, independent pricing decisions. We've done what we thought was right for -- given the current situation. And we feel good about share. I don't see us increasing share this year, but I don't see any kind of material reduction in share either.

And that share has moved up over the last several years...

Yes. I mean when we spun, I think we were in the 29% to 30% range. I think we're probably in the 32.5% range. So we're very happy with the share increases that we've seen. It's a great business. It's high margin. We're dealing like right now, we're trying to make sure that we're dollar for dollar covering the input cost increases, not just tariffs, but some of the other input costs. Obviously, that will have an impact on margins. You would expect it to just mathematically. But we want to preserve sales and earnings given that it has -- there have been a lot of input cost increases that we've been navigating.

Let's shift to commercial within Americas, and I have a bunch of data center questions...

Yes.

But I'll start kind of ex data center and really kind of understanding non-res markets outside of that area of strength and kind of what you're seeing out there.

There's very strong demand with many of the verticals outside of data centers. And a lot of the demand factors are unrelated to the economy. You take health care, you have an aging population. If you look at whether it's walk-in clinics for light commercial, you think hospitals. So we see strong demand in many of the verticals. The constraint that we've had, frankly, has been capacity.

So we'll probably grow non-data centers low single digits this year. We are trying our best to do every -- all of our investments in data centers to make them as fungible as possible for non-data centers. So platforming, how we design the products, how we think about equipment and tooling, how we set up our lines, we're trying to make it as fungible as possible. But given the LTAs that we've been agreeing to with our hyperscaler and our colo customers, that has absorbed a lot of our capacity over the last year or 2. So we're probably in that low single-digit range.

But some of the underlying demand factors are strong. We just won a robotics facility that has close to 100 chillers in it. So it's a non-data center win. When you start to see capacity building, not just in the United States, but we were in India as an example, recently, when you start seeing big demand for data centers, that drives demand for chip factories or other things that we're very well positioned in. So infrastructure, industrial, some of the robotics, we've done very, very well in.

Shifting to the data center side of things and just understand recognizing that there will be future opportunities to add even more. But talk about what you've done from a technology standpoint in terms of the product suite and then from a capacity addition to go from $500 million to $1.5 billion plus.

Yes. And that -- those are just like early innings for us right now. I will tell you, if you look at our product portfolio, it's night and day versus what it was 4 or 5 years ago. Like the conversations that we have with the hyperscalers and colos, they could not be any more different than they are than just 3 years ago.

We have the product portfolio they need. We went from, in some cases, when we spun having gaps or having me-toos to having differentiated products now, not only on the chiller side, water cooled, air cooled chillers, 2-megawatt, 3-megawatt, maglev bearing with free cooling, point design with some features specific for exactly what the hyperscalers want, integrating them through QuantumLeap with an organically developed CDU portfolio.

We have DCIM capabilities through the Nlyte acquisition that we did in the U.K. And now we're working on digital twin capabilities to integrate that through a very integrated differentiated offering. So I can tell you that I was talking to the CEO of a player that's coming into the data center space, and he met with the hyperscaler and that hyperscaler told him, if you're going to benchmark one company that what it really means to be a great partner, talk to Carrier.

And I say that, I hate -- I give the credit entirely to our team because we have the product portfolio. We've expanded our capacity, 4x water cooled chillers in North America over the last 4 years, 3x on air cooled chillers, innovating, the team working night and day, and it always starts with our customers. How do we commission the equipment in a way that we don't leave until it's exactly what you need.

So I apologize it's a bit self-aggrandizing, but the credit goes to our team because our share that we're seeing in data centers is kind of like the share numbers that our competitors have seen on overall Applied. We've been really winning. And now we're in the phase right now with the hyperscalers and the colos solidifying LTA. So as we make these investments that support '27, '28, '29 and '30, we have confidence in the demand that's going to support those investments over these next 3, 4, 5 years.

In terms of the growth there, when we think about commercial business and the opportunity on the service side and the margin profile on the service side, just what that high growth on the data center piece and equipment oriented means for the margins in CSI?

Well, we've always said that, I would say, data centers accretive to overall Applied, aftermarket accretive to Applied. So I think that's one of the really -- if you think kind of long term and you're starting to think about '28, '29 and the aftermarket revenues that we're going to get from all of this data center wins that we're having, it's incredibly compelling.

We've traditionally said aftermarket revenues is 5 to 10x what we see on the OEM side and data centers, I think, would be at the higher end of that range. So we feel extremely encouraged by the long-term revenue growth that we're going to have. And we've done a nice job like in our base aftermarket business, we have tiered offerings. We have a Base and Elite and then -- and Enhance and then Elite.

And the Elite is just a complete white glove treatment where we have technicians around the clock. We have full stocking of parts. We have guaranteed uptime. We want to encourage our customers to buy Elite. Not every data center customer wants that. Some will say, I've already built in redundancy in terms of how I've designed it. That's okay. If you don't want a technician at site 24/7, that's your call. But we can offer that. But as we start thinking about LTAs with our data center customers, it's very encouraging.

And that's interesting on the higher multiplier on the service because we'll also hear about potentially shorter life because they're going to be used much, much more heavily than what you might find in the traditional application. That service is just tied to the heavy use...

Yes...

That you would see...

The only thing I will say, and I do agree, Joe, with what you said is they may not operate all of them at a 100%. They may have designed some of the chillers to idle them at some point as part of redundancy. But I think on a chiller as opposed to a data center perspective, your point is exactly right.

And then there was a lot of attention on this idea of higher approach temperatures to the chip and what that could mean for chiller demand. Maybe just help us, like we try to think about it in terms of the chiller content per megawatt, right? And like what is it going to? Obviously, the megawatt growth should be tremendous. But just how big of an impact this is on -- you don't need to run them all the time or maybe you need fewer...

Yes...

You're just going to have a lot more...

Well, I would say a couple of things in there. One is that we've -- we think of it more like $1 million per megawatt. Some of use $10 million, but that spreads over, I would say, noncooling kind of content. But if you look at the cooling content, it's probably closer to $1 million per megawatt. I think that part of your question on that input temperature and the 45 degrees C and are you going to need chillers with the Vera Rubin.

The short answer is, yes. You know that both the input temperatures for the Blackwell, Vera Rubin, the input temperatures, you're looking at 45 degrees C. With the Vera Rubin, you're going to get a lot more computing capacity with the same input temperatures. But for both Blackwell and Vera Rubin, you're going to need a combination of traditional cooling, but you'll see a lot more liquid cooling. That's why we're investing a lot in our CDU portfolio.

We came up with our own 1.3 megawatt CDU. We have a 2.6 megawatt coming out. We have a 5 megawatt coming out. So we are building liquid cooling and you're going to see a lot more demand for that. That growth rate should exceed traditional cooling. But I think the key is going to be the integration of traditional and liquid cooling.

And then what about QuantumLeap and the idea of a system sale to a data center? And my understanding, and correct me if this is wrong, but that today, a lot of it is going to be equipment sales as opposed to system sales. But if you can sell thermal management system and drive some energy consumption efficiency, that opens up more white space consumption of energy.

That's exactly...

What are you doing there?

I think it's so exciting. Look, you just step back and you think strategically about Carrier, we're effectively progressing from an equipment company to a thermal and energy solutions company. So we think about in the past, we might have sold an air conditioner for a home for a commercial office building. Now we're selling solutions.

So you think about the opportunity presented by AI and what that could mean even as part of a QuantumLeap offering, where you have traditional cooling, you have liquid cooling. Those 2 loops interface with each other. And then you could think about using AI to anticipate whether to idle chillers, whether to maximize the liquid cooling loop. And then you think about the possibility of what kind of solutions from an energy efficiency perspective you can create for a data center operator.

So we have the -- all of the portfolio we built out for air cooled and water cooled chillers, we're building out the CDUs. We've looked at, we'll continue to look at acquisitions with some of that liquid cooling space, but we want to spend millions, not billions. So we -- and we can also develop it a lot ourselves.

So we're in no rush to do it. We'll continue to look at it while we organically develop our own CDU portfolio, which we're very pleased with what our engineers are doing. But the real exciting secret sauce will be in the digital twin space of how you can create digital twins to really optimize those what were formerly disparate systems into one combined system, and that's value creation for our customers.

What are you hearing from customers on timing of adoption around 2-phase liquid cooling? And in your offering, do you think about cold plates should be part of that or shouldn't be part of that?

Well, we've made this strategic investment in ZutaCore. We've worked closely with them for a while. We just increased our investment with them. And that's not just a passive investment. We also have a contractual relationship with them. So we are co-developing and buying product from ZutaCore.

So that's a very strategic relationship, and they're probably one of the best players in the world with 2-phase solutions. Exactly when it comes, it's hard to say. At a conference a couple of weeks ago, I said it's not 1 year, it's not 10, and then people said that was kind of a soft answer. So I -- but I'll repeat it because it didn't go over well then.

So I -- but I think it's somewhere in the middle of that. But there's -- I think -- the one thing I will say, it's not whether, it's when. We -- I think with the demand we're seeing for cooling and the properties of a refrigerant over water, I do think we move into that 2-phase direction. So we're building the foundation to lead once we enter that space. We're not spending a lot on immersion cooling. We think 2 phase comes first.

Yes. All right. I could keep going on data centers, but let's move to Europe and VCS as well. Just talk about heat pump demand trends. core markets when we think about Germany, France, Italy, kind of what you're seeing there?

Feel good about it. I think that this war has been a bit of the inflection point we've been waiting for that once in places like Germany, that ratio of electricity to gas got below 3, it's at about 2.4 -- 2.5. We did see, I think, a relatively sudden increase in demand for heat pumps in countries like Germany, in France, in Italy. So the order rates for residential heat pumps has been extremely encouraging.

The thing we watch, so I think when we thought about the quarter, at one point, we probably thought the commercial business would be up like mid-single digits. That probably wants to be flatter. But the residential business, we thought would be flat, that probably is up mid-single digits. So I think it just inverted a little bit, but we feel really good about this inflection point we're hitting on heat pump demand in Europe, certainly including Germany.

The thing we got to watch is how much boilers decline. So heat pumps, let's say, they were up exponentially. If boilers decline more than we think, then we don't get as much growth as we thought. But if boilers could be down at 5%, and we let that heat pump demand continue to increase, that resi business is really poised for a turnaround plus you're coming off such lows, just like in the United States, you were asking about the 7 million, 7.5 million units. Germany is coming off multi-decade lows.

So I think about Carrier, I start thinking about '27, the stuff that's good stays good, really, really strong. It's actually -- my thinking on data center demand for '27 today versus 2 months ago, exponentially higher. And that's why we're looking -- like we weren't talking about a new facility on our earnings call, we're talking about it now.

So we're seeing great, great demand because of the team's win rate and the kind of LTA discussions we're having. Now you start to see the short-cycle stuff, truck trailer, resi here -- resi light commercial here in the Americas, same in Europe, those start coming off troughs. I don't want to get out of our skis for '27, but you see a lot of factors coming together for a nice setup for a nice '27.

Go back to data center because I can't resist. What happened in those 2 months? Is that orders that you've won or customer conversations you've had?

Yes, on both. It was orders that we've won that would manifest themselves in our 2Q orders, but also just the nature of these conversations, both not only with the hyperscalers, but also with the colos. And it's not a U.S.-only phenomenon. It's been a little bit lumpy in Europe. Our order rates in Europe have not been over the last 4 or 5 quarters, exactly what we would have expected.

But now we're starting to see those -- there's a clock ticking in the U.S., that speed to market, sometimes in Europe, finalizing those orders could take a little bit longer than we'd like. But we're starting to see the win rate -- we're starting to see those wins materialize in Europe that set us up for the second half into '27. And the team in Asia and the Middle East has done a very nice job. Middle East, we were seeing great demand before the war that needs to stabilize.

And then after the war, I would expect Middle East to start to recover in places like Saudi. But India has been through the roof. We've been growing 20% 5 years or so in a row in India. First quarter was up 33%. We have a new facility that's coming in, in Sri City down by Chennai. So India, really strong, parts of Southeast Asia. So it's a bit of a global phenomenon, including some of the hyperscalers in China as well.

When you think about the setup for what's good stays good and what's been challenged gets good, what does that mean from a mix perspective on the margin side of things? And so just thinking about resi, HVAC being margin accretive, what you're doing in Europe and to see better volume there and the absorption. I don't know if you have a figure out there, but just like if we were to get to that, what that natural step-up is in the profile?

Sure. Thanks, Joe. Here's the way I would think about it in general. We have the long-term target out there of achieving 50 basis points or more of margin expansion annually. We'll kind of be in that ballpark this year. Now obviously, there's a lot moving around this year between tariffs, pricing, commodity costs, et cetera. But I think as you start to think about into '27, it is somewhat of a similar setup to this year, right?

Really strong in the commercial aftermarket side. If you start to see that recovery in the short-cycle stuff, that stuff drops through with very nice margins. And our overall gross margins pretty much across the business, they're 30% or higher. So the setup on assuming volume growth in '27 would be very, very strong. And obviously, we have the 50 basis points, and we're always looking to achieve it through things like better productivity and obviously, the volume drop-through.

I think we have time for one more. And so just on capital deployment, and it sounds like opportunities to invest in your business, obviously, to support the growth. Then when you think about the share repo side of things, what you need to bring into the portfolio, your prioritization around capital deployment?

Our prioritization has been consistent since our spin that we've always prioritized growth. So that's both a combination of organic and inorganic investments. Having said that, right now, we see such strong demand. We've talked a lot about data centers. So I do see CapEx increasing $500 million to $600 million or so.

When we finalize how we think about the new site, it will be a multiyear investment. We want to kind of do it in phases. So we want to be very thoughtful about we got to rush on getting the capacity and the lines in place to support demand for '27. But as we think about test labs or maybe some level of insourcing at a component level, we don't need to do that right away. So we can phase the investment.

We had said that we do $1.5 billion buyback this year. I still expect us to do that for this year. And then I think of M&A as opportunistic. The team is pretty busy supporting right now the demand we see. We may do $100 million acquisition on certain things or -- but it's -- again, it's in the millions, not the billions right now. And we wanted to be very, very targeted, like we're trying to think about AI and how we integrate that into differentiated building offerings. So that might be an area that we would look at liquid cooling, things that are related to controls or aftermarket. We want to be very strategically focused on some of the M&A.

Great. Well, thank you very much. Really appreciate the discussion.

Thank you, Joe. Appreciate it.

Thanks, Joe.

Great. So we're going to get started again, with the Wolfe 19th Annual Transportation & Industrial Conference with Carrier, and it's a great pleasure to welcome back Chairman and CEO, Dave Gitlin; and also have Mike Rednor from IR on stage as well.

So Dave, I thought it would be a good opportunity to maybe just give us a lay of the land in terms of what you're seeing out there as we enter the summer season.

Nigel, first, thanks to you. Thanks to Wolfe for having us back. When you look at Carrier, the part of our portfolio that has been really good is off the charts good. So over 40% of the portfolio is a combination of commercial HVAC and aftermarket. Commercial HVAC with the tailwind of data centers has been strong double digits 5 years in a row, 6 years in a row. This year will be up certainly double digits again. You saw our data center orders in the first quarter up 500%. Data center orders will be good again in the second quarter. And we had said that we would grow from $1 billion last year to $1.5 billion this year.

We have orders to now our coverage for the year supports the $1.5 billion, so it becomes an execution issue. It is a little bit back-end loaded. Internally, we're certainly driving to exceed that number, and it's not going to be a function of more orders for the year. It's going to be a function of outputs. So we feel very good about, certainly '26. A lot of our focus supporting our customers for '26, but the anxiety we have is despite all the investments we've made in capacity in North America, up 4x for water-cooled chillers, up 3x for air-cooled chillers, we may not have enough capacity for '27. So that's an issue that is a really nice problem to have, which is how do we continue to support the demand we're seeing for '27 and '28.

So data centers and overall CHVAC, very strong, not only in North America, but globally. Aftermarket has been double digits 5, 6 years in a row, will be double digits again this year. We now have 100,000 connected chillers, 200,000 Lynx subscriptions, leveraging AI to drive unique solutions for our customers, whether it's prognostics, diagnostics, anticipating failures before they occur. So very excited about aftermarket in the DNA of the business. So that piece is going well.

And in the short-cycle businesses, whether it's -- if you look at the RLC business, in Europe, one of the, I guess, side -- positive side effects of what we're seeing with the higher fossil fuel prices is a shift to the heat pumps, a little bit analogous to what we saw after the Russian invasion of Ukraine. That really sudden shift to heat pumps, we're starting to see maybe not to the extremes we saw back in '22, but we're seeing variations of that now. So that's been a bit positive, and that's continued. We can get more into that, Nigel.

And then some of the shorter cycle stuff like res RLC in North America, light commercial, we thought would be down in the first quarter, was up almost 10%. We've seen some continued positive signs there. And then the resi business was a little bit better in the first quarter, and we're early in this quarter, but it hasn't -- it's been tracking along the lines that we thought.

So overall, we can get into all pieces of that, but what's been good has been great and the pieces that have been facing a little bit of headwind have been doing better than we thought.

Okay. Okay. That's good. So just to maybe just emphasize, so resi sounds like it's tracking in line with expectations for 2Q so far.

Yes.

Light commercial, a bit better.

Probably.

And then Europe is -- encouraging signs.

Yes.

Okay. Okay. Does that mean Europe is back to growth in 2Q?

Yes. I would say that the RLC business, it's early, but the commercial HVAC -- what I actually think will happen is that the RLC business will probably grow a little bit more than the commercial HVAC business, just given timing of orders for CHVAC, which I think coming into the quarter, we thought it would be inverse. But I think overall, for what we think -- we thought for CSE, it probably lands about where we thought. Just probably how we get there will be a little bit inverted.

Okay. Obviously, you have tough comps coming up in the U.S. resi business this quarter. What's your lay of the land in terms of inventory right now, channel inventory, where that sits? Are we now in a situation where sell-in, sell-through is virtually matched up at this point?

Yes. And that's been good news. Inventory, we ended the first quarter, I think it was down 35% year-over-year. We ended April down about 40%. So that's very good. So we're kind of in that mid-30% range of year-over-year inventory levels. So we feel very good about that. And to your question, Nigel, we've done a much better job of tracking that exact ratio of sell-in to sell-out. If you could turn the clock back, if we could turn the clock back to 2025, we would have seen that, that ratio was a bit elevated in the first quarter of last year. So right now, it's actually completely in balance to what we would expect to see, what we've historically seen.

So inventory levels in check, really, the quarter will go the way of not the first 6 weeks of the quarter, but the second 6 weeks of the quarter. So it's wonderful to see this heat wave in New York. I'm hoping everyone in the room rushes to replace their systems if they're living in the suburbs of Connecticut. So we -- so far, it's been -- we're kind of cautiously optimistic about how things are playing out despite some of the macros that are out there.

I did last year, Dave.

Yes. Thank you.

I'm not going to do it every year.

Yes, you could do it once a year. It would be a good sign about our reliability, though.

Yes. Today is the first 90 degree day in New York. So the sun's good.

Yes. Keep it going.

How -- I mean, there's some -- a lot of questions about pricing and what price actions have been announced. What's been the reaction for the channel? What do we expect to see in 2Q, 3Q? Maybe just bring us up to you on that.

Yes. First of all, we -- our share has been either maintaining or growing. If you look at the first quarter, we've been fine on share, probably a little bit of upside there. We did announce the price increases in resi was in the high single-digit range, expecting mid-single digits. And in the light commercial was kind of in the mid-single-digit range. So we have done pricing based on the input cost.

We said at a Carrier level, we said that we'd get about 1 point of price coming into the year. And based on some of the recent input cost impacts, we've now said that's closer to 3 points. So you could think about that as $200 million. Now it's more like $600 million, an additional $400 million. And look, we've been very, very close with our distribution and our dealer partners. We've done a lot of explanation of some of the tariff progression. So there's an understanding of that. We're very targeted in how we manage pricing to make sure that we really support our key accounts.

We've had great wins on the residential new construction side. That helps us a lot. We had some great wins last year, and we'll see some of the benefits of that this year. So look, no one likes additional pricing. We're managing that. And then we'll have to see how tariffs play out. If tariffs change over time, then we'll change our pricing over time.

Okay. I want to come back to that point in a second. The point on the share gains in resi construction, is that an attractive part of the market? It's viewed as low price, low margin. Is that attractive for Carrier?

Our margins are higher in replacement than they are in new construction, but it's still attractive. We've been -- it's nice to have close to 1/3 of the market. It drives absorption. It drives the need for continuously upgrading your technology. These are great customers. We're very close with these customers to provide solutions for them. So even though it's a little bit lower margin than our replacement, it's a great part of the market. Okay.

You mentioned $400 million of incremental price coming into the P&L this year. I don't think that's quite enough to cover the inflation and the tariffs. correct me if I'm wrong, but what are the measures have you taken to mitigate those 2 waves?

Yes. We are thinking about pricing to offset. So I would say, Nigel, it is actually dollar for dollar in terms of how we think about it. And if you look at the incremental $400 million of pricing, probably $300 million or so is related to tariffs and then the $100 million are in that ballpark is related to the mix of fuel and raw materials.

Okay. What else are you doing around supply chain, around productivity to really overdrive on that, if any?

Yes. Well, those are kind of net numbers. We're doing -- but I would say the team is doing a tremendous job on just all things controllable in terms of productivity because what we thought coming into the year has been a bit different on things like raw material logistics impacted by some of the fuel surcharges. So we have to overdrive all things supply chain. The way we look at it internally is there's some things in part of -- in terms of the supply chain, just negotiations with our suppliers and trying to figure out how to do strategic partnerships with them where we benefit from price. Then there's redesign of the products either with our suppliers or our own activity with our own products to just fundamentally take cost out of the product through redesign. That's going extremely well.

And then we are doing a much better job in terms of factory productivity. So the team is doing a very nice job in terms of the controllables there. So in terms of just base productivity, which we track weekly, those parts of the business are going very, very well.

Okay. And then coming back to tariffs, the engagement with the administration. I mean, I don't want you to talk out of school or anything here, but maybe just give us a color in terms of the engagement with the administration and trying to -- educate is the wrong word, but communicate the industry viewpoints.

I would say hats off to President Trump and the administration in terms of having an open door policy to discuss the impact that policy has on business because I can tell you that whether it's President Trump, Secretary Lutnick, the desire is to increase investments in the United States, which we've been doing and we will continue to do. I just mentioned, we're looking at capacity needs for data centers for 2027. And do we have enough in the United States? We expanded Charlotte, North Carolina 50%. We're going to need to do more.

So we've been clear with the administration that we are committed to U.S. jobs, U.S. investments, and we will continue to accelerate those activities. So they're very receptive to the discussions and to adjusting policy as needed to support more U.S. jobs, U.S. investment and supporting the consumer in the United States. So we've had -- we being a number of companies, very productive discussions, and then we'll have to see how things play out. But we really appreciate the receptivity of this administration to just listening and understanding, and then course correcting if they think it's appropriate.

So watch the space. So Dave, your 6.5 million to 7 million units market assumption this year is quite a way below Trane, Lennox, industry peers. If you actually crunch the numbers on January, February, March, I mean, it's early days, but it seems that we're pointing towards an 8 million unit mark perhaps. Is that math wonky? Or are you conservative? Is the answer in the middle, I mean, any sort of lay of lands from what you see right now?

Look, coming off the heels of the second half of last year, we did want to be -- we did want to err on the side of conservatism, but it's too early to say whether it's conservative because it's a short-cycle business. There are some -- obviously, there are some macros out there that you have to keep an eye on. We would love to see the 30-year start with a 5. We have to watch the consumer. Obviously, there's inflationary pressures out with fuel and some of the raw materials. So looking at the impact of tariffs. So we put all that in there.

The way I -- in my conversations, and I think this applies both on the Truck Trailer side and on the new construction side and just the overall residential market is there is true underlying demand. When we meet with customers, there's 4 million too few homes in the United States, 4 million or 5 million too few homes. They're rearing to go.

I saw some of the homebuilder sentiment yesterday come out, and it was a few points better than what we thought. I sit with some of the CEOs of homebuilders. I meet with some of our major distributors and dealers when I travel and they're like, my customers, they need to replace their equipment. There's -- we need to build some new homes. We need to replace some of the trucks and trailers and equipment related to those that we've been putting CapEx off for a few years, and they're ready to go. Like there is a desire to like just go.

And now -- but you overlay on that, some of these macros that are sort of holding them back in the near term. So it's not a question of whether. It's just a question of when that true underlying demand is going to come. But so far, so good on some of the shorter cycle stuff this year. We'll have to see how it plays out, but we don't want to get out over our skis until we get through the cooling season.

For sure, for sure. Obviously, the repair versus replace equation gets a lot of attention.

Yes.

What's your perspective on that? We saw -- obviously, we saw the needle shift last year towards repair. Any sense on how that's tracking so far?

I think we're kind of -- we're back a little bit more in a replacement cycle. It's hard to answer it precisely in a very databased way because there's a lot of -- you're looking at a lot of indicators that don't have precision. But I would say that the -- at least anecdotally, there was a move a bit last year to repair, and I think we're kind of back into a normal ratio of replacement to repair.

Okay. Okay. Any questions on resi, light commercial from the audience? No. Everyone's quiet. Okay. Great. Dave, before we turn to Europe, I just want to track back to data center. It sounds like the problem there is more capacity than demand right now. So number one, based on the order flow for this quarter, the backlog you're building, how does 2027 started looking to you outside of capacity constraints? And what are you doing to address those capacity constraints?

Well, I mentioned for this year, we said $1.5 billion. We're pushing to do better. We'll have to see. For next year, we would certainly expect it to be up. The question is going to be how much. And we're still in the process of building capacity here in North America. So without a significant investment in additional capacity, we would still grow next year. But the -- when we meet with customers, they're incredibly invigorating discussions.

So a couple of the major hyperscalers where we've had very major wins, the relationship is just extremely strong. And their appetite for spend in '27, '28, '29 is there at the most senior levels. So we're discussing the product -- the exact products they need, not only for '26, but what are they going to need because we're making investments not only in capacity, but the products that they are specifying for '27, '28. And then we're just in discussion of how much could it be. So it's a little bit in the art of what's possible, but it's also true of the colos.

I was with one of the colos a couple of months ago, and he would have normally raised $5 billion, he's raised $50 billion and he wants to spend it. So there's an appetite not only here in the United States, but globally, and it's our challenge to keep up. I just got back from India where they're going to grow from 1.5 gigawatts to 10 gigawatts, and I met with one customer who he himself wants to spend close to that amount.

So the appetite in places like China, India, parts of the Middle East, here in the United States, Europe was a little bit behind, but they're starting to catch up. That's why with CHVAC in Europe, it's been a little bit lumpy for us in terms of the timing of orders. But the conversations are happening and those orders will land. So it's -- Nigel, it's too early to say what next year could be. But is there a scenario where we invest, make another investment here in the United States for data centers? That's something we're looking at.

Would that be 50% increase in capacity, 100%? I mean, how do you think about that?

It would be sizable. I think if it were -- if it wasn't material, then we would just add on to Charlotte. But if it's material -- the only way we would do it, if it's material enough to support the demand we're seeing for '27, '28, '29 and beyond. So I think if we do it, it will be meaningful.

Okay. And would that be across both air and water coolers?

Yes.

Yes. Okay. And maybe just talk about why you're gaining share in chillers in data centers. It is a pretty competitive space. There's some really good players here. How is Carrier overachieving in that area?

Look, we have great competitors. But what I would tell you is there's a misconception amongst a couple of the private meetings that I've had where people think that we've gained some share because we have some capacity that our competitors don't. That's just not true. So yes, we have capacity. Yes, we've been adding to capacity. But I can tell you to a person, when we meet with the Chief Technology Officers of our customers, we're partly winning because of our technology. Data centers used to be built in cold ambient temperatures. Now they're being built in Arizona and in Texas and in Spain and some of the higher ambient temperatures.

So you need compressor technology that can give you the same kind of efficiency levels with high ambient temperatures where you don't have the benefit necessarily of free cooling. We've done that. We've done -- for air-cooled, we've done better packaging where we can get the same efficiency with a smaller footprint in the packaging. So we've done it. We've actually -- when the hyperscalers give you their specifications and they witness their FOK, their first-of-kind unit, we've been there shoulder to shoulder with our customers where they're watching the witness test. They've given us specs that are more stringent than our competitors to see if we can beat them. And then we meet those specifications and then they make it harder.

So we are right there giving them the products that they need, and they like that we commission the product, they like that we track it. Our on-time delivery has been essentially 100%. They like that we are working with them not only for what they need for today, but for tomorrow that we've been making the investments. So I'm telling you, we've admitted that we were a little bit later than a couple of our peers to this. We came in a few years ago, but we've come in very hot. And I am very confident that our growth rate will continue to exceed others.

Okay. Okay. And then before we leave this topic, maybe talk about the importance of the CDU and other parts of the QuantumLeap offering and where we are in that ramp-up.

That's a big part of our formula that I think is differentiating. So when you think about what we've termed QuantumLeap, it's the combination of traditional cooling with liquid cooling in a way that's very differentiated. So I think ultimately, one of the key differentiators that we have is our ALC or Automated Logic controls business, which is a building management system business. So how to have a digital twin that can do the controls between traditional cooling and liquid cooling is really where the secret sauce is. And I've seen that in other industries where you really transition from a product-only company to a solutions company.

And that's what Carrier is. If you think about -- all right, where is Carrier in 5 years? We're transitioning. We will always be a product company. We are constantly innovating new products. That's part of the secret sauce. It's part of our DNA as a company, and we will always do that. Innovating new products to win head-to-head on the product side. But we're overlaying that is more of a solutions company differentiated by digital, AI and systems differentiation. So that's where we're investing. That's where we're growing.

And in the data center space, if you can combine traditional cooling, liquid cooling, the BMS, we have this Nlyte DCIM business, providing unique solutions there is what our customers is looking for. And then with CDUs itself, we've looked at acquisitions. Obviously, there's very high expectations following some of the recent sales that we've seen out there. But we've organically developed, I would say, a very differentiated megawatt CDU. We have a 2.6 coming out here in a couple of quarters. We have a 5-megawatt coming out at the end of this year or early next year.

So we can buy another company. We'll continue to look at, I would call them bolt-ons, not like multibillion-dollar type acquisitions. And we can keep developing a CDU is essentially a mini chiller, and we have more than 5,000 brilliant engineers, and that's what they do for a living.

Yes. So if we look at your global commercial HVAC business, take out services, take out data centers, you're not really baking a whole lot of growth ex data centers for equipment. Maybe just give us a lay of the land in terms of the other verticals.

Yes. I would tell you that the nondata center will be up low single digits this year. And what's good is things like actually warehouse has been good. Higher ed is coming back. That was a little bit soft for a little while. Health care, anything that has to do with infrastructure spend like semiconductor fab. It varies by region. Some things are strong in China that are not as strong here in the Americas and vice versa. K-12 has continued to be a bit weak. That impacts light commercial and some of the commercial HVAC side.

But I think that we're -- and commercial real estate has been a bit soft. But if I look at our growth in nondata centers, it has a little bit less to do with the strength or nonstrength of the verticals. It just has been -- a lot of our investment in capacity has been going to try to keep up on the data center side. So we want to balance that out as much as we can over time, but I would call it low growth -- low single-digit growth on nondata centers.

So does that mean that you're being more selective in some of the other verticals to kind of feed the data center capacity?

Yes and no. We want to make sure that we continue to invest in both. We're very careful about that because the data center growth, as far as we can tell, it has multiyear legs. But we don't know -- it cannot continue at the same pace forever, 10, 20 years. Who knows exactly when. So we want to make sure that with our capacity that we're building with the technology we're building that we have nice balance in the system. So we're actually going out of our way to make sure we invest in both. So we have balance. I will tell you, the orders in data centers have just been extremely significant. So we are making sure that we support those customers while we try to balance the investments.

Thanks, Dave. I want to touch on two more topics. We've got 5 more minutes. So if there are any last questions, please get ready for that. In Europe, I think we're a little bit data stuff. There's not great data in Europe. Maybe help us think about what you're seeing on subsidy applications in Germany and other countries, the impact that high energy prices, high gas prices is having on that. And then how that plays out with the boiler situation because the offset has been boilers in that market.

Yes. I think some of the algorithm that we had when we combined with Viessmann was double-digit growth heat pumps, boilers down 5%. I think that, the really good news is that if you look at a volume basis, heat pump demand has been very strong since the Middle East war. The ratio of electricity to gas, we -- it's ideal for that ratio to be less than 3. It's been 2.5. We've seen strong demand in Germany, France, Poland. We've seen some nice trends there. U.K. continues to be strong. Italy has been a little bit better than we thought. So the demand has been more widespread.

Heat pump, if you look at subsidy applications in Germany, they were up 30% in the first quarter, and they've been very strong in April. I think May subsidy applications will be very strong in Germany. So I think it's just a reminder across Europe, that any kind of subsidy to transition the continent away from gas, you're going to continue to see those. So even in Germany, the government has said they have enough funding to support subsidies through at least 2029. So the heating law probably will change in Germany. It's been -- needs to be voted on and passed by parliament, but that's okay.

What we're focused on is if there's still some level of subsidies that's a positive thing. But even without it, what we're -- we're introducing this new product that we've talked about, Nigel, which is just below the premium level, but it's going to be Viessmann branded. It's already -- we haven't even introduced it. It's coming out just before the heating season. It's already won an award from this iF association. So we always win awards for the prior Viessmann, Vitocal unit. This product coming in, even right before its introduction, winning awards for -- because it's going to be state-of-the-art in terms of acoustics efficiency, everything else, but priced just below the existing. So it's going to be very complementary, very sought after in countries like Poland.

So heat pump demand, very strong. Boiler, probably that mid-single-digit type decline, which is what we want and expect. So I do think that what we were hoping for a couple of years ago for Europe, we are now starting to see.

So that sounds really good. I mean it sounds like there's upside to your plan. I mean I'm not asking you to raise numbers here, but it does feel like there's more of an upside for us here.

No, I think it's -- what I was saying earlier is that I think that CSE lands about where we thought. I think that if CHVAC was going to be up mid and CSE for the quarter was going to be flattish, it could be the inversion of that. But I'd just say the fundamentals are there. I mean what happened in the first quarter was we started to see the demand. We did some pricing activity in Germany that's now behind us. So we're actually -- we raised price starting in April. So we a few points of price, a few points of surcharges.

So I think if the volume continues and we're very disciplined on pricing, the indicators are positive for resi. But after the last like 9 quarters or so, we're going to be careful not to get out over our skis there as well. So all I'm saying is that since the Middle East activity happened, the inflection point for heat pump demand across Europe has started to hit.

And is the key driver of margin recovery there, is that volumes? You're seeing the volumes recovering in that market?

That will help. Certainly, we've had some absorption issues. So just got to be disciplined on price. I think the margins on this new product we're introducing will be as strong as what we have for the existing Vitocal. The margins on boilers are obviously quite strong. So I think we continue to take cost out of the system.

You know that about half of the headcount reduction we did last year on the G&A side was in Europe. So I think we're set up for margin recovery as we start to see the absorption come back from -- volumes start to come back. So margins were a little bit disappointing for us in the first quarter. I'm confident that margins will start to recover. We always said that it would be EBIT ROS in the mid-teens, and I'm confident we'll get there over time.

And as part of -- so mid-teens in Europe, Americas margins, you've got pencil in quite a ramp from 1Q to 2Q. I just want to make sure we're still on that ramp path.

Nigel, maybe I'll take that one, and thanks for having us. You're right. The step-up Q1 to Q2 on CSA Americas, think of it as we get the seasonal impact of step-up in resi volumes. And then as we get in the second half of the year, we're going to get a lot of absorption of the growth in the commercial business while continuing to drive productivity across the board, and that kind of gets you to the guide of up 25 to 50 basis points for the year.

Yes.

But the 2Q ramp, so part of that seasonal, 4, 5 points perhaps. And then the other side is just factory absorption?

Better factory absorption versus Q1, and we'll continue to drive productivity there.

And then the price cost sort of equation is still on track?

In general, yes, you recall, we put in price increases basically at the end of April to cover all the input costs, which includes logistics, fuel and the tariffs. The tariffs went into effect in early April. So there is a little bit of gap there. So you actually get a little bit of better price versus cost as you get into Q3. But all in, Q2 should be okay.

Great. I think we're more or less out of time, but we've got time for one question. Yes, right here, please.

I think they want you to...

I just want to clarify, the 50% growth in data center sales this year, the $1.5 billion revenue versus $1 billion last year. Is that all organic equipment sales growth?

Yes.

Great. Well, I think that does it. Dave, thanks for the time. Mike, too.

Thank you, Nigel.

And great. Great discussion. Thank you. Appreciate it.

Thank you, Nigel.

Good morning, and welcome to Carrier's First Quarter 2026 Earnings Conference Call. I would like to introduce you to today's host for the conference, Michael Rednor, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to Carrier's First Quarter 2026 Earnings Conference Call. On the call with me today are David Gitlin, Chairman and Chief Executive Officer; and Patrick Goris, Chief Financial Officer. Except where otherwise noted, the company will speak to results from continuing operations, excluding restructuring costs and certain significant nonrecurring items. A reconciliation of these and other non-GAAP financial measures can be found in the appendix of the webcast.

We also remind listeners that the presentation contains forward-looking statements, which are subject to risks and uncertainties. Carrier's SEC filings, including our Form 10-K and quarterly reports on Form 10-Q, provide details on important factors that could cause actual results to differ materially.

With that, I'd like to turn the call over to Dave.

Thanks, Mike, and good morning, everyone. Let me start by thanking our team globally who continue to deliver differentiated solutions for our customers and help preserve the planet for generations to come, while also delivering financial results that exceeded our expectations. Demand for our commercial HVAC and aftermarket solutions remained strong, while our shorter-cycle businesses have performed better than expected.

Company orders in 1Q were up 11% led by global CHVAC up 35%, including CSA commercial HVAC up over 80%. Global data center orders were up over 500%, reflecting continued customer demand for our differentiated solutions. Our current data center backlog now fully covers our expected $1.5 billion of data center sales this year. Of course, we are targeting to exceed that number.

Organic sales were about flat as CSA Resi and Light Commercial both performed better than expected. CSA Resi movement was better than expected and field inventory levels remain healthy. CSA Light Commercial was up nearly 10%, driven by share gains in large retail accounts and continued traction from our recently introduced highly efficient hybrid fuel rooftop units.

In Europe, encouragingly, the increase in natural gas prices supported strong demand for heat pumps. With the ratio of electricity to natural gas in Germany below 3 for the first time since early 2023, strong demand for heat pumps has continued into April in Germany and across Europe. Both EPS and free cash flow were better than expected, and we returned about $500 million to shareholders through dividends and share buybacks.

In summary, I am proud of our team for navigating macro headwinds and delivering better-than-expected results. Our growth algorithm is centered on products, aftermarket and system differentiation, and we are making strong progress across all 3.

I'll start with products on Slide 4. Our CSA RLC business is a superb business with high share and strong margins, ROIC and free cash flow, and we continue to invest in differentiation. On the product side, for example, we recently introduced a new highly efficient fan coil with a significantly smaller footprint and lower weight, which is very attractive to our extensive dealer network as it is easier to install and service.

We are also expanding our TAM with new system offerings focused on hydronics. Last year, we introduced an air-to-water heat pump that delivers heating, cooling and domestic hot water. In 2027, we will expand the Viessmann boiler lineup with an entry tier offering and will then further expand into the attractive North America domestic hot water adjacency through a differentiated system solution that combines our air-to-air heat pump expertise with Viessmann's deep knowledge of hydronics.

Carrier Energy continues to progress well with utilities and key hyperscalers, and we plan to introduce our Gen 1 units in the market this summer. The resi digital ecosystem is another key opportunity. We expect that connecting homeowners, dealers, distributors and Carrier into a single 360-degree digital stack will provide greater customer satisfaction, increased renewal rates and parts capture as well as improved forecasting and working capital performance across the value chain.

In Light Commercial, we're executing the same disciplined playbook. Our field retrofit kit is converting existing rooftop units into connected assets, improving operational insights and expanding parts, service and aftermarket opportunities. Our recently launched multistage ultra-high-efficiency WeatherMaster platform has the best-in-class efficiency to weight ratio.

While I am highlighting CSA RLC as an example of product differentiation, we're seeing similar progress globally. In the fall, ahead of the heating season, CSE RLC will be introducing a new differentiated high-tier Viessmann branded heat pump that is complementary to our current premium offering. Our CSAME business introduced a new Toshiba-branded side-discharge VRF platform, featuring best-in-class efficiency, distinctive aesthetics, low noise performance and high reliability. So product differentiation is a consistent theme across the portfolio.

Turning to Slide 5. On the CHVAC side, our product portfolio, field network support and operational capacity are night and day versus where we were at spin. We now have -- not only have a comprehensive product portfolio, we are winning head-to-head what you see in our orders, share gains and backlog. We've invested in the right products with new offerings such as 2- and 3-megawatt maglev bearing air-cooled chillers with free cooling and a range of water-cooled chillers enabling reliable data center operation in high ambient environments.

And by the end of this year, we will have introduced an expanded suite of very attractive CDU offerings. Our high-margin controls business has also significantly increased share in the U.S. and is a key differentiator in our system-wide offerings. Significant capacity expansion and superb technical talent additions have supported growth in this important business. The team's great work and investments are driving results, as you can see on Slide 6. Sales in our global CHVAC business are up 80% since spin. Our backlog is up 130%. We've gained 500 basis points of share, and our margins are up 3x. Not only is the applied business driving great growth for today, the related aftermarket business will drive great growth for years to come. And the good news is that we have the aftermarket playbook to ensure that we capture the opportunity as you see on Slide 7.

Similar to our commercial HVAC business, we have transformed the way we think about aftermarket. Our playbook starts with how we design products with aftermarket as a focus. We continue to expand our parts capture availability and partnerships to deliver growth. We've added highly scaled salespeople and technicians globally and we are focused on providing solutions for customers that meet their mid- and late-life upgrade and modification needs.

Importantly, we continue to lean into the opportunities created by AI and digital connectivity with the number of connected devices in the field, up over 25% in the quarter. All segments have plans to deliver on their aftermarket targets, and we feel good about our start to the year and our expectation to deliver our sixth year in a row of double-digit growth.

Last on systems on Slide 8. Data centers present a clear opportunity to bring together the full power of One Carrier to provide our customers with unique solutions. Our QuantumLeap offering leverages our unique capabilities and is gaining great traction with our customers. Since launching this integrated holistic offering about a year ago, we've won hundreds of millions of dollars in orders. Our differentiation lies in integrating previously discrete systems, including chillers, CDUs, our Nlyte data center infrastructure management system, our building management system, leveraging new digital twin capabilities, air handlers and complete life cycle support.

Earlier this week, we announced our expanded investment in partnership with ZutaCore, which will further enhance our technology differentiation in this space. In transportation, we've been building visibility across the cold chain, which creates value for our customers and drive subscription and aftermarket revenues for us. Our Lynx subscriptions cover nearly 240,000 units, and we expect to triple this number in the next few years.

Before I turn it over to Patrick, a brief comment on our full year outlook. Compared to our February guide, we are seeing an increase in input costs as a result of new tariffs, fuel and raw material prices. We expect to offset these headwinds dollar for dollar through supply chain actions, cost reduction and increased pricing. On the latter, we now expect to realize an additional 2 points of pricing globally this year. I am pleased with the better-than-expected start to this year, but with just 1 quarter behind us and still a lot of macro uncertainty, we are reaffirming our full year guide.

With that, I will turn it over to Patrick. Patrick?

Thank you, Dave, and good morning, everyone. Please turn to Slide 9. For the quarter, reported sales were $5.3 billion. Adjusted operating profit was $594 million, and adjusted EPS was $0.57. By comparison to last year, this was a challenging quarter, although company results were better across all metrics compared to our Q1 guidance.

Better-than-expected total company sales and operating profit performance was mainly driven by CSA Resi and Light Commercial. The year-over-year decline in adjusted operating profit and adjusted EPS largely reflects lower sales and absorption in our CSA Residential business and continued headwinds in China Resi and Light Commercial.

Adjusted EPS declined 12% as tailwinds from a lower effective tax rate and a lower share count were more than offset by the lower operating profit, I just mentioned. You will find a year-over-year adjusted EPS bridge in the appendix on Slide 19. Free cash flow in the first quarter was a cash outflow of $15 million, which reflects normal seasonality and was also better than expected.

Moving on to the segments, starting with CSA on Slide 10. Organic sales for the segment were down 3%. Residential sales were down 12%, driven by movements that is the unit volume from distributors to dealers, which was down 8% in the quarter and lower field inventories, which were down about 35% year-over-year. As Dave mentioned, Light Commercial was up 9%. Commercial sales were up low single digits, in line with expectations, and we continue to expect significant sales growth in the second half, driven by data centers. Segment operating margin of about 15% was as expected and largely reflects the impact of lower sales and associated under-absorption in our Resi business.

Moving to the CSE segment on Slide 11. Flat organic sales were a few points better than expected, driven by Residential and Light Commercial, which grew low single digits, offset by a mid-single-digit decline in Commercial. We're seeing a continued shift toward electrification and heat pump adoption in this region as evidenced by strong heat pump sales, up low teens and partially offset by continued declines in boilers down mid-single digits. Similar to the CSA segment, we expect a significant ramp in commercial deliveries in the second half mainly driven by data centers.

Segment operating profit and margin performance was disappointing in the quarter, driven by lower commercial volume and higher temporary promotions only partially offset by RLC volume growth and strong productivity. RLC price increases and surcharges went into effect in April.

Turning to the CSAME segment on Slide 12. We're seeing continued very strong performance in Commercial in this segment outside the China region with sales up high teens, led by strength in India and Australia. This was more than offset by ongoing weakness in Residential and Light Commercial China, leading to an overall 1% organic sales decline. Overall sales in China were down low teens with the RLC business down around 25% and Commercial down low single digits.

Sales in the Middle East were down mid-single digits, impacted by the ongoing conflict in the region. The decline in segment operating margin to about 10% was mainly driven by the weakness in China RLC as expected.

Moving to the CST segment on Slide 13. CST had a third consecutive quarter of solid organic growth with another very strong quarter in Container, partially offset by pressure in Global Truck and Trailer. Our Container business was up nearly 40%. The decline in segment operating margin reflects unfavorable business mix.

Turning to Q1 orders on Slide 14. Total company orders in the quarter were up 11%, mainly driven by our commercial businesses globally, which were up about 35%. CSA commercial orders growth reflects some large data center wins in the quarter. We've seen positive momentum in RLC orders in CSE continue into April. CSAME remains a tale of 2 halves, with strong performance outside of the China region, offset by China RLC. Within transportation, Global Truck and Trailer order intake was weak, while Container continued to outperform.

Moving on to Slide 15 and shifting to our 2026 organic sales outlook. As Dave mentioned, we had a better-than-expected start to the year, but given the current macro uncertainty, we are reaffirming our full year sales outlook of approximately $22 billion with organic growth of flat to low single digits. Think of our prior guide being a bit below $22 billion and our current outlook a bit above $22 billion, both round to $22 billion. This includes a roughly $250 million year-over-year revenue headwind from the exit of Riello, mainly reported in the CSE segment with the sale now expected to close before the end of the second quarter. The building blocks of our full year outlook have not changed and largely reflect our expectations for continued double-digit growth in commercial and aftermarket globally, offset by softness in our short-cycle businesses.

Moving on to Slide 16, profit and cash guidance. Same as prior slide, we are reaffirming our full year outlook for operating profit and adjusted EPS, no change in CSA and CSE expected margins, and we now expect CSAME margins to decline approximately 50 basis points, reflecting the impact of the Middle East conflict offset by margin expansion in CST by approximately 50 basis points.

A quick comment about Middle East. Our total sales in the Middle East were about $400 million in 2025 with the vast majority reflected in the CSAME segment and the balance in CST and CSE. The CSAME segment also benefits from equity income related to unconsolidated JVs we have in the Middle East, which is reflected in the updated margin guide for this segment. No change in outlook with respect to free cash flow and share repurchases.

Moving to Slide 17. We expect adjusted EPS of approximately $2.80, up high single digits versus 2025. The bridge is unchanged from our February guide. As usual, additional guide items are in the appendix on Slide 20, and you will note there is no change for our February guide on these items.

Finally, let me provide some color on the second quarter. We anticipate Q2 revenues to be just below $6 billion. This includes about $100 million more revenue from Riello compared to our prior guide and about 2 points of incremental pricing to offset increased input costs. We expect operating margin of about 17%, a 24% tax rate and about $0.80 of adjusted EPS. For cash, we expect normal seasonality, which would imply a few hundred million of free cash generation for the quarter.

With that, I would ask Elizabeth to open it up for questions.

[Operator Instructions] Your first question comes from the line of Jeffrey Sprague with Vertical Research.

Just on the -- maybe kind of unpacking the guide a little bit more, right, with 2% more price, the organic growth is unchanged. So maybe just kind of talk a little bit about maybe the price volume kind of trade-off you're expecting there. And also sort of interesting that we don't see margin pressure on kind of the inflation. Usually, we get kind of the arithmetic pressure there. Maybe that's inside the ranges. Could you touch on that? And how much of that inflation is 232 related versus general inflation?

Okay. I'll begin with the comment you had about the revenue guide and organic sales growth for the year. Our original guide was $22 billion in revenue. Think of that, that was really a little less than $22 billion. We added 2 points of price, which basically still rounds to $22 billion, but we're a few hundred million dollars above $22 billion now and both end up being low single digits organic growth, Jeff. And so it's really in the rounding to the $22 billion, and it remains within our LSD organic growth outlook for the full year.

In terms of the impact of pricing on the margin outlook, at the total company level, it's about a 30 basis point headwind to margins for the full year, which remains within the range that we've provided really on that. The third element of your question was related to input costs. Of the 2 points of price that we are realizing or expect to realize for the year to increase -- to offset increased input costs, think about 75% of that related to tariffs, and that is really 232 related. And think of the balance, the other 25% related to other input costs, which includes fuel and some of the commodities.

Great. Dave, and then just back to resi, kind of good to see this sort of initial evidence of things kind of normalizing and the like. Could you just elaborate a little bit more on what's going on in movement, kind of the signals you're seeing from the channel and just how you see the early part of kind of the season beginning to unfold here?

Yes. I'll -- I guess, Jeff, I'll start at 30,000 feet at kind of the macro level, which is that on the challenging side, the 30 year is above 6, and there's still some stress on the consumer with the high fuel prices, but I will say, on the other hand, there's clearly pent-up demand, both at a housing level, there's 4 million too few homes in the United States and for HVAC replacements because there was probably a bit of repair over replace last year.

So we think existing home sales will be up in the mid-single-digit range, which would be very important. New home construction, probably flattish. And yesterday, it was reported that applications for mortgages to buy a home were up 20%, which was good to see. So there's some counterbalancing macro indicators. What we're seeing -- what we saw is that 1Q was better than we thought. We thought movement would be down in the 20% range, and it was kind of down more in the 10% to 12% range. So it was about -- it was a little bit better than what we thought.

April has started better than we thought. But having said that, we'll go the way of May and June in 2Q. So orders were up in the 5% or 6% range in 1Q. And I think what's really good for us this year is that field inventory levels are very, very healthy. They ended the quarter, as Patrick said, down 35%. As we look at it today, they're still down about 35%. So we're being very cautious on managing field inventory levels. So things so far year-to-date are better than we thought. But again, we have a long way to go.

Your next question comes from the line of Nigel Coe with Wolfe.

Patrick, can you maybe unpack the 2Q guide? It looks like you point towards low single-digit core sales decline in 2Q and the 17% margin, maybe just unpack that between the Americas and other segments, please?

Yes, you're right, Nigel, that for the second quarter, we expect flattish to down low single-digit organic sales and some inflow there by segment. We expect the Americas to be about mid-single digits down, with margins last quarter, I said, mid-20s. We're still in that range, probably closer now to about 24% for the Americas.

In Europe, we expect organic sales low single digits, so positive with margins closer to 10%. And then we expect both Asia and Transportation to be down low single digits. Margins for total company down around -- margins, total company at about 17%, as I mentioned, and then Asia closer to 12% and transport in the mid-teens.

Great. Any color on margins, Patrick? And in particular, just double-clicking on the mid-single-digit decline in the Americas. How does that [ shake out between ] residential?

Yes. Sorry, I forgot that part of your question. The story is actually similar to Q1. If I look at our resi sales in the second quarter, we expect them to be down similar to what we've seen in Q1, meaning close to the about mid-teens, which means that we expect to see the similar headwinds from mix in the second quarter that we've seen in the first quarter, which explains the -- still the margin headwind from a mix point of view in CSA.

Similarly, we expect Light Commercial to be down as well in about the mid-single-digit range. And so that basically our 2 most profitable businesses will represent a headwind on margins for CSA in the company in the second quarter of the year, just not as much as it was in Q1.

Your next question comes from the line of Julian Mitchell with Barclays.

Maybe just wanted to circle back to the price and cost aspect. So I suppose -- I think you said it's dollar for dollar offset. So if it's sort of 2% more price is maybe $400 million, and then it sounds like over $300 million of that is the result of the tariff movements. So I just wanted to double check that.

And how should we think about the extra several hundred million of costs kind of phasing in through this year and then the mitigation efforts into '27 on the tariff front? And any sort of update on the phasing of price? Does that sort of match and move with the costs moving up?

Yes. First of all, Julian, your math is correct. It is in that $400 million, $450 million range for the total year with the impact being overweight, of course, on the 232, as I mentioned earlier. In terms of phasing of the 2 points of price, we'll see more of that in Q3, Q4 than in Q2 because the -- as you know, this was all effective April 6. And so the pricing followed a little bit after that, but it is in effect now.

So in Q2, it will be -- the net of the 2 will be a little bit of a headwind, and we expect that to become neutral in Q3, Q4 and for the year then as well. And so as you may recall, we're on LIFO, and so we see the impact immediately. And so there is a little bit of a gap in Q2, but there won't be a gap or at least that's our expectation in Q3 and after that.

That's helpful. And maybe just following up on sort of how to think about the CSA margin progression? Because I guess, as you said, you've got the most profitable parts of CSA are down decently still in the second quarter on the revenue front year-on-year in both R and LC but you're sort of saying the margin decline is much narrower year-on-year second versus the first quarter. So maybe just help us understand sort of the movement in CSA margins as we go through the year to hit that guide you have of the full year margin there being stable, up a bit?

Yes, as I mentioned earlier to Nigel, we expect about 24% margins in Q2. We expect Q3 to be a little bit better than that, so mid-20s. And then we expect high teens in Q4 for the full year to be around 21% segment margins for the Americas. And so sequentially, very typical to go up for the Americas, of course, Q1 to Q2, given the ramp-up for the cooling season and distributors building inventory.

And then in Q3, as I mentioned, we do not expect there to be a gap between price and the input cost headwinds. We see a little bit of that in the second quarter. And then, of course, year-over-year, we expect significant growth in CSA in the second half. It's going to be in the teens. And we expect very significant margin expansion given much better volumes in the absence of the really strong headwind of under-absorption we had in the second half of 2025.

Your next question comes from the line of Scott Davis with Melius Research.

Do you guys think we're close to a bottom in China? It's been kind of sloppy for a while, and I know it's probably not the most visible market in the world, but a little color there on what your local guys are saying, I think, would be helpful.

On the residential side, Scott, it's really hard to call a bottom. It's just been bad for a while, and we're seeing no real signs of it turning. What I would say is that the team is taking the right actions to position us to start to perform better than we and the market have been performing. But it's hard to call a bottom on the housing side. I think there are other parts on the CHVAC side that actually look quite encouraging. Data centers, there's a lot of opportunity. We're in great discussions in China on the commercial HVAC side for data centers, where I do expect some good wins as we go forward.

Some of the EV battery type areas continue even though that there are some challenges globally, that part of China continues to do well. It's an aging population. So things in health care are good. Semiconductor fab is good over there. So there are some verticals of real strength in China. So we were kind of flattish in 1Q on the CHVAC side. I think with the momentum around some of the orders that we'll start to see, I can see CHVAC starting to, I guess, you could say, "bottom", but on the housing side, there probably are challenges as we go through the year.

Okay. That's helpful. And just to switch gears a little bit. I would imagine you're pretty much sold out on data center and applied for '26. So when you get a new order in, what you say, in the month of May, I would imagine that's for '27 delivery. Is that -- or can you still book and ship in this calendar year?

No, we could still book and ship. I mean the reality is that we are very back-end loaded. So as it is, there's quite a ramp in the second half of this year for data centers. I mean, most of the growth is really in the second half. And we've actually taken orders for the second half of this year where we got to complete the design and then order the parts and deliver it in the second half. So it's a little bit back-end loaded, but we still have capacity to take additional orders.

We had committed to $1.5 billion of data center sales this year. Our backlog, as it is today, at least covers that number. But we would still take some additional orders for this year. We are starting to book a fair amount for '27. We track that by quarter. So next year, we are not as back-end loaded as this year, but we still have additional capacity for some additional orders on top of where we're currently booked.

Your next question comes from the line of Joe Ritchie with Goldman Sachs.

So yes, a lot of helpful color already. Just I wanted to follow up on the pricing comments. There's some concern in the market just given what's happened over the past year on your ability and not just you, but the other OEMs as well to continue to push price through this. Dave, can you maybe just talk about your conversations with your customers, your dealers, distributors on your ability to continue to get pricing even in this -- if the tariff environment continues to worsen?

Yes. Look, no one likes it, to be honest. The distributors, we've had some tough discussions with them, the dealers as well. I will tell you that our extended channel gets it, though. They understand that when we get a sudden input cost increase, we'll take every action we possibly can to mitigate it with supply chain actions. We're actually doing everything we can to optimize activities in the United States. But we've done a lot of actions to differentiate ourselves through the product, through digital, through some new TAM introductions like around hydronics.

So our channel knows that we wouldn't be doing it unless we had to. We are spending a lot on R&D to innovate. We are spending a lot on branding and with the Viessmann opportunity here in the Americas. So we all basically get together. We've been offsite with our distributors and our dealers. We stack hands and we say, let's go at it.

Now if tariff change, we'll take not all of it off because some of the price increase was related to some of the fuel surcharges and other raw materials that Patrick mentioned. But I will tell you that to President Trump's credit and this administration listens, I know that industry -- a lot of industries have been talking to the administration about this, the new 232 tariffs. And we remain optimistic that something changes there. And if it does, then we would change the pricing that we put in place, both in resi and light commercial here in the Americas. But we have to take actions assuming they don't change, and we'll just have to see. But I'm confident that the pricing that we expect to stick will stick. And we're confident because of the investments that we've made that we will maintain the share.

That's helpful. And then just a quick question on data centers. Clearly, you're expecting a pretty significant ramp as the year progresses. Just any color just around like how your CDU offering is going? Is that part of some of the order growth that you've seen at this point? And just talk to us about the trajectory there.

Yes. I got to tell you, I'm really proud of the team on the CDUs. We've looked at some of the acquisitions that have been out there, but we decided that we can not only organically design and develop and produce our own CDUs because it's effectively a mini chiller. It's what we do. But we could do it in a differentiated way. So we've already introduced our 1-megawatt CDU. We'll have a 3-megawatt that will be out in the third quarter or so. 5-megawatt will be out, I would say, towards the end of this year, maybe into early next year. And we've sold them to a few hyperscale -- a few colos. We're in great discussions with the hyperscalers.

The ZutaCore investment, we already had one. We increased it a couple of days ago. And they're a great partner for us. It's a very, very strategic relationship that we have with ZutaCore. They're one of the few guys that has 2-phase solutions, which I think is where the puck is going overall. So it's nice to get in early with them.

We'll continue to look at M&A in the liquid cooling space. But right now, our engineering team is doing a superb job designing our own products and the traction, I mentioned that we've won probably, I think, something like $300 million or $400 million of these QuantumLeap sales and a lot of it is in the CDU area. So that's gone very well, and I can tell you, we got a lot of irons in the fire globally to sell more.

Your next question comes from the line of Andy Kaplowitz with Citigroup.

Dave, could you give us a little more color into what you're seeing in CSE? I know you mentioned the strength in heat pumps. You didn't change your revenue guidance. I don't think for CSE, but could you talk about what you're seeing? And then can you talk about CSE margin and the need to drive promotions? I know you focus on productivity and cost-out efforts in CSE. So does that help mitigate the margin pressure that you're seeing in that business?

Yes. Let me speak, I guess, Andy, specifically on the RLC side, and then we can expand it to overall CSE. But what we're seeing on the resi side is clearly sales were up in the low single-digit range. Orders were up in mid-single digit. But here's the good news is that it appears that with heat pump demand, we did see a bit of an inflection point here in 1Q. The ratio I mentioned in my prepared remarks that the ratio of electricity to natural gas in Germany is now about 2.5. And that's the first time it's been less than 3 since early 2023. And that's about the time that we were seeing the big demand for heat pumps in Germany and across Europe.

Germany subsidy applications were up 30% in the first quarter. They were at very, very high numbers. So we saw demand for Germany heat pumps on the sales side up about 20% in Germany. It was up more on the volume side and low teens across Europe, and it was, frankly, in many countries in Europe, quite strong. Boilers were down a bit, but we expected that. So the disappointment, as you mentioned -- so look, I think on the sales side, we are seeing a moment around heat pumps that we've kind of long expected, and now we're starting to see that, not only in Germany, but across Europe.

The margins were impacted by some of these onetime promotions that we did that were a little bit heavier than planned, and I will tell you the team recognizes that, and they've now taken actions to address that, and we've implemented both price increases and surcharges effective April 1. The good news is that we did convert about 150 new installers, and we converted over 500 homeowners that were first time to the brand, and we expect those conversions to be sticky. We've also -- we will be introducing this -- it's a high-end unit, but it's a little bit lower end than the premium current Viessmann brand. That's coming out in the fall. And I think that's going to be perfectly placed to address some of the key parts of the market, not only in Germany, but in places like Poland as well.

So look, I think we did take some pricing actions. They were a little bit more than we planned. They are behind us. We've now increased prices and surcharges going in. The margins were a little bit disappointing, but we see margins for the full year getting back 100 bps year-over-year because we're taking cost actions, driving productivity. And I think we've actioned some of the pricing to compensate for what we did in the first quarter.

Very helpful. And then can you give us more color into what you're seeing in the CSA Light Commercial, I think, up 9%, I think you said in Q1. You said it was better than expected. And I know you said down and Patrick said down in Q2, but can you talk about your share gains there, the potential that you can end up trending better than that, I think down high single digits that you have for the year?

Yes. I'll tell you, we had guided it down for the first quarter. I think a few weeks before the end of the quarter, I had indicated in one of the conferences that there was some upside. And it did -- the team did well. We were up 9% in 1Q. I'll tell you, the area that we're seeing the best strength is in retail, especially on national accounts. We've had some really major wins, which is helping us significantly on the share side. We get a little bit of favorability from price mix. We had some new products that were introduced last year that are doing really, really well in the marketplace, especially this hybrid unit.

So -- and the other thing, we talk a lot about field inventory levels on the Resi side, which are very healthy, but they're very healthy on the Light Commercial side. They were down about 25% year-over-year, ending the quarter. So we came into 2Q pretty well positioned. I think that we're in the same boat as resi is that we're just being very careful to get out over our skis. There's a lot of macro uncertainty. There's some watch items around consumer confidence and inflation and some of the related pricing with tariffs. So we expect sales in Q2 to be down in the mid-single-digit range. We'll have to see. April was okay. And the team is doing well. But again, there is a lot of macro uncertainty, and that's why we haven't changed the full year guide down high single digits because it's kind of early, and there's still some uncertainty. But from a performance perspective, new products, major new wins with national accounts, team performing well. So pleased with the start to the year, and we'll have to see how the next couple of months and the rest of the year play out. But so far, so good.

Your next question comes from the line of Deane Dray with RBC Capital Markets.

Dave, I was hoping you'd give us the update on services. How do you feel about the growth there and the outlook for the year?

Great is the short answer. We -- this is kind of what we do. It's now -- I mentioned in the prepared remarks, the key for the whole aftermarket playbook is it has to be in the DNA of how you run the business. We have to design for aftermarket. We have to work all of our supplier contracts for aftermarket. Every distributor discussion has to include about not only our performance around fill rate, but it has to include getting to 100% of their part needs coming from us and what do we need to do with each other to make sure that we're getting 100% of our own parts. And this is something that has cascaded the world. We have a whole focus on talent in the aftermarket. We've recruited some great folks across the world in aftermarket, and we keep pushing some more and more of our top talent into this area.

So we've said double digit forever. We got a playbook around mods and upgrades, connecting our devices, driving parts, driving service attachment, and I think we're in the very early innings of this. So we feel extremely confident. It will be our sixth year in a row of double digit. We target a number that's, I think, closer to 13% or 14% internally, and we expect our teams to drive that.

Great to hear. And then just as a follow-up, and I recognize this is a sensitive question, but are you able to comment at all about the recent litigation against the resi HVAC manufacturers? And if it helps you, we did an expert call where someone who has looked at this case, declared it to be weak. So I guess that it still has to play out, but I'd be interested if you're able to provide any comments.

Yes, Deane, I think weak is being generous to the plaintiffs. So I think the case is meritless and we'll defend it vigorously as you'd expect. And look, you're not going to find a more compliant company or a more compliant industry than us. So it's meritless, and we're going to fight it.

Your next question comes from the line of Andrew Obin with Bank of America.

Just a follow-up on ZutaCore and your comment on 2-phase cooling. There is chatter in the industry that with transition to sort of direct current, the industry already has too much on its plate to sort of manage a transition to 2 phase. I found your comment to be very interesting in terms of this is where the puck is going, clearly, your acquisition reflects it. Any commentary from you as you talk to your customers as to what the timing is of 2 phase for the industry? Do you think it's going to happen with the next rack generation? Or do we have to wait?

It's hard to answer that, Andrew. I think -- I would say it's not 10 years out and it's not 1 year out. So it's going to -- I think -- so there's the range for you. I do think we'll ultimately migrate in that direction. It's not going to happen overnight. So I think that we have a lot on our plate developing a whole host of single-phase CDUs. And look, there's some smaller M&A out there on the single phase. We'll continue to look or we'll continue to do DC-type investments because we're kind of doing well either way. We did look at -- we looked at some of these bigger plays, but we decided that what was best for us and our company is keep developing things organically with DC-type investments and maybe look at smaller acquisitions over time that round out our portfolio, but those are in the millions, not in the billions range. I think when we get to 2 phase remains to be seen, but is it in the next 5 years or so? Probably.

Excellent. And just a follow-up question. What do you think -- what are your thoughts, people are getting more optimistic on Class 8 truck getting better. Historically, it's a nice market for you. How do you think about visibility on that recovery into the second half of '26 and also '27?

Yes. I mean we've seen some indicators on the Class 8 side that appear positive. So I think, look, there's -- if you look at truck trailer in the Americas, I felt like we were on the path for a good recovery, but some -- at the higher level, some of the fuel prices has really probably hurt them a little bit. I think on the good news side is that there's a lot of pent-up demand where people have been delaying big CapEx decisions over these last few years. So you're going to get to a point where a lot of our key customers in the Americas are going to have to and want to start spending more. And I think that was the plan coming into the year.

Some of those decisions because of some of the fuel prices has probably been pushed to the right. So when I look at our overall CST business, the way I think about it is that Container has done very well, much better than we expected. Orders have continued to be great for 2Q. So we were expecting Container to be down a bit this year. I think Container ends up performing better.

When you look at NATT for the full year, ACT is in the flattish range, maybe up low mid-single digits, but ACT has seen a few challenges. I think our European truck trailer business is about where we thought. So I think net-net, Ed and the team are doing a great job. I think we land the year exactly kind of where we thought with Container probably a bit better and NATT probably a bit worse.

Your next question comes from the line of Chris Snyder with Morgan Stanley.

I wanted to ask about Americas Resi HVAC. Just with all the moving parts on the cycle changing quickly and then the macro changing maybe even more quickly, can you just kind of maybe provide some color on how the company is able to distinguish true demand in the market versus maybe potential channel build? I would imagine there's some supply chain concerns out there with the geopolitics and there's obviously pretty well anticipated Q2 price increases.

I guess -- so maybe even just to put a finer point on it, if a customer places an order in mid-April, is that price locked in now ahead of this late April price increase? Or would it ultimately just be adjusted higher alongside any changes?

Yes. Chris, here's the way that I would try to answer that. I think given last year, we've done a much better job at really trying to understand true underlying demand and the amount of inventory that is in the field. We obviously know at an SKU level by distributor, by location, by SKU, what they have, and we try to work very closely with our distribution channel to make sure that we -- they don't have more than what we think they need and what they think they need.

We don't have precise SKU visibility into the dealer network, but they're typically very small dealers. We have over 100,000 in the United States, and it doesn't make sense for them to hold a lot of inventory. So I think that we have a pretty good sense of trying to match supply and demand. We did announce a price increase that became effective April 27. That was known by the channel. April movement was better than we thought. And I think part of that was probably people trying to beat the price. Once the price is in place, April 27, it's in place. Now if something happens with tariffs, we'll take a lot of that pricing back away because it was related to tariffs, and we told our channel, if we get reprieved on the tariffs, the pricing will revert except for the pricing associated with things like the fuel surcharges.

So was there -- was April movement a little bit better than we thought? Yes. Did we keep our guidance in place that we thought for the full -- for the quarter? Yes, because we do believe some of that might have been trying to beat the price. And then we'll have to see how the cooling season plays out.

I really appreciate that color. I understand it's almost an impossible situation to forecast. Maybe if I could follow up on Americas margins. Q1 met the mid-teens target, but just given that volumes came in high single digits better with positive mix on Resi and Light Commercial driving the beat, I would maybe expect a little bit more upside.

So I guess the question is, did you start to already feel some of this cost pressure coming through in Q1, whether it could be maybe the fuel on the service side, some of the -- even the metal, given your LIFO exposure there?

Yes, Chris, two elements there. One, as Dave mentioned, we're seeing a lot of activity on the data centers, and we're trying to do more than the $1.5 billion this year. We're making some investments in CSA to continue to enhance our capabilities in data centers and go after more opportunities. And two, there was a small FX headwind in the quarter as well. If you adjust for these two items, you would have had a margin that we would have expected given the higher sales. So not related to...

Your next question comes from the line of Patrick Baumann with JPMorgan.

It's not an earnings call without Steve Tusa. We're not sure how to get through it, but go ahead, Patrick.

He'll be back at some point. On the pricing side, sorry to beat the dead horse here. But -- so the 2 points of increase, and you said 75% was Section 232 related, and it's flowing into second quarter to fourth quarter. And so when I run the math on the implication for the price that you're putting through on RLC, assuming it's kind of there, it's like a high single-digit percent increase on the revenue for that piece of business. Is that what you're expecting there from the tariff pass-through? And I'm asking because I thought the increases you put through were like at least what I saw was high single digits, but only for a portion of the resi product line that was sourced from Mexico. It seems like it's maybe broader than just that.

I think your math is broadly accurate. And in addition to that, pricing is going up in every segment, given the higher oil prices and some of the commodity prices, but your math on Resi is accurate for CSA.

And what I'd add, Patrick, is we did not selectively raise price for only certain products in Resi. We raised it because then what you end up doing is disproportionately raising it for some and then not others. So we raised for our RLC business, both Resi and Light Commercial here in the U.S. We did have to raise prices kind of across the product portfolio.

And do you think -- are you seeing others react in a similar way?

We don't know. We -- people are going to do what they do. We've seen what probably you've seen people do publicly. But we know that all of us have cost input challenges and how others react on the pricing side is their call. We do have -- what we have is very good elasticity curve, so we watch that quite carefully.

Understood. And congrats on the orders in data center. I just wanted to go back quickly to the $1.5 billion guide there for sales this year. It doesn't sound like it's a capacity constraint issue as to why you're not increasing that. So is it just like lead times of when these orders are being booked? And then can you touch on profitability for data center sales? Just wondering, as sales continue to ramp for this business, the mix implications of that, you highlighted investments in the quarter. Just curious in terms of profitability relative to maybe the rest of your CHVAC sales in the Americas or however you want to describe it?

Yes. Look, I think that we kept it at $1.5 billion because we have a lot of execution to do in the second half of the year. If you look at our true bookings that we would be able to -- and what we think we booked and what we anticipate booking here in just 2Q, we would be able to exceed that number. We just got a big hill to climb here in the second half. So we felt it was prudent to keep it at $1.5 billion for now, and we'll have to see how these next couple of quarters play out.

In terms of margins, the data center business is attractive. I mentioned that our overall CHVAC business margins are up 3x since when we spun and data centers are overall accretive to the CHVAC business.

Your next question comes from the line of Joe O'Dea with Wells Fargo.

Dave, I wanted to come back. I thought somewhat constructive comments in terms of 232 and I think touching on optimistic that something could change there. And so if you could just unpack that a little more and whether you think there could be exemptions, the time line for something to change? And then also kind of related, if it doesn't change, is there any realistic path to a 10% tariff rate or given the threshold that's just unrealistic?

Yes. I think the short answer, Joe, is I don't know. What I do know is that President Trump and his administration have created space for industry to comment on things that impact industry and American consumers and American jobs. And I know that we appreciate the administration's willingness to listen. What happens with 232, I would be lying if I said I knew. I don't know. I just know that there have been constructive discussions. Optimistically, I would love to see something change in that, but I really don't know whether, when or if something would change.

We have to assume that they won't change. We do understand that there have been ongoing negotiations related to the USMCA. How those play out, we don't know and whether those would take over the recent 232 proclamation, we don't know. But we do know that the USMCA discussions have been going on. And our understanding from the sideline is those have been constructive as it relates to Mexico.

This concludes our Q&A session. I will now turn the call back to David Gitlin for closing remarks.

Okay. Well, thank you to our team for continuing to perform very well in an uncertain environment. And thank you to our investors for your continued confidence in us.

This concludes today's call. Thank you for attending. You may now disconnect.

All right. This is the last one. Hopefully, you guys have enjoyed yourselves and learned a little bit about the industrials sector and had some food and drinks. So that's kind of the point of all this.

But we're going to finish off here with Dave Gitlin, CEO of Carrier. Dave, thanks for being here. And sorry, Mike Redner as well. Dave, thanks for being here, and I'm going to kick it over to you for some intro and then we'll go into Q&A.

Well, thanks, Steve. Thanks for having us. Thanks to JPMorgan as well. As we close out 1Q and look at our positioning for the rest of 2026, our team is energized and executing against a clear strategy. Over the past several years, we have intentionally reshaped Carrier into a focused, high-quality portfolio exposed to durable secular tailwinds: electrification, energy efficiency, digitalization and the growth of data centers and cold chain infrastructure. With leading positions across attractive verticals and geographies and 50,000 tremendously talented and dedicated teammates, we are advancing our vision to be the global leader in intelligent climate and energy solutions, guided by a disciplined playbook to win in products, aftermarket and systems.

The strategy is showing up in results. Roughly 40% of our portfolio, commercial HVAC and aftermarket, have grown double digits for the past 5 years, and we remain on track to deliver our sixth consecutive year. In commercial HVAC, we continue to see strong demand and record backlog, with data centers a standout driver. In CSA, data center orders were up about 400% in 4Q, and we expect another strong quarter in 1Q. Importantly, our wins are not just cyclical, they are share-based, enabled by differentiated new products, expanded capacity and deeper technical resources, all helping us capture a larger portion of the data center value chain.

In aftermarket, the playbook works, and we continue to drive annual double-digit growth by increasing service attachment and leveraging digital tools to deepen customer relationships and improve uptime. This creates a more resilient, higher-margin earnings stream. On our shorter-cycle residential and light commercial businesses, we are translating our innovation road map into differentiated launches that support margin expansion and share gains globally. In CSA Residential, we've introduced our first integrated heat pump domestic hot water offering and new digitally enabled thermostats to increase customer intimacy.

In light commercial, we introduced a dual fuel rooftop unit, which automatically selects the most efficient fuel based on the outdoor temperature. In CSE, we are launching a new Viessmann-branded lower cost but highly differentiated heat pump, which will expand our TAM. In CSAME, we released a Toshiba-branded side discharge VRF system that has best-in-class efficiency with higher reliability and great aesthetics. In our Truck and Trailer business, we expanded our all-electric refrigeration units into Asia, leveraging advanced technology to deliver faster cooling with lower energy consumption and Lynx-enabled cold chain visibility.

Taken together, these actions reinforce the core of our strategy: leading with innovation, scaling our aftermarket and digital capabilities and allocating capital to the highest return opportunities, positioning us to expand margins and gain share across cycles. From an outlook perspective, we remain on track to deliver our guidance on sales, profit and adjusted EPS. We are excited about 2026 and focused on delivering best-in-class results for our customers and shareholders as One Carrier.

With that, Steve, happy to get into the Q&A.

Great. Thanks, Dave. We're just having everybody kind of open up with a bit of a state of the world around all the events going on in the Middle East and how that may impact you guys temporarily. Or your exposure is pretty low, I understand.

It is. It's actually a very strategic area that we want to grow, but today, it's about 1% of our sales in the Middle East. So not material exposure. Our #1 priority, of course, is supporting our 800 people in the region, the safety of them and their families, and we've gone to great lengths to do that while supporting our customers. We have equipment that are in critically important areas to our customers, and we're balancing, obviously, the safety of our people and making sure that we support our customers.

So no material exposure. We'll watch some of the logistics of containers making their way through the Persian Gulf. But for us, we've been shipping all of our units from Asia to America around Africa, around the Cape of Good Hope. So we don't have anything that goes through the Suez Canal. And we've taken all of those routes away from product going into Europe. So not a material exposure for us as a company.

Okay. Just sticking with, I guess, the near term. You guys talked about $5.5 billion to $5.6 billion-ish of sales to 2Q. Anything on the bottom line that we have to be aware of as far as the move from 1Q to 2Q on kind of the sequential seasonality? Understanding that you just reaffirmed the annual, of course.

Yes. And look, reaffirmed the quarter, reaffirmed every quarter, reaffirmed the annual because there was some sense at a couple of the conferences down in Miami that we were changing something for 2Q, and we were not. Everything is playing out exactly how we thought it was going to play out. $5 billion first quarter, $5.6 billion in the second quarter. And I think what happened is we generically said that we're kind of balanced between first half and second half, and we believe balance as in exactly 50-50, 49%, 48%, 1 half, it fit our definition.

But having said that, look, what you're dealing with in 2Q is we said, if you think about just CSA, residential is still down about 20% year-over-year, light commercial down in the high single digits. We have really tough comps on the commercial HVAC side because 2Q of last year was up 45%. So I don't think we have any particular call-outs on the EPS side, and we feel good about the $5.6 billion in 2Q.

Okay. Anything on the order comps in -- to keep in mind as we move through the year? You just talked about -- I guess, touched on data center being another strong quarter. Anything to think about in this quarter from an orders perspective?

No, not really. I think if you look at orders last year, the first half was down 6%, second half, I think, was up 3%. But when you look at it at a business level, it was kind of all over the map. If you look at CHVAC, we had really good quarters. I think it was 2Q and 4Q. Transport was really good, 1Q and 3Q, and resi got weak as we kind of got into the middle of the year. And you know that data centers can be extremely lumpy.

So I guess, Steve, short way of saying or a long way of saying no particular call-outs on the seasonality or calendarization of orders. I will say that -- I mentioned in the prepared remarks that Q4 was really strong with data centers, especially in CSA. We continue to grow our backlog. Our orders will be very, very strong again in 1Q. And we continue to win head-to-head, which is extremely encouraging.

Yes. It's really -- you guys have really cranked hard on this data center stuff for sure. In that whole business, the transformation of where you were to where you are today has been pretty impressive. Obviously, you've got kind of empty cupboards from a technology perspective that you really cranked up over the last 6 or 7 years or so.

Well, I appreciate you saying that because we'll -- we were working on something to show when we do our 1Q call that shows the product portfolio that we had on the CHVAC side when we spun and what it is today. So if you looked at -- there's nothing that we don't bid today. And there was a lot of stuff 3 years ago that we just didn't have the products to compete.

So we are -- you think about what we've done, water cooled chillers, maglev bearing, 10-, 18-megawatt. Not only do we have them, but we're winning with those products. 2-, 3-megawatt, air cooled chillers, maglev bearing, precooling. So we are very excited, the screw chillers that we have over in Europe and Asia.

So the product portfolio is night and day. So have we spent maybe a little bit more R&D than a couple of our peers? Sure, but we had to really build out that portfolio. And I can tell you, we're going to have one of the hyperscalers present to our Board next month. But they will tell you that when they witness our FOK, our first of kind unit test and they put us through a bit of the ringer on the requirements, they will tell you to a person that technically, we are performing at superior levels.

And just talk about the shift in the industry from -- not air to liquid cooling, but within the chiller industry from what's going on between water and air cooled chiller because I think people sometimes get mixed up in -- from liquid cooling and air cooling. But within the chiller industry, there's water cooled and air cooled. Maybe just look at -- talk about how Carrier views that transition and how you're addressing that.

We still have both. There was this -- like our first major hyperscaler customer really had a bias for water cooled chillers. And those were 18-megawatt and maglev bearing. And it depends a little bit on your access to water in some of these locations. You know that traditionally, data centers were built in very cold temperatures where water was a little bit more plentiful. Now you're seeing it built in hotter climates where water is a little bit tougher to come by.

So you see -- both are closed-loop systems, whether it's a water cooled chiller or air cooled, they're both closed-loop systems. But when you -- a water cooled chiller will just use more water that needs to be treated. So you are seeing, especially with a couple of the colos, especially in Europe, which has a bias for air cooled chillers, and some of the colos and even some of the hyperscalers, a bit more migration to air cooled.

If you look at Carrier, when we spun, a couple of our -- the key players, I'd call them like 30% share, we were probably in the 10% range. On water cooled, when we introduced this new product line, we went from 10 to 3x that, 4x that in just the last 5 years. If you look at what's about to happen on air cooled, I don't know if we're going to go up 3x or 4x, but we're going to go up exponentially because what we're winning and bidding now a lot are these 2- and 3-megawatt, now they want 5-megawatt air cooled chillers. So our share will de facto increase on the air cooled side as well.

And so is the market going in that direction? Or is that Carrier now pivoting to focusing on share in that direction? Just talk about how the market is evolving. I guess it's still pretty split.

It's still split. I mean, it's both. We have a hyperscaler that we're close on a win with. It will be a mix. They're going to order some water cooled, some air cooled, and it kind of depends on the specific needs of the location. I would say probably a little bit more of a move generally towards air cooled, but you still see demand for both.

And as far as your capacity is concerned with all this growth and all these orders, just talk about where you've been on chiller capacity to date and then where you're ultimately going by, let's say, 2030, where do you expect to be from here?

Well, I think it's -- our capacity expansion, especially here in the Americas, has helped us tremendously. Because we're probably up 3x to 4x for both our capacity for air cooled and water cooled here in our 2 major facilities in North America. So we have the ability to take orders I think that some of our peers cannot. So I think we're winning technically. I think we're winning in part because of the relationship we built with a lot of our key customers and how we support them not just by shipping a product, but also seeing it through to commissioning, the type of aftermarket agreements we're working with them.

And I think, look, we came into the year with about $1 billion of backlog for 2026, not -- that excludes backlog we have for '27 and '28. We committed to do $1.5 billion. I don't think it would surprise you that internally, we're pushing for a bigger number if we're externally going to commit to $1.5 billion.

And so that means we needed $500 million of book and ship business just within the year, and we're pushing for more than that. But I can tell you, we're working with one guy who's kind of vacillating between an order for 2Q and 3Q, and we're telling him, "You tell us what you need and we can support either one." And I don't think there's a lot of guys that can do that.

And is that out of 1 like, main facility? Or are you kind of like leveraging your whole footprint to be able to do this?

We actually try to leverage our entire footprint. We try to deliver for the region within the region. So in North America, we have our Charlotte facility, which we've expanded by 50%. We've converted one of our Monterrey, Mexico facility that used to do boards entirely to chillers now. So we try to do most of what we need for North America in North America. There will be times we import from Asia if we -- before we had some the capacity expansion. But we typically do a lot of in-region manufacturing.

And as far as the revenue numbers here, the $1.5 billion you're doing, is there -- and you call it data center revenue. Is it the vast majority chillers? Or are there other things in there like a BMS or something else that -- some other type of product that may work its way in there? Is the majority of that chillers?

The majority of it is chillers. BMS is meaningful. I tell you, it's one of the unsung heroes within the Carrier portfolio is our ALC, our automated logic controls business, very high margin. It's grown double digits every year since we spun, really well positioned. I mean, kind of the go-to for one of the hyperscalers in particular. It's like we have, I think, 80% share.

But they -- it's a real -- a bit of a gem that's now, I think, going to become the big differentiator. When you think about how do you differentiate with this whole liquid cooling, traditional cooling, I think a lot of it will come down to the controls. And we've gained a lot of share. There was a point at which we were #5. I think when we spun, we toggled between 2 and 3 now in the Americas.

And I think the big differentiation will be the control mechanism between traditional cooling and liquid cooling. Because a lot of -- I think most of us in the space will have the capabilities to do most of everything. It's going to be how you have the algorithms and the sophistication around the controls, and we have this gem of a business that will enable that.

How much liquid cooling revenue do you think you're going to have in '26?

I would say it's probably less than $100 million.

But that's part of the $1.5 billion?

It's part of the $1.5 billion. But we've been -- we've taken the approach, Steve, being kind of very judicious and structured on how we attack this opportunity. There's no question that we believe we have a right to win in the space. We looked at acquisitions on the CDU side. But as you know, it's effectively a mini chiller. So we said, let's just -- we could develop it ourselves or we could go outside. We actually -- pace matters because speed to market. But technology matters, and we have brilliant engineers. We have over 5,000 engineers, a lot of whom design chillers for a living, which a CDU effectively is, it's a packaging exercise.

So we have our own 1-megawatt. We have a 3 and a 5 coming out here in the next few months. Manifolds, anyone can do, never buy. Cold plate, they're still like trying to figure out the best way to handle that. So I don't see us doing a liquid cooling. I think that the key for us is organic development. And if we're looking at M&A, it's probably in the $100 million to $200 million range. It's probably not in the $5 billion to $10 billion range.

And you're saying that cold plate is not an area that you don't really want to go that far into the room?

No, I'm not saying that. I think cold plate is a part of the system. What we're debating is what we want to do in the area of cold plates. I don't think we necessarily need to manufacture cold plates, for example. But do we need people that know -- like today, we work very closely with NVIDIA and Dell and the chip manufacturers. Do we need to build up those skills? Do we need to build up systems engineering? Do we need people that can design cold plates and know how that can interface with the CDUs in the most effective way? Yes, that's a capability that we believe we need, but we're not looking to necessarily get into cold plate manufacturing. There is -- the jury is out on something like that.

Right. And the thing about the CDU landscape is it's changing so fast, that like you don't want to -- it's kind of like the train is moving and you're -- everybody is kind of running, trying to stay close to the train, ready to hop on at any given time. So to pigeonhole yourself into one of the early versions and then have to kind of like constantly redesign, I think it's been interesting to see how all the HVAC guys have -- I think it's the right play to attack it when it becomes a system-level component, which plays right into your guys' strengths.

Yes, you need the elements. The technology, as you said, Steve, will change. We have this relationship with ZutaCore. It was one of our early VC investments. We continue to be very, very...

Is that two-phase or emerging?

Two-phase.

Two-phase, yes.

So we believe we're going to go from single-phase to two-phase. ZutaCore is two-phase. So we like that investment because we think that's not -- it's not whether, it's when we'll move in that direction. We're not spending a lot on immersion today, but we are spending on, obviously, single-phase and now ultimately through ZutaCore, two-phase, and we may look at other things in that space as well.

So the $1.5 billion of data center, maybe a little bit upside there. On the rest of the applied markets, what are you guys seeing there? Pretty much in line as far as the orders and the revenues coming there?

Yes. I mean, the math would get you to LSD on the non-data center piece. And that's really a function of focus. I mean, we have so much energy going into some of the data center activity. But look, the -- I know we have 1 peer that often talks about 14 verticals, but we participate in all those as well. Education, higher ed's kind of made it a bit of a comeback versus last year. Same with K-12, which cuts across light commercial and applied.

Hospitality, we'll see what happens, obviously, with the war and how long that lasts. But hospitality has been doing quite well for us as well. Even commercial real estate surprisingly for us has been year-over-year positive. I saw the ABI numbers earlier today, which were in spitting distance of 50, even projects proposals was above 50. So we'll see. I think we're well positioned in the non-data center piece, but that's about what we thought.

And so as far as this trajectory in the second -- you got a kind of a tough comp, so it's growing low singles, and it's kicking up pretty nicely in the second half. Is that really when the data center shipments really start to hit?

Yes.

In the second half?

Yes. 100%.

Okay.

The backlog is there. It's going to be an execution thing. And we -- I wish it were more linear by quarter. It is what it is. It's kind of how the customers wanted it, but we are really well positioned to deliver that in the second half. We're not worried about that.

Even though it's really cold outside here, we are kind of tiptoeing closer to the spring selling season, so maybe we can pivot to resi. What are you guys seeing out there? I know Watsco was here yesterday and making some encouraging comments about their sales trend. There's a lot in their portfolio, but a little more constructive. I know it's early. What are you guys seeing in the latest turn of the cards there as an indication for the season?

Yes, everything consistent with what we thought, quarter-to-date. If you step back, we said down -- volume down kind of in that low double-digit range, and we said sales down in the high single digit. When you look at it, you would be down about 20% in the first half and up about 10% in the second half. And that 10% is driven by the absence of destocking in the second half. So for the full year, that gives you 5%. I think down around 20% in the first quarter is how we planned it, and things are going to plan. Movement has been -- January and February in line with what we thought, same with March to date. So I feel certainly encouraged by the fact that there's nothing that is in any way worse than what we thought, and we'll have to see how the rest of the quarter and how the season plays out.

I'll say this, that one of the most important metrics, KPIs that we have within Carrier is field inventory. We got burned last year by having more field inventory in the channel than we should have as we kind of went into the season and came out of it in the summer, and we are determined to not let that happen again. So we wanted to end the year and January down 30% year-over-year, which we did. We ended February down 30% year-over-year. And we still are in that range of down 30% as we sit here today.

If you look at where we are, our field inventory absolute levels, if you compare it to a 6-year average, for us at Carrier, it's down about 15% to 20%, and we're back to like 2018 levels. So we're being -- we will 100% support the ramp. And if the ramp is better than we think because of demand or the heating season or cooling season, we will 100% support our customers, but we also don't want to get out over our skis on field inventory. So in 1Q, we were absolutely tracking to what we thought, and we will also be careful to prioritize field inventory over sales, and I think we'll be able to manage both of those equations.

Got it. And so would you -- so you're saying inventories are low. Are they -- I guess, the first quarter steps up nicely from a shipment perspective. They're going to remain pretty low through the first quarter is what you're saying?

Yes.

Into the selling season?

Yes.

Okay. Got it. Okay. You also made a few waves with your industry projection on the quarter -- on the quarterly call, down 15% -- or 10% to 15%, I think it was, right? Are you still feeling like that's the right number? Is there -- is that just a hedge for bad things to happen, as the former CEO of UTC used to say? But -- or what's the underlying model for that one?

Yes. I mean, look, the way we came up with the number was that we said all of these -- this perfect storm we had in the second half of last year, like these 4 macros that all went south at the same time where existing home sales at a 20-year low, soft new home construction, weak consumer, consumer confidence at 30-year that started with a 6. We just assume that all of that continues into this year. And then if you took the second half number and you assume that continues into this year, the second half of '26 versus the second half of '24 would put you down 30%. So we assume the first half would be down 30% versus the first half of '24. So that's how we came up with the math.

Did we want to be confident that we're going to not miss after what happened last year? Of course. But we -- it's a short-cycle business. There's a lot of variables that we don't quite know how they're going to play out. 1Q is tracking as we expected. And then we'll have to see.

I will say, if I may, Steve, that in terms of controlling the controllables, there's a lot of really good stuff we're doing behind the scenes that go beyond just tracking what the weather in Chicago is going to be. I mean, we see hydronics as an enormous opportunity for us, early days there. We see Carrier Energy, this integrated battery heat pump, as a significant opportunity.

You know, Steve, we used to not be a thermostat player. Now we've introduced it at the high end. We're introducing it across the entire portfolio, with digital as one of the real priority areas that we have here in North America. So I could double-click on any of those topics, but I do think there's a lot going on underneath the covers with CSA resi that positions us quite well.

I guess just if you throw all those in, and I know there was an announcement with -- you guys are partnering with Google and Tesla, I think, on the energy storage combination, which is an interesting one. But if you kind of sum all those up, you should outperform the industry if you're doing pretty well on those. Is that like still a 3%-ish, low single-digit percentage uplift for you guys relative to the industry, you think, over time?

It's hard to say a precise answer to that. What I'll tell you is today, we're a little under, like we're close to 1/3 of the market. And we have very high margins in that business. I think the Carrier Energy piece, we've sized at a run rate number of like $500 million of incremental a year. We're working -- that one partnership that we kind of established with Google and Tesla and others to influence local policy is -- we think that's exciting, but we're working closely with 10 utilities and 2 of the hyperscalers.

So that's really exciting. We're going to come out with our Gen 1 product. That's already out there today. We are in Carrier homes. We're testing it. We need to validate that not only will the heat pump move over to the battery during peak hours, but you can return the electrons, the excess electrons during peak too back to the grid. So that's getting certified by EPRI. That's going really well. And then our cost-optimized unit, our Gen 2 unit comes out next year. So that's going well.

Our hydronics, we came out with a unit that is really for an air-to-water, which is a very small part of the North American market. And now for air-to-air, we have technology that others have with an integrated heat pump with a boiler, but we're also working something else in kind of the more to come category that I think could be quite disruptive that will come out next year that can get us more -- leveraging our heat pump to get us more into that hydronics space for air-to-air market.

Where are you on ductless now in your portfolio? You guys -- Toshiba, obviously, good technology move. Where are you on ductless now?

Ductless is great. I mean, it's a high-margin business for us. When -- I would say, 2010 that we were probably like 5%. And today, it's in the high teens in terms of market share. So we've come a really long way. We're in spitting distance of 20% share. I remember actually at our Investor Day...

Is it globally or U.S.?

I'm talking U.S. right now.

U.S. Yes, got it.

We're using the global technology. But specifically for the ductless market in North America, we've gained share. If you look at the crossover unit that we introduced here in North America, we did that 3 years ago. Since we've done that, our CAGR for that unit has been 36% over these last 3 years. So some people don't even realize that we have -- that's really what you even asked us about. On February 10 of 2020, at the New York Stock Exchange, you were focused on ductless. Rightfully so, you thought it was a growing market. See, I remember what you...

That's when you said you have a guy in the basement calculating the market and the replacement age.

Yes, we're going to go out.

Yes. Because he says the guy in the basement, is he still around?

Yes. No, we let him see the sun once. Every 5 years, he's allowed out. Actually, last year, he was not allowed out.

Yes, yes.

So -- but if you look at this this unit that we introduced last year, it's basically -- the external unit, as you know, is ductless, and it could pair with either a ducted or a ductless indoor unit. We've gained tremendous amount of share. And that's part of the beauty is we can leverage Toshiba technology. We can leverage Viessmann technology to gain share in that really important space. It's very high margin.

If you look at our ductless business in the U.S., that new product that we introduced just 3 years ago is 40% of our sales today. And we're working on more innovation. So ductless in the U.S. or North America is about 15% of the market. It's growing. It's growing quite well, and we're really well positioned there.

Can we just talk very quickly about price? You referenced the 1% for resi. What do you expect for price? Any updates there as we kind of move into the selling season that's pretty much set, that's pretty much baked?

Yes. We feel good about that.

Okay. Okay. And then just going to touch quickly on Europe. What -- any update on the dynamics there? Dover was here yesterday. They do the heat exchangers at SWEP. And they were pretty bullish, saying it's bouncing off, but off of a very low level. They don't quite have the boiler offset that you guys may have. But what -- any updates there of note since the fourth quarter?

Well, look, I think the short answer is no major updates, things are tracking to what we thought. I would say heat pump is very strong. We said heat pumps would be up double digits. Our model assumed boilers down low single digits, but we also have the market down mid- to high single digits, and that will be driven by boilers. I think that -- so when we look at 1Q, everything is tracking to kind of what we thought.

The thing to watch, I would say two things to watch in that market that are perhaps in the category of reasons to believe that we may -- as we start to dig our way out of this, I mean, you think about the German market, north of 1 million units down to 600,000, that's a big pill to swallow over 3 years. But number one is we have this new product coming out that will be transformational. We -- today, Viessmann, a very premium brand. This one will be in the mid- to upper tier, Viessmann-branded. Lower cost product, but lower cost to install. So if subsidies come down in certain countries, this is like perfect not only for the German market as a second offering or to convert non-Viessmann installers, but in places like Poland and elsewhere, this is like perfectly positioned. So this product is 100% one to watch.

And then we're going to have to see the impact of this war because, obviously, there's more planned replacement on the residential side in Europe than there is North America. And what happened with the Russian invasion of Ukraine was there was a lot more -- there was this kind of rush to move away from fossil fuel because Europeans get reminded that 85% of their natural gas comes from outside of Europe. And you don't want to -- they don't want to be reliant on Russia or the Middle East or the U.S. So we're going to have to see when natural gas prices went from EUR 30 per watt hour to almost 2x that in the span of 5 days. It's a bit of a reminder that it's probably a good idea to switch to heat pumps over time. So we'll see the impact of that over time.

So it sounds a little more encouraging on -- but nothing in the results. Everything is kind of on track so far, but a little more encouraging, some signs of life?

Yes.

On the light commercial side, just really quickly, anything moving there relative to guidance? And any verticals stand out?

No, I'd say the two that probably stand out, K-12 is a little bit better than we thought. Retail, especially where we go direct to the retail customers, the national accounts, those are going very well. We said that 1Q, the first half would be down around 10%, second half down mid- to high single digits. I think that in 1Q, it's probably slightly better than we thought it was going to be, but we'll have to see, a couple of weeks left.

And then lastly, just the transport refrigeration business. Is this a keeper? Is this going to remain in the portfolio?

We like the business. We like the business. Ed Dryden and the team are doing a very good job. The way we handicapped the year at flat year-over-year that -- the Container business just has really tough comps, and then Truck Trailer would be a little bit more positive and offset some of that. I'd say to start the year, container has been stronger than we thought. I mean, if you think about some of the impacts of the war, one is suboptimization of the container fleet out there, which can drive more orders. So I think Container in 1Q, 2Q will be probably a little bit better than we thought, but we have really tough comps in the second half.

But we got to keep our eye on Truck Trailer because their customers are under some pressure with raising fuel prices. So we are where we thought we would be, and we feel good about the first half of Container. We'll keep an eye on the rest of the business. But no real new news, and it's a good -- it's a really good high-margin business that's got -- been dealing with some of the short-cycle stuff at recent lows, and those will come out of that.

And then the -- just moving to the bottom line, the $50 million to $100 million in positive price/cost spread, I think that's the number. Is that still intact? And anything moving around on tariffs?

No. Look, the one thing I'll say on kind of tariffs overall, you have IEEPA, you have 232, you have 122. And so we deal with input costs that are all over -- that change every day. It could be raw material, it could be tariffs. The short answer to your question, Steve, is no news. But we will get a point of price, give you a couple of hundred million and you combine tariffs and raw material, that's a couple of hundred million, and we'll offset one with the other.

But I do believe that I think it's a misnomer to say that all we did is pass IEEPA along to our customers because when you have input costs that go up and you're raising price, it's hard to do a one-for-one connection to that. So we manage all kinds of moving parts in the cost and price formula to get where we need to get to. But we have a formula around productivity that's been proven to work, and it will work again this year.

So is there a little bit of upside there, potentially?

I don't think so. I don't want to say that. It's premature to say that. But we feel like -- we feel that we can overcome a lot of surprises. We have, every year since we spun, whether it was COVID, supply chain issues, maybe you see some logistics issues that happened with suboptimization of container. We don't worry about surprises because we have a formula that works.

Great. Any questions out there? We have time for one question, maybe. Nope? Nobody asked a question the entire event.

Maybe your last event, someone would do it.

I mean, look, I just think I asked all the great questions. Not enough out there.

Yes.

All right.

Thanks for having us, Steve. Appreciate it. Good to see you again.

We are very excited to have Carrier Corporation with us today. We've got Dave Gitlin, who's the CEO; and Patrick Goris, who is the CFO.

Dave, as I walk over to you, obviously, you had your Investor Day almost a year ago now. There's been a little bit of noise, as you know, out there about a couple of end markets. But I think the highlight of the Investor Day for me was about Carrier promoting accelerating growth, right?

Yes.

And I think you said you would drive that outperformance in growth through continued new product development, aftermarket, increasing systems-related growth. So as we start '26, where do you think Carrier is on that journey to increase that performance?

When you look at 3 of the 4 elements that we talked about with our growth algorithm, products, aftermarket systems, we said combined, that would be around 4 or 5 points of growth, and we feel good about all of them. Aftermarket, the formula works; product, we're introducing new products, we're gaining share. We're surely gaining share in data centers.

And systems is this new frontier for us with things like CDUs to build out a QuantumLeap offering in data centers; Carrier energy, system-level offerings in HEMS in Europe. So in terms of those 3 controlling the controllables, we feel great. The issue we've had is this year, we're going to face about 3 to 4 points of market headwind with our CSA RLC businesses down high single digits and some continued headwind in the residential business in Europe.

So have -- had it not been for some of those market headwinds of 3% to 4%, which puts the whole company plus about 1%, even just a couple of points of market headwind would put us in our growth algorithm of 6% to 8%. I don't know if we get there in '27, but I can tell you, as soon as we get a little bit of short-cycle market tailwind, which we would expect, we get back into that 6% to 8% range.

Got it. And Dave, I know you just reported a couple of weeks ago, but you're with my peer earlier today. Like has anything changed in your outlook? I'm just wondering like anything new that you want to sort of talk about.

No, the short answer, Andy, is 100% nothing new. 1Q is what we thought. Full year is what we thought. Calendarization is what we thought. There's nothing new.

Easy enough. So 2025 end up being a little bit more challenging as you talked about. Are there any actions you can take to better anticipate potential perturbations in resi HVAC? I know it's cyclical. You know it's cyclical. Like what are you doing to sort of make sure you're on top of what's going on in the market these days?

Well, I think it's a couple of things. If you look at how we've been talking about the market, we're looking at what would be a standard mean, 9 million units per year. And when you're going through a phase where you have multiple years ahead of it, alarm bells should start to indicate that at some point, you probably will go below the mean. So I think there's through -- a few lenses through which we can look now with the benefit of hindsight that looking at inventory buildup as we got into the end of the second quarter, there were some indications that we look at more now than perhaps we were a year ago.

Two is our channel contacts. We have weekly meetings not only with Watsco, but all of our independent distributors going super deep on all the early indicators. We're doing a lot more around field inventory management. We said we'd end last year at 30%, we ended January at -- down 32%. Our inventory levels continue to stay low, and we're doing a lot more on keeping field inventory levels low.

And then we brought in -- one of our hyperscaler customers helped us with some of their AI specialists where we not only look at the macros, things like existing home sales, new home sales, consumer confidence, interest rates but we also obviously look at movement, sell-in and inventory levels, but they're also saying you could look at other things like clicks on Zillow or other things like that.

So between indicators, daily, weekly communications with distributors and dealers and the macros, I think we're incredibly in tune. And remember, we hadn't missed resi for a number of years. So we'll take -- we took a lot of medicine last year. We've learned a lot from it, and I think we've really positioned ourselves well going into this year.

To your point, and Patrick can chime in if he wants to. But like you set the industry volume decline this year down 10% to 15%, right? And I think it seems appropriately conservative, but maybe you can comment on that. And in that vein, have resi orders been tracking so far early in the year the way you would think?

Well, obviously, it's still very early...

It's furnace season so.

We just gave give guidance 2 weeks ago. But anything we're seeing this quarter is consistent with our full year guide, including the guide for Q1. And frankly, this is the quarter where our distributors would start to build inventory for the season. And that's what we would expect. And therefore, we would see -- we would expect to see increasing volumes as the quarter progresses as we typically see every year. And so distributor inventory will be up sequentially, but still down significantly year-over-year by the end of the quarter.

Got it. That's helpful. And then maybe one more resi-related question. Given the cost and productivity actions you took in '25 and as you're navigating the Americas resi challenge, how are you thinking about operating leverage and incremental margins in your Americas business in the second half of '26 and into '27 if resi does start to come back?

Yes. So what we've seen, unfortunately, in the second half of last year is how painful it is if that business contracts significantly in a short period of time. So we've seen significant decrementals. Obviously, that also means that as the business improves and we see growth year-over-year, we expect to see very attractive incrementals. And so for the second half of this year, the incrementals in CSA will be attractive because of resi will be up double digits second half of the year in sales given the absence of destocking. So the incrementals should be in the 40-plus percent range.

Yes, very nice. And then maybe, Dave, just staying within your Americas business, light commercial sales, as you know, were down 20% in Q4 and for the year. But you also did note that field inventory is down materially with light commercial distributor inventories down 25%, but you still expect a high single-digit decline in that portion of the business in '26. So what's the outlook for that business? Like how are you feeling about that right now?

I'll give you a few pieces of good news is orders up 70% in 4Q, even though an easier compare because it was up 20 -- it was down 20% in 4Q of the prior year. Field inventory down 25%, as you said. We're introducing a lot of new products, which is in the past and continues to be a lot of tailwind for us because we are quite differentiated with our rooftop units. So I think the thing that's hard to gauge will be the 35% of that business that's planned replacement is probably under a little bit of pressure with the small and medium business owners.

And then nearly half is a replacement business. There's going to be some pent-up demand for full replacements. We'll have to see exactly when that kicks in. So the team is doing a nice job to set ourselves up for this year. We guided down high single digits. We'll have to see how the year evolves.

Dave, I was with one of your competitors yesterday, and they talked about retail maybe getting a little better. Like I don't know if I should get excited about that. But what do you think about different end markets within unitary...?

When we look at the end markets, I would say retail hasn't shown a market improvement from an industry, but our share has had significant improvements in retail. We go direct in that business to some of our national account customers and our win rate with new national account customers, major national account customers has been very, very high. So retail for us has been very, very strong. I think for the industry, it's probably still a bit muted.

K-12 was very soft last year. It is showing signs of life to start this year, which we had thought it was going to be a little bit better because a lot of that Esther funding was going to shift over into state bonds, which we're now starting to see being released a little bit. So a couple of the verticals do look promising. We'll have to see how 1Q, 2Q play out. But I think we've set the bar at a conservative level, and the team is certainly grinding to do better than that.

Dave, to your point, there's no unitary markets that's -- I mean k-12 is already pretty bad. Is anyone still going in the wrong direction, you think? Like I know your guide is still down, but...?

No, it's hard to say. I think that there's nothing that is trending worse this year than it was last year. I mean some of the warehouse has been softish. Commercial real estate has been soft. Frankly, despite the ABI numbers, that's even been showing signs of life over the last couple of months. Frankly, surprising to us, that's actually gone a bit well. So nothing that's terribly off the rails. We just have to watch some of the small and medium business owners to see their confidence level to start releasing some CapEx for planned replacement.

Got it. And then obviously, Americas commercial HVAC has been a highlight for you guys. Q4 orders up over 80%. You doubled your data center business, you're going to do another 50% in '26. So given the significant focus you have, can you talk about how you're differentiating right now in the world of data centers? What are you doing?

Yes. I think a lot of it has to do with how we are introducing new products that are right in the sweet spot of what our customers want. We saw it with water-cooled chillers where we introduced these 18- to 20-megawatt maglev bearing chillers on the water cooled side, and our share went from 10% to close to 40%, and we're doing the same playbook on the air cooled side. So we've been working with our hyperscaler and colo customers. They wanted 2-megawatt, 3-megawatt, maglev bearing.

We've been introducing those, but with the specific requirements they want in terms of free cooling, quick restart. So as we've iterated with our customers between the interplay between air-cooled and water-cooled chillers with a point design that's very specific to what they're trying to accomplish with their data centers, we've seen significant share gains in data centers.

So I don't think on air cooled we'll have the same 10% to 40% but we are going to de facto gain significant share. And if you look at this business, Andy, when we spun, especially in the Americas, where the team has done a phenomenal job, we were mid-single-digit ROS and kind of a distant third. We've come so far by investing in capacity in North America. We invested in the product portfolio, in technicians, in the sales force, in spec engineers and design engineers.

Hats off to the team because that's been a complete turnaround. Margins is now in the mid-teens. Our data center orders in 4Q for the applied business was up 400%. We were up 5x. So we had great orders last quarter. Orders this year in the first quarter are going to be good. So we're differentiating and we're gaining share.

Dave, as you know, the technology changes really fast, right? So how do you ensure that you're sort of keeping up with it? Obviously, there was when Jensen Huang came out and talked about maybe using warmer water things. So like how [ spected ] are you? How do you think about that technology evolution?

Yes. We think that the game ultimately gets won at a systems level. So we're investing a lot in our traditional chillers. And I think that if you look at what I believe Jensen Huang was saying is that the input temperature, 45 degrees C is the same for the Blackwell and the Vera Rubin chips. So you're going to get more power effectiveness -- power usage effectiveness out of the same chip, but the cooling needs are fundamentally going to be the same.

It will just be a more efficient chips. So we will have chillers going forward. You will see the chiller market continue to grow 20%, 25% a year. We've been growing more than that because of share gains. And liquid cooling will grow 2x traditional chillers. So we've invested in our own CDUs, a new -- 1 megawatt. We have a 3 and 5 coming out later this year, and we're spending a lot to leverage our BMS business because we've become one of the top couple of players in our ALC building controls business. So having our own liquid cooling, especially through the CDUs, having our BMS, having our traditional cooling and then using things like AI and digital twins to look at system level differentiation.

Dave, similar question around capacity because you've talked about it, you need to really jam on the capacity pedal. So are you still staying ahead? Could you've gotten more orders? Like how do you think about that over the next couple of years?

Yes. I think we've invested a fair amount, and I think we're in a good place now. We've expanded our Charlotte facility. We took a facility in Mexico that was doing controls. We've outsourced those controls, and we repurposed that entire facility to chillers. It's the size of multiple football fields. So we've added the capacity in our 4 walls. And I think we now have that footprint. We're now ramping our suppliers. We want to dual source as much as possible for contingency planning purposes. So we feel really good about the capacity for North America.

Got it. And let me ask you about commercial HVAC outside of data centers. Like any markets that also are surprising on the positive side and/or the negative side?

Well, South -- when we look in Asia, we've seen great growth in India for data centers. We're seeing it in the Middle East, in places like the UAE and Saudi. And then we're going to start to see a lot more data center growth. We were in Japan recently. We're going to see good data center growth in Japan and Southeast Asia, in places like Singapore and Malaysia. And then Europe, what's happening in Europe is you can look at fairly lumpy sales.

So we're bidding on some very major colo type bids that we feel very confident in. And it's -- you can't exactly time when they're going to land. They will land. Europe will grow over time on the commercial HVAC side significantly. This year, we've said mid-single digits. Over time, we're very well positioned. There's a lot of growth in Western Europe in particular.

I can't resist asking you because one of your peers who was on stage with me, like all of a sudden had a big influx of European orders, I would imagine significant thermal management. So have you seen more activity, though? Like are you more confident in that starting to be a new part of the cycle?

Yes. We're seeing a lot of bidding activity. We're very well positioned, especially on some of the major -- like you're talking about facilities that are in the 1 gigawatt range. So we see a lot of bidding activity. We are in advanced stages on those, and we'll see how those play out. But Europe is showing signs of data center growth here as we look over these next couple of years.

So maybe just focusing on Europe for a second. Can you remind us of the relative mix today in Europe of commercial HVAC versus resi and light commercial heat pumps and resi like commercial boilers?

Yes. So you look at Europe, think of it as $5 billion. It's about 75% RLC, 25% commercial. And then within the RLC side, it's about 30%, 30%, 40%. It's about 30% heat pump, 30% boilers and then 40% all other. And that all other category includes aftermarket, which is margin accretive. And then it's got stuff like solar PV and battery, which is a little bit below the margins of heat pump and boiler.

What we -- when we look at Europe, in terms of that controlling the controllables, you look at our growth algorithm, a point of price, a couple of points of aftermarket. We need market instead of being headwind to come back, which ultimately it will. This year, we've said it will be down 5% to 10%. And then that big bucket of initiatives, we feel very good about things like air conditioning sales, system sales.

The one to watch that I'll tell you that I think could be the most important is new product introduction. And later this year, as we have a new offering that's coming in below that premium kind of in that mid- to upper mid-tier range, that's a game changer. And we can't wait for that to come out, Viessmann branded, targeted at new installers converting over to us and even a second-tier offering for our existing installers and for new customers. That one we're very excited about.

So again, I can't resist, Dave. So what does a game changer mean? Like '27 sales, how broad is the product offering? How do you think about that?

Well, it hits a much bigger class. So what's happening in Europe is as you see uncertainty around subsidy levels, those have been swinging, our whole mantra has been we're going to win and grow regardless of what governments do. If we have a business model that relies on what the Italian and German governments do, that's not a sustainable business model. So we have said that we're going to introduce products to make sure that we can win and grow independent of subsidy levels.

I would not be surprised in Germany if subsidy levels come down. Our guide assumed that, in fact, that happens. So one of the reasons this product is so important is it's not only lower price, lower cost on the OEM level, from an installation perspective, the indoor unit is a fraction of the size, the digital capabilities are significantly advanced. So it's a product that's going to bring the cost of the system installation down. So we think it's significant.

So I feel like the kid in the backseat of the car asking you if we're there yet, but like you mentioned subsidies kind of swinging around. Like what do you think it's going to take for the German market to sort of bottom and start to improve?

I think a couple of factors. Number one is we do need certainty on what's going to happen, not only with subsidy levels, but the heating law. So I think the ambiguity uncertainty around that has caused a bit of a paralyzing effect in Germany. I think we've taken a whole lot of medicine. We talk about the overage in the United States and now we're in that underage. That's been happening in Europe. Germany averaging 800,000. We were north of 1 million units. Now last year, we were at 600,000.

So I think in terms of absorbing that overage, we've done that. It does feel in Germany and other parts, fiscal stimulus is positive. So there's some sense that optimism is too strong a word, but having spent a week in Europe last week with our installers, there is a sense that this market will start to recover. I asked to a person, all of our installers, if subsidies come down, heating law goes away, does customers go back to boilers, the sense is that train has left the station.

The transition to heat pumps is happening. So we'll get that mix benefit with heat pumps up double digits, boilers down low to mid-single digits. We've gotten some of that noise around floor-standing boilers fundamentally behind us. A little bit of market tailwind, and we're really well positioned there.

Yes, I agree. I'm going to open it up to the audience in a second, but I want to ask you one follow-up on European commercial HVAC. We already talked about data centers, but anything else leading to a little bit of optimism there? Any other markets helping out?

Generally speaking, for commercial HVAC is hospitality, higher education. That's where we see some activity as well. And our overall guide is for growth, of course, in data centers and non-data centers to be up low single digits or so for the year. So we see some activity there in some verticals.

Any questions there?

One more time can you talk to the residential market in the U.S. in terms of the conditions you're seeing either by region or by different end categories?

Sure. The question is around resi in the U.S., what we're seeing?

Yes.

In the first 6 weeks of this year, we're seeing what we kind of thought we would be seeing. The way we've kind of positioned the year is that unit volumes in the industry would be down 10% to 15%, we'd be down high single digits because we get a bit of benefit of the absence of destocking in the second half, we get a couple of points of price. In terms of the start to the year, it was a colder start to the year. It benefits furnaces at the margin.

But the truth is we won't really know until we get -- what drives our business is splits. We won't really know until we get into the cooling season as we get into that March, April. Builder -- our channel partners will start to build in anticipation of the season, and then we'll have to see how movement plays out. So I would say, start to the year, no surprises, certainly no bad news, and we're going to have to see how the first couple of months play out over these next few months.

Any other questions? I was thinking about you as my furnace was running all out, like is there any potential for -- I mean you got to replace these things, right? And the OEM does it. So -- but you can't really see it yet if you're -- is that what you're kind of saying?

Furnaces were higher than we thought. I'm saying it's not a needle mover. We have so much of our sales are split. So was there a bit of upside to start the year in furnaces? Yes. Does it change our 1Q forecast? No. I think the key is going to be underlying demand as we get into the season, we don't want to discuss the weather. We just want to see that existing home sales hit like a 20-year low. There's some discussion in the marketplace that existing home sales will start to improve.

We'd love to see the 30-year start with the 5. We'd love to see a little bit of upside in single-family new home construction, which is flattish, maybe up a point or so. I'd like to see a little bit of upside on that. So I think we've calibrated this year where we've assumed that all the badness we saw in the second half continues through this year. If any of those factors get better, then things would be better. We're going to have to see how things play out, though.

Any other questions from the audience? So let me ask you, Dave, about CSAME. I know it's a little bit smaller portion of the business, but it's been more difficult maybe for us to get a read on. It was down high single digits in Q4. So maybe talk about the puts and takes that's impacting that business.

Yes. Think about the business as $3.5 billion. It's half China, half everything else. And then within China, it's about half commercial, half residential. Outside of China, we've said up high single digits. And there's some great growth opportunities outside of China in Asia and the Middle East.

Japan grew 8% last year. We've had a good start to the year. India, we're adding a new facility in India because of the demand that we're seeing there. The Middle East between Saudi and the UAE is very encouraging. Southeast Asia, 4Q, Thailand was a bit lower than we thought. But in general, we're seeing nice demand in places like Singapore, Thailand, Malaysia. So outside of China, we feel good. Now we've guided China to be down high single digits with the residential business down about 20% and maybe flat to up a little bit -- up a couple of points on the commercial side.

Residential is hard to say. We've actually introduced some new product offerings with Toshiba branded. So that should give us a little bit of lift, but that market has been tough for a long time, and it's hard to find bottom there. Commercial HVAC, we have an opportunity, like batteries are being shipped around the world out of China. So that piece is quite good. EV is quite good. Data center is quite good. So we'll have to see how C HVAC plays out. But overall, that has the potential to be over any kind of sustained period, one of our better growth trajectory regions.

To that point, Dave, like I don't know whether we have a trade deal with Japan or not, but like you mentioned a couple of times, Japan, I feel like Carrier would benefit if that happens, right? Is that something that you've talked about?

Yes. I mean we're very -- the Toshiba brand is very strong in Japan. We're very well positioned. We have modular chillers that are perfectly sized for some of the commercial growth, but especially for data centers. I actually think Japan is going to surprise the world to the upside on data center investments. It could be 18 gigawatts over time, especially along -- maybe 12 of that along the eastern part of the country. So we're well positioned in Japan. I think investments are going to increase, especially in our sweet spot. We've gotten margins up into the mid-teen range from basically flat when we purchased the business. So the team in Japan is doing well.

So I think you've guided transport relatively flattish for the year, but there's obviously a couple of different pieces of the business. Maybe talk about the puts and takes in that business.

Sure. One business that has done really well within transport is container, had an exceptional year last year, started out this year very strong as well. At the same time, global truck and trailer has been weaker. And there is a margin differential between the 2 with truck and trailer having generally higher margins, especially in North America. And so we've seen growth, but from a margin point of view, we have not seen the full benefit of that. The first half of this year, our guide assumes that container continues to be really strong.

As I mentioned, that's what we've seen so far this year. And we would expect truck and trailer to pick up a little bit in the second half of the year, whereas container will have tougher comps. So we would expect margin to improve a little bit in the second half of the year from where we have been last year.

Got it. Got it. And then I did want to ask you about aftermarket. It's something that I know is near and dear to your heart. I think you've said maybe you [indiscernible] maybe not double digit forever. But maybe talk about how it's proceeded versus sort of when you first came in, you obviously came from the aerospace world. So is it easier, harder to capture installed base here? Like how do you think about your aftermarket progression?

I think the opportunity is the same. The issue is that to drive an effective aftermarket business, it has to be in the DNA of how you run the business from everything from how you design the product, how you support your customers, how you price the product, how you think about your relationships with your channel partners and your suppliers. So we've done a lot to change the entire nature of how we run the business and how we run the aftermarket business.

So we said, you need your devices to be connected. We used to have 17,000 a few years ago. Now we have over 70,000. We said that we need more long-term agreements. We used to have something like 40,000 or 50,000 of our chillers under service agreements, and now we have 110,000. So we had to change the nature of how we work with our channel partners in terms of how they buy spares from us.

So that's a work in process. But what we did in the United States is we started with a single branch, and we said, what does good look like? And we optimized that branch with Salesforce, ServiceMax. How we look at productivity of our technicians, how we support our technicians, how we get parts on to vans into a job site, what are the key KPIs we look at, both leading and lagging. We said we're going to make this branch in the United States the absolute model of what we want.

And then we cascaded that across every branch across North America, and now we're doing the same in Europe and Asia. So it's in the DNA. We've said double digit forever. We only capture about 25% of our own aftermarket, which you could say is a shame, but you can look at it and say it's an enormous opportunity, and we look at it as the latter.

So I think to that point, you -- close to 60% in the Americas, right? So like is there something you can take from the Americas? Is it just a different market in these other places, you can't get as much? Or like how do you think about that?

Didn't get the question.

Just Americas is 60%, the world is 25%. So where is the better opportunity? Is it in the Americas? Or is it capturing the rest of the world, do you think?

It's both -- from an overall company point of view, clearly, it's both. And within the Americas, we benefit from a huge installed base. And for example, our Carrier energy and home energy management systems, I think it puts us in a unique position to work with utilities and to go after the HEMS opportunity with the integrated home the heat pump and battery system.

At the same time, our opportunity with -- outside of the U.S. clearly, from a market point of view, our market share is not as strong as it is in the U.S. So it's an and. It's not an or. And I think our investments reflect that.

David, it's a good opportunity to ask you about AI and how you're going to infuse it in the aftermarket. It has a chance to, I think, augment, right, but also disrupt. So how do you think about it?

Yes. We want to use AI to play offense and grow the business. What you'll find is there's -- in general, not just in our industry, there's a lot of data out there that is being underutilized. So we launched a new platform that it's called Tell Me More. And we get data through our Abound digital platform. We get data from our technicians that gets logged into things like ServiceMax. We get data from our channel partners.

We're aggregating the data that we get from various inputs into a concentrated data lake. And then we're using AI to drive solutions for our customers. So for example, as you're getting that data, we're looking for patterns to say, this would be an indication either because of the thermal or vibratory condition that this unit is going to fail and you should take a preventative action. So we're very excited about using AI to help our technicians, whether it's residential or commercial out in the field and also to drive more stickiness with our customers.

We're, of course, using it on the productivity side. You think about the complexity of warranty management on the residential side. So we're using AI there. Patrick is using it within the finance department and elsewhere. So we think we're in the early innings. But in addition to productivity, the one that excites me is using it to drive growth and customer stickiness.

Patrick, you mentioned HEMS. So I just wanted to ask you about it. I mean I think you're rolling it out into the Americas in '26, right? So maybe give us more color on the business model as you roll it out and the revenue opportunity as we think about it over the next couple of years.

Yes. And so you may recall that last year, we started pilots in the homes of some of our employees. Those pilots have shown that during peak hours of demand on the grid that we're able to power the HVAC system of those homes through the battery and then recharge the battery during off-peak hours. So there is a lot of interest of utility companies to kind of validate that. So that is going well. This year, we expect the first revenue to hit our books.

The one thing that we're still working through is exactly how that model will look like. And it is more likely than not that we will have different models in different parts of the country because of different utilities and different regulators. But the premise is that -- or the objective is that for us, we don't -- our objective is not to have the homeowner pay anything more out of pocket than for a heat pump. Meaning the homeowner replaces their heat pump or replaces their AC system, buys a heat pump. We attach to that heat pump a battery.

So it's an integrated heat pump with a battery. So the homeowner is not more out of pocket. The utility companies have a benefit because they don't have to fight up expensive power during peak hours. And so they're willing to share some of that benefit with us. And so how that model between the utility companies and us looks like, that is still under discussion with the different parties. Some of that could be a mix of upfront with over time, payments to us. Some of it could be all over time. That's what we're going through now.

Helpful. So maybe just a question on pricing and price versus cost. You mentioned, I think, $60 million of net headwind from steel, copper and aluminum for '26. You're offsetting that headwind with approximately 1 point of price. But maybe talk about the steps that you can take if costs drift on you on that side. I think you said you're 50% blocked for the year, but do you have any other protections?

Well, as a rule of thumb, irrespective of what material prices do, we drive a lot of productivity. Material productivity, we redesign our products. We take a lot of overhead cost out as we do every year. We look at warehousing and logistics. And so in the current circumstances, we see some headwinds from copper and aluminum, particularly. Our blocking policy helps because it basically helps us delay the impact of that. It gives us a little bit more time to take some more cost out of the system.

But at this point, the headwind in is that $50 million to $100 million range, net of the blocking. We've seen some of the prices come down a little bit in recent -- I think it was last week. But our approach is the same. Irrespective of what input costs do, we try and offset it with additional productivity. And of course, there is a price lever as well. And this year, as you heard us say, we expect low single-digit price realization.

And when you say prices come down, you're talking about the commodity prices.

Yes.

Yes. And Patrick, you do have usually like a stockpile of productivity projects. Like how is that stockpile like...

The last several years, I think we've made tremendous progress on that. It used to be that at the beginning of the year, I think shortly after the spin, probably less than half of the productivity year was identified. That's completely switched now. And so well over half of the productivity is identified as we start the year. And it's basically an engine that I think is running well. For this year, we've added to that the extra overhead savings that we implemented last year as we saw the slowdown. You may recall, starting summer last year, we took out additional costs, and this year, we'll benefit from the $100 million of overhead savings in addition to, call it, the regular cost out materials, logistics, warehousing and everything else.

Yes. So Dave, obviously, a lot of portfolio transformation over the last few years. Maybe give us an update on how you're thinking about capital deployment going forward, potential for meaningful buybacks as you've been doing maybe versus incremental tuck-in M&A or other investment priorities.

We talked about $1.5 billion of buyback this year. We certainly plan to do that. Look, we will continue to make our priority investing in organic growth and to grow the business. So we continue to invest in R&D and CapEx to drive growth. We'll be very targeted on the M&A side. We are not looking at the big transformational, multibillion-dollar type things right now. We're in a phase of heads down execution. We have a boatload going on with data center activity.

Obviously, we see huge opportunities around some of the system-level offerings. The aftermarket opportunity is tremendous. We have our shorter-cycle residential and truck trailer type businesses that we want to make sure that we're prepared for when they eventually do ramp that we can support that recovery. So we'll do some smaller type M&A here and there. But right now, our priority is not doing the big multibillion-dollar type deals.

And you feel like you have the technologies you need? Like one of your peers bought something last night in terms of dealing with data centers and all that kind of stuff?

Yes. We -- obviously, we looked at the same thing. I think that when it comes to things like liquid cooling, what we're looking at is what does it take to win? What do we have? And what is the most cost-effective way to get -- to fill any gaps on what it takes to win. So we said, you know what, to win, we need a CDU. And we could have gone and bought someone for hundreds of millions, but we said it's a lot more cost effective to do it bottoms up.

So we've now developed our own 1, soon to be 3 and 5-megawatt CDUs, and they're extremely competitive in the marketplace. The one you're referencing is a cold plate technology. Do we need it ourselves? Do we need to partner? Do we need to buy it? So we need to figure out what do we need to win? And then when it comes to those things, if we have a gap, what's the best way to acquire? We have an investment in a company called ZutaCore that is a 2-phase solution. They, of course, have access to things like CDUs and cold plates. So we have a lot of ways to fill whatever perceived gaps that we think we have to make sure that we can win in the marketplace.

That's helpful, Dave. And last question, what are the top 2 or 3 innovations and structural changes affecting your company over the next 5 years? Are there any emerging industry trends that are perhaps being overlooked in the current discourse?

I think a lot of the differentiation is going to take place at the systems level. If you look at North America, we would tell you that our products are quite differentiated, but I would bet you if you had our peers on stage, they would say the same. So in places where we don't have that degree of differentiation at a product level, the differentiation will be at a systems level.

What Patrick was describing for HEMS is the new frontier. If you had a battery electric solution in every Carrier home and building, that would alleviate 13% of the demand that's put on the grid during peak hours. Our solution will win there. And our solution on QuantumLeap for data centers, we are incredibly encouraged about because we believe that integrating traditional cooling, liquid cooling, data server management and the building management system that we believe is where the game is won, and we think we have a unique portfolio to win there.

Awesome. Well, Dave, Patrick, thank you very much. Appreciate it.

Thank you.

Thank you.

Great. Good morning, everyone. Welcome to day 3 of the Industrials Conference. It's my pleasure to start today with Carrier. We have Dave Gitlin, Chairman and CEO; and Mike Rednor, Investor Relations.

So thanks very much, both of you for being here today. I think we'll get straight into questions.

And I suppose, first off, thinking about the overall top line outlook, you have that 6% to 8% organic growth goal, and obviously, it's a through-cycle target. You've been below that the last couple of years for some well-rehearsed reasons. What do you think the probability is that you can get into that 6% to 8% range in the next few years?

Good. We feel good about the algorithm. You can look at it -- Julian, and thank you for having us. You can look at it from a short and a long-term perspective. Short term, you take 40% of our portfolio that's growing double digits, that should give you consistent 4 points right there. And that's commercial aftermarket, this will be our sixth consecutive year of double-digit growth. Our backlog is only getting better on the data center and CHVAC side.

So we feel very good about sustained double-digit growth there as we do with aftermarket. This year, we end up around 1% growth because if you think about our RLC business in the Americas, that's down high single digits, which on a $6 billion or so type business, that's giving you a few points of headwind.

You have China container business. So that is a little bit additional headwind. So if all you had was flat in RLC in the Americas, a little bit of growth in places like truck trailer and RLC in Europe, some level of stability in China, you definitely get into at least the low end of that 6% to 8%.

If you think longer term, the algorithm we laid out was 4 elements, one of which was product, give you a point or so a year. We feel good, we've been getting that. We get 2 points from aftermarket, double digits on 25% of the business, and then a point or 2 from systems. So call that 4 to 5 points. Right now, our -- the market, which is what it starts with, is about 3 to 4 points of headwind. That's what you gets you to 1%.

If market is just 2% of growth, which it should be over any period of time, 2% plus that 4% to 5%, you're in that 6% to 8% range. So we think the algorithm is great. We're facing some short cycle, short-term headwind, and then we'll start to recover from that.

That's great. And if you kind of dive into the very short term, and you've guided this year a couple of weeks ago, I think people are trying to figure out kind of the cadence of the year and so forth. And I suppose you talked about the first half maybe being 49% of the year. It implies a very big sequential step up in the second quarter. Obviously, you normally have that in things like U.S. RLC. But just what's the confidence in that very sharp second quarter bounce?

Yes. As you said, Julian, it's very normal for us to step up 1Q to 2Q. Last year, I think quarter-over-quarter, our sales were up something like $900 million. The year before was $500 million. This year, it will be a bit north of $600 million. So -- and it's going to have a very good drop-through because a lot of that step-up will come from our higher-margin businesses associated with things like RLC, CSA. And then we'll get a $0.05 or so of productivity. So we feel good about both the revenue and the EBIT step-up.

That's great. And I think it's -- again, it's an inflationary environment. Metals costs, in particular, have sort of caught the attention of people, chips to a degree, but that's a smaller kind of item for most companies. How confident are you around offsetting those higher costs? How is the pricing environment today?

Short answer is we feel good about it. We have said it's $50 million to $100 million of raw material commodity headwind, mostly copper and aluminum. We did see the President discuss potentially reducing or eliminating some of the tariffs on some of those raw materials, which would make a lot of sense, and we certainly support.

But even if they stay in place, call it, $60 million, $70 million of commodity headwind, we've talked about 1% price, so that gives you $200 million. So we'll be price cost positive.

If you look at our residential businesses in terms of realization rates, it's probably best as you go from west to east. In the Americas, we have 5% price that we've announced comes into place next month. We'll realize a couple of points on that.

If you look in Europe, it's probably closer to 1 point or so. And then China, we'll just have to see. The market has been quite down for some time. So it's hard to know exactly where pricing is going to land there. But we feel good about pricing realization, certainly in the U.S. followed by Europe.

And on that point on U.S. RLC, are you kind of seeing the other competitors behaving themselves in terms of pricing and so forth?

We are. I mean it's rational. No one's, I think, trying to be opportunistic. But when you face commodity type headwinds, it only makes sense to raise prices. And our channel partners understand that and are supporting us. And I think our competitors seem to be rational and in the same boat.

And in Europe, there are a lot of investor concerns a couple of years ago about the sort of flood of capacity additions, maybe Asian entrants into the heat pump market. It's been more quiet on that front the last kind of 12 months. So how do you see that supply-demand balance in European heat pumps right now, the industry?

I think it's in balance. Look, what happened is, if you take a country like Germany that's typically around 800,000 units and all of a sudden, you're north of 1 million, there tends to be a lot of interest from around the world, including us. And then when you go from north of 1 million to 600,000, a lot of those desires to build facilities all over Europe subsides a bit.

In fact, some are going in the other direction in closing facilities. So I think from the overall supply perspective, it seems to be stabling out to support the long-term demand without an overbuild throughout Europe.

I think that when you step back and you look at Europe, the biggest differentiator will be the boots on the ground that we have. Ultimately, people can raise a shingle, they can start to say, I'm in the heating business, and I want to sell, whether it's a competitor from Asia or a new type of installer.

But ultimately, technical skills are hard to come by. We have 80,000 installers direct relationships with them. And ultimately, you need -- AI is not going to install your heat pump. You need someone to show up at your site. They need the technical expertise. We have these relationships.

We have the brand, we have the technology, and we have a really exciting product coming in, Viessmann branded later this year. So it's been a little bit rugged, of course, with the market declines over the last couple of years. But as that market recovers, we're really poised for a nice recovery.

In U.S. or Americas RLC, I think you've talked in the past about this kind of cumulative overage and that type of a few million units. I suppose what's your impression of kind of the natural market size? And where do you think we are kind of versus the long-term trend today?

Yes. there's 145 million homes in the United States and 90% have air conditioning. So that puts you at 130 million homes with air conditioning. Those typically -- those units typically get replaced 1 out of every 15 years, which gives you about a 6% replacement cycle. So that 6% on 130 million homes, that gets you pretty close to 8 million per year. And then you put on top of that 1 million to 1.5 million of new home construction, our view is that a typical market is around 9 million units a year.

From 2020 to '24, we averaged 9.7 million. And so if you consider that a "overage" which I know some may be skeptical of, I think it's -- in a business that will have some cycles, I think it's only natural to look at these factors. You had 3.5 million of overage above that mean of 9 million. Last year, we were 7.5 million. So we took a lot of medicine last year, call it, 40% or so. And this year, we're saying 6.5 million.

So we don't use this to perfectly predict when you hit that 3.5 million of underage, you start to turn the corner. We use it as an indicator that says, when times are good and you're above the mean, you have to be aware that they're not going to stay above the mean forever. And had we -- that's something that we could have looked at to say, that's an indication that you probably will go below the mean at some point.

And now that we're below it, we know that we're going to be back to the mean at some point. When exactly we turn that corner, it's hard to say. But where it really impacts you is when it comes to your operations and your demand planning, which is we know that we'll recover. We don't know exactly when.

So we need to build agility into our operations network, dual source suppliers, have the lines that can be ramped, have enough temp labor. So if suddenly, we get into the season in April or so, and we start to see the demand pick up, we can support our customers and go win in the marketplace.

And when you're thinking about that kind of sell-in, sell-out dynamic, how is the sell-out trending or movement as you call it?

About what we thought. This topics kind of -- it's gotten a little bit confusing because of all the dynamics with the pull forward on the new refrigerant and then some year-over-year compares. I think when you parse through what's happened, and you almost use English instead of sell-in, sell-out and movement, what fundamentally happened is last year, the volume and the movement were both about the same for us down about 20%.

What happened is in the first half of last year, we had predicted some level -- not strength but some level of volume in the second half that didn't materialize. So what was happening during the course of the first half of last year is we were shipping units to our distributors, they started to have less movement to their dealers because the underlying demand started to slow.

So we saw a buildup of inventory in the channel. And if I could turn the clock back, I would have seen more early warning systems than we saw it because we got surprised by the volume in the second half. But you saw the volume -- you saw the inventory go up.

Then what happened in the second half of last year is our distributors looked around and said, "I have more inventory than what I need to further demand." So movement came down, but our sales to them came down even more because they stopped ordering from us because their underlying demand was shrinking and they had enough inventory.

What we tried really hard to do last year was end with field inventory at a point which we thought had fully destocked the channel, which we had set a target for ourselves to be down 30% year-over-year. And we said that was more important than anything.

We didn't want to like -- if we had to prioritize hitting a sales number in 4Q or hitting that field inventory number, we said that is most important. It may impact your IC, it may impact a whole bunch of things, hit that field inventory number, and we did. And then January, at the end of January, field inventory was down 32%.

So we're being super careful about that field inventory level. In January, movement was about what we thought. We said the first half this year would be down about 20%, a little bit more perhaps in 1Q, perhaps a little bit less in 2Q. But where we thought is where we are and we're trying to very carefully manage field inventory.

And have your thoughts around the elasticity of market demand to the cost of the unit or to the existing home sales or this kind of discretionary element, have your thoughts changed around that behavior in the market over the last kind of year or so?

We look at elasticity curves, and that's why we're talking about a realization rate of a couple of points. I mean, Julian, you know that there was a stretch of a few years there where we got a fair amount of pricing. And we'd be raising 10 and realizing 6. So we're not going to go negative, but we're certainly not going to be at those levels in part because of we're looking at the consumer and we're looking at existing home sales. And we think we're properly pricing the units for the underlying demand.

And when you're looking at that aspect around existing home sales and consumption and what that means for repair versus replace, how are you thinking about that ratio?

It's hard to get perfect data here, but I think anecdotally in talking to both our distribution and dealer partners, I think there's no doubt that we saw an increased amount of repair over replace last year. And I think it was for a whole bunch of factors.

We feel very strongly that is not a long-term trend. First of all, the payback is not there. You spend a few thousand dollars on a compressor and you get another year to 2, 3 years out of your unit. And then you have to replace it. So you're adding your 3,000 plus whatever the ultimate replacement is.

So that's where I think we shine is with our kitchen table type discussions with our more than 100,000 dealers. We're 1 out of every -- we're in 1 out of every 3 homes in the United States. So we know how to have the right conversations with the homeowner and really make sense of it, which is ultimately a replacement does make sense.

Number 2 is with existing home sales at 20-year lows in the United States, you are -- that is going to drive to more repair because if you're literally waiting for mortgage rates 30-year to start with the 5 and you're a year away from moving, you might be a little bit more inclined to repair your unit than replace it, afraid you're not going to get the full payback on that when you sell the house.

And when you buy the home, a significant amount of time you negotiate the replacement of your air conditioning system or your HVAC system with the home purchase. So the suppression of existing home sales has probably led to some of that as well. And then this whole refrigerant change, I think, led to some of that.

When you sit at the kitchen table, you're going to tell folks, if you repair it, you're going to be stuck with a 410A refrigerant that's effectively obsolete and your costs are going to go up. So if you call me back to your home in 2 years, it's going to be a very expensive another repair at that point.

So look, we feel good that it's a replacement business. We're going to get back to being a replacement business. We need a couple of these macros to go in our direction and we'll start to revert back to that mean.

And then switching to the commercial side. Commercial unitary or light commercial has been kind of challenged. Maybe there's some bleed through from the residential weakness for parts of that. But how do you feel about the light commercial Americas business right now?

Look, we've guided it down to high single digits for the year. I will start with the good news in that business is that, number one is we did see good orders growth in the fourth quarter. So we were up 70%, albeit on an easy comp, but we were up 20% -- we were down 20% in the fourth quarter of '24. So it was an easy comp, but we were still up 70%.

Number 2 is we got inventory to good levels. So we ended the year with field inventory down 25%. And number 3 is we're introducing a bunch of new products. So we have a dual fuel unit, it's electric, it's hybrid with gas. So where we've done very well in that business with a lot of new product introductions, we have more of that, that's just coming in now. So we're poised to do quite well. Of course, we have a very good market position there.

I think we just got to kind of see there's some still stress on the small, medium business. About 35% of that market is planned replacement. So there's probably a little bit of pressure on that 35% where there's still some potential consumer confidence issues with SMB.

Now you get 20% new build, and I think we're in the zone of -- it's probably down a bit, but we have that calibrated. And then you're dealing with 40% or so that's -- 40%, 45% that's emergency replacement, obviously, hard to model.

But I think as those units, there's been some pent-up demand, maybe people limp by with the repair. As those units start to get replaced, they will eventually will start to recover, but I think we're balanced on how we think about the year.

And then kind of applied or large commercial HVAC, how do you assess, I guess, your competitive strength in that business, particularly in the data center field? A lot of technology change as well in that market. How are you kind of keeping abreast of that transition maybe towards more liquid cooling and so forth?

I could -- honestly, I could not be more proud of the team with how we're doing in data centers. Our orders in CSA in the data center space were up 5x in 4Q, a bit of an unheard of type number from an orders perspective. So -- and our orders will be good in first quarter as well.

So we've been winning. We've been winning more than our share by a fair amount, and we're winning the right way. We're winning by 100% being there for our customers, innovating with new products. If you see the correlation between our new product introductions and market share, it's directly correlated.

We saw it with water cooled chillers. We introduced the maglev bearing kind of in the 18 to 20-megawatt range. We won a lot with this with one of the hyperscalers, and we keep winning with them. And now we're using similar technology on water cooled to win with other hyperscalers. And now that market share increase we saw in water cooled, we're 100% going to go through the same with air cooled.

We introduced both a 2- and a 3-megawatt air-cooled chiller maglev bearings. That's coming out real time. There's enormous interest in the marketplace for it. And we have the capacity to support our customers because you know the CapEx they're spending this year. They're placing orders in this year for this year, and we are able to support that kind of short lead time demand.

So between new product introduction, capacity, and I think the -- ultimately, where the game is going to be won is in some level of systems integration. And I think we're best positioned to win there in part because of our BMS business. So our ALC business is one of the unsung heroes within Carrier. We've gone from #5 to #2 here in the Americas. That business keeps doing well.

We've done very small under the radar screen type acquisitions in the channel, so our route to market is quite effective. And you look at the -- how you can use the BMS system to integrate traditional cooling and liquid cooling and have that fully optimized for the system, that's something that we feel we're very uniquely positioned to.

We have our QuantumLeap team, we have our QuantumLeap offering. We've been winning some pretty good CDU type orders. We have 2 new CDUs coming in later this year. So we feel we've been winning. We've been winning the right way. Our share increases, I think would surprise a lot of folks in this room, and it's only getting better.

And when you think about liquid cooling versus the more traditional water cooled chillers and air handling units and so forth, do you see a big divergence in the growth rates of those 2 camps within data center cooling?

We do. I think if you look at overall growth rates for data centers for cooling should be in the 20%, 25% range. Liquid cooling should be 2x that, obviously, starting from a lower base. So we've seen it coming. We've had choices to make. Is it make or buy?

We can and have -- we made a decision like we could have spent billions buying CDUs and cold plates and some of that technology. But a CDU is effectively a mini chiller. So we have a lot of brilliant engineers that know how to do the packaging and all of the controls and pumping elements associated with the CDU.

So we have our own 1.3 megawatt CDU. We developed that at a fraction of what it would have taken to buy that technology externally. We're coming out with a 3 and a 5-megawatt here in the coming months. So we can build out a CDU portfolio. We're looking at what we do around cool plates. Is that a make or buy? So -- and then we have VC type investments.

We own a percentage of ZutaCore, which is two-phase technology. We have a good relationship with them. So we'll place some of these smaller bets to build out the portfolio from a technology perspective. We work closely with NVIDIA. We work closely with Dell and others. So we're integrating more than we ever did in the past with the chip manufacturers. So we feel very well positioned on the liquid cooling side.

And then one thing I've been curious about is you spent a lot of energy building up aftermarket. And so just trying to understand when you think about liquid cooling related product like a CDU, is there the same service potential there as with a chiller or it's a slightly different dynamic?

I think it's going to be the same dynamic. You have rotating equipment, you probably end up with similar life. You'll obviously in a data center have a lot more CDUs than you will with chillers. Obviously, it's a fraction of the cost and size of a chiller. So I think that mathematically, the aftermarket opportunity is very comparable.

Perfect. And when we're thinking about the mix in the Americas business, there's a lot going on high liquid cooling growth this year, resi and light commercial will be down. Sort of a mix of those moving parts. I guess why are you confident that the margins in the Americas business should grow this year?

We're going to get the normal productivity that we always get. We're going to have -- year-over-year, we had an enormous absorption hit last year because when we had that sudden unforeseen drop in our resi business, that absorption hit, and you saw what it did to our margins and resi in the second half of the year, that won't repeat.

So we took $100 million of cost out globally with a difficult but important action when we reduced 3,000 of our colleagues. So that drops through part of which in the Americas. So between the lack of an absorption hit, productivity, some of the drop through on the cost actions, we feel balanced on our margin forecast for CSA.

Great. And then maybe switching back to Europe for a second. It's hard from the outside to kind of gauge what effects boilers down, heat pumps up means for the sort of net dollar sales and margins for the European business? Kind of just help us understand where we are on that.

Yes. You could think about our business being if you start with CSE overall, it's about 75% residential and 25% commercial. The commercial business will 100% over time do well. You get lumpy sales, big sales that are not -- we tend to talk and think in terms of quarters. That's not exactly how that market works.

So when they come, they'll come, and they're going to come big. So we're really well positioned on some big campaigns. We feel good about the long-term growth in CHVAC.

When you think about the residential business, of that 75%, you could think about it as 30-30-40. So 30% heat pumps, 30% boilers and 40% all other. And that all other includes aftermarket, which is above the norm -- above the mean for margins, and then it includes some stuff that's below like solar PV and batteries.

So the margins on heat pumps and boilers are very comparable, within spitting distance of each other. To get the margin accretion, we need more aftermarket. And remember, we're going to get a lot more absolute dollars as we transition from boilers to heat pumps.

This year, we've said we'll grow 100 bps or so in that business. We feel good about that. Remember, half of the cost takeout that we did is in Europe. And we'll start to see as that market comes back and you get better drop-through on that when it does start to come back, we feel very good about the margin expansion.

We know how to do the margin thing. Like if you think about Japan, people in this room will -- I mean, will remember, when we bought Toshiba, kind of a breakeven business that wasn't growing very much. Last year, they grew 8%, and our margins this year on an EBIT ROCE basis will be around 14%.

So have we had some volumes go against this? Yes. When those start to come back, one thing that -- the only good news about the volume coming back is we've had -- we've taken some tough actions on the cost side to really help the drop-through when the margins do return.

Then capital deployment, a lot of buybacks recently. I guess it's somewhat share price dependent. But when do you think you might start to go on the offensive again on the acquisition front?

We've been doing some small M&A, and I think we'll continue to do that. We're not whale hunting right now. We're not looking at huge multibillion dollar type things. Right now, we're a very self-aware type company. So we know that we got a lot -- we want to get the wins on the board with the VCS acquisition, which I know we will.

We want to execute with this enormous data center opportunity that's in front of us, and I know we will. And we want to make sure that we have the agility from an operational perspective to support that recovery on some of the shorter-cycle business because there will be pent-up demand on the truck trailer side for sure, on the residential side for sure, on the light commercial side for sure.

So we have a lot to make sure that we keep our heads down, go execute for our customers. We feel really good as we start getting in the kind of growth that you asked, the first question around that 6% to 8%, we know it's coming. This year, we still have some headwind on some of the shorter-cycle businesses. We think we're balanced on how we've kind of guided for the year, and we feel really good as we -- how we position the portfolio.

Great. And with that, I'll have to turn to audience response questions. So if we could start with current ownership of Carrier. So fairly even, about half no, which is pretty typical. Secondly is kind of general bias or attitude to Carrier right now.

Understatement. It's very high on that one.

Decently positive. Third question is around through-cycle EPS growth and the peer set here is kind of broad U.S. multi industry. So in line to above.

Next question is on usage of cash that we just talked about. So mostly buybacks. Next question is on valuation. What's the appropriate kind of year 1 PE multiple? So in the 20s.

And last question is kind of what's the biggest anchor on the valuation today. Okay. So core growth.

Great. Well, with that, thanks so much, David, Michael.

Good morning, and welcome to Carrier's Fourth Quarter 2025 Earnings Conference Call. I would like to introduce your host for today's conference, Michael Rednor, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to Carrier's Fourth Quarter 2025 Earnings Conference Call. On the call with me today are David Gitlin, Chairman and Chief Executive Officer; and Patrick Goris, Chief Financial Officer.

Except where otherwise noted, the company will speak to results from continuing operations, excluding restructuring costs and certain significant nonrecurring items. A reconciliation of these and other non-GAAP financial measures can be found in the appendix of the webcast.

We also remind listeners that the presentation contains forward-looking statements, which are subject to risks and uncertainties. Carrier's SEC filings, including our Form 10-K and quarterly reports on Form 10-Q, provide details on important factors that could cause actual results to differ materially.

With that, I'd like to turn the call over to Dave.

Thanks, Mike, and good morning, everyone.

2025 was an important year for Carrier. The short-cycle residential and light commercial markets softened more than we expected in the second half of the year, we made meaningful progress on our strategic priorities and reached major milestones, including growing our data center business to around $1 billion.

Notably, even with CSA residential down nearly 10% and light commercial down about 20%, total company organic sales were down about 1% as we continued to drive growth in our long cycle and aftermarket businesses.

We also reduced channel inventory and lowered overhead while continuing to invest in technology differentiation, salespeople and technicians. Those actions position us for stronger incrementals when our short-cycle markets recover.

We had our fifth consecutive year of double-digit growth in commercial HVAC, while continuing to gain share and increase margins.

Aftermarket was also up double digits for the fifth consecutive year. We offset tariffs with aggressive cost and pricing actions drove strong material productivity and took decisive overhead cost actions. And as you'll see in our outlook, the cost actions that we execute into 2025 will deliver over $100 million of savings in 2026.

Finally, we distributed $3.7 billion to our shareholders through buybacks and dividends.

In terms of capital allocation, we remain focused on investing in the highest return opportunities, maintaining a strong balance sheet and returning cash to shareholders. We will continue to focus on outsized growth in products, aftermarket and system offerings, and you can see the progress we're making on all 3 growth vectors, starting with products on Slide 4.

Our data center investments are delivering results with fourth quarter CSA data center orders up more than 5x. We are still in the early innings, and our expanded portfolio now addresses essentially all major data center chiller applications. Our share of water cooled chillers has increased 4x since spin, and with our recently introduced maglev bearing air cool chillers, we see meaningful share opportunity there as well. Key differentiators include quick restart, free cooling and leading efficiency at elevated ambient temperatures. We introduced our first CDU for liquid cooling in 2025 and plan additional higher-capacity CDUs up to 5 megawatts in 2026.

Over the past couple of years, we have expanded our commercial HVAC engineering lab and chiller manufacturing capacity globally and have added hundreds of technicians. These multiyear investments have positioned us to outgrow the commercial HVAC market as reflected in our 2026 outlook with double-digit revenue growth, including data centers up about 50%.

Aftermarket also remains a good news story for us, as you can see on Slide 5.

Our playbook works, and we continue to improve upon it. 3 years ago, we had 17,000 chillers connected. Today, it is over 70,000. Our attachment rate in CSA grew more than 3x last year and is now close to 60% and our global coverage, that is chillers covered by service agreements, is up to 110,000, including Toshiba. We estimate that 70% to 80% of our high complexity chillers are under service contracts.

The area within our aftermarket business where we see the highest growth potential over the next 5 years is modifications and upgrades. Sales last year were up 20%. With a focused team, investments and strategy, we see great opportunities in cities globally.

In 2026, we are well positioned for double-digit aftermarket growth for our fifth -- or excuse me, our sixth consecutive year.

Turning to Systems on Slide 6. Our HEMS offering in the United States is getting tremendous attention from hyperscalers and utilities, and it is not surprising given the magnitude of the impact that our solution can have on the grid. If our integrated heat pump battery solution where in every home and building that Carrier currently serves, we would free up nearly 15% of grid capacity during peak hours. It also weighs favorably versus alternatives in terms of time to market, cost of implementation and affordability to the consumer.

Our Carrier energy team's progress in 2025 was significant. Through field trials in Carrier employee homes, we have been demonstrating that we can consistently provide up to 4 hours of battery-powered heat pump operation during peak hours. We are planning market launch later this year.

Likewise, in Europe, we have been working closely with our installers to offer differentiated HEM solutions. Our systems [indiscernible] installers those qualified to sell and install complete solutions, including heat pump, battery, solar PV, domestic hot water, all connected through our digital home energy management system offering, drove their sales up double digits last year. We plan to double our number of qualified prove installers in 2026, driving strong growth for them and us.

Turning to Slide 7. In our CST business, there is no better example of end-to-end solutions than what we're seeing in our container business. 4 years ago, Lynx did not exist. Today, we have over 220,000 paid Lynx subscriptions with over 110,000 on containers, including 6 of the world's top 10 shipping lines. We also recently invested in [indiscernible], which provides enhanced wireless IoT connectivity on cargo ships. By combining advanced AI-driven reefer health algorithms in our Lynx applications with enhanced ship connectivity, we enable shipping customers to avoid manual checks on refrigerated units and to predict and avoid failures before they occur. This end-to-end solution is expected to help smooth the container cycles and provide meaningful recurring revenues while delivering differentiated customer value.

Let me turn now to discussing some of our shorter-cycle businesses, starting with CSA resi on Slide 8. Over the long term, residential remains a significant opportunity for Carrier. It is a large replacement-driven market with secular tailwinds in electrification and heat pumps and our leading brands channels and installed base are unmatched and position us for outsized earnings growth as demand normalizes. In this market, we estimate demand in a typical year to be around 9 million units. Between '20 and 2024, our industry averaged 9.7 million units for a cumulative overage, so to speak, of about 3.5 million units. Last year, we estimate our industry delivered about 7.5 million units. So we absorbed about 45% of that overage. We are assuming that we absorbed the balance in 2026. Our assumption for the year is essentially no change to the macro conditions that we exited last year with, little change to mortgage rates, consumer confidence or new and existing home sales. That would result in total industry units down 10% to 15%. With that industry assumption, our sales would be down high single digits as we benefit from the absence of destocking in the second half of 2026 compared to 2025 and combined with low single-digit price realization.

Turning to CSE Residential on Slide 9. The good news in this market is that the transition from boilers to heat pumps is underway with heat pumps growing double digits as anticipated. The bad news is that total heating -- the total heating market has been in a cyclical downturn for the past few years. Like the Americas, the industry has been absorbing overage that we saw in the 2022, 2023 time frame. We expect continued softness in total heating units in 2026, resulting in expected flat sales with our growth initiatives being offset by lower industry volumes. When unit volume stabilizes, we are well positioned to drive strong earnings growth given our strategic initiatives and the cost actions that we have taken in this segment.

Turning to Slide 10 for what this all means for our full year guidance. With respect to revenue growth, we expect that about 40% of our portfolio, commercial HVAC and aftermarket will continue to grow double digits. Expected continued softness in our higher-margin short-cycle businesses, especially CSA residential and light commercial is expected to largely offset that growth, taking the total to about 1% organic growth for the company. On the profit side, mix is expected to be a headwind somewhat offset by the cost actions that we took last year. Patrick will take you through the guidance in more detail, but we will continue to focus on controlling the controllables across all aspects of growth, cost and productivity. We are the best positioned company in our industry when our short-cycle businesses recover, which they surely will, and we are poised to see outsized grains when they, in fact, recover. We enter 2026 energized and focused on outgrowing our markets, delivering best-in-class solutions for our customers and driving productivity as we always do.

With that, I will turn it over to Patrick. Patrick?

Thank you, Dave, and good morning, everyone. I'll provide some color on our results and then move to our 2026 outlook. Please turn to Slide 11. For the quarter, reported sales were $4.8 billion, adjusted operating profit was $455 million and adjusted EPS was $0.34.

As expected, the year-over-year decline in these financial metrics was largely due to much lower volumes in our higher-margin CSA residential and light commercial businesses, leading to an overall 9% decline in organic growth, partially offset by a 3% tailwind from foreign currency translation. Total company orders were up over 15% in the quarter, driven by strength in CSA commercial, underscoring continued strong demand for our products in this market. Adjusted operating profit was down 33%, mainly reflecting lower organic sales and the unfavorable business mix I just referred to as well as much lower manufacturing output, partially offset by strong productivity. The adjusted EPS decline mainly reflects lower adjusted operating profit, a lower share count and somewhat higher interest expense and tax rate. We have included the year-over-year adjusted EPS bridge in the appendix on Slide 21. Free cash flow in the fourth quarter of about $900 million reflected a large reduction in inventories and accounts receivable and full year free cash flow of about $2.1 billion was in line with expectations. As to full year results, you can see that our organic sales were down about 1% due to weakness in our shorter cycle businesses, which represent over 50% of our portfolio. Very strong growth in global commercial HVAC up 14%, helped mitigate the short-cycle businesses sales decline.

Moving on to the segments, starting with CSA on Slide 12. This segment had a very difficult quarter with organic sales down 17%. And Commercial delivered another strong quarter with sales up 12%, but this was more than offset by lower resi and light commercial sales. Resi sales were down close to 40% and with volume down over 40%, offset by regulatory mix and price. Light commercial sales declined 20%. Segment operating margin was just under 9% and a decline of about 10 points versus the prior year, reflecting the impact of lower sales and significant under-absorption in our resi manufacturing facilities, which had less than half the output compared to Q4 of last year. At year-end, field inventories for resi were down roughly 30% year-over-year, in line with our expectations and we believe that field destocking is now substantially behind us. Similarly, light commercial distributor inventories were down 25% year-over-year. For the full year, CSA Commercial had another excellent year with sales up over 25%, offset by resi down 9% and light commercial, down 20%.

Moving to the CSE segment on Slide 13. Organic sales were down 2%, with commercial up mid-single digits, offset by mid-single-digit declines in resi like commercial. The residential heating market continues to be challenging in this region, particularly in Germany, which is our largest market. The transition to electrification and heat pumps is happening as reflected by growth in heat pump sales and a decline in boiler sales. Segment operating profit and margin were both up year-over-year on lower organic sales, reflecting the impact of cost actions.

Turning to Climate Solutions Asia Pacific, on Slide 14. Strength in India and Australia was more than offset by ongoing weakness in resi and light commercial in China, leading to an overall 9% sales decline. Overall sales in China were down about 20%, with resi and light commercial with resi and light commercial down about 30%, where we intentionally reduced distributor inventory during the quarter while commercially China was down mid-single digits. Segment operating margin of about 12% was up 100 basis points, primarily driven by strong productivity, offset by the impacts of lower sales.

Moving to Transportation on Slide 15. This segment had a strong quarter with 10% organic sales growth, driven by continued exceptional growth in container. Global Truck and trailer was flat in the quarter with growth in North America offset by weakness in Europe and Asia. Segment operating margins expanded by 30 basis points year-over-year primarily driven by strong productivity, partially offset by business mix.

Turning to Q4 orders on Slide 16. Total company orders were up 16% for the quarter, with strength driven by commercial HVAC globally, which was up over 45% and particularly in CSA, where commercial orders increased 80%, reflecting some large data center wins. Applied orders within CSA commercial more than tripled compared to last year. Light commercial orders were up 70% with resi orders about flat. As you can see on the slide, orders were flat to up in every segment.

Moving on to Slide 17 and shifting to 2026 organic sales guidance. We expect flat to low mid-single-digit organic growth and reported sales of approximately $22 billion. This includes a roughly $350 million year-over-year revenue headwind from the exit of Riello, mainly reported in the CSE segment. We announced the sale in December, and our guide assumes the transaction closes at the end of the first quarter. Also, as Dave mentioned earlier, our outlook reflects continued double-digit growth in commercial and aftermarket globally, offset by continued expected softness in our shorter cycle businesses.

In Commercial HVAC globally, we expect the first half to be up low to mid-single digits and the second half up mid-teens, reflecting comps and customer delivery timing. This back half acceleration reflects conversion of data center wins and delivery of our broader commercial backlog. By segment, we expect CSA and CSE to be up low single digits, while AME and CST are expected to be about flat.

Within CSA Residential, we expect a very difficult first half followed by growth in the second half as we benefit from the absence of destocking. CSA Commercial is expected to remain strong and as I just mentioned, accelerating in the second half as we deliver more of our data center wins.

Within CSE, our outlook for a flat RLC business largely reflects expected continued overall heating market weakness. Within CS AME, expected declines in China are offset by growth in the rest of the segment. And in Transportation, declines in container as 2025 was a record year, are expected to be offset by modest growth in our global truck and trailer business as well as Sensitech.

Moving on to Slide 18, profit and guidance. Profit and cash guidance. Total company adjusted operating profit is expected to be about $3.4 billion. The benefit of modest organic growth and productivity, including prior year overhead cost actions are partially offset by unfavorable business mix, given high single-digit declines in CSA resi and light commercial and investments. We expect free cash flow to be approximately $2 billion, which will be second half weighted, reflecting our normal seasonality.

Finally, we intend to repurchase about $1.5 billion in shares.

Moving to Slide 19. We expect adjusted EPS of approximately $2.80, up high single digits versus 2025. Adjusted EPS growth includes about $0.15 from increased operating profit, as I just outlined as well as tailwinds from a lower tax rate and a lower share count, which are partially offset by higher net interest expense NCI and the exit of Riello. As usual, additional guide items are in the appendix on Slide 23, and our guide assumes no change to the macro, including the current tariff environment.

Finally, let me provide some additional color on the first quarter. As we've communicated previously, CSA resi faces a very tough compare. We anticipate total company Q1 revenues to be about $5 billion, with organic revenue down high single digits, including CSA resi down over 20%. We expect Q1 company operating margin to be about 10%, largely reflecting the sales and manufacturing volume pressure in our higher-margin short-cycle businesses. Adjusted EPS is expected to be about 0.50, which includes the benefit of about a 0% effective tax rate due to a discrete tax item in the first quarter. Free cash flow is expected to be a use of a few hundred million dollars in line with our normal operating cadence. While we expect sales and EPS to be pretty well balanced between the first and second half of the year in absolute terms, the year-on-year growth in sales and EPS will obviously be second half weighted. Overall, we will continue to drive operational excellence throughout our businesses as we return to organic growth and margin expansion and remain focused on executing in 2026.

With that, I would like to ask the operator to open it up for questions.

[Operator Instructions] Your first question comes from the line of Nigel Coe with Wolfe.

What a year. Thanks for all the details. I did want to maybe Patrick dig a little bit deeper into the sort of mix? And can you just maybe talk about the CFA margins? And it looks to me if I just I bought the numbers. It looks like maybe closer to 10%, maybe low double-digit margins in CSA. And number one, is that correct? And secondly, maybe just run through some of the drivers of that. The fixed cost absorption headwinds that you're facing any kind of raw material impacts? Just kind of what's driving that margin? And maybe the recovery path from there?

Yes. There's a lot there. I'll start with CSA expected margins in Q1. We expect them to be close to about 15% in Q1. And from an overall company point of view, the way you can think about Q1 is Q1 actually looks very similar to Q4 of 2025, but with a bit of higher sales at about $5 billion and about 1 point higher of an operating margin point of view. In Q4, our resi sales were down about 40%, and we expect resi sales in Q1 in the Americas to be down about 20% to 25%. And so that explains a little bit of the uptick in margin in Q1. And then in Q1, because of the 0% effective tax rate, there is about a $0.10 benefit versus Q4. So about $0.15 improvement, $0.05 of that is better CSA performance, $0.10 of that is a lower tax rate.

Okay. Just the 10% overall operating margins were through me off there. So maybe just talk about the other segments, other downside drivers in the other segments?

Yes. If I go through the other segments, the Transportation segment is expected to have similar margins to the prior year, about 14% and Asia had very strong margins in the first quarter of '25. We think the margins will be similar to what we've seen in the fourth quarter of '25, so about the 10%, 11% range. In Europe, we think that the margins will be similar in Q1 as they were in Q4. So generally similar margins as to what we've seen in our businesses in the fourth quarter of the year. The Americas a little bit less of a headwind of resi.

Your next question comes from Julian Mitchell with Barclays.

Maybe I just wanted to understand a little bit more of that full year guidance for the CSA residential business. Maybe help us understand what you're seeing in the market on pricing and how you see industry penciling on the price front. And maybe help us clarify kind of how much volume fair gain or outperformance you're expecting this year relative to that double digit, I think, still in market decline?

Yes. Julian, let me kind of walk you through how we came up with our forecast and guidance for this year. So we're assuming at the highest level that industry conditions are the same as last year. So no improvement on interest rates, consumer confidence, newer existing home sales. We assume that the second half of 26 industry units are the same as the second half of 2025. So on a 2-year stack, that would mean a 30% decline in industry units, which is what we assume for the first half of 2026. So all the results there is that in the first half of this year, industry units would be down year-over-year by 20% to 25%. And in the second half, industry units would be flat to the second half of last year. So the full year would be down industry units down 10% to 15%.

Now Julian, what it means for us is that we believe that the distributor inventory destocking that occurred in the second half of last year is substantially behind us. So therefore, we think that in the first half of this year, we'll be down 20%, 25%, consistent with movement. And in the second half, sales will be up. Our sales will be up 10% given the absence of last year's second half destocking. So a bit complicated. But what that all means is the net result of all of this is that we expect our sales and our volume to be down high single digits year-over-year with our sales, including about a low single-digit benefit from pricing.

That's super helpful. Maybe my second question with a different topic around CSE you had this dynamic in 2025 where decent heat pump growth offset by a boiler price and sort of mix headwind? Just wondered what you're dialing in for that CSE RLC market for the year ahead and how you see your own internal dynamics vis-a-vis heat pump and boilers playing out?

Well, look, I think the mix up is essentially playing out as we thought. So the issue is that what we're predicting for this year for 2026 is that the industry overall in Europe will be down mid- to high single digits. Now we guided to flat because we do get the benefit of mix up, heat pumps up double digits, boilers down low to mid-single digits. We'll see aftermarket up double digits, which drops through at a point or 2. And then we have our growth initiatives and our revenue synergies, which are frankly playing out well. The big issue that we've been having, frankly, is in Germany, where we're, of course, overweighted. So remember, we were thinking that the German market would go from something like 715,000 to 660,000, then we thought 640,000 and it ended up around 600,000. And -- if you look over historically, the German market is about 800,000. So just like in the U.S., we do think there will be a reversion to the mean. We just don't think it happens this year given some of the continued ambiguity and uncertainty around some of the heating laws in Germany.

Your next question comes from the line of Scott Davis with Melius Research.

I'm looking at Slide 8. I'm just trying to figure out how far below normal do you think channel inventories are in CSA resi?

Yes, Scott. We -- as we sit here today, we ended January versus January of last year, down about 32%. So we did go to great lengths with our channel partners to end at the field inventory levels that we had said. And that's putting us at like 2018 type levels. So the good news is that the field inventory that we targeted to get down, we got down, and we've continued to take it down here in January.

Okay. Helpful. And moving to more fun stuff. Data center is obviously hugely helpful here. But I don't know how far after booking orders, but when you think about the $1 billion revenue numbers that you put up, 60% of orders kind of implies $1.6 billion for 26%. Is that somewhere in the ballpark? And perhaps there could be some orders in '27 and stuff, I'm sure it's not perfect, but I'm just trying to get a sense of that, how that order flows through revenues in '26?

Yes, Scott, that's about right. What we're guiding is the $1.5 billion for this year. So you're in the ballpark. So we saw great orders last year. I mean, phenomenal orders in 4Q. January has been good. So we feel very well positioned. Now the reality is that we have a lot more in 3Q and 4Q, we would love to see a little bit more pulled in. But right now, that's when the customers that we've had great wins with are looking for the deliveries, but we feel really good about data centers for this year.

Your next call comes from the line of Joe Ritchie with Goldman Sachs.

Dave, can we just talk about the inventory dynamics just a little further. So clearly, you saw a pretty big reduction in your inventories Q-on-Q. I think it was down 17%, but the inventory levels were up year-over-year, about 8%. And so is that a function of just building inventories for the parts of your business that are growing? Just give us any more detail on that dynamic?

Joe, Patrick here. You may recall that we decided last year to keep our U.S. resin manufacturing facilities running at minimal levels because it was more economical than selling them down for several months and then having a cold start. As a result, there is a couple of hundred million more inventory on our books at the end of the year than we otherwise would. And our current guide assumes that, that gets liquidated through the year. Quarter-over-quarter inventory has actually dropped.

Got it. Okay. Great. That's helpful, Patrick. And then 1 last question. I know we were kind of being a dead horse here on the resi side. But this like 6.5 million unit industry average, I mean, assuming whatever you want to assume for new housing starts, call it somewhere in the 1 million, 1.5 million zone, really kind of assumes a replacement rate that's like north of 20 years for this year. It just seems -- it seems conservative at first blush. Just any thoughts around if you go back even further, Dave, and you take a look at where the industry was even before that kind of 2020 time frame, like do you really think that for the year, you're going to need to flush out this much demand in order to get back to equilibrium or just trying to be conservative to start the year?

Joe, what we start with are some of those bigger picture analysis, the average with new home construction of 99.7% and 3.5 overage last year, 7.5%. So we kind of use that for triangulation. Then we go towards what we're seeing with boots on the ground in the marketplace. And we're seeing that what we ended last year, a lot of those macros, we did not assume that we wake up on January 1 and they'd all be suddenly better and different. So that's why we did the analysis that I kind of took Julian through of what we assumed in the second half we just assumed for the second half of this year because you know it is a seasonal business. We can't assume something for the second half and apply those volumes to the first half. So we tried to be as pure as we could about the analysis that we applied and then we applied that 2-year stack to '24. So look, we've guided to down high single digits for us, the market down 10% to 15%. And if things play out exactly as they did in the second half, that's about where we would end up this year. Do we hope it's better? Of course, but that's how we're planning.

Your next question comes from the line of Steve Tusa with JPMorgan Chase & Co.

Just on the resi side, I haven't done the math, but what do you think for the -- like, for the year now, like movement ended at in the channel? And what are you assuming movement is for next year?

Mike help me with what, movement was in [indiscernible].

Like sellout, sellout. Sell out, sorry, sell out.

Steve, movement was down about 30% in Q4. .

Okay. So that's the sell-out number. Okay. And then what are you guys assuming for inflation in total company price? And are you -- how are you marking the commodities? Are you marking them like to market today or year-end or maybe just some color on the inflation side.

Steve, in terms of pricing, Dave mentioned about low single digits, so give or take, close to 1 point for the total company. In terms of commodities, we block on a rolling 4 quarters. And today -- as of today, we have about a $60 million headwind related to copper, steel and aluminum headwind for this year, and that is net of our blocking position. And that headwind is about equal across the 4 quarters. And we're about 50% -- a little over 50% block for the full year.

Okay. And the 1% is in resi as well? Or is resi a little higher than 1%?

Low single digits, so in that range.

In that range. Steve, we announced a price increase of up to, I think, 5 or 6 effective in March. And we think we'll realize in that low single-digit range.

Your next question comes from the line of Andrew Kaplowitz with Citigroup.

Dave, you obviously talked about the $100 million of cost benefits expected in '26 that you actioned in '25. Maybe you could talk about how the benefits are layering in, in '26. And if, for instance, CSE residential or CSAM continues to drive, what can you do to protect the margin improvement you have in your guidance?

Okay. I'm going to -- I want to make sure I get the question, but I'm going to walk you through the profit walk '26 versus '25. At a high level, we're targeting about $100 million of incremental operating profit. Volume mix combined is a headwind of about $100 million. We talked earlier about price. So price is about 1 point as I combine that with some of the tariffs, it's about $100 million, $200 million productivity, including the cost actions that we have taken is close to $400 million. We offset that with some of the inflation that I mentioned, the annual increase in merit and then investments and basically, you get to about $100 million increase in operating profit. And then, of course, the segments each have their targets and are working on contingency plans depending on how they perform versus their target for the year.

That's helpful, Patrick. And maybe you can touch on the guide for CSA, I mean on the confidence level there for flat in '26. As you know, China RLC revenue was down ending in Q4 '25. You talked about destocking, but it looks like your orders bounced back a little and maybe it's easy comps in China. So give us more comment on what you're seeing there versus the rest of Asia?

For AME for '26, Andy, we're guiding flat. We expect China to be down about high single digits. We think RLC softness continues. We think that's down about 20% with the CAT business in China being up low single digits. And then the rest of Asia to grow high single digits. We've been doing very well in places like India, the Middle East, Japan, those have been -- that are watching us for the last 2 years. Japan actually grew 8%. And frankly, when we bought that Toshiba business, very little growth with margins pretty close to 0. And by the end of this year, our EBIT ROS should be in the mid-teens. And last year, we grew 8%. So a lot of good work outside of China, resi in China remains tough. We tried to take some actions in the fourth quarter to decrease the amount of inventory in the channel on the residential side. So hopefully, that helps us a bit going into next year, but the macros in that resi channel business are still tough.

Your next question comes from the line of Deane Dray with RBC Capital Markets.

Dave, if we just step back in terms of all the dynamics and the destocking, what's your expectation when we come into the typical cooling season. There's still a sense there's some pent-up demand on the resi side and channel inventory at 8-year lows. Will there be any chance of stock outs or just -- it sounds like the channel could be some channel inefficiencies. And just kind of how are you prepared for that?

It's -- one of the things that we put a lot of emphasis on, obviously forecasting, but also operational agility. So as we get into the season, we have our forecast. We've assumed, for example, that the first quarter is down in the 20%, 25% range. And January was kind of consistent with what we thought was going to happen for the first quarter. As you get into the season, what we've learned from last year is that things can surprise you to the upside or downside. So we just need to be ready. If we get into the season and weather is a very positive factor. We have inventory levels in the channel quite low. Demand starts to pick up. We will be positioned operationally to support that, but we think we've tried to plan in a way consistent with what we've been seeing over these last 6 months.

All right. That's good to hear. We'll be listening to Al Roker. And on the data center side, what are the implications on the recent comments from NVIDIA regarding chiller demand. does that change your expectations for the mix between water and chillers? Does it change any of the configuration, economics of the configurations that you're modeling in today?

We actually have been very, very fortunate to work very closely with NVIDIA. Frankly, earlier this week in Vegas, our team was meeting with NVIDIA. We've been working together on a number of climate optimized reference designs and thinking very closely about the chilling requirements for their future chip, the Barry Rubin. What I would say, Deane, at the highest level is that, number one, data centers will require a combination of liquid cooling and traditional cooling, and we are confident that NVIDIA agrees with that. If you look at the black well chip and the nevirarubin chip, they both have similar thermal profiles. They're both designed to operate up to 55 degrees C, so both need some form of cooling. The virirubin chips will be more efficient and deliver a lot more output, but the input temperature will be about the same. And that power translates directly into heat. So both designs require the same amount of heat dissipation. So we're working closely with NVIDIA and of course, our hyperscaler and colo customers. We're working on both liquid cooling traditional cooling, the combination through our Quantum Leap offering. And yes, there's going to be -- depending on the customer, some prefer water cooling if you have access to more water and then a lot of our recent wins have been on the air cool side. Good to hear.

Your next question comes from the line of Chris Snyder with Morgan Stanley.

I wanted to follow up on some of that conversation around speaking to the channel partners. Do you think your channel partners plan for the same level of spring purchasing that they have done in prior years? Or do you think it would maybe be a more spread out cadence throughout Q2 and Q3, just given all the volatility that they've had to work through over the last 12 months. because while channel inventories have returned to 2018 levels prepare some of the comments, it seems like demand could be tracking below 2018 levels.

Yes, Chris, I think that our channel partners are planning the year very consistent with how we're planning the year. So I think after what we all saw in the second half of last year, where, frankly, we all got surprised by the magnitude of the decline. I think there's reticence for anyone to get out over their skis. So everyone went to great lengths to get field inventory down, our channel partners and us working with them. We think that we're balanced, and it will all now be a function of underlying demand as we get into the season. So I think that, clearly, there will be more demand as we get into the season than off-season. I think it would be a typical ramp but off a lower base.

I appreciate that. And then maybe if I could follow up on Americas margins. I think Patrick said Q1 of about 15%. So if my math is right, it seems like you guys are calling for Q2 to Q3 to get back to that mid-20-ish range. And obviously, that's a level that you guys have gotten to consistently in the past. But can you just maybe talk about the path to get there? Because it feels like there would still be some level of absorption headwinds, volumes still down and just continued cost inflation in the market.

Yes, Chris. So most of the under absorption year-over-year this year will be in Q1 for resi. And then sequentially, given the seasonal build, which there will be a seasonal build that typically happens in the second quarter, late in the first quarter. And that is the reason, frankly, why sequentially we expect margins to improve in that mid-20s range, as you mentioned, for CSA. And so it's a combination of less headwind from under-absorption as well as an improvement in sequential sales, which is typical for CSA, even though in absolute terms, organic sales will be lower than the year before.

Your next question comes from the line of Amit Mehrotra from with UBS.

Dave, I just had maybe a philosophical question and then I wanted to get a follow-up on incremental margins, if I could. So first, folks sometimes never waste a good crisis. And what I mean by that is that given kind of the environment that you've had to endure. Has that offered an opportunity to kind of rethink how the company approaches some of the structural costs? Is there anything that you're doing or want to do differently with respect to cost that's born from this environment of just hypercyclicality in the market?

For sure, I mean I love the question because as you just said, you never want to let a good crisis go away. So we -- certainly, from a cost perspective, we did take out, which is very, very difficult, but the right thing to do, we did have to reduce 3,000 heads last year, mostly in the second half of last year. We always look at our footprint and we've had to rationalize our footprint, and there will be more of that as we go forward. And then we look at our overall way of doing business. So we're using AI across our functions to drive more productivity. There's a lot of demands on our people. So it's easy to just sort of try to take out cost. The hard thing is to drive better productivity while taking out costs. So the team's done a great job embracing AI as well to drive more productivity. And then we've looked across everything. We've looked at our forecasting. We've looked at how our whole growth process and how we look at specific campaign by campaign and introducing new products into the marketplace to ensure we win and we've looked at product platforming. So how we can use a back-office COE concept for engineering to drive product platforming. So we made a lot of changes.

Look, our formula worked since our spin. We got surprised in the second half of last year by some of the residential downturn. We are not pleased that we missed in the second half. It's not who we are. We plan for that never to happen again. That's not who we are as a company. And we went to great lengths to learn from that in the second half to do everything in our power to make sure it never happens again.

Great. And just a follow-up, highly related to that. If I look at the decremental margins, obviously, very, very high in the fourth quarter, could have implied quite high in the first quarter as well. But the counterpoint to that is high decrementals sort of also imply high incrementals. And I'd just be curious, when this thing turns and eventually, it will turn, how much cost do you have to -- do you think you have to bring back? And can we be looking at the same type of margin just incrementally as opposed to decrementally if you can talk about that?

Yes, Chris, maybe a little bit about the Q4 decrementals. And if you look at the decrementals, it looks like it's a 70% decremental. It's impacted by currency. If you yank out currency, which is about $150 million in sales with no earnings. Our decrementals are 50%, still really high, but not, of course, close to 70%. And the 50% of the represents or reflects sales reductions in resi and light commercial in the U.S. and the under absorption. So as those businesses recover, which, as you said, at some point, they will recover, we expect to have high incrementals. And you mentioned how much of the cost we've taken out do we have to add back. Our current guide includes about $100 million of incremental investments. Throughout this period, we continue to invest in sales resources and digital capabilities. And so I do not expect we have to add a lot of incremental costs that we've taken out this year. as business improves, we will continue to increase our annual investments, but I don't see a step-up after what we've done last year.

Your next question comes from the line of Joe O'Dea with Wells Fargo.

Dave, can you just taking a step back and thinking about the resi cycle and 6.5 million units and underlying support for 9. Just talk about the building blocks to get back to 9, the degree to which what we're seeing this year is just replacement that happened maybe sooner than it needed to in that 2020 to '24 period. what you think about in terms of repair versus replace dragging things out a little bit in '26, but most important, that path to get back to 9.

Yes, Joe, I think it comes back to the fundamentals. Once you start to see the 30 year start with a 5 or less, it's been starting in the low 6s a little bit of tailwind on consumer confidence, a pickup in new home construction, especially on single-family side and existing home sales A lot of those elements, once you start to see that underlying demand pick back up, we should start to see a reversion to the mean of that overall 9 million units. I think in terms of repair versus replace I have no doubt that we saw an uptick in repair last year. We don't think that, that's a long-term trend. And I would say for 3 reasons, Joe. Number 1 is that the economics will almost always weigh better in favor of a replacement. A typical repair can cost $1,000 compressor can be a PK, but it only extends the unit's life by 1 to 3 years. So in general, a consumer will be better off with a full replacement.

Number two, it was particularly impacted by low sale of existing homes because it hurts you on both ends from the homeowner that's been waiting to buy a new home is a little bit reluctant to have a full replacement a year or 2 before they sell their home. So they may be waiting and limping along with the repair. And once they buy the home, they will often negotiate a replacement of the HVAC product as part of the full replacement. So that Decrease in existing home sales has put probably more pressure on repair versus replace, but as existing home sales starts to pick up, which it eventually will, you'll get back into that replacement cycle.

And the third piece I'd mention is what you typically see in an industry is with the refrigerant chain, you do refrigerant change, you see more repair versus replace. It takes a while for the channel to get trained on the new refrigerant. Last year, we had a canister shortage with the 454B, which impacted things a bit. And then the old refrigerant eventually becomes more expensive and it's harder to access. So that it will lead to more replacement over time. So we need the macros to recover. We don't see repair over replace as a long-term trend. And once that happens, which it eventually will, and will be ready operationally to support our customers. The conversion on that will be quite positive.

That's helpful color. And then just on CDUs, why do you win on CDUs? We hear kind of talk about a pretty fragmented competitive environment, just the degree to which for you, a sale tends to be more of a system sale with a chiller and air handling what that means for kind of margin profile of a CDU and if that's dragging things down at all? Just to explain that a little bit.

Yes. No, no margin drag at all from the CDUs. I'm really proud of the team because we looked -- on the liquid cooling side, we've looked at both organic and inorganic. And we've opted for a couple of VC investments. We still have a percentage of ZutaCore, which has a 2-phase solution. On the CDU side, we decided to produce our own. It's essentially a mini chiller. We introduced at 1.3 megawatt last year. We've already had a really nice win down in the southern part of the United States. We just got a handshake on a new win earlier this week for another 1 in South America. So we feel good about what we've introduced organically. We have a 3 and a 5-megawatt coming out later this year. There's a lot of interest. And I think that part of it is our relationship with customers, but part of it is that interaction not only between traditional cooling and liquid cooling, but the entire cooling cycle with our chip customers as well. So we're really excited about what we have going on in liquid cooling and Quantum Leap. We're in the first inning. But we see this as a real differentiator for us going forward.

Your next question comes from the line of Tommy Moll with Stephens.

I wanted to circle back on the comments about movement. Two-part question here was the down 30 million in the fourth quarter. Is that a volume number or a revenue number? And then as you think about movement in '26. David, if I'm trying to read between the lines here, I think you're essentially saying that channel inventories are pretty balanced currently. And so I think the takeaway there is movement on to track your sales pretty closely through; 26, but correct me if that's not right.

It's generally right. What I would say, first of all, Tommy, volume was down a little bit north of 40%. Our sales were down in the high 30s because we got a mid-single-digit benefit from price and mix. The movement -- if you think about this year, MOVEMENT will generally track our sales, except in the second half, we get a bit of a benefit from the absence of destocking that happened in the second half of last year.

Okay. Thank you for [indiscernible].

The Q4 number we said was volume was units. The Q4 movement was down over 30% is volume.

Yes. Okay. And just sticking with resi for a follow-up here. Obviously, there have been a lot of headwinds on the volume side. We can all make guesses as to what the drivers are. But 1 that hasn't been mentioned squarely that I just want to mention now is Daikin, which obviously lost a lot of market share towards the end of 2024. You were 1 of the clear beneficiaries of that. And so granted the industry demand levels are pretty poor right now. But could your volumes also not just be reflecting the fact that they've been able to take back some of that share and that's not a fault of anyone that's just a reality that there's a mean reversion in place. And so you're going to see some of that in volume headwinds at Carrier.

We don't think so, Tommy. We understand what you're saying, that we know that there's been some changes in share in the industry over the last 5 years. If you look at us versus spin, we're probably up a few hundred basis points since we spun. And if you look at our share last year, I would call it flat from a movement perspective, a sell-out perspective. So we saw no change in share last year. We understand there's some movement in terms of some folks that may have lost some share and picked it up from our perspective. up a few hundred bps since we spun. And last year, we held steady at that number. And we expect to hold steady at that number, if not increase. We have a bunch of new products coming out. We have a new fan coil that showed a lot of -- there was a lot of interest in Vegas earlier this week. The team has done really well with our channel partners to position us. So we have no intent of losing any share while maintaining price. And we want to ensure that we are on that track of gaining share.

This concludes our Q&A session. I will now turn the call back to David Gitlin for closing remarks.

Well, listen, thanks to all of you. We could not be more energized about this year. We did take the opportunity to learn from some things from last year and apply those to position us for a tremendous year in '26. So my thanks to our nearly 50,000 teammates around the world, and thanks to our investors for your continued confidence.

This concludes today's call. Thank you for attending. You may now disconnect.

All right. Welcome to our second session today. We're really excited to have Dave Gitlin from Carrier here, Chairman and CEO. We also have Mike Rednor, who runs IR.

I know that, Dave, you wanted to open up with some comments. So the floor is yours.

Thank you, Joe. Good to see you again, Joe. And thanks to Goldman Sachs for hosting us.

Carrier has made great progress over the last 5 years since our spin. We've made significant portfolio changes that have led us to where we are today: a focused and balanced world-class climate and energy solutions company. We're balanced geographically with 50% in the Americas. We're balanced by verticals with data centers being a great source of growth, but we are not overly reliant on it. We have a great aftermarket business that has been and we expect will continue to grow double digits per year.

And as we look ahead into 2026, we expect that the 40% of our portfolio that has been growing double digits, aftermarket and commercial HVAC, will continue to grow at that pace. And the shorter-cycle businesses, specifically our residential and light commercial businesses, along with truck trailer, are poised for recovery. We've worked hard to create this differentiated portfolio, and we are well positioned to yield the benefits of it.

Now before the Q&A, Joe, I want to remind our investors of our 4 consistent themes. First, we continue to control the controllables, taking out overhead costs, driving double-digit Aftermarket growth, investing in innovative offerings to take share and introduce differentiated system offerings.

Second, our commercial HVAC business is night and day versus 5 years ago. We have significantly increased our margins, improved water-cooled chiller share in the Americas from 10% to nearly 40%, and are well positioned for continued outsized share gains with our newly introduced maglev bearing air-cooled chiller offering.

Third, we have great margins with our market-leading short-cycle businesses, where we are well positioned to capture the inevitable upcycle.

And fourth, capital allocation. We will complete our $3 billion buyback this year, and we'll continue to repurchase shares through 2026, while we invest in organic and inorganic growth.

Now as we look ahead to 2026 and beyond, we are laser-focused on delivering outsized results. We are confident that our portfolio is uniquely positioned for strong, profitable growth for many years to come.

With that, Joe, let's get into the Q&A.

Yes. Thanks so much, Dave. So why don't we touch on what everybody wants to hear about, which is CSA resi. So why don't you give us an update on 4Q '25 and how that's trending?

Sure. When we did our earnings call at the end of October, our assumption was that movement would be down about 30% in October and about 25% in November and December. The movement was about what we thought in October, and it's been a little bit lighter in November. So instead of being down about 25%, it was down a little bit closer to 35%, so call it like 33% or so, in that range. And we expect that it will continue to be soft in December.

Our North Star as a company right now with respect to resi is to start -- to end this year with field inventory levels down 30% year-over-year. We have a very specific number in our heads of where we want field inventory numbers to be. We not only have it at an absolute number; we have it by distributor, we have it by SKU. And that is guiding our decision-making here in the last month of the year.

So if movement's a little bit lighter, you either ship more into the channel or you show restraint and you don't ship. We are not going to be driven by what orders does in the fourth quarter. We're going to be driven by what movement does. So if movement is a little bit lighter, our fourth quarter -- we would choose to have 4Q come in a little bit lighter to make sure that we protect that field inventory level.

So it puts a little bit of pressure in resi, and of course, resi is good margin for us. So we had said 4Q $2.65 or so. Would it come in a little bit lower than that, maybe $0.05 or so? Yes. But we would choose to have that field inventory level be at the right number starting next year than try to ship a little bit more here at the end of this year.

And as field inventory is down 30%, are you tracking towards hitting that target?

Yes, for sure. I mean we're actually -- as we sit here today, we're relatively close to that number today. So I mean, quite honestly, we could ship more in December. And in some pockets, there's some areas where distributors would, frankly, even want a little bit more. We don't think it's the right thing to do given where we see the absolute numbers, and we will end at that absolute number.

So what does this all mean for next year for CSA resi specifically?

Well, let me kind of get into how we think about next year, if it's okay, Joe, and then specifically on CSA resi. When I think about next year, 40% of our portfolio has been growing double digits, and really should continue to grow double digits. That's the combination of our aftermarket business and our commercial HVAC business.

The commercial HVAC business, and we can get more into this, has just done incredibly well, and I couldn't be more proud of the team, especially in the Americas. You will not be surprised to see good orders in the fourth quarter. We've been winning. We've been winning more than our fair share on data centers. We've introduced a lot of new products. I mentioned we've gained a lot of share on water-cooled chillers. Because when we stood on the stage in the New York Stock Exchange 5 years ago, we said we were going to invest in commercial HVAC, invest in capacity, invest in the product portfolio, we were going to win. And we've done all that. We've done it on water-cooled with the maglev bearing. Now we're doing on air-cooled. And we have major customers in our factories today as we speak doing FOK witnessing of our 2-megawatt maglev air-cooled chiller that's going to do incredibly well in the marketplace.

So we've been winning. We said that we would start with enough backlog to see good growth for data centers next year, and we're going to do that. We're going to end with $900 million of data center backlog for 2026, to have the $1 billion this year, go up. So we feel good about double-digit growth for 40% of the portfolio.

Then you take 10% of the portfolio will probably be down a little bit. And that's the container business, because they're up 40%, 50% this year and it's just not sustainable. So we've killed it in the container business this year, we've gained a lot of share. We've seen great growth with our customers. We've introduced a bunch of new stuff that's gone very well and new efficient container unit, highly efficient unit. We've introduced Lynx. So we've done really well.

But between the container business and resi in China, which has been soft and there's no reason to think it gets a lot better next year, it's a very small part of the business, but it's there, so we think that between container and resi in China, those probably are a little bit of a headwind on the growth side. So that's now 50%. 40%, good; 10%, not so good.

Then 50% is these high-margin short-cycle businesses. And that's resi in the America -- RLC in the Americas, it's RLC in Europe and it's the global truck trailer business. And as we sit here today, we are -- kind of going assumption, and we're not giving guidance, we won't do that until our February call, but just assume flattish. And that would get you to like 3%; like 4% at double digits; 10%, down a little bit; the rest flattish.

With respect to resi, it's just too early to say. We know that, on flat volume, we would get a bit of upside because of the absence of destocking that disproportionately hits us on the downside. We disproportionately benefit when there's the lack of it. So that could give us kind of in the MSD benefit range on flat volume.

But what I will say is the things we do know is that the second half of this year, to state the obvious, has been a lot softer than we thought. I don't think there's any reason to believe that when we wake up on January 1, all of a sudden, everything gets good. And we know that in the first half of the year, that we do have tough comps.

So we're going to have to see how things play out in resi. I think you have these countervailing forces. And Joe, I apologize if the answer is so long.

This is exactly what I wanted to hear. So keep going.

Okay. You're still there.

Yes, I'm here. I'm here. I've got plenty of follow-ups. Keep going.

So let me give you kind of the -- at the 30,000 feet, the good news on resi. It's kind of what we got into in the conference a few weeks ago, which is that we are below the mean, and there will be a reversion to the mean. We got into this math that said, on average, in CSA resi, you should see 9 million units a year. We were a little bit higher than that for 4 or 5 years at 9.7 million or so. This year, 7.5 million. Truthfully, it probably comes in lower than that. So will there be this reversion to the mean? Yes. Exactly when you start that? No one exactly knows.

The other good news is that if you look at any kind of data, you would say it's pretty much a replacement business, and it's pretty much a 15-year replacement business. And when you go back to what started to happen in 2010, is you started to see a certain recovery. So if you fast-forward to 2025, that recovery in shipments would start to manifest itself in replacements starting in 2025. So we know that we have peers and, frankly, suppliers, that are out there projecting that that increase, if you fast forward from 2010 to 2025, you're kind of poised for a bit of a recovery on the replacement side.

And then I think you also have this other factor where we just had a refrigerant change. And when you go back in time in history where you've had a refrigerant change, you have had some of the dealers have a bias for replacing components versus entire systems because they're not as trained and familiar with the new refrigerant. And that history would show that as we train more of our dealers to get more comfortable with 454B, you should start to see more of a full replace over some repairing of components.

And the other good news is that we're probably at a point, no one fully knows, that you would start to see rates start to come down. We like that 30-year to start with a 5. We would start to see some level over time of a slight recovery on new home construction. There's a lot of pent-up demand for existing home sales because that's been very soft. If you are not moving homes -- if you're planning to move homes, but you're waiting for rates to come down, you're not going to replace your HVAC system a year before you sell your house. And it hurts you on both ends because when you buy the new house, you often get the inspector to say you should negotiate a replacement of the HVAC system.

So as rates come down and you start to see more new home construction, more sale of existing homes, you start to see more dealers trained on the new refrigerant, you start to see that 15-year replacement cycle kick in, and you get that reversion to the mean, there is a lot of reason to believe.

The countervailing force, I would say, is the strength of the consumer. There's still anxiety about there -- out there, and it's not clear exactly how that will manifest itself as we go into 2026. It's just a true unknown. So I think as we start to think about giving guidance, I think you'll see us err on the side of conservatism because there is a true unknown. And we have seen that unit weakness in the second half, and we know we have tough comps in the first half. So on flat volume, CSA for us resi grows MSD. Could we end up saying that volume will be down and we end up flat? We might say something like that.

Okay. Super helpful. The big follow-up there is -- and I know that it's tough to say where we sit today, but I do appreciate all the commentary. The cadence, this first half versus second half dynamic. It was messy this year, not just for you, but for anybody selling into the space. How are you thinking about the cadence based on -- I know you didn't give guidance, but the parameters that you just laid out?

Well, if you think about 2025, first quarter up 20%, second quarter up 10%. So we are anticipating a light start to the year. So I think as people think about 1Q, we just as a company de facto will be -- we're going to see more of our EPS as we get into the second part of the second quarter, into the third quarter, into 4Q. So we know that 1Q for us will be on the lighter end, and we will kind of guide that accordingly.

I think that the thing for us -- we've learned a lot of things this year. We've done a lot with our forecasting model. We have -- actually, one of the hyperscalers has dedicated a team of AI data scientists to help us with our forecasting tool. Because it's not just looking at the traditional parameters. They've brought in some other parameters that are interestingly correlated that we hadn't traditionally looked at. Kind of we're looking at is there a correlation between Zillow activity and what we might see?

So we are looking at our forecasting tools. And I think the big thing for us as a company, when you get beyond discussions in a room like this with investors in terms of actually running the business, is how do we give ourselves as much agility as we possibly can have? Because we just don't know yet. We know it's going to turn, we don't know when, but we want to be ready to go when that happens.

So we don't want absorption issues, we don't want to have too much fixed cost. We don't want to -- and the nice thing about this business is, versus others, is because of some of the seasonality to it, you have more temporary labor than you normally would have in another industry. So we have the ability to flex a little bit, increase temp labor, decrease it in the factories. But we need to dual-source as many of our suppliers as possible. We need enough flexibility. We need to work 3PL and other type things. So when it does turn, we can support that.

We don't want to be left behind. We do not want to be left behind when it turns. But we also don't want to be out over our skis if it stays a little bit on the soft side. So factory agility is key for us.

So I know you look at the data over a long period of time, right? I know it's hard to fully frame this. But if you were thinking about a kind of worst-case scenario, given what resi volumes have done in 2025, how are you thinking about a potential like worst-case scenario? And what we're trying to really understand is like where could we bottom?

Yes. It's really hard to answer that, Joe. Because if you would have asked me that 6 months ago, I could tell you I would have failed that test miserably. Because never did we think the second half volume would be down 40%. We did not see that. So that's really the question, Joe, is that -- and it makes it hard to give guidance. It makes it hard to even, as we start to frame this for you and our investors sitting here in December, that's purposely why we're not going to get into this until February, because we need to see how the year plays out.

We know that what was soft in 3Q has continued to be soft. And what it's forcing us to do is think differently about we want to continue to gain share. We want to continue to support our customers. So 50% of all purchases are financed. And there's usually this -- you either -- we -- through our channel, there's some kind of rebate system we do. If you buy our high-end Infinity system, you might get some level of rebate negotiated over the kitchen table. Or you might get some level of financing, and we work through Wells Fargo -- sorry to mention a different bank, but whatever. We work through some other bank.

And we -- with financing -- and by the way, they need to step up because we would -- we got to work with a bank that gives us the best financing. So you can get your colleagues to...

I don't know. Is Chris in the room?

Yes. But in any case, we work financing through the channel, and it's now at a point where it's like 50% financed. So we have to get a little bit more with our end consumers and how we make sure that that purchase goes well.

Not an answer to your question on worst-case scenario, but could volume be down next year? For sure. It could, for sure, be down. Exactly how much, it's too early to say.

That's fair. So look, you gave us some good pieces of the framework for '26. Gave a little bit of an update on 4Q, and maybe trending a little bit worse exiting the year. Any other pieces that you want to highlight for the 2026 EPS framework?

I think those are the big ones. I mean we've talked about $0.20 of tailwind from the combination of stock buyback and fixed cost takeout. So that feels good. All of that feels pretty solid. We kind of mentioned how we think about growth.

I will say that the other piece will be productivity. So growth, conversion -- the fixed cost takeout, we are being aggressive. I will tell you it's never fun, but the team stepped up. We mentioned that half of that is in Europe, which is obviously always -- it's complicated globally, complicated in Europe. But the European team has really stepped up to do what is necessary there.

And then I think it's all things productivity, which is a combination of supply chain, logistics and factory productivity. This year, factory productivity got very difficult in the second half because of the absorption issues that we suddenly saw with our resi business. So what we have to do, that -- there's probably a tiny bit of hangover on that as we get into 1Q because we've made that decision to keep producing. But the truth is, it's a little bit -- if you look at our absolute inventory numbers on the balance sheet, it's a little bit at the margin. So that doesn't keep us up at night, the absorption stuff in 1Q with resi.

I think the big thing is, working with Mike Duijser and operations team to drive much more continued discipline with our supply chain and in our factories to drive a really strong number there. So I think that on EPS, we'll see what happens with growth, but we're going to drive really hard -- we set a minimum of $100 million of fixed cost takeout. We're driving hard to make that as aggressive as we can be. Be very aggressive on productivity. And then drive all things growth. And we'll see what happens with the shorter-cycle businesses.

So this is as full of a room as we've had over the last 2 days, and I'm going to open it up to questions in a second.

Are you saying that like a good thing or a bad thing?

They want to see you, Dave.

Yes.

So let's talk about pricing for a second because there's a lot of conversation about that. And ultimately, clearly, with the transition that occurred this year, there's a big price/mix up in the business. How are you thinking about the pricing...

You're talking about resi?

I mean whole portfolio, but we can talk about resi as well. How are you thinking about the pricing dynamics as you head into '26?

On the pricing side, we've been getting very good price, and I think we will get price again next year, but not as much as we've gotten in the past. I think that's the short version.

If you look at resi here in the Americas, we went through a stretch of a couple of years where we had multiple price increases that effectively stuck. And when you look at our elasticity curves, we will not continue to get that same level of pricing. So if we announce high single-digit price increase, we'd get mid-single digit.

What we're expecting for resi here in the Americas, we'll announce up to 5%. We'll say something like that here in the coming weeks. And then we would expect to yield low single digits. I don't think it will be 3% and I don't think it will be 0. I think it will be somewhere between that.

But look, we have a disciplined market. We are the clear market leaders. And if you kind of look at a buying decision for a homeowner to buy a $10,000 unit, if we move price on the product, forget the cost of the insulation, our product's a relatively small percent, we move price a couple of points, it's not going to swing the buying behavior of the ultimate customer.

So where you get into pricing discussions is when you have people that are doing unnatural acts out in the industry that drives a behavior that takes hold that drives pricing down for the entire industry. And we believe, as market leaders, that we -- it's important for us to retain pricing discipline, and you should expect that out of us as we go into next year.

Yes. So just a quick follow-on to that. There's some concern that the pricing for these units have gone up so much over the last decade and, clearly, this past year because of the refrigerant change, that it's pricing out the middle income consumer and, ultimately, leading to additional repairs and/or potentially not using ducted units going forward. How do you respond to that?

Look, I think the pricing of the product itself is still less -- well less than 50% of the total cost. So our job is to work with our distribution dealer channel to take all costs out of the system to make the cost to the end consumer as low as possible. So I do not think that -- has there probably been more repair over replace over the last year? Yes. Is part of it maybe some anxiety in the economy? Perhaps yes. And then, is part of it this refrigerant change thing? I think the answer to that is yes.

I do not think that is a sustained trend that pricing has gotten so out of whack that you're going to see everyone limping along with a component change versus a full replace. I think people want state-of-the-art systems you in the refrigerant. You're going to get to a point where the cost of the old refrigerant is so much that limping along with replacing a component versus the entire system is dis-economic. So I do not think that that is a fundamental issue.

I do think that for your typical homeowner, it is very expensive. And we're working a lot of -- as I mentioned, we have to work with the most thoughtful and creative solutions for the end homeowner to create pull through different mechanisms like financing.

Okay, as promised, going to the audience. Any questions from the audience? We have a shy group of people here. So let's continue.

Yes.

Let's talk about CSA margins for next year. So clearly, I mean, the disruption in resi has caused pretty significant decrementals in the business. How do you think about the recovery path on margins for all of CSA?

Rednor, you want that?

Sure. So the way I would think about it, Joe, is obviously this year, in 2025, first half margins looked phenomenal. We had a lot of absorption coming to the factories, resi business has done great. Second half, we had the opposite. So as you think about heading into '26, it's hard to use '25 as the baseline. The better place to look would be a much more normalized year, would be more like 2024. So that's one way to look at how the margin should be.

We are managing that, especially through Q1, very, very closely. We know it's going to be a challenging quarter from a volume perspective on the resi side. So we want to manage that really, really closely. But as we go through into the core cooling season in the middle of the year, hopefully, we start to see that step up.

Okay. Great. So we've been talking about resi for the vast majority of this conversation. Let's switch the gears over to the commercial side of the business and the data center business. So look, really good performance so far this year. You have to be excited about the progress the team is making there. Talk to us about your kind of visibility going forward in the pipeline. How are you guys winning relative to other OEMs?

I'll tell you, the pipeline is great. Our amount of deal activity right now is good. Liquid cooling, we've won our first orders on the CDU side, which was very, very encouraging.

Because we're putting a lot of effort onto this QuantumLeap offering, which is I think we're -- ultimately, the game will be won, which is, do you have system-level optimization for the customer by integrating the traditional cooling loop -- which will always be there. I don't think you will see chillers go away. From a max efficiency perspective, you do need chillers to complement. And I think that you're going to see more liquid cooling just because of the amount of heat generation from, not only the number of GPUs, but the density in the racks will require increased amounts of liquid cooling.

So we've developed our own CDU. It's about 1.5 megawatts. We're going to now have one about twice the size, and then we'll have one, ultimately, that's 5. So we have a lot of CDU organic activity in development.

On the liquid cooling side, we're working directly with NVIDIA. We're working with Dell. We're working with the chip manufacturers, and a lot of certification activity. And on both the liquid cooling side and the traditional cooling side, we -- our relationship with the hyperscalers has come along so well. Our very first hyperscaler win gave us -- we've continued to win with them, and they gave us our biggest order ever earlier this quarter. And we've been meeting with 2 of the other -- 3 big other hyperscalers. And the relationship and the amount of activity is just very, very encouraging, at all levels.

We're winning in part because of the investments in the product portfolio. We're winning because they see that, as a systems integrator, that there could be a relationship where we start to co-design with them solutions integrating that liquid cooling loop and traditional loop, for maximum efficiency but also water utilization.

And we're winning because we have capacity. We've significantly increased our capacity here in the Americas. It's up significantly 3 to 4x over just the last few years. We actually are probably one of the few guys that still have a fair amount of capacity to take on a lot of new orders for '26. So even though we're booking orders into 2028, we could take orders now for 1Q, because we've been building even a little bit at risk, for the 80% of the chiller that might be somewhat common, giving ourselves flexibility on that last 20% that's bespoke.

So Joe, I can't tell you how proud I am. We have a dedicated team focused on data centers. Steve Ribaudo running the Americas, working with Gaurang, and Christian Senu running our data center activity. They're out there in the field every day, supporting our customers, winning, well positioned for 25% next year on data centers. Internally, we would be pushing for more than that. But you know we went from $500 million last year to $1 billion this year. With $900 million in backlog for '26, we'd be upset if the number wasn't $1.25 billion next year. But internally, we'll keep pushing on that.

That's great. And just to be clear, largest order ever was the fourth quarter?

Yes. Yes, it was in October.

Okay. Great. I'm sure you saw Modine's announcement, the TurboChill DC chiller that's supposed to disrupt potentially the CDU. Any thoughts on that technology, especially now that you said you just won your first CDU order, just any thoughts around that technology and what...

Oh, it's interesting. We've done it ourselves, that stainless steel. I think that -- we've done a variation of that ourselves and it's very -- certainly very interesting. I think that the technology in this space is changing so fast. It's actually one -- it's one reason why we want to place organic bets that we have very high confidence in. Like we know for the foreseeable future that there's demand for CDUs.

CDU is effectively a mini chiller. It's right in our wheelhouse. Our engineers, I mean from the time that we had the concept of making this 1.3-megawatt CDU to the time that we started producing and selling it was record time. Because we know how to do it, we know the technology, we know how to pump liquid to a certain location on demand. So the team has done a great job.

I saw the competitor announcement. And anyone that's innovating in this area, hats off to them, because it's interesting. Again, we've done a variation of it. And you have that, you have the combination of what we're working, is this QuantumLeap, which is using the CDU to integrate the direct-to-chip cooling and the traditional cooling. And then you have immersion cooling. And within each of those spaces -- and then you have some in-row heat exchanger activity.

Within each of those areas, you have product development. So within direct-to chip, you have single-phase and 2-phase, water versus some form of refrigerant. And that's why what we've -- the tack we've taken is organic development in high-confidence areas like our own CDUs, increasing the range, and then placing some strategic VC-type bets. So we have an investment in SCL. We have an investment in ZutaCore. First is single-phase, second is 2-phase. And then we'll continue to kind of look out there. But we want to be -- have a lot of bets out there because the technology is changing.

Makes sense. Can we talk about Europe and talk heat pumps? So clearly, it's been a tale of 2 stories here for 2025. We've seen heat pump -- the heat pump market accelerate significantly while the furnace market cratered. How is that business trending? And how are you thinking about that business for next year?

Yes. Look, when all is said and done on '25, we said that RLC in Europe would be flat and it will be down a little bit. So I was -- obviously, we'd love to surprise to the upside.

I think what you have, the dynamic there is very similar to the dynamic here in the Americas, which is you went through a period of overage. We use Germany as the microcosm, which is '22 and '23, we're about 1 million units. On average, over any period of time, it's 800,000. So we had to take a little bit of medicine. We went through -- last year, it was about 700,000; this year, might be a little bit shy of 600,000. So will there be a reversion to the mean? For sure. And just like the Americas, we don't know exactly when.

In the background, the benefits that we thought we would get from mix, they are 100% happening. So as you see boilers decline and as you see heat pumps increase, you do mix up 3 to 4x. The data tells you that 100%. We do need to see some level of stability on some of the legislation. We'll see what happens with subsidies in places like Germany.

But I will tell you that the company has had a philosophy that we never want to be in this kind of room talking about subsidies. We don't control it. We don't want investors having to assess subsidy confidence. So we have put a lot into product development.

If you look at our R&D spend, it's a little bit disproportionate in Europe. And one of the big products that we've been working on is a new product launch that will make us independent of subsidies. So you're going to hear more about that, Joe, from us in Europe as we get into 2026.

But the team, I'll tell you, the Viessmann team is winning best-in-class products in '25 for products that we introduced in '21. You won't find a technically more advanced team in terms of acoustics, energy efficiency, aesthetics, installation time. And we continue to add to that portfolio.

So could subsidies change a little bit here and there? For sure. Are we taking the right actions to make ourselves independent of subsidies? Yes.

So the content is coming through as expected. The margin profile of the business hasn't improved all that much. So how are you -- how are we going to get to potentially structurally higher margins in that business over time?

I think it's a combination of fixed cost takeout and the volume. And then, of course, all things productivity. But we said that we would be in the mid-teens. I think if you look -- and we showed this to our Board yesterday, I think if you look at -- start thinking about 2026 and where you would expect to see the biggest amount of margin expansion, it's in CSE.

And the number, the target we're setting for our team there internally is a bit aggressive. But when you go through the waterfall of exactly how you get to a mid-teen type margin level, there's a very clear road map to get there over time. We'll have to see where next year exactly ends up. But ultimately, it's high teens. In the shorter term, it's mid-teens. And next year, I think when we sit together next year, you're going to say, "You said you'd see huge margin expansion in Europe. Hats off to you, you guys did it."

We'll hold you to that. Okay.

Hold me to that. Yes.