Carrier Global Corporation

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 to 25 cent 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 Wiesman heat pump products. In addition, our newly introduced Toshiba VRF 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 Lynx, 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 quantum leap 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 realize growth of 15 to 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, as a reminder, is 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 8. 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 for 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 businesses. which together constitute just under 45% of our sales. And 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. And 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, and 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 67 cents. 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 7-cent benefit from a lower tax rate about 5 cents of which 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 1% tailwind from currency. Adjusted operating profit was down 21%, primarily due to lower volume in our CSA resi business. Tariffs 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. Peak 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 segment 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 volumes. Finally, moving to CST 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 up 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. CST 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 expectation 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 costs 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 under absorption 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 10 cent 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 20 cents of adjusted EPS tailwind in 2026 from the combination of caddy over 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.