Carrier Global Corporation ($CARR)

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

So Mike, Dave, I thought it'd be a good opportunity to maybe just give us a lay land in terms of what you've seen out there as we enter the summer season?

Well, Nigel, first, thanks to you. Thanks to all 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, we'll be up certainly double digits again. You saw 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 issues. 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 output. 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 for extra water cool chillers up 3x or cool 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 linked 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 and 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, 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 RLC in North America, light commercial, we thought it would be down in the first quarter was up almost 10%. And 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.

Like commercial a but better.

Probably.

And then Europe has 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 HVAC 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 come up in the U.S. resi business this quarter. What's your layed land in terms of inventory right now, how the inventory weather 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 imbalanced 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.

[indiscernible]

Yes. Thank you.

I'm not going to do it every year.

You could do it once a year.

I wouldn't be a good sign about our reliability though.

Yes, today's the first [indiscernible] degree days in New York. That suns are good.

How have 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, it 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 in addition to $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. So the point on the share gains in resi construction. Is that an attractive part of the market is 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. The -- you mentioned $4 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 are you taking to mitigate those 2 waves?

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 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.

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, 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 uses are going very, very well.

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

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 investment 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 we'll have to see how things play out. But we really appreciate the reset [Audio Gap]

So Dave, your 6.5 million to 7 million unit market assumption this year is quite a way below [ Train ], Lennox, Unity peers. Have you actually crunch the numbers on January to March, I mean it's early days, but it seems that we're pointing towards an 8 million unit market perhaps. Is that math wonky? Or are you conservative as you answer them in the middle? I mean any sort of lay of lands and 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 air on the side of conservatism, but it's too early to say what is 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 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 to few homes in the United States, 4 million or 5 million, to few homes. They're rearing a 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 meet 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 have -- 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 back in the near term. So it's not a question of weather. 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, sure. Obviously, the repair versus replace equation gets a lot of attention. What's your perspective on that? We saw obviously -- we saw the needle shift last year towards -- 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, like commercial from the audience? No. Everyone's quiet. Okay, great. Dave, maybe 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 start looking to you outside of the 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. Okay. 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 to '29 is there at the most senior levels. So we're discussing 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 go from 1.5 gigawatts to 10 gigawatts, and I met with 1 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? Is that 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 cools.

Yes.

Yes. Okay. And maybe just talk about why you're gaining share in [indiscernible] and data centers. It is a pretty competitive space. It's some very good place here. How is Carrier overachieving in that...

We have great competitors. But what I will 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, were 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 witnessed 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. 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 talking 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 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 a combination of traditional cooling with liquid cooling in a way that's very differentiated. So I think, ultimately, 1 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 transitioned from a product-only company to a solutions company. And that's what Carrier is. If you think about it, where's 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 light DCIM business, providing unique solutions there. is what our customer is looking for. And then with CDUs itself, we've looked at acquisitions. Obviously, there is 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 1-megawatt CDU. We have 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 you look at your global commercial HVAC business, takeout services take out data centers. You're not really big in 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 through 12 has continued to be a bit weak. That impacts like commercial and some of the commercial HVAC side. But I think that [indiscernible] and commercial real estate has been a bit soft, but if I look at our growth in non-data 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 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 data 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 and 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 any last questions, please, please get ready for that. In Europe, I think we're a little bit data staff. There's not great data in Europe. Maybe help us think about, what are you seeing on subsea applications in Germany and other countries, the impact of high energy prices, high gas prices is happening on that? And then how that plays out with the boiler situation because the offset has been bolus 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 ore. 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's up to the 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 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 for the [ IF Association ]. So we always win awards for the prior Viessmann Vetocal 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 [indiscernible] efficiency, everything else, but price 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 upside 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 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 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, 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 has been 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 see in 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 [indiscernible]. 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 head count 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 volume 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 [indiscernible] 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 [indiscernible] quite a ramp from 1Q to 2Q. I just want to make sure we're still on that ramp path.

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, 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.

But the 2Q ramp, it's part of that seasonal or 5 points, perhaps, and then the other side? Is this factory absorption?

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

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

In general, yes, you'd recall we put in price increases basically at the end of April to cover all the input costs, which includes logistics, fuel and tariffs the effect in early April. So there is a little bit of a 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 out of time, but 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.

Thank you, Nigel.

And a great discussion. Thank you.

Thank you. Appreciate it.

Thank you, Nigel.