Carrier (CARR) Q3 2024: Organic Orders Surge 20% as Portfolio Transformation Nears Completion

October 24, 2024 | By EarningsIQ Research

Carrier’s third quarter showcased a business in transition, with organic orders up sharply and the final stage of its portfolio reshaping nearly complete. The company’s focus on high-growth HVAC verticals, disciplined cost control, and robust aftermarket expansion are setting the stage for a cleaner, higher-margin profile in 2025. Investors should watch for how Carrier executes on cost synergies, margin recovery, and capital deployment as the new, streamlined Carrier emerges.

Summary

  • Portfolio Reset Accelerates: Carrier’s divestitures and acquisitions converge to create a focused, growth-oriented HVAC platform.
  • Aftermarket and Digital Levers: Double-digit aftermarket growth and connected device expansion fuel higher-margin opportunities.
  • 2025 Setup Strengthens: Order momentum and cost tailwinds position Carrier for outsized earnings growth next year.

Business Overview

Carrier Global (CARR) is a leading provider of heating, ventilation, air conditioning (HVAC), and refrigeration solutions, delivering products and services for residential, commercial, and industrial customers worldwide. The company generates revenue through the sale of HVAC equipment, aftermarket services, and refrigeration systems. Its major segments now include HVAC (the core business post-divestiture), Refrigeration, and a growing digital and aftermarket solutions portfolio, with recent exits from fire and security and commercial refrigeration businesses sharpening its focus on climate and energy solutions.

Performance Analysis

Carrier delivered 4% organic sales growth in Q3, with total reported sales up 21% year-over-year, powered by the addition of Wiesman Climate Solutions (VCS), which contributed 17% to the top line. The Americas led with high single-digit organic sales growth, especially in commercial HVAC, which was up nearly 20%. Residential HVAC also posted double-digit gains, while light commercial lagged, down mid-single digits. EMEA saw low single-digit organic growth, driven by commercial HVAC, but offset by softness in residential and light commercial, particularly in Europe and China.

Adjusted operating profit rose 19%, though margins compressed by 40 bps due to the integration of VCS, which remains a short-term headwind but positions Carrier for future synergy capture. Notably, core earnings conversion hit 40% in the quarter and exceeded 100% year-to-date, underscoring strong operational leverage. The company repurchased $400 million in shares and reaffirmed plans for up to $5 billion in buybacks through 2025. Free cash flow was temporarily pressured by $1.1 billion in cash taxes and restructuring tied to business exits, but underlying free cash flow performance stayed robust.

  • Order Momentum Accelerates: Organic orders surged nearly 20%, with North America residential HVAC orders up 30% and global commercial HVAC orders up 15%, signaling strong demand visibility into 2025.
  • Aftermarket Outperformance: Double-digit aftermarket growth continued, with Carrier on track for a fourth consecutive year of such gains, driven by digital connectivity and expanded service offerings.
  • Margin Dynamics in Focus: While segment margins dipped due to VCS integration, underlying productivity and cost actions are expected to drive margin expansion as synergies materialize and non-core businesses exit.

Carrier’s Q3 results reflect a business balancing short-term integration headwinds with accelerating momentum in its core verticals and a clear path to a higher-margin, more resilient operating model.

Executive Commentary

"Organic orders were up 20%, about 20%, compared to last year, and we continue to increase our backlog, positioning us for continued growth as we head into 2025. The team drove 4% organic sales growth by leaning into verticals of strength to help offset continued headwinds in residential and light commercial HVAC in Europe and China. Importantly, we delivered double-digit aftermarket growth, and we are on a path for our fourth year in a row of double-digit growth."

David Gitlin, Chairman and Chief Executive Officer

"Q3 adjusted operating profit of over $1 billion was up 19% compared to last year, driven by the contribution of Wiesman Climate Solutions, the benefit of organic growth, and price and productivity. Adjusted operating margin was down 40 basis points. The consolidation of Wiesman Climate Solutions represented about 130 basis point headwind to adjusted operating margin in the quarter."

Patrick Gores, Chief Financial Officer

Strategic Positioning

1. Portfolio Transformation and Focus

Carrier’s portfolio reset is nearly complete, with the sale of its commercial refrigeration business finalized and fire and security exits on track for year-end. This positions Carrier as a pure-play HVAC and refrigeration company, with a simplified structure and greater exposure to secular sustainability trends.

2. Data Center and Vertical Expansion

Data center HVAC orders tripled year-to-date, reflecting Carrier’s success in targeting high-growth, high-margin verticals. Management highlighted the transformative aftermarket opportunity in data centers, where service revenue can be five to ten times the initial equipment value over time, unlocking durable, recurring revenue streams.

3. Digital and Aftermarket Leverage

Connected device deployments and digital platform expansion (Abound, Lynx, Wiesman OneBase) are driving double-digit aftermarket growth, with 5,000 new chillers connected in Q3 alone. Carrier’s “Aftermarket 2.0” strategy aims to deepen customer relationships and increase high-margin service attachment rates across the installed base.

4. Synergy Capture and Cost Discipline

VCS integration is ahead of plan, with $200 million in cost synergies targeted for 2026 and $75 million already realized this year. Standardization of electronics, embedded software, and supply chain harmonization are expected to drive further margin improvement as integration progresses.

5. Capital Deployment and Shareholder Returns

Carrier’s $5 billion share repurchase authorization and commitment to a 30% dividend payout ratio reinforce a balanced capital allocation framework. Debt paydown and refinancing plans are expected to reduce interest expense and support ongoing buybacks, while insurance recoveries from AFFF settlements will offset legal settlement outflows.

Key Considerations

Carrier’s Q3 marks a turning point as the company emerges from a multi-year transformation with a cleaner, higher-growth profile and improved margin visibility.

Key Considerations:

  • Order Backlog Build: Sustained double-digit order growth and backlog expansion underpin visibility for 2025, especially in commercial HVAC and data centers.
  • Aftermarket Multiplier Effect: Digital connectivity and aftermarket strategy are becoming core growth engines, offering higher margins and stickier customer relationships.
  • Synergy Realization Pace: VCS cost and revenue synergies are tracking ahead, but require continued execution to fully unlock intended value.
  • Margin Recovery Trajectory: Margin headwinds from VCS integration are expected to abate as cost actions and portfolio simplification flow through results.
  • Capital Deployment Flexibility: Large-scale buybacks and disciplined dividend policy reflect confidence in free cash flow generation post-transformation.

Risks

Execution risk remains around the integration of Wiesman Climate Solutions and the realization of targeted synergies, particularly if end-market demand softens or cost savings lag expectations. Macroeconomic volatility in Europe and China could pressure residential and light commercial HVAC segments. Legal and regulatory uncertainties, especially final court approval for AFFF settlements, could introduce unforeseen liabilities or cash outflows. Finally, the pace of digital adoption and aftermarket penetration may vary by region and customer segment, impacting the speed of margin expansion.

Forward Outlook

For Q4 2024, Carrier guided to:

  • Mid-single-digit organic growth, with HVAC expected to be close to 10% and refrigeration down mid-single digits.
  • Operating margin of approximately 12.5% overall, with HVAC margins near 15% and refrigeration around 13%.

For full-year 2024, management maintained guidance:

  • Reported sales of roughly $22.5 billion, with organic growth of about 3%.
  • Adjusted operating margin of ~15.5%, up 150 bps YoY.
  • Adjusted EPS from continuing operations of about $2.50.
  • Underlying free cash flow of approximately $2.4 billion.

Management emphasized double-digit adjusted EPS growth for 2025, driven by organic revenue growth, cost elimination from portfolio exits, lower net interest expense, and $5 billion in planned share repurchases.

  • Commercial HVAC and data center verticals expected to drive above-average growth.
  • Aftermarket and digital platforms to continue delivering double-digit growth.

Takeaways

Carrier’s Q3 confirms the company’s transition to a focused, high-growth, and higher-margin HVAC and refrigeration pure play. Portfolio simplification, digital and aftermarket expansion, and disciplined capital deployment set the stage for a strong 2025 and beyond.

  • Backlog and Orders Signal Strength: Robust order momentum and backlog gains underpin confidence in continued growth, especially in commercial HVAC and data centers.
  • Synergy and Margin Upside: VCS integration and cost discipline are expected to drive margin expansion, with cost synergies tracking ahead of plan and digital aftermarket levers gaining traction.
  • 2025 Will Test Execution: Investors should monitor the pace of synergy realization, margin recovery, and how Carrier leverages its streamlined portfolio to drive sustainable, profitable growth.

Conclusion

Carrier exits Q3 with a simplified business model, accelerating order momentum, and a clear path to margin and earnings growth in 2025. The company’s strategic focus on high-value verticals, digital aftermarket, and disciplined capital allocation positions it well, but execution on integration and cost capture will be critical to realizing its full potential.

Industry Read-Through

Carrier’s results reinforce several key industry trends: The secular shift toward energy-efficient HVAC, digital connectivity, and sustainability is accelerating, with data centers and decarbonization infrastructure driving outsized demand. The aftermarket multiplier effect, especially in digital-enabled service contracts, is becoming a critical lever for margin expansion across the HVAC sector. Portfolio simplification and focus on core verticals are likely to be echoed by peers seeking higher growth and margin resilience. Finally, large-scale capital deployment and buybacks signal confidence in free cash flow durability among leading industrials, but also raise the bar for execution on integration and synergy realization in a consolidating market.

CARR Industrials HVAC Aftermarket Digital Synergies Portfolio Orders