Good morning, everybody. Thanks for joining us. I am Tim Wojs, and I cover building products here at Baird, and we are delighted to have Carrier Global join us again this year at our Global Industrial Conference. Carrier is a global leader in intelligent climate and energy solutions. They offer heating, cooling, cold chain, and related aftermarket services to homes, buildings, data centers, and transportation markets. From the company up on stage with me is Chairman and CEO Dave Gitlin, and then Chief Financial and Strategy Officer Patrick Goris, and then Michael Rednor, who is VP of IR, is in the front row here. We will start with a few prepared comments from Dave, and then we will hop into Q&A. With that, the floor is yours, Dave.
Well, thanks, Tim. Good morning, everyone, and thanks, Baird, for having us. The Carrier of today is significantly different than the Carrier at spin. We are better positioned for sustained strong growth than we have been in decades. How? By becoming a pure-play climate and energy solutions company with a focused yet balanced portfolio, by investing in product differentiation, which you can see across our portfolio, by building an aftermarket playbook that drives consistent recurring revenues and double-digit growth, by adding a new vector of growth and differentiation through systems and digital offerings, and by transforming our commercial HVAC business, where our win rate is 3x what it was at spin. We have spent the past six years creating a comprehensive ecosystem to out-compete while expanding margins by investing in spec engineers, sales force, field technicians, new and differentiated products, complemented by lifecycle, digital, and system solutions.
We have had significant share and margin gains since spin. Certainly, data centers are helping, where our sales will be up 2x versus last year, and our orders year-to-date are up 350%. So it is a great source of growth, but this year, it is just under 10% of our total sales, so plenty of room for growth. It will be up about another 50% next year without being overexposed to it. Importantly, we are also winning in non-data center verticals globally, with more to come following our capacity investments, all complemented by residential and light commercial end markets recovering in the Americas and Europe. By the end of next year, commercial HVAC and aftermarket will be nearly half of Carrier, giving us multiple ways to win. Great long cycle backlog with many verticals of strength and recovering RLC markets.
All in, we have built a more resilient company that is not reliant on any one vertical or geography, positioning us for sustainable growth, which is what you should expect from us over the years to come. Now, we recognize that growth needs to come with strong earnings conversion. This year, our in-year pricing actions were a reaction to the in-year tariff and inflationary challenges. As we prepare and start thinking about next year, we are clear-eyed about the input costs and are getting out in front of these headwinds. We have already announced price increases globally and are also, of course, leaning into productivity through Carrier Excellence, our business operating system, which is deeply embedded in our DNA. We deliver on productivity across the company, including through our factories and supply chain, as well as product re-engineering to deliver lower cost.
That playbook is working, and we will continue to use it with great focus and effectiveness. While temporary cost inefficiencies, including expedite and logistic costs associated with the significant volume ramp, have impacted the business this year, we expect these headwinds to fade as we go through 2027. We are taking tough but important structural cost actions, including closing high-cost locations and other restructuring actions. We have a track record of doing great things even when it is hard, and that is exactly what you should expect from us. With that, Tim, let us get into the Q&A.
Awesome. Thank you, Dave, for that. If you have any questions, you can raise your hand or you can email session1@rwbaird.com. Maybe just to start off, kind of big picture, Dave, I mean, you held an analyst day last year that outlined kind of 6%-8% organic growth over the medium term. Just maybe talk about the puts and takes, how you are tracking to that, and your confidence in kind of attaining those over time.
We feel good about it. I mean, this year, we will be up around 10%. Next year, that is the kind of zone that we are thinking about, mid to high single-digit type growth. If you look at it always started with the market, and we see very good market conditions on the commercial side and great backlog. We have record backlogs, $8.5 billion, really well- positioned on the commercial HVAC side. I mentioned double digit forever on the aftermarket side. Then if you look at this new frontier for us, systems differentiation, that will give us another point or two as we go into next year and beyond. So, we said 6%-8%, and that is the kind of zone that we feel good about.
Aftermarket has been a really big focus for you, kind of coming out of the spin. What have you done over the last three to five years to kind of position that into your kind of double-digit forever type of model?
Prior to the spin, we consistently grew at about 1% or 2%. Every year since the spin, we have grown double digits, and we are on track to do it again this year. It is really a holistic playbook. If you look at just how you get parts from A to B and getting your fill rate up north of 95%, if you look at your service attachment rate, if you look at our complex chillers, we have close to a 90% attachment rate, which means that when the product comes off warranty, do you get a long-term agreement? We have expanded our focus on modernizations and upgrades, and this year, it will be up 25% or so with a complete playbook that we have deployed globally on how to drive change to a chiller before the end of its life.
We have leaned in a little bit on CapEx to drive more rental sales. The whole playbook around service attachment, parts, connectivity, we have 270,000 Lynx subscriptions for our transport business. Lynx didn't exist a few years ago. You look at the number of connected devices, that is just par for the course. It rolls off the line, it is connected, and we have about 120,000 chillers now connected through Abound. It is a holistic playbook. The thing that is out on the horizon, all these chiller sales that we are seeing right now, that is all going to result in very good recurring revenue with the aftermarket down the road.
What is usually kind of the path to that, especially on the data center side?
For data center, I was actually at one of our major data center customers yesterday. We are going to sell them, in the first phase, about 600 chillers. They have all of our BMS. They have 100% Automated Logic controls. We are talking to them about CDUs, and they are really excited about QuantumLeap, so systems offering. They have an entire, this multi-thousand acre facility, they have a whole area that they are thinking about for how they think about parts and remanufacturing and maintaining chillers and other equipment on the site. So we are talking to them about various options for long-term agreements. We have three tiers of long-term agreements. We have a very base one where some data centers will have already designed for redundancy, and they don't need white glove treatment where you are going to repair, that you need on-site support, on-site parts.
You need to make sure that any chiller that goes down, you fix it in a matter of minutes, not hours. Some haven't designed for full redundancy, and they want what we would call an Elite BluEdge agreement. For each data center, they will end up with one of the three, a base, a mid-tier, or a very high end. We usually put people on the site during the warranty period, call it a year or so. Then we have a couple years where there's some level of payments associated with an attached service agreement, and then varying degrees of long-term agreements. That's going to be a great source of revenue. Remember, the chiller will last longer than seven years, but in many cases, the chips will get replaced after about seven years.
That will trigger a whole new—a s you introduce new chips, the thinking around the cooling needs will change. There's a lot of strategy that we're discussing internally, how we make that seven-year upgrade to the chips a part of our chilling upgrade strategy.
Okay. Maybe just kind of staying on the data center topic. I mean, obviously, the election kind of moved sentiment a little bit last week. Just any kind of early thoughts or implications, kind of any customer conversations or data points you can talk to?
I spent the weekend with one of our biggest hyperscaler customer. We had a lot of discussions. Excuse me. I was with a colo customer yesterday. If you look at the next few years, that's pretty locked in. We have firm orders. We've signed LTAs with mandatory minimum agreements. When we look at our backlog and we look at the kind of commitments that they've now, they're already under construction with, what we're seeing with the election, I would not describe that as a 2027, 2028, 2029 type issue. We feel good about the orders we have. The great thing for us, and look, you look at the ultimate underlying demand for more token usage and all that. I think the underlying demand will continue to increase the demand for compute. So long term, it still feels good.
What I will tell you is the great thing for us is that we have great exposure to it. I mentioned 350% increase in our orders year-to-date. We have been growing 2x every year. We went from $500 million to $1 billion to $2 billion this year. We will be around $3 billion next year, so that will be another 50%. For us, it is great, but we are not one of these companies where it is 70% of our sales. This year, just under 10%. It will become a more meaningful number next year, north of 10%, but it is not 70%.
When I think about the Carrier portfolio, we went through, I would say, a couple years where those that really wanted to be all in on North American commercial HVAC, and that you wanted to buy someone where it was like a huge part of what they did, there were a couple clear folks that people would lean into. If you wanted a pure-play resi guy, there was probably a guy that you might focus on. We are in a phase now where we love our resi business. There is a lot going on. I am sure you are going to ask about it. It is the topic du jour, but it is 20% of our sales. We have a pure-play HVACR climate energy solutions company. It is a great growing space. Our backlog is at record highs, but we are not overexposed. We are not overexposed to resi.
We are not overexposed to European resi or commercia l. We have focus but balance, and I think that is going to serve us really well in these years to come.
Yeah, I mean, I guess you do have more of kind of a global kind of diversified portfolio. I mean, what are kind of the pros and cons of being so global and in so many different kind of regions?
I think one of the big advantages that we have with the portfolio we've established with folks like Viessmann and Toshiba is we have 5,000 engineers. As we start thinking about different technologies around the world, if we want to do variable speed, side or vertical discharge, we have rotary compressors with the Toshiba acquisition. We have phenomenal inverter technology. As we start thinking about domestic hot water in the U.S., you have all of the technology that Viessmann brings to bear as they've combined hot water with heating in the same technology envelope. What's great about having what we have is we can scale the technology through product differentiation. We have systems differentiation. We have digital capabilities, and we're not overexposed to any one geography or vertical.
We think that over the last couple of years, if you're in a pure play, one geography, one vertical, and that vertical and that geography is great, you're going to ride that wave, and it's going to feel pretty good for a while. When there starts to be any kind of question marks about a single vertical or single, it's nice to have balance and not be overexposed to one geography and one vertical, and that's what we have is balance but focus.
Okay. Maybe just kind of going into the business a little bit, just kind of North American resi, kind of where do you think replacement volumes are this year, and how does that kind of compare to normal?
We said that the total market typically is at about 9 million units. We went through a stretch there, 2020 to 2024, where it was a bit north of that, and then we were in the 7.5 million range. We came into this year thinking it'd be around 6.5 million units, and it's going to be somewhere between 7.5 million- 8 million. So it's been more resilient than we expected. We had said coming into this year, our resi business would be down high single digits. We'll be up around 10% this year. So, the underlying market conditions have been better, and the question is why when you have high interest rates and there's some anxiety around the consumer? It's because at the end of the day, it's a replacement business. 75%-80% of our business is replacement, 20%-25% is new construction.
And at the end of the day, units fail. You can't limp along forever with a motor or compressor change. So it's a replacement business, and we're seeing that. Then I think as we start to hopefully down the road get the benefit of, we'll see what happens with rates, we'll see existing home sales have been suppressed. As those start to come back, I mean, the market's doing better with these macro headwinds. As those macros start to give us a little bit of relief, it should start to improve as well.
Okay. I mean, obviously the kind of repair part of the market picked up last year, but you also had a lot of complexity around the refrigerant change and things like that. So where do you kind of think you are from like a fix-replace standpoint, and was that a cyclical dynamic, or do you think that that's some sort of secular change?
I think what happened last year was you had this sudden macro headwinds that created a bit of a dynamic where folks did opt for repair. I do think that because existing home sales seem to have been suppressed for a bit, I think people are just back to the new normal where it's a replacement business. So we have not seen the dynamic. I just spent a lot of time with A.J., the Watsco [President], and his leadership team, and also we were with our independents a couple weeks ago. What I will tell you coming out of those discussions is that the replacement dynamic is what it's traditionally been. We get a lot of questions, and it comes in all different ways. If you listen to our earnings call, has something changed with the resi market? So I ask.
I mean, these are people that are deeply steeped in the business. So I ask the question. I go to an investor meeting, I get 70% of the questions on 20% of our business, and has something changed in resi? I will tell you to a person, the answer is no. It's a phenomenal business. There is a handful of companies that fundamentally define the business. We are proud to be the market leaders in this business. If you look at what's happened over the last handful of years, we went through a stretch where we had the semiconductor problems where people were charging $5-$10 for a $0.01 component. So we had a sudden influx. We did raise some prices. Then we had the A2L transition, and the new product versus the 410A was higher priced, and we all raised some prices.
Now we have inflation and tariffs, so there is price increases, and we will get price increases this year as we always do. I do think that the difference about this year was that usually we have a pretty good envelope of where the input costs are going to be. We can say copper will be somewhere here and steel, aluminum, and we can kind of look at logistics costs, and this year, I will tell you what happened in April with the 232 tariffs, that was kind of unexpected and a significant number, and it was exacerbated by some of the stuff with raw materials and fuel. It happened all at the same time when the consumer was under some level of pressure.
What I will tell you when I talk to people that have been in the business for a very long time, I am talking about people that used to work at Carrier, they have been in the industry for 40 years, the fundamentals are the same. The channel dynamics are the same. We have great channel partners, we have a great route to market, we are introducing new products, we are introducing system products, we are introducing a digital ecosystem that we call Comfort 360. We are going to get pricing. We have already announced price increases for next year. It is going to be effective December 15th. We announced an 8% price increase for our resi business. So the fundamentals are the same. We will continue to drive differentiation and channel stickiness, and we will continue to drive price.
On the pricing topic, because there are a few questions here from the audience on it. So really kind of the pricing not kind of being realized in a year was kind of more of the suddenness and the severity of the cost increases relative to something that is kind of changed in an underlying basis, because then you kind of layer in like maybe some increased competition from foreign players and things like that. So maybe just kind of unpack that a little bit.
I will take this and then turn everything else you ask to Patrick. Because you are probably going to get into harder questions. I think, yes, there is a trend to —are we seeing more ductless? Yes. And that is a good thing. We love our ductless business. We have a crossover unit that is effectively a hybrid unit that if your outdoor unit is a side discharge and it connects to a traditional air-to-air internal system, that hybrid system plays really well for us. We have great channel, great branding, and great margins on our crossover and on our side discharge business. We have a great partnership with Midea, which will continue, and we have great technology in our portfolio that plays perfectly for that part of the market. So, we are very happy with how we are positioned on that side discharge base. Are there competitors that are in the market in that space?
Yes, but if you look at most of them, they are almost all partnered with one of the U.S. players. We feel very positive about that space.
Okay. Then maybe just to the last resi question I have got is, you are seeing your customer base get bigger. You are seeing new people get into HVAC distribution. How are you guys positioned for that? What are the positives and negatives?
It is very good. Look, I would tell you that our relationship with Watsco has never been better. We spent a lot of time with A.J. and his team, and it is very collaborative. Not only the Carrier Enterprise piece, but the other parts where, excuse me, that we use Watsco. We have a recurring cadence of how we look at KPIs, how we find win-wins for each other. So the Watsco piece is very, very positive. The non-Watsco piece, yes, we have seen the Home Depot subsidiary come in and buy a couple of our distributors out in the Midwest, in the Colorado area, and in the Southeast, in the Georgia area. Those are phenomenal distributors, and we are very happy with the Home Depot. They are a great partner. They are a great customer. So that opens up new avenues for us as we think about things like parts.
There, we have Ferguson and some, we have the Home Depot, we have our traditional independents, and of course, we have Watsco and our partnership there. So we think that distribution, and of course, our 100,000 dealers, is a competitive differentiator.
Okay.
I would also say that every time a transaction like this happens, it opens a window for us to enhance our agreements, our contractual agreements. It is an opportunity from that point of view as well.
Okay. Great. Maybe just on the data center business, can you speak to your confidence about getting to the $2 billion number this year? I know, there is a lot of it is a big ramp in the back half of the year, so maybe talk about that and if you are on track there.
Yeah, I said Pat, but I will do this. We feel very good about it. I mean, look, it implies $1 billion in the fourth quarter. We have a complete dedicated integrated product management team that is cross-functional. It is a very, very collaborative focused team that we have high, high confidence in achieving what we have had. It has not been easy. Some of the input cost challenges we have had has been the result of expediting parts from A to B, it might be fans, it might be some other things. We feel good about achieving the number. What has happened this year is that we made commitments to especially hyperscalers, but some colos as well, where we had some new 2 MW, 3 MW air-cooled chillers. The designs were still being completed while we were releasing the bill of material to our supply chain.
What happens once you have a stable design, which we now have, so the 2 MW, 3 MW, totally, we have passed all of our first-of-kind testing. They have been witnessed. The design is stable, the BOM is stable, the bill of material is stable. It is out in the supply chain. Once you do that, your expedite fees and some of the issues, the startup issues that you have, some of the takt time issues that you have in your factory, those are very normal for your first builds. Those are now behind us. What happens now is now you start your dual and multi-sourcing. The new factory we are building in Texas, we have created I was there yesterday. We have space for a whole series of insourcing some of the key sub-assemblies, not exclusively, but we will have ourselves as an alternate source to our suppliers, some of the key sub-assemblies.
Now what you do is you have a stable design, you improve takt in your factory, you have dual and in some cases multi-sourcing. All of that expediting starts to subside, and that's what we will see as we go into next year.
Okay. Great. Patrick, as we kind of think about 2027, if there is any kind of swing factors that you can kind of talk about, kind of big picture, and I know you guys kind of committed to double-digit EPS growth, but just kind of any big- picture things that we should think about there.
Yeah. The big swing factors obviously are going to be the levels of organic growth. Dave mentioned earlier, he is very comfortable with the 6%-8%. But if you look at our visibility there, our backlog for data centers at this point for next year is already over $2 billion. And Dave mentioned that we are comfortable that our data center sales next year will be about $3 billion, maybe a little bit more. So from a backlog point of view, looks really good there. $1 billion of data centers is already 4 points of organic growth for the total company. Add aftermarket, we would target, of course, another year of double-digit growth. Dave mentioned we have done that five years in a row. That adds another point or two. So that alone, with no contribution from any of the other businesses, gets us to about 6% organic growth.
Growth factor looks good from a sales perspective, driven by data centers and aftermarket, and then of course with potential from the other shorter- cycle businesses. The other swing factor clearly is going to be what is happening with price, cost, and productivity. And that is the element we talked a lot about this year. This year, you know we are having a headwind of $800 million in incremental input cost. We are driving price and productivity to offset as much as possible of that. We know at this point that our headwind next year from input costs will be $500 million, a little bit more than that. And that is why we have announced additional price increases. That is why we are driving additional productivity. A big swing factor for next year clearly will be price, cost, and then productivity, what the net impact is of that.
Okay.
That is our focus now. The good thing is, we know it now. In 2026, this year, around Easter weekend, we woke up, and three days later, we had a $300+ million headwind surprise because of tariffs.
Right.
We have better visibility now, unless there are additional surprises.
Okay. Then as you kind of think about kind of the margin mix in Americas and things like that, I mean, it does seem like that kind of dynamic will kind of phase in through the year. I mean, it seems like even if Americas margins have some pressure next year, just that is your highest margin business, your fastest growth business. So at an enterprise level, you do get some mixed benefits from that in aggregate, right?
Yeah. You are not going to hear us say now that Americas margins next year will compress, so we are not there. But clearly, the fastest-growing region next year is expected to be the Americas. As long as the Americas grows faster, and actually the commercial HVAC business in the Americas is a good business, we can see total company margins increase. So, it does not mean that if Americas margins would decline, which we are not saying, that the total company margins would not go up.
Yep.
You also heard us say that there is a lot of focus, not just in the Americas, but also in Europe, on margin expansion, as there is for the two other segments as well.
Then maybe just on that, I mean, obviously Europe, I mean, it seems like just what we've seen with heat pumps and what we've seen with energy prices, and you've had a new leader there, that business does seem to be turning. Could you just talk about how optimistic you might be on the European business?
Well, the total environment is certainly better than it has been at any point in the last two, three years, which is really good. On the commercial side, we've seen after five or so quarters of modest order intake and not great sales performance, we've seen that turn around. So we see significant order intake helped by data centers, and we see commercial HVAC now returning to growth. On the residential side, as you mentioned, electrification is there. Our biggest market in Germany is picking up from multi-decade low heating units. On top of that, we're seeing a big uptick in air conditioning. So, it looks well for growth in Europe in general, and I think we would be surprised if there wouldn't be revenue growth in Europe next year.
To add to what Patrick said is, it was good to see last quarter double-digit margins. You're going to see us continue, Thomas and the team, continue to take the right actions on the cost side. We've done a lot with more to come on the cost side. So you should see margins continue to expand in Europe. As Patrick said, last quarter we saw heat pumps up nearly 35%, air conditioning sales up nearly 35%. There were 16,000 Germans that died this past summer in the heat wave. So, the air conditioning opportunity in Europe is really having its moment. What's happening there is just not okay, from a health and safety perspective. If you look at the fact that we have Viessmann branded, Toshiba branded, Carrier branded, and the channel we have, we have the very unique channel because we're direct to installer.
We're kind of having the moment. We, of course, wish we had had this moment three years ago, but it's good that it's happening now.
Great. We're out of time, so please join me in thanking the Carrier team for being here today.
Thank you for having us.