Good morning and welcome to Carrier’s first 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, amortization of acquired intangibles and certain significant nonrecurring items such as acquisition and divestiture-related costs. 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. One additional note, as you probably saw in both the press release and webcast presentation this morning, we announced our revised reportable segments and segment profitability measures, so we will be speaking to financials on this basis going forward. With that, I'd like to turn the call over to Dave.

Thanks, Mike, and good morning, everyone. Let me start by thanking our 50,000 teammates for delivering another strong quarter. I'd also like to welcome Michael Gierges to our team. He is leading our Climate Solutions segment in the Asia Pacific, Middle East and Africa region, and we are thrilled to have him on board. So a strong and better-than-expected start to the year. Orders were up high single digits with double-digit order growth in Climate Solutions, Europe, and Transportation. Within Climate Solutions America, sales in both residential and commercial were up about 20% each, more than offsetting weakness in light commercial. Global aftermarket remains on track for another year of double-digit growth following 1Q, which was up 8%. Total company backlog was up about 10% year-over-year and 15% sequentially. The team continues to use Carrier excellence to drive strong productivity with core earnings conversion of about 100% and 210 basis points of margin expansion. We drove 27% adjusted EPS growth on 2% organic growth. Free cash flow was $420 million, and we returned about $1.5 billion to shareholders in the quarter through dividends and share repurchases, plus we paid down $1.2 billion in debt with no additional maturities until 2027. Turning to slide 4, we made great progress on all three drivers of sustained growth: products, aftermarket, and systems. In terms of differentiated products, channels, and brands, we introduced Carrier's first air-cooled commercial heat pump in Europe, delivering high temperatures, increased energy efficiency, noise reduction, and enhanced operational performance. All of which address increased demand for district heating and cooling in Europe. Also, as we displayed at the recent ISH Show in Frankfurt, we are gaining traction selling our Carrier branded air-to-air residential heat pumps in Europe, leveraging Viessmann's channel. Aftermarket strength continues. We drove tremendous progress in the attachment rates of our commercial chillers, now surpassing 60% for the first time, and we now have over 50,000 connected chillers, up about 5,000 versus the prior quarter. Aftermarket for Global commercial HVAC was up about 10%, supported by margin upgrades which grew about 20%. We also introduced a smart device application for Lynx Fleet, providing increased real-time visibility, enhanced customer operational efficiency, and reduced costs while maintaining cold chain integrity. On systems, we introduced Viessmann's Profi to accelerate and expand our HEMS sales in Europe. Selling heat pumps versus boilers is a mix-up sales benefit of about 4:1, and selling complete systems versus boilers is a mix-up benefit of closer to 8:1, with more value to the homeowner. So we see this as a significant win-win opportunity for sustained growth and customer stickiness. For HEMS in the United States, we announced an exciting new partnership with Google to enhance grid resilience and support smarter energy management. By integrating Carrier HEMS technology with Google's cloud, AI, and analytics, we will help increase the efficiency of the existing energy infrastructure, reduce grid congestion, unlock greater energy utilization, and reduce energy costs for homeowners. Turning to slide 5 for an update on the residential and light commercial business in Europe, organic orders were up mid-teens, driven by strength in heat pumps, offset by a decline in boilers. Germany heat pump subsidy applications in Q1 were up significantly, the highest Q1 we have seen in the past five years. Our RLC Europe book-to-bill was 1.3, and our backlog was up 60% sequentially. Organic sales were down about 10% as we expected, and we project the RLC Europe business to return to modest growth in 2Q. Revenue synergies remain on track for about $100 million this year and about $200 million next year. Cost synergies also continue to be strong, and we are on track to achieve more than $200 million by the end of next year. A few comments on the recent election in Germany. We were pleased to see that the new coalition government is committed to the European Union's 2030 climate goals, which include a 55% reduction in carbon emissions, which will contribute to a continued shift to electric heating. Also encouraging is the coalition's continued support for heat pump subsidies and its €500 billion infrastructure investments, including about €100 billion for additional green investments. Importantly, the new government is also committed to bringing down electricity pricing by at least $0.05 per kilowatt, which is expected to bring the ratio of electricity to gas prices below 3. Further improving that ratio will be ETF 2, where across Europe in 2027, we expect fossil fuel prices to increase. All in, we're pleased with improving heat pump demand and traction on our key growth initiatives. A word on our guidance and the macro environment on slide 6. Let me first say that we, of course, support free and fair trade. Also, Carrier is proud to be the largest US domiciled player in our industry, and we've grown our domestic headcount by about 20% over the past five years, and we continue to invest in our US workforce and factories. With respect to tariffs, virtually all of our imports from Mexico are USMCA compliant. For the tariffs that are in effect today, China is about 80% of our exposure. As reflected in our guidance, we are fully mitigating our tariff exposure through supply chain and productivity actions with the balance of about $300 million via price, which represents a little over 1% additional pricing. In addition, given the fluidity of the current market environment, we are taking additional cost containment measures. Based on our strong start to the year and current FX rates, we are increasing our full year adjusted EPS guide to $3 to $3.10, which is up about 20% year-over-year. As always, our team is committed to taking the actions needed to deliver on our commitments to customers and investors. You saw this when we addressed COVID and supply chain disruptions, and we are confident that you'll see us do the same here. Importantly, while we remain clear-eyed and prudent given the current macroeconomic uncertainty, we will remain laser-focused on our customers and continue to invest in differentiation and solutions to drive sustained outsized growth for years to come. With that, I will turn it over to Patrick.

Thank you, Dave, and good morning, everyone. Please turn to Slide 7. As Dave mentioned, we had a strong start to the year with earnings ahead of our expectations compared to the guide we provided in February. Reported sales were $5.2 billion with 2% organic sales growth, including about 2 points of price. The impact of mix and volume was net neutral. We had an unfavorable 5% net impact from acquisitions and divestitures and a point of headwind from foreign currency. Organic sales were largely in line with expectations, with stronger-than-expected performance in Climate Solutions Americas, partially offset by weaker performance in Climate Solutions, Asia, Middle East, and Africa. Europe and transportation came in largely as expected. Q1 adjusted operating profit increased 10% compared to last year, driven by strong productivity and price. As a result, adjusted operating margin expanded by 210 basis points compared to last year. The absence of commercial refrigeration was about a 70 basis point tailwind to margin. Adjusted EPS of $0.65 was up 27% year-over-year and better than expected due to strong productivity performance. Compared to last year, adjusted EPS growth was driven by improved adjusted operating profit, lower net interest expense from deleveraging, and a lower share count. We have included a year-over-year adjusted EPS bridge in the appendix on Slide 19. Free cash flow of $420 million in the quarter was also stronger than expected, driven by higher net income, lower-than-expected seasonal working capital build, and lower capital expenditures. During the quarter, we repurchased $1.3 billion worth of shares. And in April, we repurchased an additional $320 million worth of shares. We continue to target $3 billion of share repurchases in 2025. Moving on to the segments, starting on Slide 8. The CSA segment had a very strong quarter, with organic sales growth of 9%. A bit more than half of the sales growth came from volume and mix, while the balance came from price. Commercial ex NORESCO and residential strength continued, with organic sales in both businesses up around 20%. Within residential, regulatory mix was the high single-digit organic growth benefit with the balance split between volume and price. About 75% of our residential volumes was 454B, and we are realizing the expected 10% mix. Light Commercial came in lower than expected, down around 35% with a tough compare versus prior year, which was up about 20%. Adjusted operating margins expanded 420 basis points, driven by strong organic growth and productivity. Overall, CSA had an outstanding quarter. Moving to CSE on Slide 9. About 75% of this segment's sales represent residential light commercial or RLC, of which about 85% is represented by Viessmann Climate Solutions and 15% legacy Carrier. Commercial represents about 25% of the segment's sales. Organic sales in CSE were down 7% with mid-single-digit growth in commercial, offset by about a 10% decline in ROC, largely in line with expectations. Adjusted operating margin declined 390 basis points, driven by lower volume, mix, and investments, partially offset by favorable cost synergies. At 9%, we are confident that we can and will drive significant margin improvement in this segment. We expect volumes to improve. We are addressing the underperformance of Carrier's legacy ROC business. Commercial margins are on an improving trend, and there is significant additional opportunity to streamline and drive synergies within the region. More on that at our upcoming Investor Day in a few weeks. Moving to the CS AME segment on Slide 10. Organic sales were down 6%, driven by continued weakness in residential China and parts of Southeast Asia, partially offset by growth in Japan and India. Within China, our residential light commercial business was down around 20% and commercial was up low single digits. Both businesses faced challenging compares versus the prior year, which were both up around 10%. Despite the organic sales decline, adjusted operating margin for this segment expanded 240 basis points as a result of productivity and the absence of a prior year unfavorable currency impact. Moving to CST on Slide 11. Organic sales were up 2%, driven by containers up 20% and partially offset by global truck and trailer, which was down low single digits with over 30% growth in Asia, low single-digit declines in North America, and a high single-digit decline in Europe. Adjusted operating margin expanded 210 basis points compared to the prior year, mainly due to the commercial refrigeration exit. Turning to Slide 12. Total company organic orders momentum continued to be up high single digits. As you can see on the slide, we had high single-digit or double-digit order growth in all segments, but CSAM. Within AME, China orders were down high single digits with a high teens decline in ROC but up mid-single-digits in commercial where we continue to build backlog. Within transportation, orders were up double digits, driven by global truck and trailer, where North America orders were very strong compared to last year. Overall, we ended Q1 with a robust longer-cycle backlog in commercial and continued broad orders momentum in over 85% of our business. Moving on to Slide 13. We are shifting to full year organic sales guidance. We continue to expect mid-single-digit organic sales growth. Given current FX rates, reported sales are now expected to be a bit above $23 billion compared to $22.5 billion to $23 billion in the February guidance. Also, compared to the February guide, we now expect slightly higher organic sales in CSA driven by tariff-related pricing to be offset by lower volume, mainly in light commercial. No other material changes in our organic growth outlook. Moving to profit and cash guide on Slide 14. At the top of the slide, you can see our margin expectations for each segment. Total company adjusted operating margin expansion remains unchanged at about 100 basis points versus the prior year. I will cover adjusted EPS on the next slide. But before I do, we are maintaining our estimate for free cash flow of between $2.4 billion and $2.6 billion reflecting roughly 100% conversion. Moving to Slide 15. We are increasing our adjusted EPS guidance range by $0.05 to a new range of $3 to $3.10. Stronger productivity and updated currency is partially offset by slightly lower expected volume. The net impact of tariffs is neutral. Some additional guidance items are in the appendix on Slide 18. In summary, Q1 was a strong start to the year. For 2025, we anticipate solid mid-single-digit organic sales growth, strong margin expansion, and close to 20% adjusted EPS growth. With that, I would like to ask the operator to open the line for Q&A.

Thank you. And our first question comes from Nigel Coe with Wolfe Research. Your line is open.

Thanks. Good morning. So guidance for the press, I just want to confirm, Patrick, you're sort of pointing towards $0.87 or so EPS base case and about 5% core growth.

For Q2, you mean that, Nigel?

For Q2, yes, Q2 2025, yes.

Yes, mid-single digits organic growth, about sales of about $6 billion. I mentioned 100 basis points of margin expansion and roughly or close to 20% adjusted EPS growth.

That's great. And then just given all the moving pieces across the portfolio, how does that mid-single-digit look across the new segments?

For Q2, or for the full year?

Let's say both, Q2 and full year, yes. Thanks.

I'll start with Q2. We expect organic sales growth to pick up in the Americas to mid-teens. In Europe, the Europe segment, we expect Q2 to be up, as Dave mentioned, low to mid-single digits. In Asia, we expect another quarter of low single-digit organic sales decline and the same for transportation. That's due for the overall company to mid-single digits, maybe a little bit better than that. For the full year, our organic guide for the overall company remains mid-single digits. For the Americas, we continue to expect high single digits. Europe low single digits, same for Asia and Middle East. Then we expect organic growth to pick up in transportation in the back half of the year, and we expect transportation to be up mid-single digits organic growth for the full year.

That's great. And then just a quick follow-on on the tariff. I think $300 million is the number that will be offset by price. Any more color in terms of what the gross impact is and how much has been offset by productivity and other actions?

I would say, Nigel, we don't really think of it that way because we've effectively offset whatever we saw upfront with our suppliers and with the productivity actions. So as we sit here today, we view exposure as the $300 million that we need to go offset with price. And frankly, we've already implemented those price increases in our channel.

Okay. Thanks, guys.

Thank you.

And the next question comes from Julian Mitchell with Barclays. Your line is open.

Hi, good morning. Maybe I just wondered, if you could drill a little bit more into the Americas segment and sort of flesh out perhaps what you're seeing in the residential piece there and light commercial, and that's the two places where I suppose the full year guidance has changed in May versus February. So help us understand the drivers there and how you think about those two pieces playing out over the balance of this year?

Sure, Julian. On the residential side, we upgraded our expectations from high single digits for the full year to potentially low double digits. We've noticed better pricing in the tariff area specifically for residential. The start of the year was stronger than we had anticipated, showing about 20% growth. The regulatory environment has been favorable, with around 75% of our mix coming from segments 454B and 410, where 454B contributed just over 10% of the total volume for residential. We're seeing mid-single-digit growth in both price and volume, and we expect the second quarter to be in the 15% to 20% range. However, we anticipate tougher comparisons in the second half of the year, particularly in the fourth quarter, as we had around $75 million in pre-buy last year. We feel positive about the first half for residential, but we remain cautious about the second half, adjusting our full-year expectations to high single digits to low double digits. In terms of light commercial, the performance was underwhelming, which led us to lower our full-year guidance to a decline in the low double digits. The first quarter was notably weaker than expected, largely due to softness in small and medium businesses, such as nail salons, local restaurants, and barbershops, along with delayed spending in K-12 due to paused bond funding. We anticipate Q2 will see a decline close to 20%, followed by a flat to slight increase in the second half. This suggests a 10% decrease for the full year. However, our light commercial segment represents about $1.5 billion in sales, which is just over 5% of the company. Hence, a 10% decline would only affect Carrier’s top line by approximately 0.5%. We’re monitoring the situation closely, and the team is actively managing it, which we believe is reflected in our full-year plan.

That's very helpful. Thank you. And then just maybe secondly, I wanted to understand on the CS Americas business, looking more at the margin front. So very strong margins up year-on-year in Q1 of over 400 points. The full year is guided up about 50 bps. And if we just look at absolute margin, there isn't much difference between what you saw in Q1 and what's guided for the full year, even though perhaps one might think with the seasonality, it should be moving higher, particularly second and third quarter versus first. So maybe sort of flesh out a bit how you see those margins developing over the balance of the year, please, in Americas?

Sounds good, Julian. You can expect the margins in the Americas to improve by a couple of points in Q2, rising from around 22% in Q1 to closer to 25% in Q2. They should remain similar in Q3 but decrease in Q4, ending the year at about 22.5%. Additionally, the tariffs are a challenge for the Americas margin due to price-cost neutrality, impacting the margin by approximately 50 to 60 basis points for the entire year, which will reflect in Q2, Q3, and Q4. As Dave mentioned, residential volumes are anticipated to be lower in the second half of the year, which will also affect margins. Therefore, we expect to see margins north of 22% in Q1, an increase to nearly 25% in Q2, a similar performance in Q3, and then a decline to reach 22.5% by year-end.

That’s great, Patrick. Thank you.

Thank you.

And the next question comes from Andy Kaplowitz with Citigroup. Your line is open.

Hey, good morning, everyone.

Good morning.

Good morning.

Dave, can you update us on your outlook for Viessmann at this point? Obviously, orders in backlog are up and you said RLC Europe will return to organic growth in Q2. So do you still see flat for Viessmann for the year? I think you talked about 150 basis point margin improvement and then stepping back on the overall CSC, you talked about your work to get that margin up, but maybe you could elaborate on the issues in the segment and what you're doing to address them?

Yes. When you look at our overall growth algorithm for Viessmann, we still feel good about flat for the full year. We think that total unit deliveries in Germany may be a little bit lower than we thought. I think we were thinking more like down 7%, it may be down 10% or slightly higher, but we are seeing a better mix overall. In Germany, we think heat pumps will be up more like 30% versus our previous estimate of 15%. So the benefit of the mix offsets a little bit of the volume perhaps being a little bit lower than we thought. A lot of that lower volume is on the boiler side as we see very, very strong demand in Germany, in particular, but throughout Europe with that continued move to electrification. I mentioned in my script that we were pleased with the new government coalition that is doubling down on the shift to electrification, doubling down on reducing electricity prices, and they supported subsidies. Of course, we'll have to see the clarification on the new heating law. But the rest of the algorithm stays intact as we will continue to see a bit of price. We'll continue to see aftermarket up double digits, which gives us another point or two. All of our initiatives that drive 4% to 5% growth, whether the cost synergies, the share gains, the introduction of systems prophy, we feel good that all of those remain very, very much on track. So we feel good about flattish for the year. We had said that the first quarter would be down 10% to 15%. It was closer to 10%. The team really came through in the first quarter, and we're confident that that momentum will continue. We'll see second quarter up a bit.

And then the margin on the segment, Dave?

For the Europe margins across the...

Yes, correct.

We think that RLC and if I talk specifically about Viessmann. Viessmann will be double digits. It will be closer to low teens for this year. Last year, they ended up at 10%.

Got it. Dave, can you provide more details about your commercial HVAC business in the Americas, especially regarding the capacity increase this year? You mentioned that the data center goal is to double, which I assume is still on track. Additionally, a 20% growth in commercial HVAC is encouraging. I assume that level of growth is sustainable moving forward given the added capacity?

Yeah. We feel very good about commercial HVAC overall. You know that this will be our fifth year in a row of double-digit growth. Americas was very strong in the first quarter. It was up in the high teens. If you think about the global commercial HVAC business overall, call it up double digits again this year. We're going to see $500 million of growth from data centers. We said that we were $500 million last year going to $1 billion, and we remain very much on track with that. We had a very strong first quarter for data centers, I think it was something like $250 million of deliveries for data centers in the first quarter alone. So we feel good about where we are for the $1 billion of full data centers for this year. And then for the rest of the non-data center business for commercial HVAC will be up in the high single-digit range this year. So I think that the increase in capacity, particularly in North America, where we're increasing our capacity so much, that has really freed up the sales team to go aggressively after some of the non-data center work where data centers were probably taking up more of the capacity over the past 12 months than it will going forward. So we see really good progress on some of the mega projects. Health care remains strong. Pharma has been good. Electronic fabs and some of the higher education sectors are all positive for us. Obviously, things like commercial office buildings continue to be weak. But overall, commercial HVAC is very, very positive.

Appreciate all the color.

Thanks, Andy.

Thanks, Andy.

And the next question comes from Steve Tusa with JPMorgan. Your line is open.

Just wanted to clarify the earnings base for the second quarter of '24. Could you remind us what the EPS is, considering there have been a lot of restatements?

Yes. Tony? That hasn't changed obviously from the prior year.

Yes. There's no change. I think it's low 70s, but I'll pull the number up in one sec.

I think $0.73.

Yes, $0.73, okay. Just wanted to make sure because Bloomberg still shows 75, and you guys have restated a bit. So I just want to make sure we have the base okay on that.

In the schedules of what we just disclosed, there are the historical financials as well.

Yeah, yeah. Okay. Got it. Sorry for wasting time on the call here. Just on the residential front. Any real hiccups on the 454B actual channel like the installation because of kind of dramatic price increases that we're seeing from the suppliers? And I don't know there are limited supply of containers and things like that going on. Any issues there?

No, Steve, we're okay. Most of our 454B is coming from a specific supplier which imports some ingredients from China, and they have mentioned passing that cost along. The team is currently in discussions about this. However, if we need to have a conversation about it, we don't expect it to be significant overall. The shortage that everyone is discussing was related to canisters impacting the overall channel, and we expect that to resolve itself in the second quarter.

Okay. And then just one follow-up on Europe. That margin was a little bit lower than I was expecting. What do you think is a good kind of normalized rate, assuming Viessmann grows in line with your expectations? I mean that seems to be pretty depressed at a low double-digit rate, maybe what would be kind of a longer-term thought around that margin potential?

Our intention is to get that to mid-teens in the next couple of years. And so, there is a lot of focus there. Next week is the benefit of it now being sold its own segment. And I'll maybe provide a little bit of extra color there, but there are really three different businesses within this segment that are now under one umbrella. One is VCS, as you know, we acquired last year. There is a commercial HVAC business, that's a little over $1 billion, where we've seen continued margin improvement, but still not where exactly where we'd like it to be. And then the third part is Carrier's legacy residential and light commercial business, which is about $700 million, $800 million in sales, and that business has actually been operating with low single-digit operating margins. And so there is a lot of work being done now, and we expect, as I said, to get that to mid-teens operating margins in the next couple of years.

Okay, great. Thanks a lot.

Thanks, Steve.

Thanks, Steve.

And the next question comes from Jeffrey Sprague with Vertical Research. Your line is open.

Hey, thank you. Good morning everyone.

Good morning.

Hey Dave, good morning. Just back to kind of order and subsidy action in Viessmann in Germany, what do you attribute the rush for subsidy applications? Was there sort of a view that maybe the new government wouldn't be supportive and there was a rush to get subsidies in? Just kind of wondering what the real signal from the market is and that stat you shared with us today?

It could be some of that Jeff, but I will tell you that the numbers were very, very encouraging. Part of it could have been uncertainty about how the election would play out. Part of it may have just been pent-up demand. I mean you think about the first quarter of last year, subsidy applications were something around 9,000. The first quarter of this year was something like 65,000. So, it's just night and day. It's by far the highest number of subsidy applications ever. We'll have to see how 2Q plays out, but given that the new coalition government has said that it will continue with the subsidy rates in the same levels they were in, the 30% to 70% range, gives us a lot of confidence that we see them continuing.

And then just back to kind of the idea of gross tariffs, right? You kind of told us what's left on the $300 million. Obviously, you've been very, very cost-focused from day one since the spin. I just wonder if you could give us some examples of maybe the incremental things you did to offset whatever that residual was, how much of it was inside your four walls versus sourcing and other changes you might have made?

Yes. I would say that a lot of it was with working with our supply chain. What we've been very purposeful about over the past five years is this concept of first localization; and two, dual sourcing. So this idea of dual sourcing has given us a little bit of flexibility with our supply base, not only in some of the negotiations and discussions we need to have, but also as we try to navigate where the work may come from as tariffs play themselves out. So a lot of it's on sourcing. The team has done a great job on productivity. We continue to optimize our footprint. We've been doing that for a while; the amount of manufacturing we did for export out of China has come down significantly over the past few years. We still have a strong presence in China for China, and we have a China Plus One strategy. But we've been very purposeful about our overall footprint strategy. We've been issuing productivity within our factories. And the last is just basically tightening our belts on overall G&A and cost.

Got it. Thank you.

Thanks, Jeff.

And the next question comes from Joe Ritchie with Goldman Sachs. Your line is open.

Thank you. Good morning, guys.

Hey, Joe.

So can we talk about the 454 transition just a little further? So clearly, good strength this quarter on the Americas residential business. I'm curious, Dave, do you have any kind of line of sight to how much of the strength we saw in 1Q might have been just like this transition and your distributors stocking in the 454B product? And then just maybe any additional color you guys just have on inventory levels at the distributor level?

Yes, I can tell you that the movement has generally been positive. We continue to see good progress, although inventory levels are slightly higher compared to this time last year. Because of this, we're anticipating a strong first quarter with growth around 20%. For the second quarter, we're expecting an increase of 15% to 20%. Our full-year outlook remains in the high single digits to double digits. There are a couple of reasons for this. Firstly, we will monitor those inventory levels and work closely with our channel partners to bring them back to a more balanced state. Secondly, as we move into the second half of the year, we'll face more challenging comparisons since last year the third quarter saw growth of just over 10% and the fourth quarter was around 30%. This means the second half will naturally be tougher. Additionally, we'll keep an eye on the overall economy. We've tried to mitigate risks in our full year forecast considering these factors. The good news is we've achieved the pricing we expected for 454B, gained 100 basis points of market share over the past year, and the team is performing exceptionally well.

Okay. Great. That's helpful. And then I'm sure we'll talk about this more at the Investor Day, but do you want to maybe expand a little bit on that data center business? I know you guys are rolling out Quantum Leap, and it looks like you're getting closer to a liquid cooling product by year-end. So any color you can give us on how that business is, how you're seeing that business over the next 12 to 24 months?

Yes. This is something that we are very excited to launch Quantum Leap. We've been in bid proposals, especially with a couple of customers in Europe, not only for our CDUs, our cooling distribution units, but also the complete integrated Quantum Leap, which has traditional cooling and liquid cooling and ideally has our BMS in it, along with our ALC business with our Nlyte business as well. We think that's ultimately going to provide the most value to our customers. I will tell you, we're still in the first inning on the proposal, but we are getting a lot more interest, and that's how a lot of these discussions start. You propose something and launch it. They start to come into your factories and look at the testing with your engineers. We did look at acquisitions on the liquid cooling side, but our team in a very short period of time, developed our own organic CDU, and it was kind of point design for the sweet spot of the market. So, we're very excited about it. I would tell you that we haven't gotten a lot of sales yet from it, but we're optimistic given the nature of the value proposition and some of the ongoing discussions that that could be a bit of a game changer.

Great to hear. Thank you.

Thanks, Joe.

And the next question comes from Deane Dray with RBC. Your line is open.

Thank you. Good morning, everyone. I was hoping Patrick can take us through the free cash flow dynamics in the quarter. It was a bit light versus seasonal. You just mentioned a bit higher inventory, and you reaffirmed free cash flow for the year, but what was unique about this quarter?

Actually, Deane, I think it's actually stronger than typical Q1. Q1 tends to be somewhat light. What I mentioned was that in this Q1 that working capital was less of a use of cash than it typically is, and particularly on the payable side. So actually, we're quite pleased to start out the year with over $400 million in free cash flow, which, as I mentioned, I think the last three, four years were a little lighter than that. On inventory, again, nothing unusual in Q1. There is a seasonal buildup that starts in Q1, and then we expect to burn some of that off by the balance of the year, and generally, there remains opportunity in our overall inventory levels.

Great. Thanks for that clarification. And then can you just expand on services? They did well this quarter, just the plan for the year? Any new initiatives there?

Yeah. This has just become such a part of our DNA, Deane. We have this mantra we use internally, which I've been using externally, which is this double-digit forever. So one of the big changes that we saw was we launched an initiative in the United States where we really tried to harmonize every single branch around not only the specific metrics that we're driving, but institutionalize it in the apps and the tools that all of our service technicians and sales folks use. Now we're cascading that globally. So just the amount of rigor we have around productivity, unique offerings and of course, our same playbook, which is Blue Edge multi-base offerings, mid-tier high-end offerings, driving attachment rates. We had the best growth in attachment rates that in a quarter that we've ever seen. We went from like 48% to 60% quarter using the rigor around the tools. The truth is we want to get that to 100%, where every time you sell a chiller, it comes with a long-term agreement. But I'll tell you that progress to 60% in a short period of time has been encouraging. I think one of the things you'll be hearing from us a lot more on is margin upgrades. A lot of the – as new construction in some major cities in the world have become a little bit slower, we see a huge opportunity in certain places in the world around modifications and upgrades. So we view a country like Saudi to be a lot more new construction, but it may be that Dubai is more modifications and upgrades. That's been very encouraging, and it's across all of our businesses. So, I'm confident this year we'll be double digits again.

Great. Thank you.

Thank you.

And the next question will come from Joseph O'Dea with Wells Fargo. Your line is open.

Hi, good morning. Thanks for taking my questions. Can you unpack the tariffs a little bit just in terms of sizing the cost headwind this year and then the breakdown of what you're doing on the cost and price side? And then any specifics on the China component of that cost headwind as well as any other color you can give? And the last part of it is, what does this mean for residential pricing, if we think about the back half of the year, 454B normal pricing and then now the addition, what kind of price mix you're looking at on residential in the back half?

Look, Joe, the team has done a great job I think resting tariffs head on. I would tell you on the USMCA, for example, we're now just under 100% USMCA compliant, and that's a group of folks across our supply chain team, across our customs and legal team, guys working very well together to make sure that we are, of course, USMCA compliant virtually across the board. When we look at it, we looked at the tariffs as they exist today, and we effectively have — as we look at the cost actions we've taken, whether with our supply chain or in our own productivity in our own factories or other actions, we've effectively mitigated all but $300 million of it. And that $300 million is something we're mitigating through price. That will involve a lot of price increases in the Americas, and will involve a lot of price on residential. So we feel that the team has been very effective at working transparently and collaboratively with our channel. Obviously, no one likes price increases in our channel, but they have been very clear-eyed and understanding of the fact that we've done our best to mitigate as much as we can through cost, and then the rest we've done through price.

Got it. That's helpful. And then on the commercial HVAC Americas, the non-data center business up in the high single-digit range is actually a little bit more surprising than the data center growth. Can you unpack that a little bit from renovation, new construction price? I'd say some of the non-residential macro indicators aren't exactly encouraging, but that growth rate is pretty good. So what you're doing versus what you see in the market?

Yes. A significant part of this is our expanded capacity. We plan to increase our capacity for water-cooled chillers by four times over the next few years in the Americas, as we are expanding our facility in Charlotte, North Carolina, and repurposing another facility for both water-cooled and air-cooled units. This has allowed our internal sales team and channel partners to pursue more opportunities. Our mega projects have been robust, and our dedicated vertical team focusing on data centers is also addressing the mega projects associated with reshoring activities in the United States. Both healthcare and pharma segments are performing well, and we are gaining substantial market share in emerging electronic fabs. While the ABI has been weak and the commercial real estate sector continues to struggle after recent years, we are balancing the visibly weak areas with segments that are quietly performing strongly.

Got it. Thanks a lot.

Thank you.

And our next question comes from Chris Snyder with Morgan Stanley. Your line is open.

Thank you for the question. I wanted to ask about America's residential segment. The approximately $75 million that you mentioned in Q4 as pre-buy, did that impact Q1 but was overshadowed by strong performance in other areas, or is it anticipated to affect Q2 despite the 15% to 20% guidance for the Americas? Or do you think it may not have any impact at all? Thank you.

It's not a perfect science because we're trying to understand whether customers are buying in anticipation of demand that would have been in 2025, but shifted to 2024. We need to focus on the movement and the underlying demand. The movement in the first quarter aligned with our expectations, and the transition from our distributors to the dealers has been satisfactory, showing mid-single-digit growth in April. However, we need to monitor our base inventory levels, which are higher than they were at the same time last year. Some of this might have contributed to the current inventory level, so we must be cautious with how much we allocate with our partners, ensuring that the movement continues. We now have better tools to manage inventory levels in the channel than in the past. We're intentional with our channel partners about this, and our team and I will be meeting with our distribution partners this weekend to delve into these matters. We're anticipating a strong start to the year, expecting a growth of 15% to 20% in the second quarter, and we will be careful as we approach the second half of the year. Overall, we foresee another good year for residential, estimating around a 10% growth, give or take a point or two.

Thank you. I appreciate that. I wanted to follow up on service. And clearly, the focus there has driven great growth for the service business with a double-digit forever mantra holding strong. But I guess my question is, is it also helping you win on the equipment side for some of the bigger applied projects, the stronger service offering. Just anything you could talk about that flywheel of actually driving equipment on the back of service? Thank you.

Absolutely. When we evaluate our commercial HVAC business as a whole, I believe our team has distinguished itself in Europe and Asia. Our strong presence, along with upfront specifications, sales force, customer relationships, and brand recognition, has consistently placed us among the top two in those regions. In contrast, we've acknowledged that we've been ranked third in the Americas, which presents a significant opportunity for us. The team in the Americas has been successfully revitalizing that segment. We’ve committed to hiring 1,000 technicians over the next five years in the U.S. and are also increasing our salesforce. While we primarily utilize our direct sales team, we also collaborate with distribution partners when beneficial. These partners have solid relationships with mechanical contractors, giving us an edge as we offer connected devices that enhance customer support throughout their lifecycle. This entire process has created a self-reinforcing cycle. We recognize this and have been investing resources to strengthen it. Consequently, I believe we are capturing a greater market share in the Americas, which I think will reflect in our upcoming numbers.

Thank you, Dave. Appreciate that.

Yes, thank you.

And our question comes from Amit Mehrotra with UBS. Your line is open.

Thanks, Patrick. I want to revisit the new residential Americas guidance of high single, low double. In your prior guidance of high single, it seemed to be primarily driven by price/mix while volume or units were flat to down. Could you provide an update on what you're assuming now? Additionally, Europe residential and light commercial orders appear to be significantly stronger than the current organic growth. I'm not sure if that's a comparison issue or if we should expect a reasonable sequential increase in revenue as we move through the year.

Yes. Look, let me take the first one and Patrick will take the second. If when we said high single digits, we assumed that almost all of that came from mix because we assumed that you get with about 10% higher price on the 454B than the 410A, and if you assume that that becomes 70% to 80% of the total volume for the year, you're into that range of 7% to 8% from just regulatory mix. I think what we've seen is probably a little bit better on the price side overall, part of that because of where the tariffs landed and it is because we've seen better price realization, and we'll probably get a little bit more full year volume than we originally anticipated. And then Patrick, on the second.

Yes. On the Europe comment, the way you can think about it, so Q1 was down about 7% in sales, with commercial HVAC up mid-single-digits, resi light commercial about 10%. We expect growth actually to start in Q2 for the balance of the year, and that will continue in Q2 for the balance of the year, and that will continue, we think, for both commercial APAC and resi. Actually, commercial HVAC within Europe, we have a strong pipeline and we think that the growth will accelerate from mid-single-digits in Q1 and we'll end up double-digits in the second half of the year and double digits for the year. With respect to the resi part of our European segment, we think that will be low single-digits for the balance of the year starting in Q2, as Dave mentioned, modest growth that will continue for the balance of the year. So, overall, full year double-digit growth in commercial HVAC within the region and resi about flat, leading the overall segment to low single-digits.

Got it. So just, circling back on what you said, it looks like both volume and mix is an attribution to the revision of resi HVAC, which is top line, which is great. One final question, if I could, just maybe high level. And listen, you don't have to comment on it if you don't want to, but you had a proxy target out there of $3.60 of earnings. It's really hard to forecast that far out. Maybe just give us some puts and takes on your confidence around that number in terms of above the line versus below the line items? I know you got some tax dynamics, too, with Viessmann tax losses, things like that. But just talk about why you put that out there? Why was that the right number? Maybe the confidence around below or above the line items on that?

I won't discuss the reasons behind the number being mentioned. It was thoroughly detailed in the proxy. We'll outline our strategy at the upcoming Investor Day in mid-May. Currently, our business strategy targets organic growth of 6% to 8% over the medium term, and this year, we’re seeing mid-single-digit organic growth. We’ve also previously mentioned a goal of over 50 basis points margin expansion each year, and we've exceeded that over the last few years. This year, we expect to surpass that 50 basis points again. We anticipate continuing along this trajectory with strong organic growth, appealing margin expansion, and earnings conversion close to 30%. Additionally, this year’s repurchases will carry over into next year. Our free cash flow generation remains robust, and after dividends, we have more than $1.5 billion available for acquisitions or share buybacks. Regarding tax, we have disclosed a tax benefit on our books that we aim to monetize to lower our effective tax rate in the future. With these elements in mind, it seems reasonable to anticipate a path toward $3.60.

Very clear. Thank you very much. Appreciate it.

Thank you.

And the next question comes from Stephen Volkmann with Jefferies. Your line is open.

Hi. Good morning guys. Thanks for taking the question. I'm wondering if we can just look at CST a little bit, the mid-single-digit growth forecast kind of unchanged, but it feels like some of the industry forecasts around things like truck have deteriorated. I know your mix is a little different than some others, but maybe just call out a little bit what's driving that mid-single-digit growth in CST?

Yes. Some of this relates specifically to the North American truck trailer business, where it was noted that the full year for trailers would be down 15%. When we consider this, there are two factors at play. First, trailers are just a part of the overall North American truck trailer market. Second, we are somewhat skeptical about that number. We observe a situation where there is significant pent-up demand for trailers due to an aging fleet, but at the same time, there are concerns regarding tariffs and the economy that are making companies cautious about investing in updating their fleets. As this unfolds, we will need to see how the year progresses. However, we anticipate that the North American truck trailer segment will experience mid-single-digit growth for the full year. In Europe, we expect the truck trailer market to remain flat, with volumes likely to decline slightly, although there may be growth in the aftermarket sector. The European market also faces aging fleets and economic uncertainty, while container sales are expected to be strong, with a very strong first quarter showing around 20% growth. We believe this segment will see high single-digit growth. Like the rest of the business, the aftermarket is projected to grow in double digits, and the team has done an excellent job enhancing our offerings and pursuing upgrade opportunities. Therefore, we believe the overall Transportation segment is set for mid-single-digit growth this year.

Great. Helpful. Thanks. And then it looks like margin is also going to be sort of on the upswing here as the year progresses. Any sense of how we should kind of model that cadence?

Actually we expect so the Steve, Patrick here, so we're about 15% in Q1. We would expect that to pick up by about 200 bps or so in Q2 and stay at about that level for the balance of the year, maybe Q4 a little lighter.

Perfect. Thank you, guys.

Thank you.

And our next question comes from Tommy Moll with Stephens. Your line is open.

Morning. Thank you for taking my questions.

Hey, Tommy.

Dave, I wanted to start on your Americas light commercial business, noting the comps there can be tricky, but I'm just observing that the outlook was reduced pretty significantly from up low to mid singles last time we spoke, and now we're looking at down doubles. What were some of the factors that changed there in your outlook?

I think there are a few factors at play. Firstly, we were surprised by how much the first quarter declined. We didn't expect it to drop as significantly as it did. Looking at the second quarter, the beginning hasn't shown much improvement. As a result, we anticipate that the first half of the year will be down. We do believe the second half will see some recovery, but we've noticed that small and medium businesses have really cut back on their spending in the first quarter, and this trend seems to be continuing into the second quarter. Additionally, in the K-12 sector, some delays in bond funding at both the state and local levels have impacted our expectations more than we had anticipated. However, we’re not in a state of panic. This is still a strong business with high margins, and we've experienced exceptional growth from 2021 to 2023. We've gained a significant market share and improved our lead times ahead of some competitors, which has been beneficial. They are now starting to work through the backlog they've accumulated, which is acceptable. We have a solid product range with some unique offerings, and a strong distribution network with reputable brands. Overall, we expect the market to stabilize as we move into the second half of the year. We aimed to mitigate risk in our full-year outlook by projecting a double-digit decline.

Thanks for the detail, Dave. I wanted to pivot to a question on the Google partnership that you discussed earlier in the call. Is this participation in a demand response kind of program or what additional detail can you give particularly around the monetization opportunity there? Thank you.

Yes. We've been working closely with Carrier energy, with the utilities, and the whole concept is that we can have an appreciable impact on the grid, especially during peak hours. If you think about the demand that is being added by the data centers to the grid, we really have the biggest challenge for the utilities during peak. Think about what most of the demand is during peak; it's your HVAC system, which is now because more than 40% of our sales are heat pumps. You have both cooling and heating, putting demand on the grid during peak hours. What we need is more intelligence as we connect those devices, and we look at how to control those in an automated fashion, we have an opportunity to partner with Google to use their AI and analytics tools, which are phenomenal, and work with them as a company, work with their cloud, as well, and be able to provide more value. You think about the digitization of energy and digitization of cooling devices. This is all about using traditional appliances to use digital to create analytics, to create more value. We see this Google partnership as a tremendous win-win opportunity, not only for us and Google, but for our utility partners as well. In fact, we had a call with Google yesterday, and we're in the early phases of this relationship. But as you think about the use cases, the opportunities are very encouraging.

Thanks, Dave. I'll turn it back.

Thanks, Tommy. Please continue.

No. Go ahead please.

Okay, I got it. We want to thank you all for joining us today. As a quick reminder, before we wrap, we will be in New York City on May 19th at 8:30 for our Investor Day. We encourage you to join us and listen in. Our whole focus will be on accelerating growth. You're going to be hearing from not only Patrick and myself, but we'll have our four segment leaders there as well. And you'll hear from them with some really exciting initiatives we have to drive sustained growth over the long term. So thank you all for joining us today, and we'll see you on May 19th.

This does conclude today's conference call. Thank you for participating. You may now disconnect.