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<p>Carrier, the HVAC and refrigeration giant, has remade its $22 billion business around shrinking the energy footprint of heating and cooling. It estimates that since 2020, its products have helped users avoid 490 million metric tons of greenhouse-gas emissions—the equivalent of the annual energy use of 65 million U.S. homes.</p>

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CTW 2021-49 Carrier

<span style="font-weight: 400">When COVID-19 sparked demand for better air filtration, Carrier was poised to help. Healthy-building tech is a central focus for the HVAC-systems maker. Among the products it introduced: Portable equipment designed to contain and remove air potentially contaminated by viral particles—giving health care providers the means to turn any space into an infectious disease isolation room.</span>

This year’s Fortune 500 marks the 67th running of the list.

F500-2021-171-Carrier Global

This Florida-based corporation keeps its customers acclimated with its heating, air conditioning, and refrigeration services.

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Carrier Global is the largest heating, ventilation, air conditioning (HVAC) and refrigeration company in North America, serving customers in over 160 countries. The refrigeration segment offers products and services for trucks, trailers, shipping containers, and rail applications. In 2024, the company announced it had acquired renewable HVAC provider Viessmann Climate Solutions for $18 billion. Willis Carrier, the inventor of modern air conditioning, founded the company in 1915. United Technologies acquired Carrier in 1979 before the company was spun off in 2020.

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Carrier Global (CARR): Company Profile, Stock Price, News, Rankings

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Carrier Global

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Good morning and welcome to Carrier's third quarter 2025 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 third quarter 2025 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 non-recurring items. A reconciliation of these and other non-GAAP financial measures can be found in the appendix of the webcast. We also remind listeners that the presentation contains forward-looking statements, which are subject to risks and uncertainties. Carrier's SEC filings, including our Form 10-K and quarterly reports on Form 10-Q, provide details on important factors that could cause actual results to differ materially. With that, I'd like to turn the call over to Dave.

Thanks, Mike, and good morning everyone. Q3 was generally in line with what we shared in mid-September. At the Laguna Investor Conference, we indicated that North American resi softness would create about a $500 million sales challenge and a 20%- 25% adjusted EPS headwind in the quarter. The actual impact was consistent with that. Partially offsetting this was better than expected performance in commercial HVAC in the Americas, which was up 30% in the quarter, continued aftermarket traction, cost containment, and a discrete tax benefit. We also drove continued double-digit sales growth across multiple parts of our business, including CSE residential heat pumps, container, and our businesses in India and the Middle East.

In addition to driving strong growth across many parts of our portfolio, we are taking aggressive cost actions to reduce overhead, including the elimination of about 3,000 indirect positions, which is on top of footprint and direct labor actions required to right-size for demand in our factories. Given confidence in our strategy and our track record of execution, our board approved a new $5 billion share repurchase authorization. Turning to slide four, we are laser-focused on our strategic priorities and continue to gain traction on our key initiatives. Our three vectors of growth: products, aftermarket, and systems are all progressing very well. With respect to our first vector, which focuses on gaining share through differentiated products, brands, and channels, we booked our largest order ever earlier this month, securing another major win with a key hyperscaler. We also converted a top U.S.

home builder to Carrier, further enhancing our leading position in the new home construction sector. In Europe, we were again recognized for our market-leading Viessmann heat pump products. In addition, our newly introduced Toshiba Carrier VRF systems product line and energy-efficient container units are both contributing to share gains in their respective markets. On aftermarket, we delivered 12% growth in the quarter and remain on track for our fifth consecutive year of double-digit growth. Connectivity and digital differentiation remain foundational. Connected chillers were up 30% in the quarter, and last week we had a major multi-year software win in the Middle East with Abound, our digital platform for buildings. Paid subscriptions for Linx, our digital platform for transportation, were up 40% in the quarter to about 210,000.

Last on systems, field trials for our Carrier Energy HEMS offering in North America are progressing well, and we remain on track for market introduction mid-next year. We also continue to make significant progress on our QuantumLeap integrated system offering for data centers, with customer discussions advancing well. In our CSE RLC business in Germany, we continue to qualify additional systems profi installers. Certified installers realized growth of 15%-20% in the quarter, far above the average installer. Turning to CSA resi on slide five. Though we are, of course, not pleased with the unexpected decline this year, this is a best-in-class business. We hold the number one market position, and our share continues to grow. Our products and brands are second to none. Our extensive distribution and dealer partnerships help provide competitive differentiation. All of this results in great margins and cash flow in this business.

We are working with our channel partners to collectively take all of our medicine this year. We are therefore being very purposeful about right-sizing field inventory levels as we head into 2026. At the end of Q3, field inventories were down 12% compared to last year. As of today, field inventory levels are down another 10 points since the beginning of the month and are down about 20% versus last year. By year-end, we expect inventory levels in the field to be down 30% versus last year, the lowest level since 2018. We will continue to play offense, and given continued investments and our aggressive cost takeout, we expect to realize outsized returns as this business recovers. Turning to CSE's RLC business on slide six. The good news is that electrification across Europe is accelerating, and we are realizing the mix-up benefit from heat pump adoption.

Our residential heat pump sales in Europe were up about 15% in the quarter, with heat pump sales in Germany up about 45%. We expect this trend to continue. For example, we have seen heat pump subsidy applications in Germany increase and expect them to double versus last year to 300,000. Nevertheless, in the category of controlling the controllables, we run the business to be successful independent of subsidies. This is why we have been focused on significantly reducing product and installation costs for our heat pumps to incentivize the continued transition to electrification independent of government subsidies. More broadly, we continue to see a desire across European countries to become less reliant on gas, and key leading indicators of continued heat pump adoption remain positive.

Just last week, the EU gave another vote of confidence for ETS2 to become effective on January 1, 2027, which is, as a reminder, the system for increased pricing on carbon in heating and transport supporting the continued transition to electrification. However, for the past couple of years, the strength that we have seen in heat pump unit growth has been more than offset by overall market unit declines driven by boilers. With heating units in markets such as Germany at 15-year lows, these markets are poised for recovery. Importantly, we continue to make key investments in market differentiation and expansion while taking significant costs out, positioning us well for 2026 and beyond. Turning to slide seven, our commercial HVAC business in CSA has had best-in-class performance over the past five years. At the time of our spin, this was the one area within our portfolio where we were underinvested.

We said we would invest, gain share, and increase margins, and we have. Our investments in technology, know-how, capacity, and talent are paying off. Not only has the total business more than doubled in five years, but also our applied business, aftermarket, and controls have all doubled during this period. We have also significantly improved our margins. Given our strong backlog, we expect this performance to continue. We see data centers as an opportunity to further accelerate our share gains, as you see on slide eight. Data centers remain a top priority for us, and our traction has been excellent, especially on orders in the past few months. We remain on track to double our sales from $500 million last year to $1 billion this year.

We expect to see continued growth in this vertical next year, given that we project our backlog entering 2026 to be up about 20% year over year. Relationships with all the hyperscalers and our colo customers are very strong. Our win rate and size of wins have continued to increase. For example, in addition to multi-hundred million dollar wins with hyperscalers, we recently secured a win with a colo customer in the Americas exceeding $100 million. Our overall backlog has increased quite a bit over the past few months and now extends into 2028. Before I turn it over to Patrick, some high-level perspectives on slide nine. We are very well positioned to create outsized value for our customers and our shareholders. Through a purposeful transformation, we created a focused yet balanced portfolio with leading positions in targeted geographies and verticals.

We like that we are not overly exposed to any one geography or vertical, and in fact, have balanced exposure to the right geographies and verticals. As we look ahead, we expect the parts of our portfolio that have been strong to remain strong, particularly commercial HVAC and our aftermarket business, which together constitute just under 45% of our sales. We expect that those parts that have faced near-term headwinds, particularly RLC in the Americas and Europe and global truck trailer, to be positioned for a return to growth. When they do, we stand to have outsized benefit given our market-leading positions and the aggressive cost actions that we're taking this year.

In terms of controlling the controllables as we always do, you know our formula from our investor day: share gains through differentiation, sustained double-digit aftermarket growth, and investing in systems to drive unique value for our customers and TAM expansion. You can always count on us to drive costs out of the system in a programmatic and aggressive manner. We will be disciplined with capital allocation with a near-term focus on share buyback. With that, I will turn it over to Patrick. Patrick?

Thank you, Dave, and good morning everyone. Please turn to slide 10. For the quarter, reported sales were $5.6 billion, adjusted operating profit was $823 million, and adjusted EPS was $0.67. The year-over-year decline in these financial metrics largely relates to much lower volumes in our CSA residential business. The results are largely in line with what we outlined in September, with the exception that we saw a $0.07 benefit from a lower tax rate, about $0.05 of which is timing between Q3 and Q4. Total company organic growth was down 4%. The 2024 exit of commercial refrigeration was also a 4% headwind, partially offset by a 1% tailwind from currency. Adjusted operating profit was down 21%, primarily due to lower volume in our CSA resi business. CAATFs were net neutral in the quarter. Adjusted EPS was down 13%.

We included the year-over-year adjusted EPS bridge in the appendix on slide 19. Free cash flow of about $225 million reflects lower operating profit as well as higher working capital levels given the sudden reduction in sales. Moving on to the segments, starting on slide 11, organic sales in the CSA segment declined 8%. Commercial delivered another exceptional quarter with sales up 30%. Residential and light commercial sales came in right about where we expected per our September update. Resi sales were down 30%, driven by a roughly 40% decline in volume, offset by double-digit regulatory mix-up and pricing. Light commercial sales declined 4%. Aftermarket sales across the segments increased mid-teens, with particular strength in controls. Segment operating margin was 19.7%, down 560 basis points, reflecting the impact of much lower resi volume.

Moving to the CSE segment on slide 12, residential and light commercial sales were down low single digits, reflecting continued heating market unit declines in the region. As Dave mentioned, heat pump sales growth across Europe remains strong. Commercial declined mid-single digits, reflecting some large project timing that we expect to partially recover in Q4. Segment operating margin declined 110 basis points, driven by lower organic sales and mix, partially offset by productivity, including cost synergies. We are accelerating additional reductions in headcount and other cost actions in this segment. Turning to the CSAME segment on slide 13, organic sales declined 2%. Continued double-digit growth in India and the Middle East was more than offset by ongoing weakness in resi and light commercial in China. Within China, our resi and light commercial business was down mid-teens, partially offset by commercial, which was up mid-single digits.

Segment operating margin of 11.6% was primarily driven by strong productivity gains, offset by lower volume. Finally, moving to CSD on slide 14, organic sales were up 6%, led by continued very strong growth in container, partially offset by mid-single digit decline in global truck and trailer. North America truck and trailer was flat. Segment operating margin of 15.4% expanded by 80 basis points year over year, primarily driven by the 2024 exit of commercial refrigeration. Turning to slide 15, total company organic orders were down high single digits for the quarter. Excluding CSA resi orders, which were impacted by last year's elevated pre-ordering related to the refrigerant transition, total company orders were up low single digits. CSA residential orders were down about 40% compared to orders of 30% last year. As expected, commercial orders in CSA have been and will continue to be lumpy given large data center wins.

In CSA, residential and light commercial orders grew low single digits and are up mid-single digits year to date. We expect commercial orders in CSE to pick up in the coming quarters, given a strong pipeline, including data center projects in this region. Orders in CSAME were flat, with strong growth outside of China. CSD orders were exceptionally strong, led by container, up about 100%, and global truck and trailer, which was up about 25%. Shifting to guidance and moving to slide 16, the updated guidance primarily reflects market weakness in our residential and light commercial businesses in the Americas and Europe. We now anticipate CSA resi to be down high single digits versus our prior outlook of up mid-single digits. In Europe, we now anticipate our RLC business to be down mid-single digits versus the prior outlook of about flat.

Partially offsetting these headwinds, the Americas commercial business is expected to grow over 25% this year, an outstanding performance. Overall, we now expect about $22 billion in sales for 2025. About $700 million of the reduction versus our prior guide relates to CSA resi. Moving to profit and cash guide on slide 17, we are revising our full-year adjusted operating margin guidance. Our updated margin expectations for CS Americas and CS Europe reflect volume declines in the RLC businesses in both segments. In addition, we are adjusting our margin outlook for transportation, given stronger expected container sales and lower NATT sales. We're adding to the cost reduction actions we initiated earlier this year to right-size the business and now expect carryover savings in 2026 to amount to over $100 million. The net full-year tariff impact in our current guide remains zero in terms of operating profit.

We expect full-year adjusted EPS of about $2.65, including a lower adjusted effective tax rate closer to 21%, and expect free cash flow of about $2 billion, reflecting lower earnings and higher anticipated cash restructuring cost of about $150 million. Finally, we continue to expect about $3 billion of share repurchases this year. Additional full-year guide items are in the appendix on slide 21. With respect to Q4, we expect CSA resi sales down approximately 30% and volumes down about 40% and continued significant headwinds from underabsorption as the channel continues to destock. Before moving to Q&A, let me make a few comments on how to frame 2026. First, we expect to end 2025 with CSA resi destocking behind us. Obviously, we expect a difficult compare in the first half of 2026 in CSA resi, which will have an impact on total company performance, particularly in the first quarter.

Second, we're executing on significant cost actions, which we have spoken about previously. This should amount to roughly $0.10 carryover adjusted EPS tailwind next year. Third, we expect about a 100 basis point ongoing benefit from a lower tax rate. In total, we therefore expect about $0.20 of adjusted EPS tailwind in 2026 from the combination of carryover restructuring benefits, tax, and share repo. It is too early to comment on the levels of 2026 organic growth, but it's fair to say that we target about 30% conversion. For planning purposes, given heightened levels of uncertainty, we are running the business assuming low single-digit organic growth in 2026. In addition, the net carryover impact of pricing and tariffs is expected to remain dollar neutral based on tariffs and pricing in place today. With that, I would like to ask the operator to open the line for Q&A.

Now opening the floor for a question and answer session. If you'd like to ask a question, please press star followed by one on your telephone keypad. That's star followed by one on your telephone keypad. Your first question comes from the line of Jeffrey Sprague of Vertical Research Partners. Your line is now open.

Hey, thank you. Good morning everyone. Just obviously a couple of questions around resi. First off, Dave or Patrick, looking at your consolidated inventories, they're up sequentially in the quarter, typically down. Clearly you've pointed to more work to do to clear the channel. Can you unpack that for us? The volume decline that you're expecting in resi, plus what other moving pieces might be going on in inventory? Maybe as part of that, obviously getting the channel where you want it to be depends not only on your actions on production, but really how sell-through is progressing. Maybe just a little bit of color on what you think kind of sell-through or movement might be as we.

Sounds good, Jeff. Good morning. I'll take the first part of the question. So far, on a consolidated level, our inventories are up about $500 million. Of that, about $400 million is in our CSA resi segment. Of the $400 million increase in our CSA segment, the resi element is about $350 million of that increase. Basically, it's a reflection of two things. One, a sudden decline in residential volume, and it takes some time for our supply chain to adjust to that. The second element is we have purposefully increased inventories a little bit this year related to our components replacement business to ensure that we can satisfy demand over there. We do expect this inventory to start reducing. Actually, it started reducing already, and the inventory levels will come down by the end of the year.

They probably won't come down exactly to where we would like them to be. The reason for that is we're really balancing within our factories the levels of ongoing production with taking out a lot of labor that we just had to rehire the first quarter of the year. There's a little bit of a balance there between operating profits and free cash flow and ensuring that we can meet expected demand in the first quarter of the year. You can expect that increase to start coming down by the end of the calendar year.

Jeff, it's Dave. In terms of field inventory levels, we are going to great lengths with our distribution partners to try to start next year with a clean slate, take all of our medicine this year. I mentioned that our expectation is that field inventory levels ending this year will be down 30% year over year. In terms of your question on movement, movement was down about 30%, it looks like in October, and we expect movement to be down in the mid-20% for November and December. Now remember, movement was very strong in Q4 last year. It was up about 30%, and then it started to get weaker as we got into Q1 of this year. Movement starting in Q1 of this year was negative. We'll start to see some easier comps on movement.

When you end this year at inventory levels at 2018 levels, we feel like that's the right number. We don't feel like that destocking will be a further headwind as we get into next year. We'll have to see what movement does as we get into Q1.

Maybe just to follow up, there's like 27 other questions, but I'll just ask one and pass the time. Patrick, in your answer, you mentioned kind of repair. Where do you guys stand on what's going on in the repair versus replace dynamic and just sort of the health of the consumer and kind of managing through price and the question of price elasticity?

Yeah, as you know, Jeff, we get this a lot, and there's really no exact way to measure that. Our parts are up quite a bit, but we've been very purposeful about increasing our share of wallet on part sales. We would expect that to be up given the initiatives we're driving. When we talk to our distribution partners, they do not see an outsized growth on discrete part sales, compressors, or other key components where that would be indicative of a repair versus replace. Having said that, it's hard not to imagine that there are more consumers opting for repair over replace, and we're hearing some sporadic pickup of that in certain locations. I would have to believe it's happening in the system, although it's really hard to dimensionalize just how much.

Question comes from the line of Scott Davis of Melius. Your line is now open.

Just to follow up a little bit on Jeff's question, if the inventory destock and kind of the reset, does that impact your ability to get the price that you wanted to get for 2026 when you think about, you know, you're still working off a little bit of a, you know, a higher cost base overall? Does that change the price dynamic at all?

You know, we'll have to see, Jeff, as we think about 2026 pricing. I mean, Scott, when we think about 2026 pricing, we'll announce a mid-single digit price increase here for next year. We'll probably announce that in the next couple of weeks, and we would expect to yield in the low single digit range. When you think about this year, we've said that the combination of mix and price have both been around in that 10% range. That'll continue here for Q4. We'll get a little bit less of the mix benefit in Q4 here because we started shipping some of the 454B in the fourth quarter of last year. In terms of price, I think this year's been probably closer to mid-single digits, and next year's probably closer to low single digits.

Okay, that makes sense. If you don't mind, David, just giving us a little bit of detail on the restructuring. Are you talking about, or you didn't say structuring, you said cost containment, but is there structural cost out versus kind of just the usual cut and discretionary spend? Is there actual structural cost out that we can count on lingering, not just into 2026, but going forward?

100%. I mean, that's the entire purpose is to take out structural costs. This is not, we're not just trying to squeeze short-term costs. We're focused on indirect headcount. We're looking at about 3,000 heads, and the whole goal is to make sure that we are very disciplined about not adding those heads back in. It's not just giving out targets and having people take the heads out. We're trying to do things like using Patrick Goris' CBS organization to do things differently in terms of how we deal with collections or payables or do things much more efficiently. Bobby George and our IT department are using AI in groups like our legal department or elsewhere to make us more efficient in how we do things in the back office. We're trying to do things a lot smarter, a lot more efficiently.

We have 20,000 Copilot licenses that are starting to cascade across Carrier. The answer is 100% focused on structural cost takeout that comes out and stays out.

Okay, thank you, David and Patrick and Mike. Good luck this year.

Your next question comes from the line of Julian Mitchell of Barclays. Your line is now open.

Hi, good morning. Just running off the initial thoughts or comments on next year, Patrick, I suppose, you know, one could surmise you get to something like a $2.90s of EPS or something, maybe high single-digit EPS growth and mid-single-digit profit growth based off the low single-digit sales and 30% incremental placeholders. Within that framework, just trying to understand maybe a little bit deeper how you're thinking about CSA resi in terms of the outlook as you think about sell-out or movement dynamics and the recoupling of sort of sell-in versus that. Maybe flesh that out a little bit, please, as you think beyond December.

Sounds good, Julian. In my comments, what I was saying was that we expect to see a $0.20 adjusted EPS benefit just from the restructuring benefits, from tax, and share repurchases. That is without any organic growth. We said for internal planning purposes, just as to how we run the business, that we're assuming low single digits of organic growth. If you look across our portfolio today, and Dave mentioned this, a little over 40% of our sales have been growing double digits and would expect that to continue next year. That's our aftermarket business and our global commercial HVAC business. That would get you to about 4% organic growth next year if that continues with the rest of the company flat. The question really is, what happens with the balance of the company? A big part of that is CSA resi.

At this point, and it's still very early, our estimate is it may be flat to slightly up from a volume perspective. In Europe, as Dave mentioned, it has been quite weak for a long period of time. Our largest market, Germany, the market there is at 15-year lows. We see a hard time that getting worse. We think flat might be a safe assumption. Maybe it gets better.

That's very helpful. Thank you. My quick follow-up would be looking at the CSA commercial HVAC businesses in terms of light commercial as well as the larger applied business. How are you seeing the demand in the non-data center verticals there? I understand orders are lumpy. I think they were down in CSA commercial in the third quarter, but a big data center Q4 order. If we think about the non-data center demand in CSA light and applied, how's that looking?

Yeah, Julian, if you look at the commercial HVAC business, non-data centers were up, and from a sales perspective, in the low teens. The data center business and our commercial HVAC business was up about 250%. Non-data centers up in the low teens. Total was up 30%. Our applied business in commercial HVAC in the Americas was up 60%. Non-data centers, it continues to be a bit of a mixed bag. We're doing very, very well in things like the mega projects, healthcare, even more so in commercial than light commercial. Surprisingly, commercial real estate was even up again this quarter over last quarter. We don't see that as a trend. ABI is quite low, but for whatever reason, we've seen growth in commercial real estate two quarters in a row. Higher ed and K through 12 are weak, both for commercial HVAC and light commercial.

I believe that in Q3, within CSA Americas for commercial, the non-data center orders were actually up year over year. It's the data centers that were down given the lumpiness.

Your next question comes from the line of Steve Tusa of J.P. Morgan. Your line is now open.

Hey, good morning guys. Thanks as always for the details.

Just on this resi, you said you're getting mid-single digit price this year. When you think about the low double digit or whatever it was for the price mix, how much was mix and how much was price? I know in the beginning you were getting a bit more price than mix, but how does that break out in resi for the third quarter?

Yeah, for 3Q, it would have been 3 and 8.

Okay, got it. That's super helpful. When you guys talk about the 30%, I guess to go back to Julian's question, I think that includes services. I guess the applied business, if non-data center was up or data center was up 250 and your applied was up 60, that still implies that, just getting more specific, the applied CSA was up or was the applied, you said it was a mixed bag. Was that actually up, the applied CSA equipment?

I'm sorry. I was just saying the mixed bag was around which verticals were strong and which weren't. When we look at total CHVAC in the Americas, it was up 30%. The applied business, the equipment was up 60%, aftermarket was up mid-teens, and the controls business was up a little over 20%.

Okay, so that still implies the non-DC applied equipment was still up in the quarter.

Okay, great. That's super helpful. Thanks a lot.

Your next question comes from the line of Nigel Coe of Wolfe. Your line is now open.

Thanks. Good morning. Just a quick one on the data center backlog, Dave. I think you've mentioned you needed to build that backlog to grow in 2026. I just want to make sure that the $0.9 billion of backlog you're expecting at the end of this year is where you expect to be for 2026, and therefore we should see nice growth next year. Can you just confirm that we're still on track for about $1.1 billion of revenues this year?

Yeah, I would say $1 billion for this year, Nigel, in revenue.

Always $1 billion. It was $1 billion, still is $1 billion. I will tell you, in terms of, you know, we just discussed data center orders in 3Q, and we also mentioned that we've gotten really strong orders here in October. I've been very pleased. We wanted to go into next year with a backlog that was higher than the backlog that we had coming into this year. This year we came in with around $700 million in backlog for the year. Obviously, the total backlog is much higher. I'm talking about backlog just for deliveries in that following year. We came in with $700 million for this year, and we'll do about $1 billion. We wanted to end close to $900 million so we could drive nice growth for next year. We're on track to end with backlog in that $900 million range.

We're a little bit north of $700 million today. We got a lot of very strong irons in the fire. There's just a lot of exciting activity. Frankly, I just got back late last night from Tokyo. We were over there. We've been working with our Japanese host. We've been working with the administration, had a number of meetings yesterday with Secretary Lutnick. We signed this morning. One of my colleagues, Michael Gerges, was over there signing an MOU. There are going to be investments here in the Americas for infrastructure and data centers. We're continuing to push every angle with hyperscalers, colos, and some of the unique opportunities that are out there. We feel very well positioned for continued growth in this space as we go into next year.

Okay, you sound surprisingly fresh considering you just got back from Japan. In terms of the movement numbers you just threw out, incredibly, you know, incredibly weak. I understand channel inventory is expected to be down to 2019 levels by the year end. I'm just wondering, with the end demand this week, is that enough channel burn? Are you confident that we are going to move into 2026 on a clean slate?

I am about as confident as we can be with, you know, kind of the soft movement market that we've been over these last few months and continue to be in. We've tried to plan 4Q in a way to avoid surprises like we had in 3Q. 4Q and 3Q we've assumed are effectively the same with total sales down about 30%, movement down, I mean, volume down about 40%. We've tried to handicap movement continuing to be weak throughout the rest of the year, and that is even with a price rate increase that'll become effective in January. We're working very hard with our distribution partners. When we wake up in January, we're not talking about further destocking. Obviously, we are going to see, we can't have movement stay at these levels forever. We will have a little bit of year-over-year compare issues as we get into 1Q.

That lightens, of course, as we go into 2Q and through the year. Even with a bit of a rebound on movement, we think we'll be very, very right-sized on field inventory levels starting in January.

Question comes from the line of Joe Ritchie of Goldman Sachs. Your line is now open.

I really appreciate all the color you've given already on 2026. I'm trying to really understand like the interplay between your own inventories, organic growth, and margins in the early part of the year. Typically, you guys build inventory from the fourth quarter to the first quarter, or we do assume that that does not happen in 2026. How do we kind of think about like the decremental margins associated with the early part of the year, given you guys do have tough comps and you have elevated inventory levels on your own balance sheet?

Okay, let me start and then turn it over to Patrick. Let me tell you how we're kind of dealing operations because we saw such a sudden and extreme shift in our forecast and our demand. As we think about 4Q, we fundamentally had a decision to make. We frankly could have stopped production in a couple of our key lines and frankly sites. We decided to keep them going. A cold start is very, very difficult for operations. You'd have to have a drastic reduction in headcount. You're suddenly hiring as you start to gear up for the season. We've kept operations going in places like Tennessee and Monterrey at very low levels, but continued levels. What that means for us is we've had a big absorption hit as we've gone 3Q into 4Q. We've seen some of our inventory levels a little bit higher than we'd like.

We're pretty disciplined on working capital, but we've purposely made that trade-off to keep operations going, which means as we get into the season in the March timeframe, we won't have as big a ramp in production, which might have a slight impact on absorption as we get in towards the end of 1Q. I don't think anything major there, but we won't have the usual significant ramp as we get into season.

On the incrementals or decrementals in Q1, Joe, the first quarter of this year, CSA, which had very strong resi volume, and of course, we had significant production levels as well, our incrementals were 69%. It is going to be a tough comp, and I would expect the decrementals in Q1 on the resi side to be similar to what we're seeing in Q3 and Q4.

Got it. That's helpful. You've given the accretion from the buyback. Like any thoughts, just given kind of the weakness in the stock this year, like any thoughts on an accelerated share repurchase program?

At this point, Joe, we're focused on repurchasing about $3 billion for this year. The new authorization, our expectation is that it will take us into 2028, but nothing I can share at this point in terms of ASR.

Your next question comes from the line of Andrew Kaplowitz of Citigroup. Your line is now open.

Andy, Dave, can you give a little more color into RLC Europe and what you think is going on over there? I think you recently said that the German heating market could bottom at 600,000 units, and the obvious drag on your results has been boilers. Maybe just how you see that market playing out in 2026, what's the conviction level that we will mark a bottom this year? Maybe you can elaborate on what you're doing to get the margin up in that segment.

Let me do the first one first. I think it's a bit of a fool's errand to call a bottom. I will say that we saw such strong growth in 2022. The market there has just taken a whole lot of medicine since. The market this year we thought would be closer to 650,000 or so. It's going to end up being in that 600,000 range. I'm talking about Germany specifically. It does feel like when you look at any kind of chart over the last 40 years, the German market does seem to be getting to historic lows and prepared for some level of recovery. In Europe versus the U.S., the U.S. is almost all replacement. In Europe, you will see some planned replacement, and a lot of that has been put on hold waiting for some things to settle out.

The new German government is having more fiscal stimulus, which is positive. We'll see what happens with the heating law and subsidy levels, probably a little bit more clarity as we get into the end of this year into early next year. The good news is that if you look at the ratio in Germany between heat pumps and boilers, it's almost getting closer to parity. In terms of what we saw this year with a big decline in boilers, in the 30% range, and a very unique thing around very expensive floor standing boilers, which we don't expect to be talking about again next year, we do think that if we can continue, which we expect to see that strong growth in heat pumps, remember we're seeing subsidy levels up 2x this year versus last, about 300,000 subsidy applications.

We see a little bit more muted decline in the boilers. Germany should be poised for strength as we go into 2026. We've seen a mixed bag outside of Germany. Certain countries like France and Poland were weak. We saw strength in places like UK, and even Italy was a little bit better than we had thought. Throughout Europe, we see continued heat pump adoption. We see really good traction on our initiatives, things like air conditioning sales and some of the system level sales. We're just going to have to watch the market dynamics, but we've taken a lot of medicine over the last couple of years, so hopefully we've seen bottom.

Very quickly on the cost out in Europe, Dave mentioned earlier about 3,000 positions, overhead positions that we're in the process of taking out. Of that, about half of that is in the European segment in CS Europe.

Thanks for that, guys. I think you had suggested recently, Dave, that CSAME and CST would return their organic growth in Q3. While transportation did, CSAME still lagged a little bit. Can you give more color into the outlook? Is that just China still being sluggish?

That is really China, Andy. It goes back to resi, China, and it's not on the commercial side. The one thing we're doing in China as well, and that's going to carry over a little bit in Q4, and so embedded in our guide, is we are also looking at the field inventories in our China residential business. They have been somewhat elevated, and we are in the process, or the team over there is in the process of working with our partners there to reduce the inventory levels in the field there as well.

Carrier Global (CARR) Q3 2025 Earnings Call Transcript

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