Carrier Global Corporation

Good morning and welcome to Carrier's fourth quarter 2025 earnings conference call. I would like to introduce your host for today's conference, Michael Redner, Vice President of Investor Relations. Please go ahead.

Good morning and welcome to Carrier's fourth quarter 2025 earnings conference call. On the call with me today are David Gitlin, Chairman and Chief Executive Officer, and Patrick Gores, Chief Financial Officer. Except where otherwise noted, the company will speak to results from continuing operations excluding restructuring costs and certain significant non-recurring items. A reconciliation of these and other non-GAAP financial measures can be found in the appendix of the webcast. We also remind listeners that the presentation contains forward-looking statements, which are subject to risks and uncertainties. Carrier's SEC filings, including our Form 10-K and quarterly reports on Form 10-Q, provide details on important factors that could cause actual results to differ materially. With that, I'd like to turn the call over to Dave.

Thanks, Mike, and good morning, everyone. 2025 was an important year for Carrier. The short cycle residential and light commercial markets softened more than we expected in the second half of the year. We made meaningful progress on our strategic priorities and reached major milestones, including growing our data center business to around $1 billion. Notably, even with CSA residential down nearly 10% and light commercial down about 20%, Total company organic sales were down about 1% as we continued to drive growth in our long cycle and aftermarket businesses. We also reduced channel inventory and lowered overhead while continuing to invest in technology differentiation, salespeople, and technicians. Those actions position us for stronger incrementals when our short cycle markets recover. We had our fifth consecutive year of double digit growth in commercial HVAC while continuing to gain share and increase margins. Aftermarket was also up double digits for the fifth consecutive year. We offset tariffs with aggressive cost and pricing actions, drove strong material productivity, and took decisive overhead cost actions. And as you'll see in our outlook, the cost actions that we execute into 2025 will deliver over $100 million of savings in 2026. Finally, we distributed $3.7 billion to our shareholders through buybacks and dividends. In terms of capital allocation, we remain focused on investing in the highest return opportunities, maintaining a strong balance sheet, and returning cash to shareholders. We will continue to focus on outsized growth in products, aftermarket, and system offerings, and you can see the progress we're making on all three growth vectors, starting with products on slide four. Our data center investments are delivering results, with fourth quarter CSA data center orders up more than 5x. We are still in the early innings, and our expanded portfolio now addresses essentially all major data center chiller applications. Our share of water-cooled chillers has increased 4x since spin, and with our recently introduced Maglev-bearing air-cooled chillers, we see meaningful share opportunity there as well. Key differentiators include quick restart, free cooling, and leading efficiency at elevated ambient temperatures. We introduced our first CDU for liquid cooling in 2025 and plan additional higher capacity CDUs up to 5 megawatts in 2026. Over the past couple of years, we have expanded our commercial HVAC engineering lab and chiller manufacturing capacity globally and have added hundreds of technicians. These multi-year investments have positioned us to outgrow the commercial HVAC market as reflected in our 2026 outlook with double-digit revenue growth, including data centers up about 50%. Aftermarket also remains a good news story for us, as you can see on slide five. Our playbook works, and we continue to improve upon it. Three years ago, we had 17,000 chillers connected. Today, it is over 70,000. Our attachment rate in CSA grew more than 3x last year and is now close to 60%, and our global coverage, that is, chillers covered by service agreements, is up to 110,000, including Toshiba. We estimate that 70% to 80% of our high-complexity chillers are under service contracts. The area within our aftermarket business where we see the highest growth potential over the next five years is modifications and upgrades. Sales last year were up 20%. With a focused team, investments, and strategy, we see great opportunities in cities globally. In 2026, we are well positioned for double-digit aftermarket growth for our sixth consecutive year. Turning to systems on slide six. Our HEMS offering in the United States is getting tremendous attention from hyperscalers and utilities, and it is not surprising given the magnitude of the impact that our solution can have on the grid. If our integrated heat pump battery solution were in every home and building that Carrier currently serves, we would free up nearly 15% of grid capacity during peak hours. It also weighs favorably versus alternatives in terms of time to market, cost of implementation, and affordability to the consumer. Our Carrier Energy team's progress in 2025 was significant. Through field trials in carrier employee homes, we have been demonstrating that we can consistently provide up to four hours of battery-powered heat pump operation during peak hours. We are planning market launch later this year. Likewise, in Europe, we have been working closely with our installers to offer differentiated HEMS solutions. Our Systems Profi installers, Those qualified to sell and install complete solutions, including heat pump, battery, solar PV, domestic hot water, all connected through our digital home energy management system offering, drove their sales up double digits last year. We plan to double our number of qualified prophy installers in 2026, driving strong growth for them and us. Turning to slide seven. In our CST business, there is no better example of end-to-end solutions than what we're seeing in our container business. Four years ago, links did not exist. Today, we have over 220,000 paid link subscriptions with over 110,000 on containers, including six of the world's top 10 shipping lines. We also recently invested in NetVasa, which provides enhanced wireless IoT connectivity on cargo ships. By combining advanced AI-driven reefer health algorithms in our links applications with enhanced ship connectivity, we enable shipping customers to avoid manual checks on refrigerated units and to predict and avoid failures before they occur. This end-to-end solution is expected to help smooth the container cycles and provide meaningful recurring revenues while delivering differentiated customer value. Let me turn now to discussing some of our shorter cycle businesses, starting with CSA Resi on slide 8. Over the long term, residential remains a significant opportunity for Carrier. It is a large, replacement-driven market with secular tailwinds in electrification and heat pumps, and our leading brands, channels, and install base are unmatched and position us for outsized earnings growth as demand normalizes. In this market, we estimate demand in a typical year to be around 9 million units. Between 2020 and 2024, our industry averaged 9.7 million units for a cumulative overage, so to speak, of about 3.5 million units. Last year, we estimate our industry delivered about 7.5 million units. So we absorbed about 45% of that overage. We are assuming that we absorb the balance in 2026. Our assumption for the year is essentially no change to the macro conditions that we exited last year with. Little change to mortgage rates, consumer confidence, or new and existing home sales. That would result in total industry units down 10 to 15%. With that industry assumption, our sales would be down high single digits as we benefit from the absence of destocking in the second half of 2026 compared to 2025, combined with low single digit price realization. Turning to CSE residential on slide nine. The good news in this market is that the transition from boilers to heat pumps is underway with heat pumps growing double digits as anticipated. The bad news is that total heating the total heating market has been in a cyclical downturn for the past few years. Like the Americas, the industry has been absorbing overage that we saw in the 2022-2023 timeframe. We expect continued softness in total heating units in 2026, resulting in expected flat sales with our growth initiatives being offset by lower industry volumes. When unit volume stabilizes, we are well positioned to drive strong earnings growth given our strategic initiatives and the cost actions that we have taken in this segment. Turning to slide 10 for what this all means for our full year guidance. With respect to revenue growth, we expect that about 40% of our portfolio, commercial HVAC and aftermarket, will continue to grow double digits. Expected continued softness in our higher margin short cycle businesses, especially CSA residential and light commercial, is expected to largely offset that growth, taking the total to about 1% organic growth for the company. On the profit side, mix is expected to be a headwind somewhat offset by the cost actions that we took last year. Patrick will take you through the guidance in more detail, but we will continue to focus on controlling the controllables across all aspects of growth, cost, and productivity. We are the best positioned company in our industry when our short cycle businesses recover, which they surely will, and we are poised to see outsized grains when they in fact recover. We enter 2026 energized and focused on outgrowing our markets, delivering best-in-class solutions for our customers and driving productivity as we always do. With that, I will turn it over to Patrick.