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 Redner, 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 Gorris, 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 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 Viesman 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 links, our digital platform for transportation, were up 40% in the quarter to about 210,000. Last on systems. Build 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 5. 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 6. 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 1st, 2027, which is a reminder, 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 7, 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 business, 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.

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. 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 seven-cent benefit from a lower tax rate, about five cents of which timing between Q3 and Q4. Total company organic growth was down four 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 a 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 profits 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 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 resin-like commercial in China. Within China, our resin-like 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 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 percent 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 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 America's commercial business is expected to grow over 25% this year, an outstanding performance. Overall, we now expect about $22 billion dollars 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 $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 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 Sprake of Vertical Research Partners. Your line is now open.

Hey, thank you. Good morning, everyone. Hey, just obviously a couple questions around RESI. Just first of all, 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. But 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? And 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. So maybe just a little bit of color on what you think kind of sell-through or movement might be as we act.

Sounds good, Jeff, and good morning. I'll take the first part of the question. So far on a consolidated level, our inventories are up about $500 million. dollars of that about 400 million dollars is in our csa resi segment and of the 400 million increase in our csa segment the resi element is about 350 million of that increase and basically it's a reflection of two things one a sudden decline in residential volume and so 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. And 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 have them to rehire the first quarter of the year. And so there's a little bit of a balance there between operating profits and free cash flow and ensuring that we can meet demand, expect the demand in the first quarter of the year. So you can expect that increase to start coming down by the end of the calendar year.

And 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 percent year over year. In terms of your question on movement, movement was down about 30 percent it looks like in october and we expect movement to be down in the mid-20s for november and december now remember movement was very strong in 4q last year it was up about 30 percent and then it started to get weaker as we got into q1 of this year so movement starting in q1 of this year was negative so we'll start to see some easier comps on movement so 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, and then we'll have to see what movement does as we get into Q1.

And 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've 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 Our parts are up quite a bit, but we've been very purposeful about increasing our share of wallet on part sales. So 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 is more consumers opting for repair over replace, and we're hearing some sporadic pickup of that in certain locations. So I would have to believe it's happening in the system, although it's really hard to dimensionalize just how much.

Right. Thank you. I'll leave it there.

Thanks, Jeff.

The question comes from the line of Scott Davis of Milius. Your line is now open.

Hey, good morning, guys. Just to follow up a little bit on Jeff's question, has the inventory de-stock 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, does that change the price dynamic at all?

You know, we'll have to see, Jeff, as we think about 26 pricing, I mean, Scott, when we think about 26 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 Q. 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. But in terms of price, I think this year's been probably closer to mid-single digits. and next year is probably closer to low single digits.

That makes sense. And then 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 kind of the usual cut and discretionary spend? Is there actual structural cost out that we can count on lingering, not just into 26, 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 head count. We're looking at about 3,000 heads. And then the whole goal is to make sure that we are very disciplined about not adding those heads back in. And it's not just giving out targets and having people take the heads out. We're trying to do things like using Patrick's CBS organization to do things differently in terms of how we deal with collections or payables or do things much more efficiently. Bobby and our IT department using AI in groups like our legal department or elsewhere to make us more efficient in how we do things in the back office. So we're trying to do things a lot smarter, a lot more efficiently. We have 20,000 co-pilot licenses that are starting to cascade across carriers. So the answer is 100% focused on structural cost takeout that comes out and stays out.

Thank you, David, Patrick, and Mike. Good luck to the rest of the year.

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

Hi. Good morning. So 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 290s 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 percent 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. So, first of all, 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. And 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. And so the question really is, is what happens with the balance of the company? And a big part of that is CSA Resi. at this point, and still very early, our estimate is it may be flat to slightly up from a volume perspective. And 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 debt getting worse. And so we think flat might be a safe assumption. Maybe it gets better.

That's very helpful. Thank you. And then just maybe 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, but 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. So the data center business in our commercial HVAC business was up about 250 percent. Non-data centers up in the low teens, so total was up 30 percent. So our applied business in commercial HVAC in the Americas was up 60 percent. 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, health care, even more so in commercial than light commercial, but surprisingly, commercial real estate was even up again this quarter over the last quarter. We don't see it as a trend. You know 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-12 are weak, both for commercial HVAC and light commercial.

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

Perfect. Thank you. Thank you.

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

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

Hey, Steve. Good morning.

Just on this resi, so you said you're getting mid-single-digit price this year. I guess when you think about the low double-digit or whatever it was for the price mix i guess how much was mixed and how much was price i know there's like in the beginning you were getting a bit more price than mix but um how does that break out in resi uh for the third quarter yeah for 3q uh it would have been three and eight okay got it that that's super helpful and then when you guys talk about the 30 percent i guess to back to julian's question um i think that includes services so i guess the applied business if if non-data center was uh or data center was up 250 and your applied was up 60 i did that that still implies that kind of the just getting more specific the the applied csa was up or was the applied you said it was a mixed bag what 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 wasn't.

When we look at total CHVAC in the Americas was up 30 percent. The applied business, the equipment was up 60, aftermarket was up mid-teens, and the controls business was up a little over 20 percent.

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

Yes, up in the low teens.

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

Your next question comes from the line of Nigel Cull of Wolf. Your line is now open.

Just a quick one on the data center backlog, Dave. I think you've mentioned you needed to kind of build that backlog to kind of grow in 26. I just want to make sure that the $0.9 billion of backlog you're expecting at the end of this year is kind of where you expect to be for 2026, and therefore we should see nice growth next year. Yeah, and 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. It always was $1 billion. Always $1 billion. So it was $1 billion, still is $1 billion. And I will tell you, you know, 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. So I've been very pleased. We wanted to go into next year with a backlog that was higher than the backlog, of course, 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. So we came in with $700 million for this year, and we'll do about a billion. We wanted to end close to $900 million so we could drive nice growth for next year. And we're on track to end with backlog in that $900 million range. We're a little bit north of $700 today. We got a lot of very strong irons in the fire. And there's just a lot of exciting activity. Frankly, I just got back late last night from Tokyo. So we were over there. We've been working with our Japanese hosts. We've been working with the administration, had a number of meetings yesterday with Secretary Lutnick. So we signed this morning. We had one of my colleagues, Michael Gerges, was over there signing an MOU. There's going to be investments here in the Americas for infrastructure and data centers. So we're continuing to push every angle with hyperscalers, colos, and some of the unique opportunities that are out there. And 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 to Japan. But in terms of the movement numbers you just threw out, incredibly weak. So I understand channel inventory is expected to be down to 2019 levels by the year-end. But I'm just wondering with 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 kind of the soft movement market that we've been over these last few months and continue to be in. So, you know, we've tried to plan 4Q in a way to avoid surprises like we had in 3Q. So 4Q and 3Q we've assumed are effectively the same with total sales down about 30, movement down, I mean, volume down about 40%. And 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 will become effective in January. So we're working very hard with our distribution partners, so when we wake up in January, we're not talking about further de-stocking. 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, and that lightens, of course, as we go into 2Q and through the year. But, you know, 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. Okay.

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

Hey. Good morning, guys. So, look, 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, because typically you guys build inventory from the fourth quarter to the first quarter. Are we to assume that that does not happen this, you know, in 2026? And then 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, Joe, 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. So 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, And 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, then you're suddenly hiring as you start to gear up for the season. So we've kept operations going in places like Tennessee and Monterey at very low levels, but continued levels. So 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 tradeoff 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. But I don't think anything major there. But we won't have the usual significant ramp as we get into season.

Patrick? And then just on the incrementals and 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%. And so clearly, it's 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. And then my quick follow-up, 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, and then 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.

Okay, great. Thanks, guys. Thank you.

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

Good morning, everyone. Good morning, 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. So maybe just how you see that market playing out in 26, what's the conviction level that we will mark a bottom this year, and maybe you can elaborate on what you're doing to get the margin up in that segment.

Yeah, let me do the first one first. I think it's a bit of a fool's errand to call about them. But I will say that, you know, we saw such strong growth in 2022. So the market there has just taken a whole lot of medicine since. So 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. So 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. Now, in Europe versus the United States, the United States 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 and to 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. So 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. and we see a little bit more muted decline in the boilers, Germany should be poised for strength as we go into 2026. And then you'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. So I think 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. And 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.

And then, Andy, 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 a European segment in CS Europe.

Thanks for that, guys. And then I think you had suggested recently 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. And it goes back to Resi China. And so 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, our team over there is in the process of working with our partners there to reduce the inventory levels in the field there as well.

Appreciate it, Gus.

Thank you.

The question comes from the line of Dean Dray of Royal Bank of Canada. Your line is now open.

Thank you. Good morning, everyone.

Good morning, Dean.

Hey, I was hoping to circle back on the de-stocking. And if you could put some of this into context, most of these decisions on the de-stocking are being made by your independent dealers. So I know if you could just kind of collectively their mindset in being aggressively taking inventory down to eight-year lows. And then once this is done, is there a risk that you get a normal seasonal demand in the spring, a couple of hot days, and then we'll be back talking about inventory shortages and just how quickly can it ramp up assuming normalized demand in the spring?

Well, look, Dean, that would be a tremendous problem to have. What we have learned about this business is that it is very short cycle and you can see sudden swings and you can see sudden swings for a whole bunch of variables. So I will say that we've looked hard at our forecasting model too, that we had a model that kind of withstood the test of time in a short cycle business over many, many years, but it clearly failed us over the past five months or so. So we've looked at it. We're using AI to see if we can get more correlations between certain variables so we can have a bit better. It's going to take a couple quarters to figure out whether the new forecasting tool has some better correlation to some of these variables. But having said that, I do think that our independent distributors are being very clear-eyed about making sure that they start the year with inventory levels that they feel are balanced. then we're working very closely with them, distributor by distributor, to make sure that they have what they feel they need, but not a single unit more than what they need. Could we see a nice influx of orders as we get into the spring, driven by whether it's weather or by consumer sentiment or by a rebound in new home construction? for sure. But right now, as we think about our own internal forecasting and, quite honestly, our external forecasting, you'll see us err on the side of conservatism.

Understood. And then as a follow-up, the discussion about applied, we see vertical. If you take it through the verticals, you said they were mixed. Obviously, Data Center is at the top, but just kind of take us through the rest of them. And anything on the government slowdown, project pushouts, delays, anything you would comment there?

Yeah, I'd say on the second part of your question, Dean, I'd say the only real impact we've seen on the government shutdown, we've seen it a bit in our light commercial business. That business is weaker than we thought going into 4Q. We thought 4Q would be flattish. We're now saying down about 15. And part of it is, even though rates seem to be coming down a bit for some of the small businesses, they've been a little bit limited on lending and credit. And some of that is loans processed by the SBA have been put on hold. So that's the one area with the shutdown that we've seen that we can directly correlate to a business has probably been in our light commercial business. I would say overall, the verticals of strength vary by region a bit. Like for example, in most parts of the world, healthcare has been very, very strong and it's gotten a little bit weak over the last quarter in China and China renewables has been weak but I would say if you're looking for trends globally number one two and three is data centers that is strong in the Americas and and it's very strong globally we're seeing pockets of strength in the Middle East and Southeast Asia we're winning orders in India we have our sales folks in China, diverting from projects they had been on, focused clearly on data centers. A lot of industrial production has been strong globally, including reshoring in the United States, some of the mega projects. Retail has been a mixed bag, but that's been an area of strength. Education through 12 is generally weak globally, certainly here in the United States. So, and another area that you'll be hearing us talk a lot more about is mods and upgrades. So where we see limited new construction and commercial real estate in key parts of the world, and especially in some very dense populations in certain cities, we're very, very focused on modifications and upgrades. So that's a whole new vector for us. We've been at it for a while, but we're doubling down on that area as well right now.

Great. Thanks for that update.

Thank you, Dean.

Your next question comes from the line of Andrew Obin of Bank of America. Your line is open.

Yeah, good morning.

Good, Andrew.

Just a question on magnetic bearing chillers. Just where is the industry capacity? Where are you? Because, you know, our channel checks are picking out that overall the industry sort of was a bit too successful in getting orders. And, you know, there's not a lot of capacity out there. So what's your ability to take market share, or do you need to have capacity yourself?

We're in great shape, Andrew, and it's been very purposeful. We've built a whole new facility in North America. We've expanded the existing facility that we have in Charlotte. So if you look at our capacity just since 2023 in North America, our capacity for water-cooled chillers is up 4x. Total chillers, when you include air-cooled, is up 3x. And I think, look, that's been contributing to a lot of the share gains that we've seen at commercial HVAC, some tremendous wins on the data center side. I could not be more proud of the team. And part of it is having the capacity now, and we have a lot more capacity to go, not capacity to go. We have a lot more capacity to continue to grow without further investments. And part of it is the way we're interfacing with our customers. We said to our team and we said to our customers, if you have confidence in us, we will never let you down. We will track deliveries by the hour. We'll make sure that we're always there for you, not only on the delivery side, but technically, in terms of installation, in terms of startup. So a lot of our orders are coming from customers that we've proven that we are in their corner. And then part of it is the investments that we've made in the technical portfolio. We have a new air-cooled chiller that has mag bearings. that's coming out right now. Huge interest from our data center customers. So a lot of great wins and the investments that we've made over the last 24 months in the additional capacity are paying off. We don't need any more CapEx. We may do a little bit more in certain countries where that's a part of the win process and we'll see how that plays out. But right now we're very, we're well set in North America.

Thank you. And just a little bit more pace on Resi coming back in 26. Should we be saying first, you know, because you sort of said flat to slightly up. So should we be saying Q1 down and then it gets positive after second quarter? Is it first half, second half story?

I clearly the first half will be very difficult given the very strong first half we had this year. And so I think it's fair to say that we would expect Resi first half, especially Q1, to be down year-over-year from a volume perspective.

Thank you very much, Patrick. Thank you.

Your next question comes from the line of Chris Snyder of Morgan Stanley. Your line is now open.

Thank you. I wanted to ask about America's margins into next year. It seems like the guide, if my math right, puts Q4 at maybe a low double digit to low teens exit rate. And, you know, if the company is, I guess, effectively underproducing to maybe about Q2 of next year, I would think the absorption headwinds drag through maybe around mid-year. I guess, should we expect America's margins down next year, you know, just given how hard these first half comps are, you know, even if the segment can collectively grow in 26? Thank you.

Obviously, quite early to comment on 2026 margins, but I think that a CSA margin this year will be around 21 percent or so unless for some reason resi would be significantly down next year which we at this point do not expect i would not expect the csa margins in to be down next year actually i would expect them to be up thank you i appreciate that um and then just to follow up on the price um you know i think you guys said expect low single digit realization on you know fresh 26 price.

I guess kind of how do you think about balancing the need to cover cost inflation, which is still evident, versus just potential demand destruction? You know, we have seen these price increases get multiplied as they work their way through the channel and onto the homeowner. And I think the risk would be that this just keeps the market in repair mode for longer. Any thoughts on how you guys balance that as an industry even? Thank you.

I think it will be important for us next year. And Dave mentioned that we expect to announce a price increase. We do expect to realize low single-digit price next year. Input costs are going up. And of course, we haven't spoken about this yet, but should there be any additional tariffs, this might impact the requirement or the need to further adjust pricing. And so, we certainly expect to realize additional pricing next year, though it will be much more modest, of course, absent any additional new tariffs.

And I think- And we do watch these elasticity curves. So we are sensitive to not taking actions that drive that dynamic between replace and repair, and we'll continue to watch our curves. But even watching those quite carefully, we're confident we'll get some level of price next year, albeit more modest than this year.

Thank you. I appreciate that.

Thank you.

Your next question comes from the line of Nicole DeBlaise of Deutsche Bank. Your line is now open.

Good morning, guys.

Good morning.

Can we just start with CST? Orders were up pretty significantly. Do you think we're starting to see this market rebound off the bottom, or is it more about just easier prior to your comps?

You know, I would say on the good side, the container business has been tremendous. You know, I mean, up 50 percent in the quarter. The year is going to be very strong, probably up 30 percent. And that's been share gains. It's been share gains the right way through our new product introduction. So that has been just a very, very good news story for us. It's hard to say with the North American truck trailer business. We've seen, you know, we expect that to have some good growth here in the fourth quarter. It was flattish in the fourth quarter. So the trends there are right. but it's too early to call a strong rebound, but we are seeing it move in the right direction. And I would say European truck trailer was a little bit down. It was down a few percent in Q3. It'll be down another couple of percent here in Q4. So I kind of think of it similar to some of our resi businesses. Truck trailer, we're number one player, very good margins, very well positioned. So as these markets, which have been a little bit depressed in Europe and the Americas, Because as they start to come back, and it's not clear exactly when, but as they start to come back over these next couple of quarters, that'll drop through very well.

Okay, got it. Thanks, Dave. And then can we just talk about Europe commercial as well? I think it was down mid-single digits in the quarter, and you had expected something a bit better than that. Orders were also down a bit. Can we just unpack what's going on there?

Is this more of a comp issue as well? yeah i'd say it's a i honestly would call it more of a timing issue um than much of anything else we see that even though orders weren't even great uh orders tend to be lumpy especially when we're pursuing some key data center customers i think that uh this quarter will be up double digits you know internally we're shooting for a fairly strong number but uh it should be up double digits here in Q4. We expect to have good backlog going into next year. The data center pursuits have been very strong. There's a couple unique things happening where, for example, in Q3, our rentals business was down more than 20% with year-over-year comparisons with the Olympics in Paris. So there's some things kind of at the margin within the factories and within aftermarket, but overall, demand very strong, team very well poised for double-digit growth, and we expect very strong growth in this space for next year as well.

Thank you. I'll pass it on.

Our last question for today comes from the line of Amit Maratra of UBS. Your line is now open.

Thanks, operator. Hi, everybody. Maybe just a couple quick ones for me. One is not to beat a dead horse on pricing, but any movement on pricing related to tariffs over the course of the year? I know you guys took a price increase on May 1st. Pricing discipline, obviously very strong, so no questions there but just just with respect to any movement relating to care specifically vis-a-vis rebates or anything like that just given how how tariff it's have evolved over the course of the year yes i mean um good memory we uh implemented incremental pricing earlier this year related to some of the new tariffs uh that was at the time of our q1 earnings uh we said it was about would require about $300 million of incremental pricing.

We updated that back in July with some of the additional actions we were taking. The pricing requirement is only closer to $200 million this year to offset tariffs. That number has not changed. So we're still in that $200 million range. And as I mentioned earlier, the carryover impact of tariffs, pricing, and the cost equation of that is expected to be net neutral in 2026, based on tariffs in place today.

Right. And then, Dave, just a quick follow-up. We're all trying to figure out the drivers of the weakness in residential HVAC this year. And just a lot got thrown at the market this year, whether it was the pre-buy, the slower, shorter selling season, the refrigerant shortage, just a lot of stuff happened this year. You made an interesting comment, I think, last month where you talked about a third of existing home sales translates to new HVAC shipments. It just seems like I understand that dynamic, but that number just seemed higher than I would have anticipated. So as you think about your demand models and the input to those demand models, we're all trying to answer this question about what volume looks like next year. What are the main kind of levers you're watching from a leading indicator perspective that may inform kind of how that market evolves.

Yeah, let me just start by clarifying that when people buy new homes, our experience is that usually 20% to 25% of the time, that results in a change to their HVAC system. So I think seeing the depressed new home construction, but also the sale of existing homes has been a double hit to demand. I think if you just step back and you think about resi as you go into next year. I would say the good news is that overall comps this year will be down high single digits. As Patrick said, we have much easier comps in the second half than the first half. We are taking a lot of actions to get field inventory levels ending this year at a level where we feel like destocking should not be a further headwind as we go into next year. On the positive side, interest rates hopefully will decline, and that should help both new home construction and the sale of existing homes, which, as we just discussed, does result in changes typically to HVAC systems in 20 to 25 percent of the time. And I think those that have been opting to do some level of repair over replace, there will be pent-up demand there. The things that we got to watch is we do have tough comps in the first quarter, perhaps a bit into 2Q as well. And it'll all come down to the strength of the consumer, and it's just too early to say how that's going to play itself out. We won't get too much of a mixed benefit next year. It's probably in the $20 million range or so. So it's going to come down. There's some reasons for optimism. There's some watch items, and we'll just have to see how next year plays out.

Right. Okay. Thanks very much. Appreciate it.

Thank you, and let me just close by thanking you all for joining the call, and thanks to our 50,000 colleagues globally. You know, this is a time where people are working extremely hard to control the controllables and support our customers, and I could not be more proud of our team and how energized and how hard they're working to make sure that we provide best-in-class support to our customers. So, thanks to all my colleagues and thanks to all of our shareholders.

Thank you for attending today's call, you may now disconnect, goodbye.