Carrier Global Corporation (CARR) Earnings Call Transcript & Summary

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?