Executive Summary / Key Takeaways

• Carrier Global has successfully transformed into a focused pure-play leader in intelligent climate and energy solutions, shedding non-core businesses to capitalize on powerful secular trends like decarbonization, electrification, and digitalization.
• The company delivered a strong start to 2025, with Q1 adjusted EPS up 27% year-over-year, driven by robust adjusted operating margin expansion of 210 basis points, fueled by productivity and pricing gains.
• Strategic investments in differentiated technology, particularly in high-growth areas like data center cooling and home energy management systems (HEMS), are enhancing Carrier's competitive moat and positioning it for outsized growth.
• Management increased its full-year 2025 adjusted EPS guidance to $3.00-$3.10, anticipating solid mid-single-digit organic sales growth, approximately 100 basis points of adjusted operating margin expansion, and strong free cash flow conversion of around 100%.
• While navigating market softness in certain regions and verticals and managing potential tariff impacts, Carrier's balanced portfolio, operational discipline, and significant share repurchase program underpin confidence in achieving its growth and shareholder return targets.

A Transformed Leader in a Warming World

Carrier Global Corporation stands at the forefront of the global transition towards sustainable and intelligent climate and energy solutions. Once a diversified conglomerate segment, the company has, since its 2020 spin-off from United Technologies, embarked on a deliberate and rapid transformation. This journey culminated in 2024 with the strategic divestiture of its Fire & Security and Commercial Refrigeration businesses and the pivotal acquisition of the Viessmann Climate Solutions (VCS) business. This portfolio reshaping has forged a focused pure-play entity deeply aligned with powerful secular tailwinds: the urgent need for decarbonization, the accelerating shift towards electrification, the demands of digitalization, and the critical importance of energy efficiency and grid resilience.

This strategic pivot positions Carrier to capitalize on growth opportunities across residential, commercial, and transportation sectors. The company's core strategy centers on providing differentiated, digitally-enabled lifecycle solutions across three key ecosystems: homes, buildings, and the cold chain. By concentrating its resources and expertise, Carrier aims to drive profitable growth, enhance customer value, and build a more resilient business model capable of navigating diverse market cycles.

In the competitive landscape, Carrier operates alongside major players like Johnson Controls (JCI), Ingersoll Rand (IR), Emerson Electric (EMR), and Honeywell (HON). While competitors like JCI and HON offer broader building technologies portfolios and IR focuses on industrial applications, Carrier distinguishes itself through specialized technological differentiation and a growing emphasis on integrated lifecycle solutions and aftermarket services. Carrier's strategic focus on specific high-growth verticals and its commitment to innovation aim to provide a competitive edge against rivals who may possess greater scale or diversification.

The Engine of Innovation: Technology and Differentiation

At the heart of Carrier's strategy lies its commitment to differentiated technology and innovation. The company is actively developing and deploying solutions designed to meet the evolving needs of a world demanding greater energy efficiency and lower environmental impact. This includes advancements in heat pump technology, low Global Warming Potential (GWP) refrigerants, and integrated digital systems.

Carrier's heat pumps, for instance, are engineered for superior performance, with models validated to operate at 100% capacity at 0 degrees Fahrenheit and reliably at negative 13 degrees Fahrenheit, addressing critical cold climate needs. The company is also introducing low GWP variants of its chillers and integrating low GWP refrigerants into rooftop units, offering customers energy savings and reduced greenhouse gas emissions. In transport refrigeration, a new Vector Trailer Refrigeration unit is designed to reduce CO2 emissions by 73%. These technological advancements provide tangible benefits, such as improved energy efficiency (quantified at 10-15% greater efficiency in cooling systems compared to some alternatives, potentially lowering operating costs by 5-10%) and enhanced performance across diverse operating conditions.

Beyond individual products, Carrier is investing heavily in integrated systems and digital solutions. The acquisition of VCS brought the Viessmann One Base digital platform, which Carrier is harmonizing electronic control board designs and embedded software around to shorten time to market and decrease development costs. Digital platforms like Abound for intelligent buildings (monitoring over 1.1 billion square feet) and Lynx for the cold chain (with over 150,000 paid subscriptions) enable real-time monitoring, predictive maintenance, and value-added services like carbon tracking. Carrier's AI center of excellence is leveraging AI for internal productivity gains (up to 90% in contract reviews) and external services like proactive chiller maintenance.

A key area of focus is Home Energy Management Systems (HEMS). Leveraging Viessmann's capabilities, Carrier is expanding its HEMS offerings in Europe, noting a significant mix-up benefit (4:1 heat pump vs boiler, 8:1 systems vs boilers). In the U.S., a partnership with Google Cloud integrates Carrier's battery-enabled HVAC technology with Google's AI and analytics to enhance grid resilience and support smarter energy management, aiming to increase the efficiency of existing energy infrastructure.

For the rapidly growing data center market, Carrier launched the Quantum Leap brand for integrated cooling solutions. This offering combines traditional cooling, liquid cooling (including internally developed coolant distribution units), and building/server management systems. Carrier is adding capacity in North America to support demand in this vertical, where orders were up significantly in 2024, and sees a substantial aftermarket opportunity (5x-10x multiplier) for these critical facilities. The company's R&D investment (5-7% of revenue) is higher than some competitors (e.g., EMR at 4-6%), reflecting its commitment to innovation as a competitive moat. While this technological leadership often comes with higher upfront costs (e.g., 5-10% higher for some efficient systems), it supports pricing power and market share gains in segments prioritizing performance and sustainability.

Performance in the New Structure

Carrier's first quarter 2025 results provide the initial look at performance under the new, focused segment structure: Climate Solutions Americas (CSA), Climate Solutions Europe (CSE), Climate Solutions Asia Pacific, Middle East Africa (CSAME), and Climate Solutions Transportation (CST).

Total Net Sales in Q1 2025 were $5.218 billion, a 4% decrease year-over-year, primarily impacted by portfolio changes and foreign currency headwinds. However, organic sales grew 2%, driven by strength in CSA and CST, partially offset by softness in CSE and CSAME. Gross margin as a percentage of net sales expanded significantly by 210 basis points, benefiting from the absence of prior-year acquisition-related amortization and ongoing productivity and pricing actions. Adjusted operating margin expanded by 210 basis points, with the commercial refrigeration exit contributing about 70 basis points.

Segment performance in Q1 2025 showed varied regional dynamics:

• CSA: Delivered a very strong quarter with 9% organic sales growth, fueled by robust demand in residential (up 20%) and commercial (up 15%), despite weakness in light commercial (down 34%). Segment operating profit increased 34%, driven by volume, productivity, and higher equity method earnings.
• CSE: Organic sales decreased 7%, primarily due to challenges in residential and light commercial (down 11%) impacted by economic conditions and regulatory uncertainty, partially offset by commercial growth (up 5%). Segment operating profit decreased 37% due to lower volumes, though favorable material costs and integration synergies provided some offset. Management is focused on improving margins in this segment.
• CSAME: Organic sales decreased 6%, mainly due to volume reductions in China (down 11%) across both commercial and residential markets. Segment operating profit increased 12%, benefiting from higher equity method earnings and productivity.
• CST: Organic sales grew 2%, led by container (up 20%), partially offset by transport refrigeration softness in Europe and North America. Segment operating profit decreased 14%, impacted by higher warranty costs and unfavorable mix, partially offset by volume and pricing gains. The segment's margin benefited from the commercial refrigeration exit.

Overall, the Q1 2025 results demonstrate Carrier's ability to drive margin expansion and EPS growth (adjusted EPS of $0.65, up 27%) through operational execution and portfolio optimization, even with modest top-line organic growth influenced by regional market conditions. The significant increase in operating cash flow ($488 million from continuing operations in Q1 2025 vs $45 million in Q1 2024) highlights improved working capital management and earnings quality.

Outlook and the Path Ahead

Carrier's management is confident in the trajectory of the transformed company, reflected in its increased full-year 2025 guidance. The company now expects adjusted EPS in the range of $3.00 to $3.10, representing approximately 20% year-over-year growth. This outlook is based on an expectation of solid mid-single-digit organic sales growth for the full year, with reported sales projected slightly above $23 billion (including a $750 million headwind from the commercial refrigeration exit).

The organic growth forecast is underpinned by segment-specific expectations: high single-digit growth in CSA (driven by commercial and residential), low single-digit growth in CSE (commercial up double digits, RLC flat), low single-digit growth in CSAME (China sales flat, growth elsewhere), and mid-single-digit growth in CST (Global Truck and Trailer up mid-single digits, Container mid- to high single digits, Sensitech double digits).

Management anticipates approximately 100 basis points of adjusted operating margin expansion for the total company in 2025. This improvement is expected to be driven by volume leverage, pricing actions (including the benefit of regulatory-driven mix-up in residential HVAC), net productivity gains, and the favorable impact of the commercial refrigeration exit (contributing 50 basis points). These tailwinds are expected to more than offset planned investments in the business.

Free cash flow is projected to be strong, between $2.4 billion and $2.6 billion, reflecting roughly 100% conversion of adjusted net income. This robust cash generation supports the company's disciplined capital allocation strategy, including a target of $3 billion in share repurchases in 2025, aimed at offsetting dilution from the VCS acquisition and returning value to shareholders. The company also continues to target a growing and sustainable dividend (around a 30% payout ratio) and has proactively managed its debt profile, reducing outstanding debt and planning for upcoming maturities.

The outlook incorporates management's expectation to fully mitigate the impact of currently effective tariffs through supply chain actions, productivity, and approximately $300 million of incremental product pricing, primarily in the Americas residential segment. Additional cost containment measures are also being implemented to enhance resilience.

Risks and Challenges

Despite the positive outlook, Carrier faces several risks and challenges. Macroeconomic uncertainty persists, particularly impacting residential and light commercial markets in Europe and China, which could pressure demand. While the company is implementing pricing actions, the ability to fully realize these increases, especially in competitive or price-sensitive markets, remains a factor to monitor. Higher costs associated with warranty-related issues, as seen in the Transportation segment, could continue to impact profitability.

The AFFF litigation, an inherited liability, while subject to a proposed settlement covering a significant portion of claims ($615 million cash payment over five years, expected to be covered by insurance recoveries), still carries some uncertainty regarding potential remaining claims not covered by the settlement. The timing of insurance recoveries may also not perfectly align with cash outflows.

Execution risk is inherent in integrating the VCS business and realizing the targeted revenue and cost synergies ($100 million revenue synergies in 2025, >$200 million cost synergies by 2026). Delays or challenges in integration could impact financial performance. Furthermore, potential changes in trade policies, beyond those currently announced, could introduce new cost pressures or disrupt supply chains.

Conclusion

Carrier Global has successfully executed a significant portfolio transformation, emerging as a focused pure-play in the attractive climate and energy solutions market. The company is strategically positioned to benefit from powerful secular trends, leveraging its differentiated technology, expanding aftermarket services, and integrated system offerings to drive growth. The strong start to 2025, marked by robust margin expansion and EPS growth, underscores the operational benefits of the new structure and management's execution capabilities.

With a clear outlook for mid-single-digit organic growth, continued margin expansion, strong free cash flow generation, and a commitment to significant shareholder returns through buybacks and dividends, Carrier presents a compelling investment thesis centered on accelerating growth in a higher-quality business. While external market headwinds in certain regions and the management of inherited liabilities and potential tariff impacts require careful monitoring, the company's balanced portfolio, operational discipline, and strategic investments in innovation provide a solid foundation for achieving its financial targets and creating long-term value for investors. The focus on high-growth areas like data centers and HEMS, coupled with the integration of Viessmann's strengths, positions Carrier to outperform in the evolving climate and energy landscape.