CARR Q2 2025: Aftermarket +13% but soft U.S. residential cuts margins
- Robust Capacity Expansion: Carrier’s significant investments—such as doubling North American capacity with a new facility and a 40% expansion of its Charlotte facility—position the company well to capture strong demand, especially in the rapidly growing data center segment.
- Consistent Pricing Power and Margin Improvements: The company’s steady mid single-digit price increases, effective tariff-related pricing adjustments, and ongoing cost synergies (with additional productivity expected in Europe in Q4) are set to drive improved operating margins.
- Sustainable Aftermarket Growth and Market Share Retention: With aftermarket services up 13% in Q2 and strong double-digit growth expected for the year, alongside maintained market share in key segments despite softer residential volumes, Carrier demonstrates robust recurring revenue potential.
- Weak Residential Demand & Elevated Inventory: Multiple Q&A comments highlighted that U.S. residential sales were softer than expected with a notable buildup in channel inventories, implying that weaker end‐demand could pressure revenue and margins moving forward.
- Margin Pressure from Unfavorable Mix: Speakers pointed to challenges in key regions—especially Europe—where an unfavorable mix in high‐margin products (e.g., lower boiler sales in Germany and a shift in resi mix) is putting downward pressure on margins.
- Volume Uncertainty Amid Macroeconomic and Seasonal Factors: Management’s revised guidance and commentary on softer-than-expected movement (exacerbated by weak cooling degree days and lower volume forecasts) suggest that ongoing macro and seasonal headwinds could further dampen volume growth and complicate comps.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | -9% | Total revenue fell from $6,689 million in Q2 2024 to $6,113 million in Q2 2025, largely driven by pronounced declines in key international regions that outweighed a near-stable performance in the United States. |
United States Revenue | -1.4% [N/A] | The U.S. region saw only a slight decline—from $3,477 million to $3,429 million—which suggests stable domestic demand and minimal market disruption compared to previous performance. [N/A] |
Europe Revenue | -20% [N/A] | European revenue dropped significantly from $1,889 million to $1,520 million, indicating substantial market headwinds or weaker demand in Climate Solutions within the region relative to the previous period. [N/A] |
Asia Pacific Revenue | -11% [N/A] | The decline from $1,104 million to $981 million represents an 11% drop, reflecting regional softness and potential adverse impacts such as unfavorable currency movements compared to Q2 2024. [N/A] |
Other Regions Revenue | -16% [N/A] | Other Regions revenue decreased from $219 million to $183 million, likely due to steep declines in segments such as Transportation and less stable market conditions, which contrast with more modest reductions seen in established regions. [N/A] |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Adjusted EPS | FY 2025 | $3.00 to $3.10 | $3.00 to $3.10 | no change |
Organic Sales Growth | FY 2025 | mid-single digits | mid-single digits | no change |
Adjusted Operating Margin Expansion | FY 2025 | about 100 basis points | about 100 basis points | no change |
Free Cash Flow | FY 2025 | $2.4 billion to $2.6 billion | between $2.4 billion and $2.6 billion | no change |
Share Repurchases | FY 2025 | $3 billion | approximately $3 billion | no change |
Sales | Q3 2025 | no prior guidance | Approximately $6 billion with mid‐single‐digit organic growth | no prior guidance |
Adjusted Operating Profit | Q3 2025 | no prior guidance | Expected to be flat year-over-year | no prior guidance |
Adjusted EPS | Q3 2025 | no prior guidance | Approximately $0.80 | no prior guidance |
Effective Tax Rate (ETR) | Q3 2025 | no prior guidance | Assumed at 24% | no prior guidance |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Revenue | Q2 2025 | About $6B | $6,113 million | Beat |
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Margin Guidance
Q: Explain margin guide and synergy capture?
A: Management noted that Europe’s margins were lower due to mix issues—particularly a decline in high‐margin boiler sales in Germany—even as cost synergies (targeted at $200 million) and aggressive expense reductions were on track to improve margins next year. -
Volume & Mix
Q: What are U.S. resi and light commercial assumptions?
A: They expect U.S. residential volumes to be soft—with first‐half growth around 15% and a second‐half decline near 10%—resulting in mid–single digit annual growth, driven by pricing and mix adjustments without a major shift from repair to replace. -
Segment Margins
Q: What are Q3 segment margins and mix impacts?
A: For Q3, overall margins are forecast flat; U.S. residential drag is significant (about a $203 million impact), CSA margins are down roughly 200 bps, while Europe remains steady and transportation benefits from exiting lower-margin businesses. -
Productivity Impact
Q: Will productivity improvements hit gross margins?
A: Productivity is improving both at the gross margin level—thanks to better material and logistics cost management—and in SG&A, with indirect expenses falling from over 9% to around 7% of sales, driving record profit levels. -
Operational Resolution
Q: How is the canister issue addressed?
A: The canister problem has been fully resolved after prompt precharging of units, and management reported non–data center CSA activity was up by 20% this quarter, confirming operational stability. -
APAC Growth
Q: What’s the status of Climate Solutions in APAC?
A: The APAC region is strong, with Japan posting high–teens growth, India nearing 30%, and the Middle East in the mid–teens, while China’s residential segment remains challenged by excess inventory. -
Reefer Recovery
Q: How is the North American reefer market performing?
A: North American reefer sales showed modest growth in Q2 and are expected to recover further in the second half, aided by easy comps despite still–weak truck volumes. -
European Outlook
Q: What are back-half margin expectations in Europe?
A: Management expects European margins to improve from about 10–10.5% in Q3 to roughly 12% in Q4, driven by seasonal sales upticks and ongoing productivity actions. -
Residential Softness
Q: Why were Q2 residential volumes softer?
A: Softer residential performance was attributed to sluggish end-demand, lower-than-expected cooling degree days, and an inventory buildup in the channel that management is working to balance. -
Capacity Expansion
Q: How is capacity being expanded for data centers?
A: Data center capacity has more than doubled in North America through a new facility and a 40% expansion in Charlotte, supporting future global growth. -
Tax & Pricing
Q: Any impact from expiring tax provisions or pricing rollbacks?
A: There is no significant impact expected from expiring tax incentives; pricing remains stable in the mid-single digit range, with a tariff-related price adjustment from $300M to $200M and no major rollbacks anticipated.
Research analysts covering CARRIER GLOBAL.