Carrier Global's Q3 2025 Earnings Call: Contradictions Emerge on Inventory, Pricing, and Residential Growth Expectations

Date of Call: None provided

Financials Results

• Revenue: $5.6B, total company organic growth down 4% year over year
• EPS: $0.67 adjusted EPS, down 13% year over year; ~$0.07 benefit from a lower tax rate (timing ~$0.05)
• Operating Margin: Adjusted operating profit $823M, down 21% year over year

Guidance:

• 2025 sales expected to be about $22 billion.
• Full-year adjusted EPS about $2.65; adjusted effective tax rate ~21%.
• Free cash flow expected ~ $2.0 billion; ~$150M anticipated cash restructuring costs.
• Expect roughly $3 billion of share repurchases in 2025 and new $5 billion authorization.
• Q4 CSA residential: sales ~ down 30% and volumes ~ down 40%; expect field inventories down ~30% vs prior year by year-end.
• For 2026 planning assume low single-digit organic growth and ~$0.20 EPS tailwind from carryover restructuring, tax, and buybacks.

Business Commentary:

• Residential HVAC Challenges and Recovery:
• Carrier indicated a $500 million sales challenge and a 20-25% adjusted EPS headwind due to North American residential softness in Q3.

• The decline in the residential sector was attributed to various factors including demand and inventory levels.

• Commercial HVAC Growth and Market Share:

• Carrier's commercial HVAC business in the Americas grew 30% in the quarter, with specific verticals like mega projects and healthcare showing strength.

• Growth was driven by investments in technology and know-how, capacity, and talent, as well as market demand.

• Cost Containment and Strategic Initiatives:

• The company announced a new $5 billion share repurchase authorization and is taking aggressive cost actions, including eliminating 3,000 indirect positions.

• These actions are part of strategic initiatives to reduce overhead and position the business for future growth.

• Geographic and Business Segment Performance:

• In the CSE segment, residential heat pump sales in Europe increased 15%, with 45% growth in Germany, supported by strong heat pump adoption.

• Demand varies by region, with Europe showing weakness due to market unit declines, while North America and Asia show promising growth.

• Data Center Business Momentum:

• Carrier's data center business is on track to double sales from $500 million last year to $1 billion this year, with a strong backlog extending into 2028.
• The growth is driven by strong customer relationships and large project wins with hyperscalers and colocation providers.

Sentiment Analysis:

Overall Tone: Neutral

• Management repeatedly emphasized confidence and actions: board approved $5B repurchase; 'laser-focused on strategic priorities' and continued double-digit growth in aftermarket and commercial HVAC, while acknowledging material headwinds in CSA residential (residential volumes down ~40%, resi sales down ~30%) and revising 2025 outlook to $22B and $2.65 EPS.

Q&A:

• Question from Jeffrey Sprake (Vertical Research Partners): Can you unpack consolidated inventories (sequential increase), drivers in CSA resi inventory rise, and how sell-through/movement is progressing?
  Response: About $500M consolidated inventory increase (~$400M in CSA, ~$350M in CSA resi) driven by sudden resi volume decline and purposeful inventory build for components replacement; inventories have started to decline and are expected to come down by year-end as supply chain and production adjust.

• Question from Jeffrey Sprake (Vertical Research Partners): Follow-up on repair vs replace dynamics and consumer health—are more consumers choosing repair over replace?
  Response: Parts sales are up but not evidencing an outsized repair-versus-replace shift; management believes some consumers opt to repair but it’s hard to quantify materially across the system.

• Question from Scott Davis (Melius): Will destocking impact ability to realize pricing in 2026 and are cost actions structural vs temporary?
  Response: Management expects to announce a mid-single-digit price increase for 2026 with low-single-digit yield; cost actions are structural (targeting ~3,000 indirect positions) and intended to be permanent productivity improvements.

• Question from Julian Mitchell (Barclays): How should we think about CSA resi outlook and the mix of company-level organic growth into 2026?
  Response: For planning they assume low-single-digit organic growth; CSA resi may be flat to slightly up on volume in 2026, while aftermarket and commercial HVAC (≈40% of sales) continue double-digit growth that could drive ~4% organic if sustained.

• Question from Steve Toussaint (JP Morgan): In Q3 how did price vs mix split in resi and was non-data-center applied equipment up?
  Response: In Q3 price was ~3 points and mix ~8 points in resi; applied equipment in non-data-center was up in the low teens (total Americas commercial HVAC up 30%, applied equipment up ~60%).

• Question from Nigel Coe (Wolfe): Confirmation on data center revenue target and backlog progression into 2026—are you on track for ~$1B this year and ~$900M backlog for next year?
  Response: Yes—on track for ~$1B in data center revenue this year and to end 2025 with backlog near $900M to support growth into 2026; orders have been strong recently and backlog extends into 2028.

• Question from Joe Ritchie (Goldman Sachs): Given elevated inventories and tougher comps, how should we think about decremental margins and the Q1 ramp?
  Response: They kept production running to avoid cold-start inefficiencies, accepting absorption headwinds; expect Q1 resi decrementals similar to Q3/Q4 (incrementals/decrementals remain elevated) and a muted production ramp into the season.

• Question from Andrew Kapowicz (Citigroup): What’s the outlook for RLC Europe/Germany and conviction on market bottoming for 2026?
  Response: Germany likely near multi-decade lows (~600k heating units); heat pump adoption is accelerating (Germany subsidy applications to ~300k) and management expects Europe to be poised for recovery into 2026, though exact bottom timing is uncertain.

• Question from Dean Dray (RBC): Dealers are aggressively destocking to eight-year lows—if spring demand rebounds quickly, can the channel and you ramp without shortages?
  Response: Management believes distributors are intentionally right-sizing to balanced starting inventory; while rapid demand rebounds could occur, they've planned conservatively and expect to avoid further destocking pain entering 2026.

• Question from Andrew Oben (Bank of America): Capacity and share opportunity for magnetic-bearing chillers—do you need more capacity?
  Response: Carrier materially expanded chiller capacity (water-cooled capacity up ~4x in NA since 2023; total chillers up ~3x) and currently has sufficient capacity to capture share without further major CapEx.

• Question from Chris Schneider (Morgan Stanley): Should we expect Americas/CSA margins to be down in 2026 given absorption headwinds early in the year?
  Response: While early 2026 comps are tough, management currently expects CSA margins to be roughly flat to up next year (CSA margin this year ~21%); they do not anticipate a margin decline assuming resi isn’t significantly worse.

• Question from Amit Mehrotra (UBS): Any movement on pricing tied to tariffs and what leading indicators inform resi demand modeling?
  Response: Tariff-related pricing actions this year offset roughly $200M (carryover net neutral for 2026 at current tariff levels); key leading indicators for resi are interest rates, new and existing home sales, sell-through/movement, and field inventory levels—management watches these closely for demand forecasting.

Contradiction Point 1

Inventory Levels and Management Strategy

It involves differing strategic approaches to managing inventory levels, which can impact operational efficiency and financial performance.

Can you explain consolidated inventories, particularly in the CSA resi segment, and discuss inventory movements and sell-through progress? - Jeff Sprake (Vertical Research Partners)

2025Q3: Inventories are up due to a sudden decline in residential volume and increased component replacement business inventories. The strategy is to reduce inventories by year-end, though it may not reach desired levels. - [Patrick Goris](CFO)

What caused the lower residential volumes in Q2, and do you attribute this to demand or inventory factors? - Christopher M. Snyder (Morgan Stanley, Research Division)

2025Q2: Volume in Q2 was down more than expected, and inventory levels were higher than desired. We're working to reduce inventory levels and expect some balance by end of 3Q. - [David Gitlin](CEO)

Contradiction Point 2

Pricing and Margin Expectations

It involves changes in financial forecasts, specifically regarding pricing and margin expectations, which are critical indicators for investors.

How will the inventory reset affect achieving target price dynamics by 2026? - Scott Davis (Melius)

2025Q3: We still plan a mid-single digit price increase for next year, expecting to yield in the low single digits. The Q4 will see less mix benefit due to shipping some 454B units last year. We'll announce 2026 pricing soon. - [David Gitlin](CEO)

What are your assumptions for U.S. resi/light commercial demand in H2, and how do you assess price dynamics and the repair vs. replace balance? - Julian C.H. Mitchell (Barclays Bank PLC)

2025Q2: The good news is price and mix are as expected. Volume was down mid-single digits, and we now assume volume down 20%-25% in the second half. - [David Gitlin](CEO)

Contradiction Point 3

Residential Segment Growth Expectations

It highlights differing expectations for growth and performance in the residential segment, which is a key component of the company's revenue.

How does the inventory reset affect achieving the desired price dynamics for 2026? - Scott Davis (Melius)

2025Q3: We expect a strong recovery in the second half of next year with a normalized selling season. - [David Gitlin](CEO)

Can you explain the Americas segment's full-year guidance adjustment, particularly for residential and light commercial? - Julian Mitchell (Barclays)

2025Q1: The first five months of this year, residential sales are up mid-teens. A key driver has been growth in the regulatory segment. - [David Gitlin](CEO)

Contradiction Point 4

Data Center and Non-Data Center Business Growth

It involves differing projections for growth in the data center and non-data center segments, which are crucial for the company's revenue mix and strategic focus.

What is the capacity situation in the magnetic bearing chillers market? - Andy Oben (Bank of America)

2025Q3: We've increased capacity 4x in North America, with new facilities and expanded existing ones. We're well-positioned for growth without additional investments. - [David Gitlin](CEO)

What is your outlook for commercial HVAC and data center growth? - Andy Kaplowitz (Citigroup)

2025Q1: Strong commercial HVAC growth of high single digits, with $1 billion in data center growth. Capacity increase allows for non-data center work. - [David Gitlin](CEO)

Contradiction Point 5

Volume Growth Assumptions for 2025

It involves changes in volume growth assumptions for 2025, which are crucial for forecasting revenue and market positioning.

Can you detail consolidated inventories in the CSA resi segment, including inventory movements and sell-through progress? - Jeff Sprake (Vertical Research Partners)

2025Q3: We've seen strong movement from distributors to installers and flat to low single-digit volume growth assumptions for 2025. - [David Gitlin](CEO)

Can you explain the impact of no prebuy on resi in Q4 and the outlook for high single-digit growth in 2025? - Jeffrey Sprague (Vertical Research)

2024Q4: We've seen strong movement from distributors to installers and flat to low single-digit volume growth assumptions for 2025. - [David Gitlin](CEO)