Conference Transcript - CARR 2026-02-19

Julian Mitchell, Analyst — Barclays

Great. Good morning, everyone. Welcome to day three of the Industrials Conference. It's my pleasure to start today with Carrier. We have Dave Gitlin, Chairman and CEO, and Mike Redner, Investor Relations. So thanks very much, both of you, for being here today. I think we'll get straight into questions. And I suppose, first off, you know, thinking about the overall top-line outlook, you know, you have that 6% to 8% organic growth goal, and obviously it's a through-cycle target. You've been below that the last couple of years for some well-rehearsed reasons. You know, what do you think the probability is that you can get into that 6% to 8% range in the next few years?

Dave Gitlin, CEO

Good. We feel good about the algorithm. Awesome. You can look at it, Julian, and thank you for having us. You can look at it from a short and a long-term perspective. Short term, you take 40% of our portfolio that's growing double digits. That should give you consistent, you know, four points right there. And that's commercial aftermarket. This will be our sixth consecutive year of double-digit growth. Our backlog is only getting better on the data center and CHVAC side. So we feel very good about sustained double-digit growth there, as we do with aftermarket. This year, we end up around 1% growth, because if you think about our RLC business in the Americas, that's down high single digits, which on a $6 billion or so type business, that's giving you a few points of headwind. You have China container business, so that is a little bit additional headwind. And so if all you had was flat in RLC in the Americas, a little bit of growth in places like truck trailer and RLC in Europe, some level of stability in China, you definitely get into at least the low end of that 6% to 8%. If you think longer term, the algorithm we laid out was four elements, one of which was product, give you a point or so a year, we feel good, we've been getting that. We get two points from aftermarket, double digits on 25% of the business, and then a point or two from systems so call that four to five points right now are the market which is what it starts with is about three to four points of headwind that's what you get you to one percent if market is just two percent of growth which it should be over any period of time you two plus that four to five you're in that six to eight percent range so we think the algorithm is great we're facing some short cycle short-term headwind and then we'll start to recover from that

Julian Mitchell, Analyst — Barclays

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

Dave Gitlin, CEO

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

Julian Mitchell, Analyst — Barclays

And, you know, I think it's, again, it's an inflationary environment. You know, metals, costs in particular, have sort of caught the attention of people, chips, to a degree. but that's a smaller kind of item for most companies you know how confident you around offsetting those higher costs how's the pricing environment today

Dave Gitlin, CEO

short answer is we feel good about it we we've said it's 50 to 100 million of raw material commodity headwind mostly copper and aluminum we did see the President discussed potentially reducing or eliminating some of the tariffs on some of those raw materials which would make a lot of sense and we certainly support but even if they they stay in place you know call it 60 70 million of commodity headwind we've talked about 1% price so that gives you 200 million so we'll be price cost positive if you're if you look at our residential businesses in terms of realization rates it's probably best as you go from west to east in the Americas we have five percent price that we've announced comes into place next month we'll realize a couple points on that if you look in Europe it's probably closer to a point or so and then China will just have to see the markets been quite down for some time so it's hard to know exactly where pricing is going to land there. But we feel good about pricing realization, certainly in the U.S.,

Julian Mitchell, Analyst — Barclays

followed by Europe. And, you know, on that point on U.S. RLC, are you kind of seeing the other competitors, you know, behaving themselves in terms of pricing and so forth? We are. I mean,

Dave Gitlin, CEO

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

Julian Mitchell, Analyst — Barclays

there are a lot of investor concerns a couple of years ago about the sort of flood of capacity additions maybe Asian entrance into the heat pump market you know it's been more quiet on that front the last kind of 12 months so how would you see that you know supply demand balance in European in heat pumps right now, the industry?

Dave Gitlin, CEO

I think it's imbalanced. You know, look, what happened is if you take a country like Germany that's typically around 800,000 units and all of a sudden you're north of a million, there tends to be a lot of interest from around the world, including us. And then when you go from north of a million to 600,000, a lot of those desires to build facilities all over Europe subsides a bit. In fact, some are going in the other direction in closing facilities. So I think from the overall supply perspective, it seems to be stabling out to support the long-term demand without an overbuild throughout Europe. I think that when you step back and you look at Europe, the biggest differentiator will be the boots on the ground that we have. Ultimately, people can raise a shingle. They can start to say, I'm in the heating business and I want to sell. whether it's a competitor from Asia or a new type of installer but ultimately technical skills are hard to come by we have 80,000 installers direct relationships with them and ultimately needs you know AI is not going to install your heat pump you need someone to show up at your site they need the technical expertise we have these relationships we have the brand we have the technology and we have a really exciting product coming in beast mint branded later this year so you know it's been a little bit rugged of course with the market declines over the last last couple of years but as that market recovers we're really

Julian Mitchell, Analyst — Barclays

poised for a nice recovery in u.s or america's rlc you know i think you've talked in the past about this kind of cumulative overage and and and that type of you know a few million units I says, what's your impression of kind of the natural market size, and where do you think we are kind of versus the long-term trend today?

Dave Gitlin, CEO

Yeah, there's 145 million homes in the United States, and 90% have air conditioning, so that puts you at 130 million homes with air conditioning. Those units typically get replaced one out of every 15 years, which gives you about a 6% replacement cycle. So that 6% on 130 million homes, that gets you pretty close to 8 million per year. And then you put on top of that one to one and a half of new home construction. Our view is that a typical market is around 9 million units a year. From 2020 to 2024, we averaged 9.7 million. So if you consider that a quote-unquote overage, which I know some may be skeptical of, I think it's, in a business that will have some cycles, I think it's only natural to look at these factors. You had 3.5 million of overage above that mean of 9 million. Last year we were 7.5, so we took a lot of medicine last year, call it 40% or so, and this year we're saying 6.5. So we don't use this to perfectly predict when you hit that three and a half of underage, you start to turn the corner. We use it as an indicator that says when times are good and you're above the mean, you have to be aware that they're not going to stay above the mean forever. And that's something that we could have looked at to say that's an indication that you probably will go below the mean at some point. And now that we're below it, we know that we're going to be back to the mean at some point. When exactly we turn that corner, it's hard to say. But where it really impacts you is when it comes to your operations and your demand planning, which is we know that we'll recover. We don't know exactly when, so we need to build agility into our operations network. Dual source suppliers have the lines that can be ramped, have enough temp labor. So if suddenly we get into the season in April or so and we start to see that demand pick up, we can support our customers and go win in the marketplace and you know when

Julian Mitchell, Analyst — Barclays

you're thinking about that kind of sell-in sell-out dynamic you know how's the sell-out trending or movement as you call it about what we thought you know

Dave Gitlin, CEO

this topics kind of it's gotten a little bit confusing because of all the dynamics with the pull forward on the new refrigerant and then some year over year compares, I think when you parse through what's happened and you almost use English instead of sell in, sell out and movement, what fundamentally happened is last year the volume and the movement were both about the same for us, down about 20%. What happened is in the first half of last year, we had predicted some level, not strength, but some level of volume in the second half that didn't materialize. So what was happening during the course of the first half of last year is we were shipping units to our distributors. They started to have less movement to their dealers because the underlying demand started to slow. So we saw a buildup of inventory in the channel. And if I could turn the clock back, I would have seen more early warning systems than we saw because we got surprised by the volume in the second half. But you saw the volume, you saw the inventory go up. So then what happened in the second half of last year is our distributors looked around and said, I have more inventory than what I need for the demand. So movement came down, but our sales to them came down even more because they stopped ordering from us because their underlying demand was shrinking and they had enough inventory. What we tried really hard to do last year was end with field inventory at a point which we thought had fully destocked the channel, which we had set a target for ourselves to be down 30% year over year. And we said that was more important than anything. We didn't want to like, if we had to prioritize hitting a sales number in 4Q or hitting that field inventory number, we said that is most important. It may impact your IC. It may impact a whole bunch of things. Hit that field inventory number. And we did. And then January, at the end of January, field inventory was down 32%. So we're being super careful about that field inventory level. In January, movement was about what we thought. You know, we've said the first half this year would be down about 20%, a little bit more perhaps in one Q, perhaps a little bit less in two Q, but where we thought is exactly where we are, and we're trying very, very careful, to very carefully manage field inventory.

Julian Mitchell, Analyst — Barclays

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

Dave Gitlin, CEO

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

Julian Mitchell, Analyst — Barclays

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

Dave Gitlin, CEO

You know, it's hard to get perfect data here, but I think anecdotally in talking to both our distribution and dealer partners, I think there's no doubt that we saw an increased amount of repair over-replaced last year. And I think it was for a whole bunch of factors. We feel very strongly that is not a long-term trend. First of all, the payback is not there. You know, you spend a few thousand dollars on a compressor and you get another year to three, two, three years out of your unit. and then you have to replace it so you're adding your 3k plus whatever the ultimate replacement is so that's where I think we shine is with our kitchen table type discussions with our more than 100,000 dealers we're one out of every we're in one out of every three homes in the United States so we know how to have the right conversations with the homeowner and really make sense of it which is ultimately a replacement does make sense number two is with existing home sales at 20 year lows in the United States you are you know that is going to drive to more repair because if you're literally waiting for mortgage rates 30 year to start with the five and you're a year away from moving you might be a little bit more inclined to repair your unit then replace it afraid you're not going to get the full payback on that when you sell the house and when you buy the home a significant amount of time you negotiate the replacement of your air conditioning system or your HVAC system with the home purchase so the suppression of existing home sales has probably led to, you know, some of that as well. And then this whole refrigerant change, I think, led to some of that. When you sit at the kitchen table, you're going to tell folks, if you repair it, you're going to be stuck with a 410A refrigerant that's effectively obsolete, and your costs are going to go up. So if you call me back to your home in two years, it's going to be a very expensive another repair at that point. So, look, we feel good that it's a replacement business. We're going to get back to being a replacement business, we need a couple of these macros to go in our direction, and we'll start to revert back to that mean.

Julian Mitchell, Analyst — Barclays

And switching, you know, to the commercial side, commercial unitary or light commercial has been kind of challenged. You know, maybe there's some bleed through from the residential weakness for parts of How do you feel about the light commercial America's business right now?

Dave Gitlin, CEO

You know, look, we've guided it down to high single digits for the year. I will start with the good news in that business, is that number one is we did see good orders growth in the fourth quarter. So we were up 70%, albeit on an easy comp, but we were up 20%. We were down 20% in the fourth quarter of 24. So it was an easy comp, but we were still up 70%. Number two is we got inventory to good levels. So we ended the year with field inventory down 25%. And number three is we're introducing a bunch of new products. So we have a dual fuel unit. It's electric. It's hybrid with gas. So where we've done very well in that business with a lot of new product introductions, we have more of that that's just coming in now. So we're poised to do quite well. Of course, we have very good market position there. I think we just got to kind of see. There's some still stress on the small, medium business. about 35% of that market is planned replacement, so there's probably a little bit of pressure on that 35% where there's still some potential consumer confidence issues with SMB. Now you get 20% new build, and I think we're in the zone of it's probably down a bit, but we have that calibrated, and then you're dealing with 40% or so that's 40, 45% that's emergency replacement, obviously hard to model. But I think as those units, there's been some pent-up demand. Maybe people limp by with a repair. As those units start to get replaced, they will eventually start to recover. But I think we're balanced on how we think about the year.

Julian Mitchell, Analyst — Barclays

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

Dave Gitlin, CEO

Honestly, I could not be more proud of the team with how we're doing in data centers. Our orders in CSA in the data center space were up 5x in 4Q, a bit of an unheard of type number from an orders perspective. So, and our orders will be good in first quarter as well. So we've been winning. We've been winning more than our share by a fair amount, and we're winning the right way. We're winning by 100% being there for our customers, innovating with new products. If you see the correlation between our new product introductions and market share, it's directly correlated. We saw it with water-cooled chillers. We introduced a maglev bearing kind of in the 18 to 20 megawatt range. We won a lot with one of the hyperscalers, and we keep winning with them. And now we're using similar technology on water-cooled to win with other hyperscalers. And now that market share increase we saw on water-cooled, we're 100% going to go through the same with air-cooled. We introduced both a 2 and a 3-megawatt air-cooled chiller maglev bearings. That's coming out real time. There's enormous interest in the marketplace for it. And we have the capacity to support our customers because you know the CapEx are spending this year. They're placing orders in this year for this year. And we're able to support that kind of, you know, short lead time demand. And so between new product introduction, capacity, and I think the ultimately where the game is going to be won is in some level of systems integration. And I think we're best positioned to win there in part because of our BMS business. So our ALC business is one of the unsung heroes within Carrier. We've gone from number five to number two here in the Americas. That business keeps doing well. We've done very small under-the-radar screen type acquisitions in the channel, so our route to market is quite effective. And you look at how you can use the BMS system to integrate traditional cooling and liquid cooling and have that fully optimized for the system. That's something that we feel we're very uniquely positioned to. We have our Quantum Leap team. We have our Quantum Leap offering. We've been winning some pretty good CDU-type orders. We have two new CDUs coming in later this year. So we feel we've been winning. We've been winning the right way. Our share increases, I think, would surprise a lot of folks in this room, and it's only getting better.

Julian Mitchell, Analyst — Barclays

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

Dave Gitlin, CEO

cooling we do I think if you look at overall growth rates for data centers for cooling should be in the 20 25 percent range liquid cooling should be 2x that obviously starting from a lower base so we've seen it coming we've had choices to make is it you know make or buy we can we can and have we made a decision like we could have spent you know billions buying CDUs and cold plates and some of that technology but a CDU is effectively a mini chiller so we have a lot of brilliant engineers that know how to do the packaging and all of the controls and pumping elements and associated with the CDU so we have our own 1.3 megawatt cdu we developed that at a fraction of what it would have taken to buy that technology externally we're coming out with a three and a five megawatt here in the coming months so we can build out a cdu portfolio we're looking at what we do around coal plates is that a make or a buy so and then we have BC type investments we own a percentage of Zooter core which is two-phase technology we have a good relationship with them so we'll place some of these smaller bets to build out the portfolio tech not from a technology perspective we work closely with Nvidia we work closely with Dell and others so we're integrating more than we ever did in the past with the chip manufacturers so we feel very well positioned on the liquid cooling side

Julian Mitchell, Analyst — Barclays

and then one thing I've been curious about is you know you send a lot of energy building up aftermarket and so just trying to understand when you think about liquid cooling related product like a cdu is there the same service potential there as with a chiller or it's a slightly different dynamic i think it's going to be the same dynamic you know

Dave Gitlin, CEO

you have rotating equipment you probably end up with similar lives you'll obviously in a data center have a lot more cdus than you will chillers obviously it's a fraction of the cost and size of a chiller so i think that mathematically the aftermarket opportunity is very comparable

Julian Mitchell, Analyst — Barclays

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

Dave Gitlin, CEO

You know, we're going to get the normal productivity that we always get. we're gonna have year over year we had an enormous absorption hit last year because when we had that sudden unforeseen drop in our resi business that absorption hit and you saw what it did to our margins and resi in the second half of the year that won't repeat so we took a hundred million of cost out globally with a difficult but important action when we reduced 3,000 of our colleagues so that drops through part of which in the Americas so between the lack of an absorption hit, productivity, some of the drop-through on the cost actions, we feel balanced on our margin forecast for CSA. Great. And then maybe switching back to Europe

Julian Mitchell, Analyst — Barclays

for a second, it's hard from the outside to kind of gauge what effect, you know, boilers down, heat pumps up means for the sort of net dollar sales and margins for the European business. kind of just help us understand where we are on that yeah you can think about our business being

Dave Gitlin, CEO

if you start with cse overall it's about 75 residential and 25 commercial the commercial business will 100 over time do well you get lumpy sales big sales that are not we tend to talk and think in terms of quarters that's not exactly how that market works so when they come they'll and they're gonna come big so we're really well positioned on some big campaigns we feel good about the long-term growth in CHVAC when you think about the residential business of that 75% you could think about it as 30 30 40 so 30 percent heat pumps 30 percent boilers and 40 percent all other And that all other includes aftermarket, which is above the norm, above the mean for margins, and then includes some stuff that's below, like solar PV and batteries. So the margins on heat pumps and boilers are very comparable, you know, within spitting distance of each other. To get the margin accretion, we need more aftermarket. And remember, we're going to get a lot more absolute dollars as we transition from boilers to heat pumps. You know, this year we've said we'll grow 100 bps or so in that business. We feel good about that. Remember, half of the cost takeout that we did is in Europe. And we'll start to see, you know, as that market comes back and you get better drop through on that, when it does start to come back, we feel very good about the margin expense. We know how to do the margin thing. You know, like if you think about Japan, people in this room will, I mean, will remember when we bought Toshiba, kind of a break-even business that wasn't growing very much. Last year they grew 8%, and our margins this year on an EBIT-ROSS basis will be around 14%. So, you know, have we had some volumes go against us? When those start to come back, you know, one thing that the only good news about the volume coming back is we've had, we've taken some tough actions on the cost side to really help the drop through when the margins do return.

Julian Mitchell, Analyst — Barclays

Then capital deployments, you know, a lot of buybacks recently, it's somewhat share price dependent, but when do you think you might start to go on the offensive again on the acquisition front?

Dave Gitlin, CEO

You know, we've been doing some small M&A, and I think we'll continue to do that. We're not whale hunting right now. We're not looking at huge, you know, multi-billion dollar type things. Right now, we're a very self-aware type company, you know, so we know that we got a lot. We want to get the wins on the board with the BCS acquisition, which I know we will. we want to execute with this enormous data center opportunity that's in front of us and I know we will and we want to make sure that we have the agility from an operational perspective to support that recovery on some of these shorter cycle business because there will be pent-up demand on the truck trailer side for sure on the residential side for sure on the light commercial side for sure so we have a lot to make sure that we keep our heads down go execute for our customers. We feel really good as we start getting in the kind of growth that you asked the first question around that 6 to 8 percent. We know it's coming. This year, we still have some headwind on some of these shorter cycle businesses. We think we're balanced on how we've kind of guided for the year. And we feel really good as we, how we position the portfolio.

Julian Mitchell, Analyst — Barclays

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

Dave Gitlin, CEO

It's very high on that one there.

Julian Mitchell, Analyst — Barclays

Decently positive. Third question is around through-cycle EPS growth, and the peer set here is kind of broad, you know, U.S. multi-industry. So in line to above. Next question is on usage of cash that we just talked about. So mostly buybacks. Next question is on valuation. What's the appropriate kind of year one P.E. multiple? So in the 20s. And last question is, kind of, what's the biggest anchor on the valuation today? So, cool growth.

Dave Gitlin, CEO

Well, with that, thanks so much, Dave, and Mike, for being here. Thanks, Julian.