Q4 2024 Earnings Call Transcript

Good morning, and welcome to Carrier's Fourth Quarter 2024 Earnings Conference Call. I would like to introduce your host for today's conference, Michael Rednor, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to Carrier's Fourth Quarter 2024 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 operations, excluding restructuring and 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 welcome aboard. Let me start by saying thank you to our team for delivering great results in 2024 while completing such a significant portfolio transformation. I am more excited about 2025 than I have ever been entering a new year. I feel as if all of the work done by so many Carrier over so many years has positioned us for this moment to create outsized value for our customers, people and shareholders.

As you can see on Slide 2, 2024 was a strong and transformational year for us. We achieved 3% organic growth by delivering double-digit growth in global commercial HVAC and aftermarket, both for the fourth consecutive year to help offset unexpected weakness in residential light commercial HVAC in Europe and China. Total company orders were up low teens with HVAC Americas supplied up about 40%. Our global commercial HVAC backlog is up mid-teens versus last year, positioning us for another year of double-digit growth in 2025 in that business.

For overall Carrier, organic growth and strong productivity contributed to close to 100% core earnings conversion, 180 basis points of margin expansion and 16% adjusted EPS growth. We delivered these strong results while we successfully completed our portfolio transformation. We integrated with Viessmann Climate Solutions and executed on our divestitures, yielding over $10 billion in gross proceeds. And as committed, we paid down debt and returned to roughly 2x net leverage.

We also returned over $2.6 billion to shareholders through dividends and share repurchases. Turning to Slide 3. I think of our year since spin in 3 phases. During our first phase, we built the foundation for a new Carrier we promoted and added key talent we launched and have lived a new culture embedded in the Carrier way that has given us tremendous energy and a focus on growth and innovation. We launched Carrier excellence to drive operational execution, excellence and productivity.

We invested in our product portfolio and developed and implemented our aftermarket playbook to position us for sustained organic growth. We sold Chubb, added Toshiba, simplified the backed office and paid down debt. 2023 and 2024 were fined by our mantra of performing while transforming. We sharpened our vision and successfully transformed our portfolio. We now have greater bandwidth to create even more value for our customers and thus our shareholders.

Focus simplification, differentiation, customers, win, grow. The new phase accelerating growth has begun and there is tremendous energy within Carrier. As we navigated this transition, we have been purposefully increasing our addressable market and value proposition for our customers, as you can see on Slide 4. In 2020, we began to not only increase our investments in our product portfolio, we significantly increased our focus on digitally enabled life cycle solutions market has increased our addressable market, contributed to margin expansion all while creating greater customer stickiness and increasing recurring revenues.

Now in addition to driving differentiated products in aftermarket, we are introducing fully integrated systems, which further increased customer value across our 3 targeted ecosystems, homes, buildings and the cold chain. For Integrated Systems and homes, we are significantly expanding and enhancing our European home energy management system offerings. And through a newly created business within Carrier called Carrier Energy, we are bringing similar offerings to the United States. For the U.S., we are actively working with utilities to provide an end-to-end integrated battery heat pump solution with automated controls to run the system using stored energy during peak hours while recharging the system during the trough of energy grid usage.

The interest from utilities and other customers have been very encouraging to address grid constraints and resiliency. Within Building Systems, one offering is our integrated cooling solution for data centers that we announced last week under the brand of Quantum Leap. By combining traditional cooling, liquid cooling and our building and server management systems, we provide differentiated, more efficient solutions for our customers in this important and growing vertical. For cold chain solutions, we are transitioning from solely selling reefers to providing end-to-end systems enabled by our Linx Digital platform and Sensitech technologies.

Selling complete integrated systems provides us with a new and important opportunity for differentiation, customer value and increased revenue streams. Slide 5 lays out our strategic focus areas and priorities for 2025. In addition to our growth initiatives that we just discussed, we also remain laser-focused on margin expansion through carrier excellence while maintaining disciplined capital allocation. We deeply embed our priorities throughout our organization through a structured goal alignment process. Slide 6 shows how these priorities are reflected in our 2025 guidance.

Given our strategic positioning, we expect organic growth in single digits with our fifth consecutive year of double-digit growth in aftermarket and global commercial HVAC. We will continue to drive productivity and expect 100 basis points of year-over-year margin expansion. We expect adjusted EPS to be up 17% at the midpoint and about 100% free cash flow conversion. As we look ahead, we will continue to focus on execution within Viessmann Climate Solutions, which we discuss on Slide 7. Obviously, 2024 was well off what we expected coming into the year.

Nevertheless, I am proud that the team controlled the controllables and drove share gains, significant cost synergies and key new product introductions. The team also took the tough but necessary actions to significantly reduce both temporary and structural overhead costs, positioning us for strong margin expansion as growth returns. Looking at our growth algorithm for 2025. Given political and economic uncertainty in Europe, we assume that market volume will be flat to down mid-single digits. In addition, we expect a 5-point full year revenue headwind associated with last year's Q1 backlog reduction, which normalized at the beginning of Q2 of last year.

On the positive side, we expect continued positive mix with double-digit growth in heat pumps offsetting a modest decline in boilers. Similar to last year, we expect VCS aftermarket to grow double digits, and we also expect a point or so of price. New products introduced last year, including the 19- and 40-kilowatt heat pumps will see a full year of sales in 2025. We are introducing a full lineup of cascadable heat pumps up to 560 kilowatts with natural refrigerants that we will be selling through the Viessmann channel. As we think about revenue synergies, we are excited for the ISH trade show in Frankfurt in March, where we will showcase our new multi-brand products such as our newly launched carrier branded air conditioning units that we will also be selling through the Viessmann channel.

We gained share in key European geographies last year and expect that to continue in 2025. We and the team has been putting all the pieces together to significantly increase our complete home energy management system sales this year and beyond. We also remain confident in margin expansion and cost synergies. So all in, we expect a strong year across carrier with accelerated organic growth, margin expansion, EPS growth and strong free cash flow. With that, let me turn it over to Patrick.

Patrick?

Thank you, Dave, and good morning, everyone. Please turn to Slide 8. In short, Q4 earnings were ahead of our expectations and the guide we provided in October. Reported sales were $5.1 billion, with 6% organic sales growth, including about 2 points of price and 4 points of volume. We had a favorable 13% net impact from acquisitions and divestitures.

Organic sales were in line with expectations, driven by continued strength in global commercial and the North America residential HVAC, partially offset by weakness across residential and light commercial HVAC in Europe and China. Q4 adjusted operating profit was up 65% compared to last year, driven by the contribution of Viessmann Climate Solutions, the benefit of organic growth and productivity. As a result, adjusted operating margin expanded by 370 basis points compared to last year. The absence of commercial refrigeration was about 0.5 point tailwind to margin.

Adjusted EPS of $0.54 was up 50% year-over-year. Operational performance was in line with our guide, and we benefited from discrete tax items. Net interest expense was a bit light versus our guide given the earlier close of the commercial and residential fire business. Free cash, and I'll now refer to both continuing and disc ops, was an outflow of about $90 million in the quarter.

Full year free cash flow of $30 million was about $200 million better than we guided. Having closed residential and commercial fire in early December, we picked up the pace on share repurchases, and we ended 2024 with about $1.9 billion of share repurchases, about $1 billion more than our October guide. Moving on to the segments, starting on Slide 9. The HVAC segment had another strong quarter with organic sales growth of 11%. Organic sales in the Americas were up high teens.

Within the Americas, Commercial was up mid-teens and light commercial was a little better than expected and down around 10%. In the fourth quarter of 2023 light commercial was up about 20%, so certainly a tough comp. Residential was up 35%, mostly driven by strong volume compared to a very weak Q4 last year which was about minus 20% as our channel was in destocking mode a year ago. On the last earnings call, we mentioned that we expected no material prebuy in Q4. The actual prebuy was in line with expectations and movement was stronger than expected, movements that is sales from our distributors to installers has continued to be strong in January this year.

Organic sales in EMEA were flat, driven by double-digit growth in commercial, offset by a decline in residential and light commercial HVAC reflecting continued market weakness. Organic sales in Asia were slightly positive, driven by strength in Japan and South Asia, partially offset by declines in our residential and light commercial business in China. The HVAC segment adjusted operating margins were up 250 basis points, driven by the benefit of organic growth and strong productivity. As you can see at the bottom of the slide, 2024 was another great year for our HVAC business with continued growth and margin expansion.

Transitioning to Refrigeration on Slide 10. Q4 was the first quarter without commercial refrigeration given its exit on October 1. Overall, results for this segment were as expected. Our global truck and trailer business was down around 10% and with North America down about 25% and Europe down low single digits, only partially offset by high single-digit growth in Asia. Container was down low single digits. Our aftermarket and Sensitech businesses were both up mid-single digits.

Operating margin expanded by 160 basis points year-over-year. For the full year, this segment was down 1% organically with container up roughly 25% and mostly offset by declines in North America truck and trailer. Margins expanded 20 basis points. Turning to Slide 11. Total company orders total company organic orders were up low teens.

Overall, HVAC orders were up about 5% with continued strong orders growth in the Americas at about 10%. EMEA and Asia organic orders were down mid-single digits. In Asia, weak orders in China residential light commercial HVAC were partially offset by China Commercial HVAC orders and strength in other countries. Globally, commercial HVAC orders were up about 10%.

Refrigeration orders were up around 55% in the quarter, mostly as a result of very strong growth in North America truck trailer on an easy comp. Truck and trailer orders in Europe were up over 20% and Asia orders were up mid-single digits. Overall, we entered 2025 with robust longer-cycle backlogs in commercial HVAC and orders momentum in key businesses. Moving on to Slide 12 and shifting to 2025 organic sales guidance.

We expect mid-single-digit organic growth and reported sales of between $22.5 billion and $23 billion. This also includes a $750 million year-over-year headwind from the commercial refrigeration exit. We expect roughly a 1 point, we expect roughly 1 point of price and the remaining organic growth to come from volume and mix up. We expect currency translation to be at about 1 point of headwind.

The organic growth for Board segments is expected to be up mid-single digits for 2025. Within HVAC, we expect the Americas to be up high single digits driven by continued double-digit growth in commercial high single-digit growth in residential, driven by the new refrigerant mix up and low to mid-single-digit growth in light commercial. We expect Europe to be up low single digits with commercial up double digits and flat sales growth in residential and light commercial. Dave just walked you through our assumptions for flat sales growth in this market segment. Finally, within Asia, we expect low single sales growth with China sales flat and mid-single-digit growth outside of China.

Within Refrigeration, we expect Global Truck and trailer to be up mid-single digits with North America truck trailer returning to growth in the second half of the year. We expect mid- to high single-digit growth in container and double-digit growth in Sensitech. Moving on to Slide 13, profit and cash guidance. Total company adjusted operating margin is expected to be up about 100 basis points compared to 2024 and with half of the increase driven by volume, price and net productivity, partially offset by investments.

The absence of commercial refrigeration contributes 50 basis points of margin expansion. Core earnings conversion that is excluding the impact of acquisitions, divestitures and FX is expected to be about 30%. We estimate free cash flow to be about $2.4 billion -- to be between $2.4 billion and $2.6 billion, reflecting roughly 100% conversion with normal seasonality. We Finally, we intend to repurchase about $3 billion in shares.

Through last week, we repurchased about 900 million of shares so far this year. We estimate that average diluted share count for 2025 will be down about 5% from 2024. Moving to Slide 14. We expect adjusted EPS between $2.95 and $3.05, up 17% at the midpoint. The building blocks are identical to what we shared with you on the last earnings call, except for currency. Adjusted EPS growth includes about $0.30 of operational performance driven by volume leverage, price and net productivity and about $45 million of corporate stranded cost elimination, partially offset by investments.

We expect foreign currency translation to represent a headwind of about $0.05. As a result of debt paydown, we expect net interest expense to be a $0.05 to $0.10 tailwind. Finally, we expect a lower share count, partially offset by a 22% tax rate and NCI to provide another $0.10 to $0.15 of EPS benefit. With respect to capital deployment, we'll pay down $1.2 billion worth of debt this quarter. The dividend per share increases by 18%.

And as I mentioned earlier, share repurchases are expected to amount to $3 billion this year. As usual, additional guide items are in the appendix on Slide 17. Finally, let me provide some additional color on the first quarter. We anticipate Q1 revenues to be about flat sequentially, a little more than $5 billion, with first quarter organic revenue growth flat, up low single digits. This reflects continued strength in global commercial HVAC and a tough comparison in resulite commercial HVAC in Europe and China.

We expect organic growth for refrigeration to be about flat. We expect about 100 basis points of margin expansion in Q1 and adjusted EPS to be between $0.55 and $0.60. So overall, we ended 2024 on a strong note and expect 2025 to be another year of strong financial performance. With that, we'll open it up for questions.

[Operator Instructions] Our first question comes from Jeffrey Sprague with Vertical Research.

Patrick. Mike, good to hear you're there, too. Can we just drill a little bit more into resi and what you saw in the quarter. So you're characterizing it, I guess, as no prebuy or no significant prebuy.

Maybe you can just kind of elaborate on that. Does that suggest your holding inventory that you sell into the dental in Q1? Or any other kind of color on how the kind of pieces moving parts together?

Yes, Jeff, we'd say that we had a bit of prebuy basically what we thought back in October, we shipped about $75 million to $100 million worth of 410 unit -- 410A units that we would characterize were pull ahead from this year into last year. And we calculate this by looking at the inventory levels that are held by our distributors, which were just slightly elevated versus the same time last year. And as Patrick said, movement was very strong in 4Q. Movement was up about 15% from our distributors to our dealers, and we were up about that same amount in January, first week of February was a little bit lower than that.

So look, inventory in the channel, not too high, movement goods. So we think that nearly everything we shipped was underlying true demand with maybe 75 to 100 of prebuy.

And Jeff [indiscernible] inventory in Q1. So we did help inventory. Yes, we will sell some 4 in Q1 from inventory.

Right. And then so getting to high single digit for the year, we got in 410A in Q1. And then we've sort of got price-related mix effect for the balance of the year getting us to high single digit. What do you think the kind of realized prices on the 454 units on an all-in basis?

Yes, Jeff, about 10%. But let me walk you through the high single digits. It's really along the lines you were saying. So we think that volume will be flat to down low single digits, which includes that modest prebuy that I just mentioned.

Then we expect base price to be up low single digits. So between those 2, you're about flattish the benefit of the mix up of the transition to be high single digits. So 80% of our volume is impacted by the refrigerant transition. 20% is not affected because they are either furnaces or things we ship to Canada. Of that 80%, Jeff, we expect about 90% of that to be 454 and about 10% to be the 410. And of that 454B, we expect a 10% -- to realize a 10% price increase.

So that mix up alone, that gets you to about 7% sales growth. And then we expect modest growth in the remaining 20% of the business.

Grand. Maybe just a quick one, and I'll pass it on. Just on the share repurchase, I think many of us thought you might do an ASR, it looks like you bought a lot the way in Q4. Is that the plan for the balance of 2025 also as the regular way our repo.

Yes, Jeff. Exactly, as you said, we achieved the same thing without NSR. And not until the balance of the year, we'll expect to be in the market throughout the year.

Our next question comes from Andy Kaplowitz with Citigroup.

Dave, so maybe just a little more color into your outlook for [indiscernible]. I know for a while, you were talking about a stronger potential revenue growth possible in '25 and now you're talking about this 24% backlog reduction headwind. Of course, German elections are coming up. So maybe just talk about the visibility to get to that flat growth.

And is it derisked now in your opinion in the guidance when you look at the items that are in your control, aftermarket synergies, how much visibility do you have in getting those pieces of growth?

Yes, I think so. I think that it's a very balance guide, perhaps conservative, but we'll see. I mean, look, we -- when we look at the total market, we just have to be honest that there is a fair amount of economic and political uncertainty in Europe. So we put that volume at flat to down 5%.

And we did see -- I think first quarter of last year was the last quarter that I think we shipped out of some level of excess backlog. So that now normalizes in the second quarter of this year, but that will cause us about points of total full year headwind. The stuff that -- so that kind of walked us down to, say, down 5 to 10. But when we look at what's in our control, 3 to 4 points of mix up, that assumes double-digit heat pump growth and down a bit in boilers. And we have pretty good visibility to that.

If you look at the second half of last year, just in Germany, or the subsidy applications were up around 65% year-over-year, up 60% on a 2-year stack. Viessmann heat pump orders in the half were up about 40%. So some early indications that there's underlying demand for heat pumps in Germany. So 3 to 4 points of mix up, we'll get a point or 2 of aftermarket with double-digit growth, a point or so of price.

And then that bucket of revenue synergies, we're looking at $100 million of revenue synergies this year around the globe, probably 70% in Europe. And I could tell you, Andy, we have that like line by line, the air conditioning units with Carrier brand going through the Viessmann channel. We have Hydronics, we have system-level sales that we're taking from Europe to use for HEMS in the United States. We have multi-brand strategy in China.

So details on the revenue synergies. System in could be a new frontier for us this year as we really put the wheels in motion to drive that. Share gains, again, this year, NPI again this year. So we feel good about what's in our control, and we'll keep an eye on the market.

And then David, Patrick, it looks like you're forecasting something like low 30s incrementals for HVAC in '25 maybe puts and takes to get there, especially because it's topical around tariffs. How do you account in your bridge? Do you put the China in there? And then there's obviously steel and aluminum, I just got passed, can you remind us of the cost structure on that side of the business?

Yes. I'll just talk very high level on the tariffs. We have embedded into our guide what's happened with the tariffs related to China and those are fully mitigated in our guide for this year. With respect to what has happened more recently about some of the materials.

Most of the materials we purchase such as steel actually come from U.S. vendors. In addition to that, we are pretty well blocked for the full year. In North America, I think we're blocked for about 80 -- close to 80% of our steel volume. So generally, we think we're in a pretty good position there.

With respect to your questions on the margins for next year, and I'll talk at the overall company level because given the size of HVAC, it applies to that as well. What you can think about is differently than in '25, we expect a bigger contribution from organic sales growth, that's both volume and, of course, the mix up. That, combined with strong productivity. Those are the main drivers of margin expansion, and that then would be offset by reinvestments in our business.

And so it's really driven by organic growth, continued strong productivity the impact of the mix up, of course, offset by reinvestments in our business.

Our next question comes from Julian Mitchell with Barclays.

Maybe just first off on the organic sales guide for the year. So you're starting out with sort of flat to up slightly in the first quarter. Total company, the year is up mid-single digits. So maybe walk us through kind of how we think about growth for the rest of the year after Q1 and maybe put a finer point on the cadence of a couple of the businesses most in focus, which are Viessmann and the Americas resi HVAC, please?

Yes. So Julian, from an overall company point of view, I said flat to low single digits in Q1. And that would also, as I mentioned, mean refrigeration flattish and HVAC, therefore, low single digits. Within Q1, VCS because of the tough comp that Dave referred to likely between 10% and 15% down in Q1. And then starting in Q2, we expect sales growth to be in the high single-digit range for the overall company and that include or is particularly the case for the case for HVAC and also for Viessmann. We expect Viessmann in Q2 to be mid-single digits of growth and then the rest of HVAC to be pretty strong as well.

And so that takes you Q2 in the high single-digit range that we expect that to continue into Q3 and then the Q4 sales growth to maybe taper down a little bit to the mid-single digits.

That's very helpful. And then maybe if you could focus for a second just on the light commercial business in the Americas. There's often a lot of investor concerns around decline there. And obviously, the orders quarter-to-quarter are lumpy.

You're guiding for revenue growth, I think mid-single digits for this year ahead in Americas like commercial. So maybe just help us understand kind of how you see the market dynamics there? Any concerns around the education vertical given ESRA funding moving lower, any color on that vertical would be great.

Yes. Let me just say in terms of the latter piece, specifically with the ESR funding, even though that will start to obviously come to its end, it's going to be replaced with the bond funding from the states, which could be about billion of the bond referendums that have been passed in 30 states or so. So I'll tell you, Julian, we've seen great growth in K-12. Orders for us last year were up 20%. So we feel good about the growth in '25, '26. When we look at light commercial overall, we expect sales growth to be up low to mid-single digits.

And kind of like resi, it's driven by the mix up of 454B. We assume a flattish market. Actually, the first quarter will be our toughest compare. So we think that will be down, say, 5% to 10% in light commercial.

And then when we think about the full year, the benefit from the mix up is somewhat similar to what we said on resi, but 90% of our volume is impacted by the refrigerant transition. So that 10% excludes sales, for example, the Canada, other sales outside the U.S. Of that 90%, we expect 80% of that to be 454B, and we expect mid- to high single-digit price increase there and then the 20% will be 410A in 2025. So like I said, K-12 looks pretty good. Some of the other verticals are good.

Some are in decline that have been in decline like commercial real estate and warehouse. So we feel balanced on the year at that low to mid-single digits.

Our next question comes from Steve Tusa with JPMorgan.

Just on the resi side, the HRI data is obviously up pretty substantially. You guys are talking like others about a more modest degree of pre-buy. Is there. Do you think you're kind of in line with the industry? Is there somebody else that may be selling more? And maybe just talk about how you see the competitive environment playing out in the first half?

Well, look, we have tools where we look at by distributor exactly how much inventory they're holding. And we're looking at inventory levels, underlying demand driven and looking at movement. And when we do not a tops-down assessment but a true bottoms-up assessment of what we think in the market and what we think the true demand is from our distributors, that's how we got to the $75 million to $100 million. I will say that on a 12-month roll, when we look at last year, we did gain around 100 bps of share, but that's our assessment of what we think the prebuy was.

And as far as heading into this year, and pricing in the marketplace. Do you see anybody, obviously, there were some big share shifts last year with 1 of your major competitors. What are you seeing in the channel there? And are you concerned at all about any efforts there to regain that share?

Look, that's something that's come up every year for like the last 5 years, we get a variation of that question, which is we've announced pricing. Do we think it will stick because someone else may end up being more aggressive. And every year about what we thought we'd get in price, we've gotten in price. So we think we'll realize about 10% from 454B.

Whether or not everyone in the industry is at that level, it's hard for me to say.

Our next question comes from Joe Ritchie with Goldman Sachs.

Can you guys give us just an update on your capacity additions on Americas Commercial I think I recall you guys pretty significantly increasing your capacity. And then ultimately, what does that ultimately mean for like being able to maybe convert your backlog faster in the next like 12 to 24 months?

Yes. It's a really big deal for us, Joe. I honestly could not be more proud of our operations team because we basically stood up a brand-new facility in North America for commercial HVAC, something that would normally take maybe 18 to 24 months, we did in about 7 to 8 months. So we're ready, we're shipping our first units out of our new North American facility.

We're maxing out our Charlotte, North Carolina facility. So with the capacity that we've now built, we have the ability to significantly increase our Charlotte output probably by about 50%. And then we have the ability to get to that same level, if not more, from our new facilities. So we can more than double our output for North America.

And the demand has been great. The only thing, frankly, as that's been constraining our demand has been our capacity. And now with the increased capacity, we're starting to bid out of it, assuming that increased capacity, which really positions us for great growth in commercial HVAC out of North America.

Great to hear. And then just my quick follow-up on Viessmann. You guys gave a lot of color around your growth expectations for the year. Can you maybe give us a little bit more on just the margins and the work that you've done from a cost structure standpoint and how we should expect those margins to improve in 2025?

Yes. We ended last year with our EBITDA ROS in the low teens. We think that with the actions that we've taken and will take, that will get to the mid-teens this year. We're looking -- last year, we were looking at about $75 million of cost synergies on a run rate basis.

We expect that to be $150 million this year. So Thomas and the team took out, as I mentioned, a lot of temporary and structural costs. And we're continuing to drive cost. And then again, we won't see the kind of top line growth that we know we'll see in future years, but the cost takeout has been significant and will continue to be significant.

Our next question comes from Nigel Coe with Wolfe Research.

Got a lot of ground here. So just a couple of quick cleanups. I think, Patrick, you said 10% of the units this year will be 410A versus 454B. So I'm guessing that the cluster of 410A units held inventory, that's the 10% that happens in 1Q.

Just wanted to confirm that. And then the mid-teens movement is something that's getting a lot of attention out there in the market. So just maybe just -- why do you think that's so strong? Maybe just talk about some market share gains, perhaps.

So maybe do you think that there's contractors of prebought units and holding them in the inventory or install them? Just wondered if there's any intel on what's happened at the contract level.

Nigel, I was mentioning to Steve that yes, we do think with high confidence that we gained about 100 bps of share last year. And credit goes to the transition we did back in '23 and '25, a very seamless transition with the [indiscernible] change and the team did a great job with the refrigerant change leading into this year. We had the capacity. We had the 410A unit so we were able to produce both sets of units.

We have near perfect visibility into the inventory in our distribution channel. We do not have perfect visibility into the inventory in our dealer channel. We have anecdotal visibility. In general, we have -- we can have about 100,000 dealers and many of them typically hold very, very little inventory for a whole bunch of reasons.

But can I tell you what certainty exactly how much they're holding? No, but it would be unusual for them to stock too much. So we feel very balanced on the mix that we've laid out for this year versus last year.

Then Nigel, the answer to your first question is yes, we expect all 410A to be flushed out in Q1 for resi.

Okay. That's 2 questions to leave it there.

Our next question comes from Deane Dray with RBC.

I would like to drill down a bit on Quantum LEAP initiative, if we could. Just give us a sense of the contribution from data center for '24. How much did it grow with expectations for 25? And anything you can give us an update on the SLA partnership, how that's going? And it looks like you've broadened some of the product lines within that business as well.

Yes. Let me start with data centers overall, Dean. Last year, it was about $0.5 billion of sales for us for data centers and this year, we think it will double. So we're looking at $1 billion of data center sales this year.

So it went from about 10% of our total sales to probably around 15% this year. And remember, the really exciting thing down the road will be the aftermarket sales. So we've done I got to give credit to the team that we stood up our first programmatic team that's focused on a single vertical data centers, Christian and the team under Geron's leadership have 1 -- had great wins with the hyperscalers, and we're applying that same intensity to the colos not only in the United States but globally. So I think we're really in the first inning of some of the key wins that we've had there, and I just see an opportunity for outsized growth in data centers in '25 and beyond.

The STL partnership that you mentioned is exciting because we're starting to do more in liquid cooling. STL in our single phase, we have a new investment that we're making in a 2-phase solution, which is a refrigerant-based solution. And then we recently launched -- we announced Quantum Leap, which is very exciting because the whole idea is that we can be a one-stop shop for all the cooling needs that you would have for a data center. So you're looking at traditional cooling, the chillers and the air handlers you're looking at NLI, which you can do server management, you're looking at BMS through our ALC business and then combining the traditional liquid cooling loop with the traditional cooling loop, with liquid cooling that we're now introducing our own CDUs right now.

So the idea for hyperscalers and certainly the colos is to say, you worry about running the data centers, let us worry about all the cooling you need by having optimized integrated cooling systems. So we're excited about data centers. We're very excited about the orders growth that we've seen we feel really well positioned for this year. And frankly, that's going to continue to grow as we get into '26 and '27.

Yes. That's all really good to hear, especially because that's what we're hearing from the hyperscale players who want an end-to-end solution on the cooling side. So if you have that with global scale, then you should see those -- that type of growth. And just as a follow-up for Patrick, it's just -- it's a headwind for everyone, but just kind of give us a sense of the setup on FX, the headwind?

And just remind us about any type of hedging that you do.

Yes. So for this year versus the prior year, the sales headwind is about $200 million. And then as I mentioned, it's about $0.05. That's mostly translation. And then on the transaction side, we do hedge the transactions.

And so there is some protection, of course, there given all the transactions we go through. And then, of course, given some of the currency streams we have going on in the world, we do also some natural hedging as well that's taking place as well. So I'll leave it at that.

Our next question comes from Joe O'Dea with Wells Fargo.

Could you just talk about the sort of tariff considerations. I think you touched on China and said actions have been taken there. But as it relates to Mexico, just how you're approaching that situation and size it for us?

Yes, Joe, let me start more broadly and just say that we're proud to be the largest U.S. domiciled company in our industry, period. Also, I do want to mention that we have about 10,000 people in the United States, which is up about 20% over the last 5 years on a comparable basis, and we just recently launched an initiative to add 1,000 technicians. So we are invested in the U.S. and will continue to be heavily invested in the United States. I think the tariffs right now in 3 categories.

The first is what's been implemented, which is what Patrick talked about. We know about China. We know about the deal in aluminum, and we're confident that we have that mitigated. The second I would put in the category of things other than Mexico that have been discussed like Canada and Europe.

And based on what we know on these categories, we feel confident that we can and will mitigate those as well. As you mentioned, the big 1 that we have to keep an eye on is Mexico because we have operations down there. And we purchase a lot from there and do export into the United States. Here's the deal.

We do not know -- there's so much we don't know. We don't know if they will go in place. We don't know if there will be exemptions at all. So there's a lot that we don't know.

What I can tell you is the team is all over it. We are looking at price actions that we clearly would have to take. We're looking at operational actions that we would take, especially with our suppliers. And we're also looking at that we would contemplate other actions that we would take unrelated to tariffs to make sure that we could mitigate any impact that we can't fully mitigate through pricing and supply chain issues.

So what I'll tell you, Joe, is this is not the first time that we've dealt with tariffs. The team is incredibly focused on making sure that we deliver that $3 a share no matter what comes our way. So do we have everything figured out if there's a 25% tariff in Mexico. We don't have it geared out exactly yet.

But what I will tell you is that this team will go to tremendous lengths to make sure that we do mitigate it and ensure that we hit the $3 a share. I will also tell you that we are leaning into our factories in the United States. So for example, we're significantly increasing our output out of Charlotte this year.

I appreciate all that color. And then I wanted to ask on the HVAC margin bridge, so the up 50 to 75 bps. Can you just give a little bit more color on puts and takes there. When we think about Viessmann synergy, 454B mix, I presume at a pretty decent incremental productivity. It would seem like there's some building blocks to do better than that 50 to 75. And so just any offsets to that?

Sure. The way you can think about it is the benefit of productivity, the price, including the mix up. Think of these as being about 150 bps year-over-year. And we're making significant investments as we do each year.

And the investments this year actually are going to be more focused on the sales side than just on the R&D side. So it's pretty well balanced this year. And that offsets those tailwinds to get to the margin expansion that I just referred to.

Our next question comes from Andrew Obin with Bank of America.

Yes. You sort of highlighted this 1 percentage point of price for 25, if I'm correct. Are there any regions where you do not expect to get price or any verticals where price is flat to negative I appreciate that the mix is in a softer bucket, but just any sort of discrepancy or pricing between regions or vertical.

I'd say there are probably 2 areas where pricing might be a little less than that. One would be rough generally in that segment, we think it's going to be flattish this year. There will be some differences by region. The other 1 is in Asia, given, of course, what's happening in residential, like commercial in China, the price might be a little lighter there as well.

And just a follow-up on aftermarket progress. I think you guys have provided some KPIs, but can you just give us an update, just a more thorough update on the progress and attachment rates, maybe service as a percent of commercial HVAC business. How is that initiative evolved because before on the debate about resin Viessmann, that was a key focus. It seems like you guys are making very good progress.

If you could give us some numbers there.

Sure, Andrew. I will tell you that it still is the key focus. There are all hands on deck on us driving double-digit aftermarket growth forever. Everyone that joins the company or within the company knows that that's our mandate as a team.

And all the underlying metrics on our control towers have been positive. We have nearly 50% attachment rate. It was up from 44% in earlier. Our total coverage for chillers.

We said it was -- it'd be around 80,000. It's in that range. I think it was just under by 1,000 or 2, so it's in that range. We talked about getting number of connected chillers out there. We continue I think we connected around 45,000 chillers last year.

So all of the underlying things, driving a bound in length as our digital platforms, driving attachment rates, driving coverage, driving connectivity, we feel really good about it, and we feel really good about double digits in this year.

So where are we as a percent of commercialized [indiscernible] revenues to date?

I would say for Carrier, we are in the range of 7%. I think it's just there. And I think we're pushing to get it closer to 30% over these next few years.

In commercial [indiscernible].

And then Patrick just added, I guess, it's a little bit higher for Commercial HVAC Yes, as a percent.

Our next question comes from Chris Snyder with Morgan Stanley.

I wanted to ask about Americas resi, which, I think, a bit stronger 35% this quarter, I think the expectation was 20 to 30. It sounds like the prebuy would moderate, I guess, did that come in maybe a little bit ahead of where you thought 3 months ago? Was just kind of end demand stronger with some of the movement in the channel you're highlighting?

Yes. I think, Chris, it's really a combination of the higher movement than we did that we had expected. We had some share gains and I think just the overall underlying demand was a bit higher than we thought. And just remember, we were coming off such an easy compare from the fourth quarter of 2023, where we were down -- I think our volume was down something like 28%.

Our total sales were down around 18%. So we had an easy compare and the underlying demand was a bit more positive than we thought.

I appreciate that. And then, Dave, I guess when you either talk to kind of your channel partners or the dealers, is there any concern around the consumer and the homeowner and maybe pushing a little bit more towards repair versus replace or just trading down. Obviously, we're pushing through return change over 10% this year, normal price, low single digits. The whole resi ATEC industry is relying on Mexico.

So it seems like there's probably another price increase potentially coming over the next 12 months. Are you hearing any of that? Is that a concern in your conversations?

We -- Chris, we look at that very deeply. We look at our elasticity curves. And the homeowners been through a lot of price increases over these last few years, for sure. So it's something that we watch carefully and certainly, tariffs would not help on the pricing side.

So the first thing we look at is, are we seeing a big switch over to repair versus replace. We have not seen that. We ask that of ourselves and our channel partners every month, every quarter. we've been paranoid about it, but we honestly have just not seen that. We will see an occasional mix down at the margin, but nothing overly material.

So it's something that we watch. We watch carefully. We I think it's appropriate with price increases and to always look at the consumer, but we feel -- right now, we feel very good. Patrick, you want to add something?

No. Just a reminder that cost to the homeowner, only about 1/3 of that or less is actually the cost of the equipment. That's ours.

Our next question comes from Tommy Moll with Stephens.

Dave, I wanted to start on the comment you made about the movement for your resi channel in the quarter, up 15%. We've hit this from a couple of different angles, but I think it will attract a lot of attention today, so worth revisiting here. Are you able to share what the comp was last year? Or any other context that might help explain that comment you made.

I don't think I have [indiscernible] movement in the fourth quarter of '23, unless...

No. I don't think we have that number handy, Tommy.

I don't have that at my fingertips, Tommy, but the best that we can do is when you think about resi for the full year, it ended up being up high single digits. I think that we were up around 9% last year. And it's basically to the team's credit, the algorithms they've used to anticipate things like inventory and movement orders and the translation into total sales, I could tell you that in my 5 years of Carrier, our algorithms around being able to anticipate thing, it's far from a perfect science in a very short-cycle business, but they're far better now than they were even just a handful of years ago.

So we're guiding to the HSD for this year. We think that 1 thing that people would worry about with a big prebuy would be that we would be talking down 12%, which were not. In fact, I think the first quarter should be up double digits. So I think we feel calibrated between the share gains, the inventory levels, the movement, the orders that we've seen and the sales into our channel we've gone out of our way to try to be as judicious and balanced as we can, and we feel good about the guide for this year because basically, that HSD is really driven by mix and price realization.

So we think the volume assumptions for the year are fairly balanced.

And Tom, we had that number. The movement in Q4 of '23 was down low teens and then Q4 2024, up mid-teens.

Thank you, Patrick. Dave, just to anticipate another line of questions for all of us today. On your ATL commentary for the 10% price. There's been a lot of confusion there just because of things that is what's the base year we're all using and all kinds of noise around this one.

But just to give you the opportunity, has anything changed there versus what you expected a quarter a couple quarters ago. And there's also been some questions around 1 of the larger players in the market potentially getting a little more aggressive on price. But really, the core of the question is what, if anything, has changed?

Nothing. I mean from our perspective, I think that Steve asked the variation of that as well, Tommy. Look, I've heard the same things listening to some of our peer calls as well in chatter in the marketplace. But what I can tell you is that every year, we've seen -- we've been paranoid about 1 thing or another, and things that have sort of manifested themselves on the price side the way we anticipate.

And the 10% is fairly straightforward. If you take the list price for a 410A unit, we're pricing a 454B unit in that same category is 10% higher. And then we've said 15 to 20 over 2 years, which is on top of the base 10%, 2 to 3 points of base pricing. So we think that we're fairly balanced on a market volume being flat to down a little bit, then a little bit of pricing, a little bit of growth on the furnace side.

And then we expect that to stick, and we think that we've tried to even build a little bit of contingency into that 10%. So we feel good about the price sticking exactly what every competitor will do, I don't know, obviously, but we feel good about how we've calibrated our pricing and our pricing with our channel partners.

Our next question comes from Noah Kaye with Oppenheimer Company.

You gave some good color on the VCS sales walk by line of business. I wonder if it would be possible to get a little bit better view at sort of country level dynamics or at least how you think about the rest of Europe versus Germany in the outlook just kind of given the swing factor and policy for turn specifically?

Yes. Look, Germany, we clearly have a watch on right now. I think that the good news about the pull-up of the election to February '23 is that 1 way or another, we're going to get more certainty. And uncertainty has not been our friend in Germany about policy.

So having some level of certainty is good. I think, if I may, at a high level in Europe, say that regardless of what's happening country to country because we will watch France, where France and Poland, where there is some suspension of subsidies, which we expect to resume as we get into the summertime. We know that there's going to be things that happen in Germany that we have to keep a watch on. I will say at a high level, number one, the European Union remains committed to the 2030 goals, 55% renewables by 2030. Remember, in 2027, there's going to be the fossil fuel costs across Europe will start to increase then because we see the expanded scope of the emission trading system, which is introduced for CO2 emissions across all European countries, which is going to trigger I think, a heightened transition from boilers to heat pumps.

There is uncertainty in Germany right now. We did see that increase in subsidy applications and orders the second half of last year was a little bit slower, I think, in January. But I do think people were trying to get their subsidy applications in before the election. So we'll see if that translates into positivity as we get into 2Q and 3Q.

But I do know that with a potentially new government we'll have to see exactly how things play out. What I will tell you at the highest level, when you hear us at our Investor Day as we get into May, is that we want to get to a point where we are not talking about elections in Germany or France. We are talking about driving solutions for the customer that are independent of regulation and subsidies. So if you start looking at complete PV heat pump battery digital overlay sales in Europe, which are going to be hearing us talk a lot more about, that's driving solutions for the customer, potentially with bank financing that are independent of subsidies or regulations that is good for the consumer, and it's good for the environment and it's good for us.

So we'll continue to try to influence and monitor policy from country to country. The EU is going to continue to move in this direction. We've seen gas prices going up more recently. That could continue.

I don't think the EU wants to be reliant on importing gas from the United States or from Russia. So that electricity to gas ratios start to come down a little bit. And we're going to continue to push solutions that are independent of policy from country to country.

I'm glad you mentioned that because you started the call by talking about really this emphasis and the opportunity around the home energy management offerings. It was something you talked about even in sort of the initial deal announcement. But if you could just give us a little bit more color on what you think this means for your wallet share or your expansion opportunity among the different channels that you always have it would be helpful. Not to steal too much thunder from Investor Day.

Yes. I -- look, I think -- at the end of the day, when we look at BCS, we'll be the first to say that obviously, not only were we not pleased that last year was down more than we thought but we dropped it a few times during the course of the year. We've tried to come into this year very calibrated, very conservative. Patrick and I are very deeply tied in with Thomas and Chris Sheppard and the team over in Europe.

So we've tried to be very balanced and very bottoms up on our assumptions. When we look at VCS overall, we're very, very happy that we are in residential in Europe, not necessarily last year, but overall, this is a great, great market to be. And the underlying dynamics are exactly what we see in the United States of a highly customized configured, differentiated product offering that is very reliant on a differentiated channel. So we like the market.

We like the transition to heat pumps. We like the transition to overall system solutions over time and there's no better company in this space in Europe than Viessmann, hard stop, the most differentiated channel that there is. So when we start putting some of our commercial HVAC products through that channel or a newly branded carrier air conditioning product through that channel, our ability to drive revenue synergies, share gain, new product introductions is unparalleled. So we're excited to have them part of the family, they have made carrier such a better company.

And 1 small example is the Head of Engineering for Viessmann Climate Solutions is leading engineering for all of carrier with respect to our centers of excellence, and it's making us a more platform company and a better technologically differentiated company across all of carriers. So we feel balanced for this year. We're going to control the controllables, and we're going to see growth for years to come. So Mike, welcome to Carrier.

It's great to have you on board, Patrick. Thank you. And thanks to our 50,000 team members globally. Last year, everyone performed while transforming, and we feel very well positioned for a very strong year in '25, and thank you to our investors as well.

Thank you all.

Thank you for your participation. This does conclude the program. You may now disconnect. Good day.