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Good morning, and welcome to Carrier's Second Quarter 2026 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 Second 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. With strong orders, record backlog levels and first half results being better than expected, we are raising our full year guidance on sales, operating profit and EPS. Second quarter orders were very strong, up about 40%, with commercial HVAC up about 65%, driven by continued strength in data centers where orders were up four times over last year. Our total company backlog, which excludes orders that we expect from long-term agreements with hyperscalers and colos, is now over $8 billion, up about 40% versus last year and up 20% sequentially. Given the increasing demand for our differentiated commercial solutions, we have announced a new facility in India and are finalizing plans for a new site here in the U.S. We are pleased that our Residential businesses in CSA and CSE were both up high single digits, while CSA Light Commercial was up 10%, a similar rate to the first quarter. Our strong free cash flow enabled us to continue to invest in growth, and we returned about $640 million to shareholders. We continue to remain proactive in optimizing our portfolio with the divestiture of Riello complete, and the sale of NORESCO announced yesterday. In terms of acquisitions, we are excited to welcome 75F to the Carrier family as you see on Slide 4. This acquisition accelerates our path to creating intelligent and fully autonomous buildings. There are three primary benefits from this combination. First, 75F's BMS platform is perfectly positioned for small- and medium-sized businesses and for international markets. Because our ALC BMS offering has primarily been focused on larger building applications in the U.S., 75F expands our TAM by about $20 billion. Second, 75F will significantly enhance our BMS capabilities. It is AI-enabled and cloud native, which, when combined with Carrier's platforms, enables agentic AI applications for autonomy and other critical features to drive reliability, uptime, grid interaction, comfort and energy optimization. Also, its wireless and auto commissioning capabilities enable faster and seamless installations for both new applications and retrofits. And third, 75F plays an important role in our systems integration strategy, nicely complementing our equipment portfolio, Nlyte's data center infrastructure management offering, along with our digital tech stack enabled by Abound and ALC. Intelligent and autonomous buildings are the buildings of the future, and Carrier, now enhanced by 75F, is positioned to lead the way. Turning to Slide 5. In 2026, we expect that nearly half of our portfolio, our commercial HVAC and aftermarket businesses, will have their sixth year in a row of double-digit growth, and these businesses remain very well positioned for continued strong growth going forward. In addition, it is encouraging that our shorter-cycle RLC businesses in North America and Europe have returned to growth. Though the timing of the recovery in Global Truck, Trailer remains unclear, there is clearly pent-up demand as we head into 2027. So with the record backlogs in our longer-cycle businesses, combined with our shorter-cycle RLC businesses in the Americas and Europe turning, we expect the second half to be up mid-teens and are well positioned for strong growth to continue. On Slide 6. Last quarter, we walked you through our transformational commercial journey since our spin. I am very proud that our team's strategic investments and great work are yielding such strong results. We are now increasing our full year data center sales outlook to about $2 billion, which will be our second year in a row of doubling our sales in this important vertical. With our recent significant wins, our 2026 data center sales forecast is all in backlog, and we continue to partner with hyperscalers and colos to further strengthen our backlog for 2027 and beyond. We continue to gain market share, and the rapidly increasing installed base that we are delivering today will drive attractive aftermarket growth over the long term. Turning to CSA Residential on Slide 7. Bottom line is that performance has been better than we expected, with our second quarter sales up 9%. We now expect the market to be around 7 million to 7.5 million units this year, largely stable versus last year. Field inventory levels continue to remain healthy, ending the second quarter down about 25% versus last year. We also continue to invest in differentiation, including building out our digital ecosystem, a key priority for us, leveraging Viessmann's cutting-edge digital platform. We now have about 55,000 channel partner technicians monitoring systems real time, up about 35% from a year ago, driving customer loyalty and channel efficiency. We are now raising our full year expectations for CSA Residential sales to be up high single digits. Residential sales in Europe are also improving, as you can see on Slide 8. Sales were up high single digits in the second quarter with heat pumps up about 20% and boilers down high single digits. Market dynamics remain favorable with continued high prices for natural gas and Germany recommitting to subsidies. We also remain very encouraged by preorder activity for our new Vitocal 200 unit. This Viessmann-branded offering has all the benefits that our customers have come to expect: high efficiency, low noise, great aesthetics and connectivity, along with lower product and installation costs. It will be a tremendous secondary offering for Germany and the primary offering for most other countries in Europe. We are on track to formally launch in the fall and expect this new product to significantly increase our TAM. Though our European commercial sales were lower than we expected in the first half, our 20% second quarter orders growth and strengthening backlog give us confidence in the second half being up mid-single digits. Segment margins in the second quarter were disappointing. We are seeing the benefit from improved volume and price/cost, but that was offset by unfavorable mix and selling investments. We will continue to drive strong growth initiatives and will take a more aggressive and structured approach to cost reduction and pricing discipline. Last month, we appointed Thomas Donato as the new President of this segment. I am confident that Thomas and the team will take the right actions to get this business to mid-teen operating margins over the next few years. Moving on to aftermarket on Slide 9. We remain on track for double-digit aftermarket growth. Through the first half, we are up high single digits, and we have the playbook, team and plans in place to deliver double-digit growth for the full year. On Slide 10, you see a lot more greens for our business units compared to our original guide, thus enabling us to raise our full year outlook for sales, operating profit and EPS and will serve us well as we head into 2027. With that, I will turn it over to Patrick. Patrick?
Thank you, Dave, and good morning, everyone. Please turn to Slide 11. For the quarter, reported sales were $6.4 billion, adjusted operating profit was $1.1 billion, adjusted EPS was $0.86. Better-than-expected organic sales growth of 3% was driven by improving Residential and Light Commercial end markets in the Americas and Europe. Adjusted operating margin of 17.2% was a bit better than expected. The year-over-year decline largely reflects the benefit of organic growth and strong productivity, offset by unfavorable mix and increased input costs. Adjusted EPS declined 7%, driven by lower operating profit and a higher effective tax rate, partially offset by a tailwind from a lower share count. You will find a year-over-year adjusted EPS bridge on Slide 20. Free cash flow of $810 million was very strong. Moving on to the segments, starting with CSA on Slide 12. Organic sales for the segment increased 4%. Dave already covered Residential and Light Commercial. With respect to Commercial, sales were down due to the timing of data center deliveries. We expect a significant sequential and year-over-year pickup in Q3. Segment operating margin of 24.4% was ahead of our guide. Compared to the prior year, the margin decline reflects stronger pricing offset by unfavorable mix and increased input costs. I will skip Slide 13, as Dave already covered the main points. Turning to the CSAME segment on Slide 14. Organic sales grew 4%, ahead of expectations, reflecting continued strong performance in India, Southeast Asia and Australia, with all three areas growing above 20% in the quarter. Driven by data centers, the Middle East delivered very strong sales growth of about 35%, despite a very challenging operating environment. Aftermarket continues to be strong in this region, up about 12%. Residential and Light Commercial in China remains the main drag for the segment. As expected, segment operating margin was about 12%. Moving to the CST segment on Slide 15. Organic sales were flat. The Container business had another very strong quarter with sales up 40%, offsetting continued pressure in Global Truck, Trailer, which was down low teens. The decline in segment operating margin reflects the margin differential between Container and Truck, Trailer. Turning to Q2 orders on Slide 16. Total company orders in the quarter were very strong, up about 40% with growth across all segments and most businesses. Our backlog is at record levels and supports an accelerating organic growth outlook for the balance of the year. Moving on to Slide 17 and shifting to our updated 2026 organic sales outlook. We now expect full year sales to be roughly $23 billion, with organic growth up mid- to high single digits and full year data center revenue of approximately $2 billion versus $1.5 billion prior guide. We now expect CSA Residential and Light Commercial sales growth of approximately high single digits and CSE Residential, Light Commercial sales growth in the low single-digit range compared to our prior outlook of down high single digits and roughly flat, respectively. Note that our updated outlook now reflects about $125 million year-over-year revenue headwind due to the upcoming exit of NORESCO. So to summarize, we are increasing sales by over $1 billion organically versus the prior guide, with about half of that related to improved sales in CSA Residential, Light Commercial and the other half related to increased data center sales. About $200 million of sales will drop out of our outlook versus the prior guide from the NORESCO divestiture and relatively small changes across the other segments, which takes our sales outlook to about $23 billion for 2026. Moving on to Slide 18, profit and cash guidance. We now expect adjusted operating profit of about $3.5 billion, and adjusted EPS of about $2.90, up from our prior guide of $3.4 billion and $2.80 of EPS. Second half adjusted operating profit and EPS will both be up about 50% year-over-year with strong earnings conversion. Second half earnings growth is driven by favorable volume and net productivity, partially offset by investments, mix and the $0.05 headwind from the NORESCO exit and start-up costs related to the new U.S. site. No change in outlook with respect to free cash flow, as the impact of higher earnings is expected to be offset by about $100 million increase in CapEx related to the new U.S. site. We now expect full year CapEx to be about $600 million. Share repurchases are expected to remain at $1.5 billion for the year. You will find full year adjusted EPS bridges on Slides 21 and 22. And as usual, additional guide items are on Slide 23. Finally, let me provide some color on the third quarter. We anticipate Q3 revenues to be just below $6 billion, including about a $200 million year-over-year impact from the Riello and NORESCO divestitures. Organic growth is expected to be about 10%, operating margin of about 16.5%, a 24% tax rate leading to about $0.75 of adjusted EPS. The sequential decline in operating margin mainly reflects lower seasonal sequential Residential and Light Commercial sales in the U.S. and significantly higher commercial sales globally. With that, operator, please open the line for questions.
分析師問答
Looked like a pretty good quarter overall. It really is the margin decline issue. Can you go into a little bit more detail kind of the mix versus price/cost, kind of the challenges that you had there? How much of that was perhaps timing? You mentioned a change in leadership, so perhaps a little bit more detail would be helpful there.
Will do, Scott. So operating profit and margin was down versus last year. Key elements, as I mentioned, were favorable volume, price and productivity. We do have some unfavorable mix. I'll get to that in a bit. And then, of course, there is also the timing of the tariff mitigation and lower JV income. In terms of timing of the tariff mitigation, you may recall that the tariffs went into effect early April, and the pricing associated to mitigate some of that went into effect at the end of the month. And so as expected, during the second quarter, the impact of tariffs and pricing associated with tariffs was a net negative, and that was a headwind to our margins in the quarter. With respect to mix, within Europe, we had, besides strong heat pump growth, good growth in battery and solar, which actually has quite lower margins within transportation. Container does well, but has lower margins than Truck and Trailer. And then within CSA, think of it as new construction was a little bit higher mix than what we expected, which drove down overall margins. Still good margin for new construction, just not as strong as replacement. So those are some of the main elements, Scott.
Yes, Scott, on your second part — on the leadership change, we're really excited to have Thomas Donato on board. We cannot thank Thomas Heim enough for everything he did. But in terms of this next chapter, we really have to do a better job on both price and cost, to state the obvious. I think Thomas brings great experience from his days at places like Rockwell Automation, ABB and Bosch. We're going to be a lot more disciplined on the price side, and there's a lot of cost that we have to take out, and that includes footprint, supply chain and G&A. So Thomas and the team know that the expectation that you have of us and that we have of ourselves is certainly to get to that mid-teen profit margin, and I'm confident we'll get there.
Okay. And just a real quick one, guys. On the 75F, what are you buying here? Are you buying the technology? Are you buying an installed base? Is it an enhancement of your own BMS? I'm just trying to get a sense of what you're getting.
Technology primarily. 75F has its own BMS offering. It's traditionally been targeted at smaller and medium-sized buildings. We're buying great technology that not only enables us to attack that market here in the United States for small- and medium-sized buildings, but it's great for an international offering as well. We're buying a great team — they have 91 engineers — and a great leader, Deep, who is coming as well. So we're buying talent. We're buying technology. And, as I mentioned in the prepared remarks, it's really going to complement and make our ALC offering much better because it's cloud-enabled. They have agentic AI built on top of it, and it's wireless, so it's much, much quicker and easier to commission a building. If you think about the building that Patrick, Mike and I are in right now, our headquarters, there might be a thousand sensors. Each one needs to be individually commissioned. With their wireless capabilities and auto commissioning, those can be all auto commissioned without human intervention. So it's a great digital tech stack that we can build on top of.
Congrats, guys.
Great to see the Residential inflecting here. Dave or Patrick, I just wonder if you could maybe give us a little bit more color on where we're at. I guess the nature of my question is, did we see any sort of a two-step bullwhip effect in this quarter? Or are your volumes pretty close to industry volumes this quarter? And then your industry outlook for the year — I would assume we got some bullwhip effect in the back half of the year. So just maybe how's the movement? How's the channel? Did we see any of those machinations in Q2 here?
We didn't really see them in Q2. We see them in the back half. We'll get 10 points of that benefit from the absence of destocking in the second half. So if you think about the second half of this year, Jeff, we'll see sales up about 20% in the back half, of course off of some relatively easy compares, but 10 of that will come from the absence of destocking. We expect movement to be up mid-single digits, and then we should get price in the mid-single-digit range. So we didn't see as much of it in Q2. We get that benefit in the back half.
Great. And then, Dave, on the capacity, I assume it's all data center-related stuff, although I guess the question is, are you looking at any Residential incremental capacity in the U.S., any footprint shift there? And just give us a little bit of color on sort of the nature of the ramp. We've had a few companies in the electrical space and elsewhere sort of gagging on trying to catch up with this demand and getting capacity stood up. So how do you de-risk that? What's the scope of the project? That sort of thing is the question.
So we're very excited about it. If you think about our data center exit rate leaving this year for next year, it would be around $2.5 billion. When we look at our backlog and the kind of discussions we're having with hyperscalers and colos, we just need more capacity. So we're all hands on deck. We want the facility up and running by the end of the first quarter. We're primarily looking at Texas and Alabama. We hope to make a decision here in the next month or two and announce it so we can get the team rolling. We've already ordered some of our advanced lead-time equipment and tooling that we're going to need for the facility. It's going to be both air-cooled and water-cooled chillers, some of the vertical integration with things like compressors. If you think about the Residential side, yes, we are looking — we already have a great presence for Residential in places like Collierville, Tennessee and Indianapolis. We are looking at expanding some of our ducted and ductless capabilities here in the U.S. Our primary focus for this new facility, though, is all things data centers. We have to accelerate building it for the demand that we see in 2027 and beyond. The thing that gives me confidence is that we started with very low share for commercial HVAC in the United States. Some of our peers started with much higher share. As we've built out the product portfolio, the capacities and the number of technicians that we have in the field, we've been gaining a lot of share in the data center space. We're really well positioned as we think about 2027, 2028 and 2029, and we're having some really nice discussions with both hyperscalers and colos. Patrick, did you want to add anything?
No, the capacity we're building goes beyond just data centers. It can be used for other applications as well in commercial.
It's good to see the business back to growth here. Patrick, I hate to ask the same question each quarter, but can you maybe just provide a bit more color on Q3? I think you said plus 10% organic and margins, I think, 16.5%. Any color on the segments would be great.
Sounds good, Nigel. So for Q3, we expect a strong pickup in sales. I mentioned about 10% organic sales growth, driven by a big step-up in commercial HVAC and data center deliveries, which will be up strong double digits. Then Residential will be growing also because of the absence of the prior destocking, of course. From an operating profit point of view, favorable volume and also price/cost are partially offset by some investments we're making. From a margin point of view, margin of 16.5% is driven by strong productivity and volume leverage, partially offset by investments and, of course, tariff-related pricing. We get pricing, but it's there to offset tariffs. So we don't really get a margin benefit from that; it's actually slightly margin-dilutive. Sequentially, we're going from 17.2% to 16.5%. That's down about 70 basis points, about $400 million or so lower sales. A lot of that is because of lower Residential and Light Commercial sales and significantly higher commercial sales. So there is a big mix.
Okay. I'm just wondering if you can — sorry, please go ahead.
No, go ahead, Nigel.
I was going to say, any color on Americas and Europe margins within that 16.5%?
Yes. For the Americas, margins will be around 22%. Europe will be about double digits, close to double digits. AME will be a little over 10%, and transportation mid-teens. That gets you total company at about 16.5%.
Okay. And then just my follow-on is really — I think the Americas margins, I think you're looking for sequential improvement quarter-over-quarter. It sounds like price/cost tariffs have been a bit more impactful, a bit more of a drag there. So just wondering if you can unpack how the Americas margin is moving.
The Americas margin sequentially will drop from 24.4% that we have in Q2 to around 22% in Q3. The biggest driver there is sequential sales down with a very large reduction sequentially in Residential and Light Commercial, which is the typical seasonal reduction, about $500 million to $600 million, and then a strong pickup in commercial sequentially. So mix clearly is a big headwind sequentially. Investments are up slightly sequentially as well. That's the main driver of the sequential margin reduction in CSA.
Can we dig into this capacity ramp a little further? Obviously, the data center market continues to grow pretty aggressively for you guys, taking up the targets again for the year. I'm just wondering, as you think about the latent capacity you have that you're planning to build, how far out you're going to go? What's the potential revenue run rate of the new capacity? And is there any other color you can provide on that $8 billion backlog — how much of that is coming from data center today?
I'll start and let Patrick take the second part. We would be able to support about $2.5 billion in data centers with the capacity that we've effectively built. We've repurposed an entire facility to both air-cooled and water-cooled chillers in North America and expanded Charlotte by 50%. It's not enough to support the demand we see for '27, '28 and '29. So we're looking to build here in the United States. Both Alabama and Texas governors have been very supportive. It's an investment in the zone you'd expect for a building of that size. We're being very careful not to get out over our skis if data center CapEx were to slow. For someone like us, we would need to go from about 10% to maintain share in the range of 15% to 20%, which we can and will do. We feel good about the investments we're making. We're trying to be very purposeful to make sure our lines and product portfolio are as fungible as possible to non-data center applications. The LTAs we're establishing with hyperscalers and major colos give us tremendous contractual confidence in the volume we expect over the coming years. Patrick?
Our backlog is actually north of $8 billion. Commercial backlog is about two-thirds, roughly 70% of that, and 40% of the backlog is data centers.
That's helpful, Patrick. Quick follow-up: of the $2 billion you now expect for data centers this year, how much came through in the first half versus the second half? Just trying to understand the impact in Q2 as well.
In the first half, we saw about $500 million. So of the $2 billion, $1.5 billion is the balance of the year, with the huge ramp-up in the second half starting now.
I wondered if you could help us a little bit with the margin dilution point. I just wonder if you can give us a sense of how much the impact was the investment in the quarter. Presumably that's going to be a much bigger impact in the second half. And then, as we extend that into 2027, I'm trying to get a sense for the moving parts on margins as commercial dilutes and Residential is accretive. But the sequential point I get, Patrick, so that's fair enough. As we look at Q4 and then into 2027, that would be helpful.
Compared to the new guide for the full year, our operating profit and adjusted EPS are about 50% year-over-year with strong earnings conversion. Compared to the prior guide, we're raising $1 billion in sales and $0.10 of EPS. The reason why there is not a stronger fall-through is the investments I mentioned. This year, they will be roughly in the $100 million range. The timing of the April tariff change mitigation was a headwind in Q2, and that is largely a timing point of view. Then one-off items that should not repeat include the $0.05 related to the NORESCO exit and the new U.S. facility. I do not expect next year to have an incremental one-time set of investments related to data centers on top of the $0.05 we're referring to now. Going forward, margin will depend on the mix of Residential versus commercial. If both grow at similar rates, I would expect us to remain in the 25% to 30% conversion for the total company.
Dave or Patrick, in CSE, maybe just an update on Viessmann. You told us heat pumps up 20%, boilers down high single digits. I think you modestly raised the forecast, mentioned German subsidies. Could you give us a little more color on what you're seeing in those markets? And can you comment on the confidence level that you have in CSE commercial turning with that better orders you mentioned?
The good news is we finally see an inflection point on heat pumps. We had sales up 20% and orders for Residential in the quarter up 20%. We see very strong demand for heat pumps, especially in Germany, but also across other countries following the spike in natural gas prices. Subsidy application levels in Germany this year look like they're returning to 2022 levels, which were all-time highs. So we're inflecting up in heat pumps. We like heat pump economics when the electricity-to-gas ratio is below 3. Germany has clarified the heating law, kept key elements and kept subsidies in place. Boilers will decline — our model typically expects low to mid-single-digit declines, but they were down high single digits, which impacted us a bit. We feel good about the overall mix with heat pumps up and boilers down. On the commercial side, our orders were a little north of 20% in the second quarter, and that continued into July with some nice orders over the last few weeks. We're well positioned for commercial HVAC to be up in the mid-single-digit range in the second half. We're on track for the new Vitocal 200 product launch in the fall, which should broaden our offering and increase our TAM. Given the macro dynamics, new product introductions and strong team performance, we're poised for growth in Europe. We will be more aggressive on cost going forward.
Very helpful, Dave. And then on Light Commercial and CSA, you changed your forecast significantly and improved outlook. Where is that coming from? Which markets are driving it and what's the confidence level?
The first half was much stronger than we thought, up about 10%. We've won some really big strategic national accounts, especially in retail, K-12 has been much better than we thought, and hospitality has been stronger. Field inventory levels are healthy — down about 20% year-over-year at the end of Q2 — and orders were strong, about up 30% in the quarter. Execution is the key, and our team knows how to execute. We feel very good about where Light Commercial was in the first half and where we'll be for the second half. I think Q3 will be up mid-single digits and Q4 will be up in the mid-teens, so we expect to end up high single digits for the full year. Deane, before you ask your question, Patrick, Mike and I all want to wish you congratulations on your next phase, and we thank you. You've been such an icon in the industry for so many years. Congratulations on your retirement.
Congratulations, Deane.
I really appreciate that. It's been my privilege to follow Carrier as a public company, and even back to the UTC days. I really appreciate all the support and insight you and the team have provided me over the years. Wish you continued success. I still have a couple of questions, if that's okay. I appreciate it. Really good start to the cooling season. Mother Nature helped you to a degree. Any surprises in the regional demand and your ability to supply? Sometimes, depending when you've got low channel inventory, that can be challenging. It didn't sound like any of that happened, but maybe we can start there.
We have not had issues with ability to supply. We purposely made the decision at the end of last year to keep the facilities moving. We knew we'd have a bit more inventory coming into the cooling season internally, not in our channel, because we kept the factories running. That helped our ability to supply. Cooling degree days were up about 4%, so the heat did help here and in places like Europe. In Europe, we saw air conditioning orders up 20%, which positions us well as we go into Q3. Regions like the Southeast, Florida and Texas were stronger. New home construction is probably a bit better this year than we thought — likely up low single digits rather than flat to down. At the end of the day, the headwinds we expected to persist all year have been outweighed by pent-up demand in the United States for new homes and increases in existing homes. We're fundamentally a replacement business, and customers eventually replace rather than repair forever. So things have turned out better than we expected despite higher interest rates and some consumer pressure.
That's really helpful. If you could expand on that last point: any changes in replace versus repair trends that you've seen?
It's less accentuated than it was last year. We're returning to a replacement market. Last year had nuances with items like canisters that impacted parts. Our parts were down a bit and that drove some headwind. But fundamentally, it feels like we're getting back to basics and returning to a replacement market.
I wanted to follow up on some of the Americas margin discussion. Is there anything you could provide around where Americas commercial margins are running as we think about the headwind into the back half on the big data center ramp? Then on that same topic, anything we should be thinking about from the capacity expansion in the out-years and what it could mean for margin? Are you able to drive normalized incrementals through that?
Within CSA this year we expect margins to be about flat overall, in the 20% to 21% range. Margins for commercial would be a little below that — in the mid- to high-teens — and the balance would be Residential and Light Commercial. We don't see data centers changing that; generally margins with data centers are accretive to overall commercial HVAC margins, and that is the case within CSA. Regarding capacity expansion and margins, we look at this over several years. Given the expected volumes over the next several years, we don't see the added capacity alone causing incrementals to be lower than they otherwise would be. The main driver of incrementals will continue to be the mix of Resi and Light Commercial versus commercial. If growth is more commercial, incrementals are somewhat lower than if growth is Residential, but that's the typical mix impact. Depending on mix, incrementals could be closer to 30% versus 25%, but I don't see the new capacity itself having a big impact.
To add, when we spun the commercial business, margins were generally about 5%. We needed to invest in the portfolio, capacity, technicians, spec engineers — a complete revamp. Our margins have moved from mid-single digits to up in the mid-teens. The commercial HVAC business in the Americas has been even higher than that. The investments and the team's work have really positioned us, and as volume comes through the capacity we've invested in, we expect very nice absorption in the factories.
Appreciate that. Maybe a follow-up on Residential: it's great to see the 20% growth guide for the back half. But what gives you confidence that underlying demand in Residential is getting better? Up 20% but comping down 30% and 40% — it's not necessarily showing improvement on a two-year stack. What do you see, anecdotally or in data, that gives you confidence the demand is turning and the market is on a pathway to the medium-term outlook?
We expect movement in the second half to be up mid-single digits. When you get past year-over-year comps and the absence of destocking, that gives us about 10 points. We're monitoring key indicators closely: inbound calls into dealers and distributors, especially our bigger dealers and distributors, have been higher than we expected. Field inventory levels ended the quarter down 25% year-over-year and are down about 20% now. People are gradually getting more comfortable with higher mortgage rates. There's pent-up demand for new home construction — we have 4 to 5 million too few homes in the U.S. There's also pent-up demand in existing home sales. We're seeing signs that movement will be up mid-single digits in the back half.
Just a question on Europe: what is structurally taking place given weather patterns and regulatory issues? My understanding is there are barriers to putting HVAC units in schools and hospitals and ongoing discussion about changing that. What legislative and regulatory goalposts do we need to see to get more adoption into 2027?
Historically, there has been reluctance in parts of Europe to install air conditioning, even as summers have been getting hotter. Given the fatalities and extreme heat waves we've seen, attitudes are starting to change in key countries. It's surprising, because boilers are typically fossil fuel-based while many AC solutions are electric. We're starting to see more proactive attitudes, especially for schools and hospitality given the risks of closing schools on hot days. We have strong product lines — Toshiba, Viessmann and Carrier-branded residential AC — and a strong dealer and installer channel that is eager to engage. As unfortunate as recent weather has been, we expect it to drive an inflection point. In Q2, our residential air conditioning orders in Europe were up 20%.
A follow-up on data centers: you said $2 billion for the year — $500 million in the first half and $1.5 billion in the second half — and that exit rate is about $2.5 billion. I'm trying to reconcile the math; does Q3 end up stronger than Q4? Could you walk through that?
Those numbers were before building the new site. Q4 will be higher than Q3 in data centers. If you annualize Q4, you get well north of $2.5 billion, which is why we need the new facility.
Congrats on the strong print. Quick question: when you look at the back half $1.5 billion of data center revenue, what's the degree of confidence? There's been chatter from peers about customers pushing out deliveries and potential delays. Have you seen that in the first half? Any concerns? If yes, how are you mitigating it?
It's never a perfect science predicting exact delivery weeks, and there's always some month-to-month perturbation. But we're fully booked for the second half. Customers are pushing us to accelerate deliveries, not push them into 2027. Execution is the main issue. We've added resources into supply chain, supplier quality and our factory quality. Our commitment to customers is perfect quality and on-time delivery. We are focused on details such as brazing people on second shift and supplier sites. We're doing everything to ensure we achieve the ramp — our customers want the product.
Understood. And a quick follow-up: Carrier's data center portfolio is heavily weighted toward chillers. Any concerns about double-ordering, given the demand? How are you managing that? Penalties or other steps?
We're not concerned about double-ordering. We're building strategic relationships where customers maintain a rotable pool and want to ensure speed-to-power and speed-to-market. They establish an expected amount of share with us. We see demand supporting their needs. We also expect continued increases in liquid cooling. Our team has been doing a great job: we have a 1.3 megawatt CDU that saw good demand in Q2 in the U.S. We'll launch a 2.5–2.6 megawatt CDU this quarter and expect a 5-megawatt CDU around the end of the year. We've considered acquisitions in this space but decided to focus on organic growth for liquid cooling and will continue to invest.
Dave, can you talk about price in North America Residential? It sounds like it'll accelerate more in the second half. Are more increases coming and how are you managing that?
It's moved around this year. After the tariffs, we planned an 8% list price increase and expected to yield around 6% to 7%. When tariffs reduced from 25% to 10%–15%, we reduced price a bit. In Q2 we realized about 3% price. We expect to get a point or two better price in the back half. We're monitoring this closely. We've been doing well on share and I expect us to gain a small amount of share this year, but our aim is to at least maintain share. Overall for Residential this year, we should be around 4% price when all is said and done.
Okay. And anything to say about China? Can that business come back? How are you thinking about it?
I would bifurcate commercial and residential in China. Commercial is well positioned — good traction with key customers in verticals like data centers, electronics and renewables. We have a strong partnership with Shanghai Electric, good products and a solid team. India was up 35% and Southeast Asia was up north of 20%. The Middle East team performed extremely well, up 35% in a challenging environment. The residential business in China has been soft given the difficult housing market. The question for the team is what investment is required to improve that business and how long the housing headwind will continue. Okay. Thank you all for your continued confidence in us. I want to thank our 50,000 team members around the world. This team continues to show up every day, work as one Carrier and deliver for our customers. A deep appreciation to our team. Thank you all.
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