Carrier Global Corp (CARR) — Q1 2026 Earnings Call Transcript

Good morning, and welcome to Carrier's First Quarter 2026 Earnings Conference Call. On the call with me today are David Gitlin, Chairman and Chief Executive Officer; and Patrick Goris, Chief Financial Officer. Except where otherwise noted, the company will speak to results from continuing operations, excluding restructuring costs and certain significant nonrecurring items. A reconciliation of these and other non-GAAP financial measures can be found in the appendix of the webcast. We also remind listeners that the presentation contains forward-looking statements, which are subject to risks and uncertainties. Carrier's SEC filings, including our Form 10-K and quarterly reports on Form 10-Q, provide details on important factors that could cause actual results to differ materially. With that, I'd like to turn the call over to Dave.

Thanks, Mike, and good morning, everyone. Let me start by thanking our team globally who continue to deliver differentiated solutions for our customers and help preserve the planet for generations to come, while also delivering financial results that exceeded our expectations. Demand for our commercial HVAC and aftermarket solutions remained strong, while our shorter-cycle businesses have performed better than expected. Company orders in 1Q were up 11% led by global CHVAC up 35%, including CSA commercial HVAC up over 80%. Global data center orders were up over 500%, reflecting continued customer demand for our differentiated solutions. Our current data center backlog now fully covers our expected $1.5 billion of data center sales this year. Of course, we are targeting to exceed that number. Organic sales were about flat as CSA Resi and Light Commercial both performed better than expected. CSA Resi movement was better than expected and field inventory levels remain healthy. CSA Light Commercial was up nearly 10%, driven by share gains in large retail accounts and continued traction from our recently introduced highly efficient hybrid fuel rooftop units. In Europe, encouragingly, the increase in natural gas prices supported strong demand for heat pumps. With the ratio of electricity to natural gas in Germany below 3 for the first time since early 2023, strong demand for heat pumps has continued into April in Germany and across Europe. Both EPS and free cash flow were better than expected, and we returned about $500 million to shareholders through dividends and share buybacks. In summary, I am proud of our team for navigating macro headwinds and delivering better-than-expected results. Our growth algorithm is centered on products, aftermarket and system differentiation, and we are making strong progress across all three. I'll start with products on Slide 4. Our CSA RLC business is a superb business with high share and strong margins, ROIC and free cash flow, and we continue to invest in differentiation. On the product side, for example, we recently introduced a new highly efficient fan coil with a significantly smaller footprint and lower weight, which is very attractive to our extensive dealer network as it is easier to install and service. We are also expanding our TAM with new system offerings focused on hydronics. Last year, we introduced an air-to-water heat pump that delivers heating, cooling and domestic hot water. In 2027, we will expand the Viessmann boiler lineup with an entry tier offering and will then further expand into the attractive North America domestic hot water adjacency through a differentiated system solution that combines our air-to-air heat pump expertise with Viessmann's deep knowledge of hydronics. Carrier Energy continues to progress well with utilities and key hyperscalers, and we plan to introduce our Gen 1 units in the market this summer. The residential digital ecosystem is another key opportunity. We expect that connecting homeowners, dealers, distributors and Carrier into a single 360-degree digital stack will provide greater customer satisfaction, increased renewal rates and parts capture as well as improved forecasting and working capital performance across the value chain. In Light Commercial, we're executing the same disciplined playbook. Our field retrofit kit is converting existing rooftop units into connected assets, improving operational insights and expanding parts, service and aftermarket opportunities. Our recently launched multistage ultra-high-efficiency WeatherMaster platform has the best-in-class efficiency to weight ratio. While I am highlighting CSA RLC as an example of product differentiation, we're seeing similar progress globally. In the fall, ahead of the heating season, CSE RLC will be introducing a new differentiated high-tier Viessmann branded heat pump that is complementary to our current premium offering. Our CSAME business introduced a new Toshiba-branded side-discharge VRF platform, featuring best-in-class efficiency, distinctive aesthetics, low noise performance and high reliability. So product differentiation is a consistent theme across the portfolio. Turning to Slide 5. On the CHVAC side, our product portfolio, field network support and operational capacity are night and day versus where we were at spin. Not only do we have a comprehensive product portfolio, we are winning head-to-head as you see in our orders, share gains and backlog. We've invested in the right products with new offerings such as 2- and 3-megawatt maglev bearing air-cooled chillers with free cooling and a range of water-cooled chillers enabling reliable data center operation in high ambient environments. And by the end of this year, we will have introduced an expanded suite of very attractive CDU offerings. Our high-margin controls business has also significantly increased share in the U.S. and is a key differentiator in our system-wide offerings. Significant capacity expansion and superb technical talent additions have supported growth in this important business. The team's great work and investments are driving results, as you can see on Slide 6. Sales in our global CHVAC business are up 80% since spin. Our backlog is up 130%. We've gained 500 basis points of share, and our margins are up three times. Not only is the applied business driving great growth for today, the related aftermarket business will drive great growth for years to come. And the good news is that we have the aftermarket playbook to ensure that we capture the opportunity as you see on Slide 7. Similar to our commercial HVAC business, we have transformed the way we think about aftermarket. Our playbook starts with how we design products with aftermarket as a focus. We continue to expand our parts capture availability and partnerships to deliver growth. We've added highly scaled salespeople and technicians globally and we are focused on providing solutions for customers that meet their mid- and late-life upgrade and modification needs. Importantly, we continue to lean into the opportunities created by AI and digital connectivity with the number of connected devices in the field, up over 25% in the quarter. All segments have plans to deliver on their aftermarket targets, and we feel good about our start to the year and our expectation to deliver our sixth year in a row of double-digit growth. Last on systems on Slide 8. Data centers present a clear opportunity to bring together the full power of One Carrier to provide our customers with unique solutions. Our QuantumLeap offering leverages our unique capabilities and is gaining great traction with our customers. Since launching this integrated holistic offering about a year ago, we've won hundreds of millions of dollars in orders. Our differentiation lies in integrating previously discrete systems, including chillers, CDUs, our Nlyte data center infrastructure management system, our building management system, leveraging new digital twin capabilities, air handlers and complete life cycle support. Earlier this week, we announced our expanded investment in partnership with ZutaCore, which will further enhance our technology differentiation in this space. In transportation, we've been building visibility across the cold chain, which creates value for our customers and drives subscription and aftermarket revenues for us. Our Lynx subscriptions cover nearly 240,000 units, and we expect to triple this number in the next few years. Before I turn it over to Patrick, a brief comment on our full year outlook. Compared to our February guide, we are seeing an increase in input costs as a result of new tariffs, fuel and raw material prices. We expect to offset these headwinds dollar for dollar through supply chain actions, cost reduction and increased pricing. On the latter, we now expect to realize an additional two points of pricing globally this year. I am pleased with the better-than-expected start to this year, but with just one quarter behind us and still a lot of macro uncertainty, we are reaffirming our full year guide. With that, I will turn it over to Patrick.

Thank you, Dave, and good morning, everyone. For the quarter, reported sales were $5.3 billion. Adjusted operating profit was $594 million, and adjusted EPS was $0.57. By comparison to last year, this was a challenging quarter, although company results were better across all metrics compared to our Q1 guidance. Better-than-expected total company sales and operating profit performance was mainly driven by CSA Resi and Light Commercial. The year-over-year decline in adjusted operating profit and adjusted EPS largely reflects lower sales and absorption in our CSA Residential business and continued headwinds in China Resi and Light Commercial. Adjusted EPS declined 12% as tailwinds from a lower effective tax rate and a lower share count were more than offset by the lower operating profit I just mentioned. You will find a year-over-year adjusted EPS bridge in the appendix on Slide 19. Free cash flow in the first quarter was a cash outflow of $15 million, which reflects normal seasonality and was also better than expected. Moving on to the segments, starting with CSA on Slide 10. Organic sales for the segment were down 3%. Residential sales were down 12%, driven by movements in unit volume from distributors to dealers, which was down 8% in the quarter, and lower field inventories, which were down about 35% year-over-year. As Dave mentioned, Light Commercial was up 9%. Commercial sales were up low single digits, in line with expectations, and we continue to expect significant sales growth in the second half, driven by data centers. Segment operating margin of about 15% was as expected and largely reflects the impact of lower sales and associated under-absorption in our Resi business. Moving to the CSE segment on Slide 11. Flat organic sales were a few points better than expected, driven by Residential and Light Commercial, which grew low single digits, offset by a mid-single-digit decline in Commercial. We're seeing a continued shift toward electrification and heat pump adoption in this region as evidenced by strong heat pump sales, up low teens and partially offset by continued declines in boilers down mid-single digits. Similar to the CSA segment, we expect a significant ramp in commercial deliveries in the second half mainly driven by data centers. Segment operating profit and margin performance was disappointing in the quarter, driven by lower commercial volume and higher temporary promotions only partially offset by RLC volume growth and strong productivity. RLC price increases and surcharges went into effect in April. Turning to the CSAME segment on Slide 12. We're seeing continued very strong performance in Commercial in this segment outside the China region with sales up high teens, led by strength in India and Australia. This was more than offset by ongoing weakness in Residential and Light Commercial China, leading to an overall 1% organic sales decline. Overall sales in China were down low teens with the RLC business down around 25% and Commercial down low single digits. Sales in the Middle East were down mid-single digits, impacted by the ongoing conflict in the region. The decline in segment operating margin to about 10% was mainly driven by the weakness in China RLC as expected. Moving to the CST segment on Slide 13. CST had a third consecutive quarter of solid organic growth with another very strong quarter in Container, partially offset by pressure in Global Truck and Trailer. Our Container business was up nearly 40%. The decline in segment operating margin reflects unfavorable business mix. Turning to Q1 orders on Slide 14. Total company orders in the quarter were up 11%, mainly driven by our commercial businesses globally, which were up about 35%. CSA commercial orders growth reflects some large data center wins in the quarter. We've seen positive momentum in RLC orders in CSE continue into April. CSAME remains a tale of two halves, with strong performance outside of the China region, offset by China RLC. Within transportation, Global Truck and Trailer order intake was weak, while Container continued to outperform. Moving on to Slide 15 and shifting to our 2026 organic sales outlook. As Dave mentioned, we had a better-than-expected start to the year, but given the current macro uncertainty, we are reaffirming our full year sales outlook of approximately $22 billion with organic growth of flat to low single digits. Think of our prior guide being a bit below $22 billion and our current outlook a bit above $22 billion, both round to $22 billion. This includes a roughly $250 million year-over-year revenue headwind from the exit of Riello, mainly reported in the CSE segment with the sale now expected to close before the end of the second quarter. The building blocks of our full year outlook have not changed and largely reflect our expectations for continued double-digit growth in commercial and aftermarket globally, offset by softness in our short-cycle businesses. Moving on to Slide 16, profit and cash guidance. Same as prior slide, we are reaffirming our full year outlook for operating profit and adjusted EPS, no change in CSA and CSE expected margins, and we now expect CSAME margins to decline approximately 50 basis points, reflecting the impact of the Middle East conflict offset by margin expansion in CST by approximately 50 basis points. A quick comment about the Middle East. Our total sales in the Middle East were about $400 million in 2025 with the vast majority reflected in the CSAME segment and the balance in CST and CSE. The CSAME segment also benefits from equity income related to unconsolidated JVs we have in the Middle East, which is reflected in the updated margin guide for this segment. No change in outlook with respect to free cash flow and share repurchases. Moving to Slide 17. We expect adjusted EPS of approximately $2.80, up high single digits versus 2025. The bridge is unchanged from our February guide. As usual, additional guide items are in the appendix on Slide 20, and you will note there is no change from our February guide on these items. Finally, let me provide some color on the second quarter. We anticipate Q2 revenues to be just below $6 billion. This includes about $100 million more revenue from Riello compared to our prior guide and about two points of incremental pricing to offset increased input costs. We expect operating margin of about 17%, a 24% tax rate and about $0.80 of adjusted EPS. For cash, we expect normal seasonality, which would imply a few hundred million of free cash generation for the quarter. With that, I would ask Elizabeth to open it up for questions.

Just on the — maybe kind of unpacking the guide a little bit more, with two percent more price, the organic growth is unchanged. So maybe just talk a little bit about the price-volume trade-off you're expecting there. And also it's interesting that we don't see margin pressure on the inflation. Usually, we get arithmetic pressure there. Maybe that's inside the ranges. Could you touch on that? And how much of that inflation is Section 232 related versus general inflation?

Okay. I'll begin with the comment you had about the revenue guide and organic sales growth for the year. Our original guide was $22 billion in revenue. Think of that as really a little less than $22 billion. We added two points of price, which basically still rounds to $22 billion, but we're a few hundred million dollars above $22 billion now and both end up being low single digits organic growth, Jeff. So it's really in the rounding to $22 billion, and it remains within our low-single-digit organic growth outlook for the full year. In terms of the impact of pricing on the margin outlook, at the total company level, it's about a 30 basis point headwind to margins for the full year, which remains within the range that we've provided. The third element of your question was related to input costs. Of the two points of price that we are realizing or expect to realize for the year to offset increased input costs, think about 75% of that related to tariffs, and that is really Section 232 related. Think of the balance, the other 25%, related to other input costs, which includes fuel and some commodities.

Great. Dave, and then just back to residential, it's good to see this initial evidence of things normalizing. Could you elaborate a little more on what's going on in movement, what signals you're seeing from the channel and how you see the early part of the season beginning to unfold?

Yes. I'll start at 30,000 feet at the macro level. On the challenging side, the 30-year mortgage rate is above 6% and there's still some stress on the consumer with high fuel prices, but on the other hand, there's clearly pent-up demand. Both at a housing level — there are about four million too few homes in the United States — and for HVAC replacements because there was probably a bit of repair-over-replace last year. So we think existing home sales will be up in the mid-single-digit range, which would be very important. New home construction is probably flattish. Yesterday it was reported that applications for mortgages to buy a home were up 20%, which was good to see. So there are some counterbalancing macro indicators. What we saw is that 1Q was better than we thought. We thought movement would be down in the 20% range, and it was down more in the 10% to 12% range. So it was a little better than we thought. April has started better than we thought, but we'll see how May and June in 2Q unfold. Orders were up in the 5% or 6% range in 1Q. What's really good for us this year is that field inventory levels are very, very healthy. They ended the quarter down about 35%. As we look at it today, they're still down about 35%. So we're being very cautious on managing field inventory levels. Things so far year-to-date are better than we thought, but we have a long way to go.

Patrick, can you unpack the Q2 guide? It looks like you point towards low single-digit core sales decline in Q2 and the 17% margin. Maybe unpack that between the Americas and other segments, please?

Yes, you're right, Nigel. For the second quarter, we expect flattish to down low single-digit organic sales and some inflow by segment. We expect the Americas to be down about mid-single digits, with margins last quarter in the mid-20s. We're still in that range, probably closer now to about 24% for the Americas. In Europe, we expect organic sales low single digits, so positive, with margins closer to 10%. And then we expect both Asia and Transportation to be down low single digits. Margins for total company are about 17%, as I mentioned, with Asia closer to 12% and Transport in the mid-teens.

Great. Any color on margins, Patrick? And specifically, on the mid-single-digit decline in the Americas, how does that shake out between residential?

Yes. The story is similar to Q1. For resi sales in Q2, we expect them to be down similar to what we've seen in Q1, meaning close to the mid-teens, which means we expect to see similar headwinds from mix in the second quarter that we've seen in the first quarter, explaining the margin headwind from a mix point of view in CSA. Similarly, we expect Light Commercial to be down about the mid-single-digit range. So our two most profitable businesses will represent a headwind on margins for CSA in the second quarter, though not as much as in Q1.

I wanted to circle back to the price and cost aspect. I think you said it's dollar-for-dollar offset. So if two percent more price is maybe $400 million, it sounds like over $300 million of that is the result of the tariff movements. I wanted to double-check that. How should we think about the extra several hundred million of costs phasing in through this year and the mitigation efforts into '27 on the tariff front? Any update on the phasing of price? Does that match and move with the costs moving up?

First, Julian, your math is correct. It is in that $400 million to $450 million range for the total year with the impact overweighted on Section 232, as I mentioned earlier. In terms of phasing of the two points of price, we'll see more of that in Q3 and Q4 than in Q2 because this was all effective April 6 and the pricing followed a little after that, but it is in effect now. So in Q2 the net of the two will be a little headwind, and we expect that to become neutral in Q3 and Q4 for the year as well. As you may recall, we're on LIFO, and so we see the impact immediately. There is a little bit of a gap in Q2, but there shouldn't be a gap in Q3 and after that.

That's helpful. Maybe follow up on how to think about CSA margin progression. You've got the most profitable parts of CSA down decently in Q2 year-on-year in both R and LC, but you're saying the margin decline is much narrower sequentially than in Q1. Help us understand the movement in CSA margins through the year to hit the guide for full-year margin being stable to up a bit.

As I mentioned earlier, we expect about 24% margins in Q2 for the Americas. We expect Q3 to be a little better than that, so mid-20s, and then we expect high teens in Q4 for the full year to be around 21% segment margins for the Americas. Sequentially, it's typical to go up for the Americas Q1 to Q2 given the ramp-up for the cooling season and distributors building inventory. In Q3 we do not expect a gap between price and the input cost headwinds. We see a little bit of that in Q2, and year-over-year we expect significant growth in CSA in the second half, in the teens, with very significant margin expansion driven by better volumes and the absence of the under-absorption headwind we had in the second half of 2025.

Do you think we're close to a bottom in China? It's been weak for a while. Any color on what your local teams are saying would be helpful.

On the residential side, Scott, it's hard to call a bottom. It's just been weak for a while and we're seeing no real signs of it turning. The team is taking the right actions to position us to start to perform better than we and the market have been performing, but it's hard to call a bottom on housing. On the CHVAC side, there are parts that look quite encouraging. Data centers present a lot of opportunity. We're in good discussions in China on commercial HVAC for data centers and I expect some good wins going forward. Some EV battery areas continue to do well despite global challenges. Healthcare demand is good given an aging population. Semiconductor fabs are doing well. So there are verticals of strength in China. We were kind of flattish in 1Q on the CHVAC side. With the momentum around some orders we expect to see, CHVAC could start to improve, but on housing there will probably continue to be challenges as we go through the year.

Okay. That's helpful. Switching gears: I imagine you're pretty much sold out on data center capacity for '26. When you get a new order in May, is that for '27 delivery, or can you still book and ship in this calendar year?

We can still book and ship in 2026. The reality is that we are very back-end loaded, so there's quite a ramp in the second half of this year for data centers. Most of the growth is in the second half. We've taken orders for the second half where we completed design, ordered parts and will deliver in the second half. So it's back-end loaded, but we still have capacity to take additional orders. We committed to $1.5 billion of data center sales this year and our backlog currently covers that number. We would still take additional orders for this year and we're starting to book a fair amount for 2027. We track bookings by quarter. Next year is not as back-end loaded as this year, but we still have additional capacity for more orders on top of what we're booked for.

A lot of helpful color already. I wanted to follow up on the pricing comments. There's some concern in the market about your ability and other OEMs' ability to continue to push price through given what's happened over the past year. Dave, can you talk about your conversations with customers, dealers and distributors on your ability to continue to get pricing even if the tariff environment continues to worsen?

No one likes price increases. We've had tough discussions with distributors and dealers. Our extended channel understands that when we get sudden input cost increases, we will take every action we can to mitigate it with supply chain actions. We are doing everything we can to optimize activities in the United States. We've done a lot to differentiate ourselves through product, digital and new TAM introductions like hydronics. Our channel knows we wouldn't act unless necessary. We are spending a lot on R&D to innovate and on branding, especially with the Viessmann opportunity in the Americas. We've met with distributors and dealers and worked together on this. If tariff changes occur, we'll adjust pricing. But we have to take actions assuming tariffs don't change. We are confident the pricing we expect to stick will stick, and because of our investments we will maintain share.

That's helpful. Quick question on data centers: you're expecting a significant ramp. Any color on how your CDU offering is going? Is that part of order growth and what is the trajectory there?

I'm really proud of the team on CDUs. We considered acquisitions but decided we can design, develop and produce our own CDUs; it's effectively a mini chiller and something we do well. We've introduced a 1-megawatt CDU, will have a 3-megawatt around Q3, and a 5-megawatt toward the end of this year or early next year. We've sold them to some hyperscalers and are in discussions with others. We expanded our investment in ZutaCore earlier this week. They're a great partner with two-phase solutions, which I think is where the puck is going. We've won a lot of QuantumLeap orders, much of it in CDU, and we have many opportunities globally to sell more. We'll continue to look at M&A in liquid cooling, but right now our engineering team is doing a superb job designing products and gaining traction.

Dave, could you give more color on CSE? You mentioned strength in heat pumps. You didn't change the revenue guidance for CSE. What are you seeing? Also, can you talk about CSE margin and the need to drive promotions? Does productivity and cost-out mitigate that margin pressure?

On RLC specifically, resi sales were up low single digits and orders were up mid-single digits. The good news is an apparent inflection point in heat pump demand in 1Q. The electricity-to-natural-gas ratio in Germany is now about 2.5, first time below 3 since early 2023, and Germany subsidy applications were up 30% in Q1. Heat pump sales in Germany were up about 20%, and low teens across Europe. Boilers were down a bit as expected. Margins were impacted by one-time promotions that were heavier than planned; the team has taken actions and we implemented price increases and surcharges effective April 1. We converted about 150 new installers and over 500 homeowners to the brand; we expect those conversions to be sticky. We'll introduce a high-tier Viessmann product in the fall that's slightly lower priced than the current premium Viessmann product and will fit well in markets like Germany and Poland. We see a heat pump momentum, and we expect full-year margins to recover about 100 basis points year-over-year through cost actions and productivity, plus the pricing actions we've implemented.

Very helpful. More color on CSA Light Commercial: Q1 was up 9%, better than expected. You said down in Q2. Can you talk about share gains and the potential to trend better than the mid-to-high-single-digit decline you have for the year?

We guided it down for the first quarter, and the team finished well, up 9% in 1Q. The strongest area is retail, especially national accounts where we've had major wins helping share. We had favorability from price mix and new products introduced last year, notably the hybrid rooftop unit. Field inventory levels in Light Commercial were down about 25% year-over-year at quarter end, so we entered Q2 well positioned. We're being careful given macro uncertainty like consumer confidence, inflation and tariff-related pricing. We expect Q2 sales down mid-single digits and will monitor April and the rest of the year. New products and national account wins bode well, but we remain cautious.

Dave, can you give an update on services? How do you feel about growth there and the outlook for the year?

Great is the short answer. This is what we do. The aftermarket playbook has to be in the DNA of how you run the business. We design for aftermarket, manage supplier contracts to support aftermarket, and every distributor discussion includes fill rate and efforts to capture 100% of their parts needs from us. This focus has cascaded globally. We've rebuilt our aftermarket talent and recruited strong leaders worldwide. We keep pushing top talent into aftermarket. We've targeted double-digit growth for years, have a playbook around mods and upgrades, connecting devices, driving parts and service attachment, and we are in the early innings. We feel extremely confident we will deliver our sixth consecutive year of double-digit aftermarket growth. Internally we target closer to 13% or 14% and expect our teams to drive that.

Great to hear. As a follow-up, are you able to comment on the recent litigation against residential HVAC manufacturers?

The case is meritless and we'll defend it vigorously, as you'd expect. You're not going to find a more compliant company or industry than ours. We will fight it.

Following up on ZutaCore and your comment on two-phase cooling: there is industry chatter that the transition to two-phase is challenging given the current generation cycle. What timing are your customers indicating for two-phase? Next rack generation or later?

It's hard to answer precisely. It's not 10 years out and not one year out. It won't happen overnight. There's a range. We'll ultimately migrate in that direction, but the timing is uncertain. We have a lot on our plate developing single-phase CDUs and will continue DC-type investments. We evaluated larger plays but decided to develop organically and pursue smaller acquisitions that round out the portfolio. Two-phase adoption is likely within the next five years or so, but remains to be seen.

Thanks. Follow-up on truck trailer: people are more optimistic on Class 8 recovery. Historically it's a strong market for you. How do you think about visibility on that recovery into H2 '26 and into '27?

We've seen some positive indicators on Class 8. In the Americas, we were on the path for a recovery but higher fuel prices hurt some customers, delaying CapEx decisions. There's pent-up demand where customers have postponed big purchases and will need to spend. That was the plan coming into the year; some decisions have been pushed right. For CST overall, Container has done better than expected with continued strong orders in Q2. Container will likely perform better, NATT may be a little worse, and ACT is flattish to up low-mid single digits but faced some challenges. European truck trailer is about where we thought. Net-net, Ed and the team are doing well and we expect to land the year where we thought with Container probably a bit better and NATT a bit worse.

On Americas Resi HVAC: with cycle and macro moving quickly, how are you distinguishing true demand versus potential channel build? Also, if a customer places an order in mid-April, is that price locked in ahead of the late April price increase or is it adjusted higher?

Given last year, we've done a much better job understanding true underlying demand and inventory in the field. We know at an SKU level by distributor and location what they have, and we work closely with our distribution channel to ensure they don't have more than needed. We don't have precise SKU visibility into the dealer network — they are typically very small dealers — but it doesn't make sense for them to hold much inventory. We have a good sense of matching supply to demand. We announced a price increase effective April 27; that was known to the channel. April movement was better than we thought, possibly because people tried to beat the price. Once the price is in place on April 27, it is in place. If tariff changes occur, we'll roll back relevant pricing as appropriate and told the channel that if we are reprieved on tariffs the pricing will revert except for fuel surcharges. April movement may have been aided by customers trying to beat the price. We kept our guidance for the quarter because some of that could be channel timing, and we'll watch how the cooling season plays out.

I appreciate that color. Follow-up: Q1 met the mid-teens target, but volumes came in high single-digits better with positive mix on Resi and Light Commercial driving the beat. Did you already feel some cost pressure in Q1, such as fuel on service, metal given LIFO exposure, or similar?

Chris, two elements. One, we're seeing a lot of activity on data centers and we're making investments in CSA to enhance capabilities and pursue more opportunities. Two, there was a small FX headwind in the quarter as well. If you adjust for these two items, you would have had a margin consistent with what we'd expect given higher sales. So not related to a fundamental cost step in Q1 beyond those items.

On the pricing side, you said two points of increase with about 75% Section 232 related. When I run the math for RLC it implies a high single-digit percent increase on revenue for that business. Is that what you're expecting? It seems broader than just products sourced from Mexico.

Your math is broadly accurate. In addition to Section 232, pricing is going up in every segment given higher oil and commodity prices, but your math on Resi is accurate for CSA.

I'd add that we did not selectively raise price for only certain Resi products. We raised pricing across the RLC portfolio to avoid disproportionate effects. We raised prices for our Resi and Light Commercial RLC business in the U.S. because selective increases can create distortions.

Do you think others are reacting in a similar way?

We don't know precisely how others will react. Many companies face similar input cost challenges. We watch elasticity carefully and will act accordingly.

Congrats on data center orders. On the $1.5 billion sales guide for data centers this year, it doesn't sound like capacity constraints are the reason you didn't raise it. Is it lead-time and timing? Also, can you touch on profitability for data center sales relative to the rest of CHVAC?

We kept the guide at $1.5 billion because we have a lot of execution to do in the second half. Given the bookings we have and anticipate, we could exceed that number, but there's a big hill to climb in H2. We felt prudent keeping the $1.5 billion target and will reassess as the year unfolds. In terms of margins, the data center business is attractive and overall CHVAC margins are up three times since spin. Data centers are accretive to CHVAC margins.

Dave, you commented constructively about Section 232 and optimism that something could change. Can you elaborate on the possibility of exemptions, timing for changes, and whether a 10% tariff rate is realistic?

Short answer: I don't know. The administration has created space for industry to comment on issues that impact industry and consumers. We appreciate the administration's willingness to listen. What happens with Section 232, whether there are exemptions or changes, I can't predict. There have been constructive discussions and I would love to see something change, but I don't know whether, when or if that will occur. We have to assume it won't change and plan accordingly. There are ongoing negotiations related to USMCA and Mexico; whether those discussions affect the recent proclamation is unclear. We're optimistic but uncertain.

Thank you to our team for continuing to perform very well in an uncertain environment. And thank you to our investors for your continued confidence in us.