Q1 2025 Earnings Summary
- Robust Demand & Pipeline Growth: Q1 results highlighted record Commercial HVAC bookings with an added backlog of approximately $500 million – including $400 million in the Americas – demonstrating strong, broad-based demand across multiple verticals.
- Strong Operational Performance: The company delivered 11% organic revenue growth, 130 basis points of adjusted EBITDA margin expansion, and 26% adjusted EPS growth, underscoring its effective pricing strategy and operational efficiency.
- Attractive, Sustainable Product Proposition: A focus on innovative, sustainable solutions with compelling customer paybacks—combined with a direct sales approach—positions the company favorably against peers in key markets such as data centers, healthcare, and education.
- Tariff Costs Impacting Margins: The company estimates tariff costs of $250–275 million for 2025, which must be offset through price increases. This counterbalance could pressure margins and risk dampening future customer demand if pricing sensitivity leads to lower sales.
- Elevated Channel Inventories and Prebuy Concerns: There are indications of elevated residential channel inventories (approximately $75–100 million) paired with some uncertainty around prebuy behavior. This buildup may signal future weakness in converting pipeline orders into sustainable organic growth.
- Market Segment Weakness and Macro Uncertainty: Certain segments, such as the Thermo King (Transport) business, are projected to face significant declines (with overall markets in the Americas down roughly 20%). Coupled with broader macroeconomic uncertainties, slower order conversions in key markets could weigh on future performance.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | +11% (from $4.2155B in Q1 2024 to $4.6885B in Q1 2025) | Strong revenue growth driven largely by robust demand in key markets – particularly in the Americas where bookings increased by 14% – and effective price realization strategies. This builds on Q1 2024’s momentum and highlights the company’s ability to translate strong volume and pricing adjustments into higher overall revenue. |
Operating Income | +29% (from $633.8M in Q1 2024 to $818.9M in Q1 2025) | Operating income expanded markedly due to the significant revenue uptick combined with improved cost management and productivity gains. The previous period’s operating performance laid a solid foundation, enabling enhanced margin leverage in Q1 2025. |
Net Earnings | +38% (from $439.8M in Q1 2024 to $609.1M in Q1 2025) | Net earnings surged as a cumulative result of higher revenues, improved gross margins, and more effective control of non-operating expenses. This sharper improvement compared to Q1 2024 underscores the impact of both operational excellence and favorable underlying business dynamics. |
Diluted EPS (continuing ops) | +41% (from $1.92 in Q1 2024 to $2.71 in Q1 2025) | Diluted EPS increased significantly owing to the robust growth in revenues and earnings, compounded by share repurchase activities that helped reduce the weighted average share count. This builds on prior period performance improvements, further enhancing shareholder value. |
Americas Revenue | +14% (from $3.3348B in Q1 2024 to $3.8007B in Q1 2025) | Americas revenue surged as a result of strong volume gains and price increases, reflecting sustained demand in both Commercial and Residential HVAC segments. The impressive growth in this region continues the positive trend from Q1 2024, driven by a well-executed sales and pricing strategy. |
EMEA Revenue | ~+3.6% (from $553.4M in Q1 2024 to $573.5M in Q1 2025) | Modest revenue gains in EMEA stem from steady, albeit challenged, market conditions where growth in organic and acquisition-driven revenue was partially offset by currency headwinds and reinvestment pressures. This reflects a cautious but positive trend compared to the previous period. |
Asia Pacific Revenue | -~4% (from $327.3M in Q1 2024 to $314.3M in Q1 2025) | The slight decline in Asia Pacific revenue is attributed to softening demand and operational challenges in key markets like China, along with regional economic pressures. This mirrors a continuation of the downward trend experienced in Q1 2024, albeit on a smaller scale, underscoring ongoing regional headwinds. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Organic Revenue Growth | FY 2025 | 7% to 8% | 7% to 8% | no change |
Adjusted EPS | FY 2025 | $12.70 to $12.90 | $12.70 to $12.90 | no change |
FX Impact | FY 2025 | Approximately 100 basis points negative | Negative 50 basis points | raised |
M&A Impact on Revenue Growth | FY 2025 | Approximately 50 basis points | Approximately 100 basis points | raised |
Free Cash Flow Conversion | FY 2025 | 100% or greater | 100% or greater | no change |
Net EPS Impact of FX and M&A | FY 2025 | no prior guidance | minus $0.20 | no prior guidance |
Tariff Costs | FY 2025 | no prior guidance | $250 million to $275 million | no prior guidance |
Residential Market Growth | FY 2025 | no prior guidance | Expected mid-single-digit growth range | no prior guidance |
Commercial HVAC Growth in Americas | FY 2025 | no prior guidance | Targeting ~50% (3‐year stack) and high single digit to 10% | no prior guidance |
Transport Market | FY 2025 | no prior guidance | Down about 20% | no prior guidance |
EMEA Transport Markets | FY 2025 | no prior guidance | Down low single digits | no prior guidance |
Asia Market | FY 2025 | no prior guidance | Flat market overall | no prior guidance |
Capital Allocation | FY 2025 | no prior guidance | Plans to deploy 100% of excess cash over time | no prior guidance |
Organic Revenue Growth | Q2 2025 | no prior guidance (Q2 not guided in Q4 2024) | Approximately 8% | no prior guidance |
Adjusted EPS | Q2 2025 | no prior guidance (Q2 not guided in Q4 2024) | Approximately $3.75 | no prior guidance |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Organic Revenue Growth | Q1 2025 | 6% to 7% | ~11.2% year-over-year (from Q1 2024 net revenue of 4,215.5To Q1 2025 net revenue 4,688.5) | Beat |
Adjusted EPS | Q1 2025 | $2.15 to $2.20 | $2.71 (using Q1 2025 Diluted EPS from Continuing Operations) | Beat |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Robust Demand & Pipeline Growth | Q4 2024 and Q2 2024 calls consistently emphasized a broad‐based robust pipeline, elevated backlog and orders across verticals. | Q1 2025 highlighted record order rates, widespread robust demand and a strong pipeline across segments and regions. | Consistent and improving. The sentiment remains very positive with record‐high demand now setting new benchmarks. |
Commercial HVAC Business Growth | Q4 2024 discussed high single-digit order and revenue growth with multi-year stacked revenue improvements ; Q2 2024 detailed strong volume growth and double-digit revenue gains across regions. | Q1 2025 reported record orders, robust revenue growth by region and an increased pipeline, with heightened optimism and ambitious 3-year growth targets. | Upward momentum. Performance has advanced to record levels with sustained strength across regions, reinforcing a very positive outlook. |
Data Center and Education Vertical Expansion | Q4 2024 noted continued strength in data centers and solid prospects for education, bolstered by funding tailwinds (e.g. ESSER) ; Q2 2024 provided strong detail on data center growth driven by multi-year CapEx cycles. | Q1 2025 emphasized leadership in the data center vertical with innovation (e.g. liquid cooling improvements) and highlighted robust growth in higher education, affirming broad-based vertical strength. | Reinforced leadership. Data centers remain a key growth engine and education stays strong, though details vary by call; overall, the expansion message is consistently positive. |
Residential HVAC Market Dynamics | Q2 2024 discussed normalized channel inventories and an impending refrigerant transition with a focus on inventory management ; Q4 2024 focused on prebuy dynamics creating a headwind and the A2L (454B) transition challenges with pricing/tailwind impacts. | Q1 2025 reported no significant prebuy impact, normalized inventory levels and a nearly complete rollout of 454B refrigerant, suggesting effective transition management. | Improving sentiment. Past prebuy headwinds and transitional issues are easing as operations stabilize and the refrigerant change is successfully executed. |
Transport Business Downturn | Q2 2024 and Q4 2024 conveyed a significant downturn in the transport business, noting cyclical declines and expecting a rebound in later periods. | Q1 2025 reiterated a marked downturn (e.g. an expected 20% decline in the Americas trailer market) while maintaining optimism for a strong rebound beginning in 2026. | Consistently cautious. Short-term challenges persist across periods, although long-term recovery remains a central part of the outlook. |
Tariff Costs and Pricing Pressure | Q4 2024 mentioned an “in region for region” strategy and modest price increases (around 2 points), while Q2 2024 did not focus on tariffs explicitly. | Q1 2025 provided detailed estimates for tariff costs ($250–$275 million) and described proactive surgical pricing actions to offset these costs, ensuring minimal impact on EPS. | Steady and proactive. The focus on managing tariff costs remains strong with enhanced detail in Q1 2025, reflecting consistent efforts to mitigate pricing pressure. |
Operational Performance & Margin Expansion Metrics | Q2 2024 showed robust operational results with margin expansions of 140 bps overall and notable improvements in various regions ; Q4 2024 reported an overall EBITDA margin expansion and increased free cash flow. | Q1 2025 reported strong organic revenue growth, margin expansion (130 bps overall; 170 bps in the Americas) and healthy adjusted EPS growth, highlighting price realization and productivity gains. | Very positive and consistent. Operational performance continues to improve steadily across regions, with escalating margin expansion and effective cost management. |
Applied Systems and Service Revenue Trends | Q4 2024 emphasized strong multi-year growth in applied systems—with high multiples of service revenue over equipment cost—and robust service revenue performance with high margins ; Q2 2024 reiterated significant growth prospects and the strategic importance of the installed base driving service revenues. | Q1 2025 continued the positive narrative by highlighting strong applied systems performance (with a focus on retrofit projects) and solid service revenue growth (one-third of enterprise revenue) across verticals. | Consistently strong. There is sustained emphasis on leveraging applied systems for high-margin service revenue, supporting long-term growth. |
Demand Side Management & AI-Driven Energy Efficiency Solutions | Q4 2024 discussed leveraging digital twins and AI (e.g. BrainBox) to improve energy efficiency and capture opportunity in demand side management ; Q2 2024 similarly highlighted connected solutions and AI integration to reduce wasted energy. | Q1 2025 did not mention demand side management or AI-driven energy efficiency solutions. | Temporarily absent. Though previously emphasized, the topic was not mentioned in Q1 2025, suggesting a possible temporary de-emphasis or integration into broader initiatives. |
Emerging Growth Opportunities Challenges (e.g., Immersion Cooling) | Q2 2024 provided insight into challenges with immersion cooling, noting hurdles with its adoption alongside AI initiatives ; Q4 2024 did not mention emerging growth challenges. | Q1 2025 mentioned a focus on liquid cooling improvements (a related innovation) without detailed discussion of immersion cooling hurdles. | Reduced emphasis. Whereas detailed discussions emerged in Q2 2024, Q1 2025 only briefly touched on related innovation, indicating a possible strategic focus shift or deprioritization of immersion cooling explicitly. |
Macro Uncertainty and Credit Tightening in China | Q2 2024 addressed choppiness in China and noted that securing orders remained challenging, with significant attention to macro uncertainty ; Q4 2024 focused on tightened credit policies in China and broader macro softness in Asia. | Q1 2025 acknowledged macro uncertainty and noted that while challenges remain in China, sequential improvements in credit conditions have been observed, even as overall uncertainty persists. | Steady with cautious improvement. While macro uncertainty and credit tightening have been consistent themes, Q1 2025 indicates modest sequential improvements in China amid continuing caution. |
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Tariff Pricing
Q: How are tariffs affecting pricing?
A: Management expects $250–275 million in tariff costs this year and will offset these costs on a dollar-for-dollar basis using surgical price actions, ensuring margins aren’t eroded, while actively seeking to mitigate the overall impact. -
Guidance Outlook
Q: Is revenue growth normalizing in H2?
A: They maintained full‑year guidance with 7–8% organic revenue growth. Strong Q1 results mean that only low single‑digit growth is needed in the back half to achieve the high‑end targets. -
Vertical Demand
Q: Any shifts in commercial HVAC verticals?
A: Management reported record order rates across a broad range of verticals—data centers, healthcare, and education—which shows robust pipeline strength and balanced market performance. -
Residential Transition
Q: How is the 454B transition affecting residential sales?
A: Residential performance was solid, with roughly 80% of shipments already in 454B, and although channel inventories are slightly elevated from a prebuy, mid‑single digit growth is expected for the full year. -
Backlog Strength
Q: Will the elevated backlog persist?
A: The pipeline remains exceptionally robust with record order-to-book ratios, particularly in Commercial HVAC, suggesting a sustained elevated backlog throughout the year. -
European Margins
Q: When might European margins rebound?
A: Ongoing investments in new products and enhanced channel efforts are driving strong order rates; margins are expected to recover once integration costs from recent acquisitions subside. -
Data Center Innovation
Q: What’s driving the data center side?
A: Consistent innovation efforts—including enhanced liquid cooling and improved COP—are underpinning strong performance in data centers, a key focus area for future growth. -
China Dynamics
Q: How is the China market evolving?
A: Despite earlier challenges, the China team is showing sequential improvement, with management expressing confidence that local strategies will lead to gradual outperformance over time. -
Sourcing Advantage
Q: Does Mexico offer a competitive sourcing edge?
A: Yes; about 85–90% of Mexico‐based shipments are USMCA compliant, which stabilizes the supply chain, while sourcing from China remains vulnerable to high tariff rates.