Carrier Global Q2 2021 Earnings Call Transcript

Quartr
Provided by Quartr
July 28, 2021

There are 16 speakers on the call.

Operator

Good morning and welcome to Carrier's Second Quarter 2021 Earnings Conference Call. This call is being carried live on the Internet and there is a presentation available to download from Carrier's website at ir. Carrier.com. I would like to introduce your host for today's conference, Sam Pearl, Senior Vice President of Investor Relations. Please go ahead, sir.

Speaker 1

Thank you, and good morning, Welcome to Carrier's Q2 2021 Earnings Conference Call. We appreciate your flexibility in accommodating the earlier start time for the call. Since we plan to discuss the Chubb transaction as well as the Q2 earnings, we have more flexibility if the call runs a little longer. With me here today are David Gitlin, Chairman and Chief Executive Officer and Patrick Orest, Chief Financial Officer. Except as otherwise noted, The company will be speaking to results from operations, excluding restructuring costs and other significant items of a non recurring and or non operational nature, often referred to by management as other significant items.

Speaker 1

The company reminds listeners that the sales, earnings and cash flow expectations and any other forward looking statements provided during the call are subject to risks and uncertainties. Carrier's SEC filings, including Forms 10 ks, 10 Q and 8 ks provide details on important factors that could cause actual results to differ materially from those anticipated in the forward looking statements. This morning, we'll review our financial results for the Q2, discuss the full year 2021 outlook and the agreement we announced Tuesday to sell our Chubb business. We will leave time for questions at the end. Once the call is open for questions, we ask that you limit yourself to one question and one follow-up to give everyone the opportunity to participate.

Speaker 1

With that, I'd like to turn the call over to our Chairman and CEO, Dave Gitlin.

Speaker 2

Thank you, Sam, and good morning, everyone. It is great to be hosting this call from the Carrier Cooled New York Stock Exchange, and we appreciate the support that we've received from the team here. Please turn to Slide 2. Before we discuss the Q2 results, let me address the press release that we issued Tuesday announcing that we signed an agreement to sell our Chubb business to API Group for an enterprise value of $3,100,000,000 To be clear, Carrier's Global Fire and Security Products business is not part of this transaction and remains an integral part of Carrier's portfolio and our healthy, safe, We committed at our Investor Day last year to objectively assess our portfolio and do so through a rigorous application of our Strategic and financial priorities. Within our Fire and Security portfolio, our products business is differentiated with leading market positions and Chubb is an industry leader with 13,000 employees that do a great job with installation and maintenance supporting our customers, But it is an agnostic business that does not pull through our products and yields lower margins.

Speaker 2

We concluded that Chubb is more strategic to API Group than it is to us. Divesting Chubb will significantly simplify our business. Chubb represents over 20% of our employees or less than 10% of our adjusted operating earnings. Selling Chubb will increase our focus on our core businesses and enable us to reinvest the proceeds consistent with our capital allocation priorities to create long term shareholder value. Patrick will discuss in more detail, but our capital allocation priorities have remained consistent.

Speaker 2

Funding organic and inorganic growth, Dividends and share buyback within a solid investment grade credit rating. Our intention is to use the cash proceeds and excess cash on the balance sheet for acquisitions, buyback and debt pay down over 12 to 18 months to help position the company for strategic growth and to generate attractive shareholder returns. The net result will be a new, More focused Carrier with more product differentiation, faster revenue growth, higher margins and higher returns on invested capital. This was an important deal for Carrier and I want to thank our team and advisors for their tremendous work. Now turning to our Q2 results on Slide 3.

Speaker 2

Q2 was another strong quarter for us. Our growth continues to be fueled by broad economic momentum, Our position at the epicenter of important secular trends and the benefit of our strategic investments. Managing the surge in growth has strained our extended supply chain, but our teams are navigating those challenges well to support our customers. You see our progress reflected in our 2Q results. Organic sales were up over 30%.

Speaker 2

Particularly encouraging was that the growth was strong across our portfolio and that we even grew 7% versus 2Q of 2019. Orders were up about 35% organically compared to last year, driving our backlog up 8% sequentially and up over 20% year over year, positioning us well for 3Q and the second half of the year. We produced $821,000,000 of adjusted operating profit, up over 70% year over year And consistent with what we said during the April earnings call, Q2 incremental margins improved sequentially from Q1. Free cash flow continues to be strong with first half free cash flow up more than 30% over the first half of last year. Given our first half performance, strong backlog and expectations around the balance of the year, we are again raising our full year guidance for sales, earnings and cash.

Speaker 2

We now expect organic sales to grow 10% to 12%, adjusted EPS to increase by about 30% compared to And we are increasing our projected free cash flow by $200,000,000 to about $1,900,000,000 Now turning to Slide 4. We remain confident in sustained growth in our end markets and that our new operating system culture and team performance Position us well to lead within our space. Key secular trends are likely to propel sustained growth for our industry. With people spending 90% of their time indoors and increasingly returning to their offices and recreational activities, we see more spend being allocated to the health, Safety, comfort and intelligence of indoor environments of all types from homes to schools to hospitals to commercial office buildings. Likewise, the need for safe cold chain solutions has been intensified by the focus on vaccine distribution and the increasing global middle classes demand for more fresh produce and other refrigerated products, and of course, The need for sustainable solutions.

Speaker 2

Given that the building sector contributes about 40% of carbon emissions And food waste contributes another 10% to 15%, we are confident that spend on sustainability will continue to drive demand for our green solutions. We therefore remain laser focused on healthy, safe, sustainable and intelligent building and cold chain solutions and we are leaning into those trends by executing on our 3 pronged growth strategy, growing our core, expanding product extensions and increasing recurring revenues through digitally enabled aftermarket offerings. And we are seeing strong progress as you can see on Slide 5. We have booked $250,000,000 in healthy building orders year to date and our active pipeline sits at 500,000,000 We are confident that spend on healthy buildings is not only sticky, but that it will accelerate as building owners will play both Defense and offense on behalf of their occupants. Defensive spend is largely focused on defending against the spread of airborne illnesses.

Speaker 2

For example, 40% of classrooms in the United States have insufficient ventilation and studies show that better ventilation and filtration materially reduce the spread of microscopic particulates like COVID and other illnesses like the flu and common colds. Building owners are also starting to invest in better relation to play offense. Recent studies have shown that people perform twice as well when the indoor environment is optimized. High CO2 levels, which can occur in crowded classrooms and offices with poor ventilation have been proven to impact brain based skills, Because of the many benefits of healthy indoor air environments, our goal is to make indoor air visible. So good air quality becomes as important and expected as safe drinking water.

Speaker 2

A Bound is a key enabler to make that happen. We received favorable feedback from our key launch customers, which We have deployed it in our company headquarters where we have been demonstrating its power to customers. We are now leveraging our global sales force to deploy Abound and have had significant interest from marquee customers. In addition to Abound, we recently launched a Wi Fi enabled carrier home air purifier with a HEPA level filter as one of our latest healthy home offerings. We have now sold over 38,000 OptiClean units.

Speaker 2

On K-twelve, we have a dedicated team offering kitted solutions to our customers, resulting in sales to about 15% to 20% more school districts so far this year compared to last year as part of what we expect to be a significant opportunity over the next few years. Similarly, our connected cold chain offerings are gaining traction. Our cloud based digital links offering that we are building in partnership with AWS was recognized by Fast Company as one of 20 20 1's world changing ideas. In the container space, we are adding connectivity for 1,000 of units each month and now can support mixed suites carrier and non carrier, thereby increasing our recurring revenues and reducing our customer maintenance and logistic costs. We had significant links wins this quarter with truck trailer, including 1700 more trailer refrigeration units for prime and a 3 year supply agreement with UK grocer, Sainsbury's for all of its truck and trailer transport refrigeration equipment.

Speaker 2

Vertex is Carrier's AI and IoT platform that offers predictive insights, recommendations and Autonomous actions to optimize equipment performance and building operations, while minimizing our customers' energy consumption. Currently, over 220,000 pieces of equipment are connected to Kornix. Digital solutions are helping to drive increased aftermarket and recurring revenues. Aftermarket sales for Carrier were up about 20% in Q2 over last year, All helped by our differentiated BlueEdge tiered offerings. Our attachment rate in commercial HVAC was more than 35% in Q2.

Speaker 2

And we are on track to add another 10,000 chillers to long term contracts this year from about 50,000 to 60,000. Likewise, in our Refrigeration business, our Europe truck trailer business sold nearly 6 1,000 BlueEdge service agreements in the first half of the year. In addition, our Fire and Security segment and continues to expand our key digital offerings. Earlier this year, LANELIS II was featured in the Apple Worldwide Developers Conference and we're excited to work with on providing Blue Diamond mobile credentials in Apple Wallet, on iPhone and Apple Watch. As employees come back to office buildings, This work can increase the profile of access control solutions that help reduce touch points, enhance occupant experience and increase confidence and indoor environments.

Speaker 2

So very significant progress on healthy, safe and intelligent offerings and recurring revenues. And on Slide 6, you see similar progress on our focus on sustainability. In short, we are committed to providing environmentally sustainable solutions and our performance over the past year reflects just that. We are on track to meet our commitment of reducing our customers' carbon emissions by more than 1 gigaton and ensuring our operations are carbon neutral by 2,030. 30.

Speaker 2

Electrification and energy efficiency are major focus areas for us. Commercial heat pumps in Europe And residential heat pumps in North America were both up 20% to 30% in the quarter. Electrification is Equally critical to our Refrigeration business. Interest in our Vectra eCool unit in Europe remains high and our backlog continues to grow. This is the only 100 percent electric trailer reefer unit in the market today.

Speaker 2

Our efforts in helping customers reduce Missions in creating more energy efficient solutions are starting to be reflected in some of our external ratings, including improvements in both our MSCI and analytics scores in the past year. As you can see on the slide, we are now considered a leader in the industry. So great progress on ESG, which is a fundamental aspect of who we are. So before I turn it over Patrick, a word on a leadership change that we recently announced. In a couple of weeks, Tim White will join us as President of our Refrigeration segment.

Speaker 2

Tim has been running GE's multibillion dollar onshore wind business for the Americas region and he ran key P and Ls within Collins Aerospace that included electric systems, environmental control systems and engine control systems. He is the perfect leader to take this well positioned business the next level as we focus on electrification, digitalization and sustainable solutions. I also want to thank David Apple for his tremendous leadership of the segment. We are fortunate to have David moving to Paris where our commercial refrigeration business is headquartered to provide the focus that, that business needs to improve operational, strategic and financial performance. We appreciate David taking on this critical assignment.

Speaker 2

So with that, let me turn it over to Patrick. Thank you, Dave, and good morning, everyone. I'll start with comments about the quarter and the outlook

Speaker 3

and then provide additional color on the Chuck transaction. Please turn to Slide 7. As Dave mentioned, Q2 was a good quarter with sales, operating earnings, adjusted EPS and Free cash flow all exceeding our expectations. Sales of $5,400,000,000 were up 37% compared to last year. Currency was a 5 point tailwind for sales in the quarter or about $200,000,000 and acquisitions, that's mainly Chiggo, added another point of growth.

Speaker 3

Given the impact from COVID last year, this quarter obviously had an easy comparison. Nonetheless, organic sales growth of 31% was significantly better than we expected across all our businesses. Adjusted operating margin expanded over 300 basis points to 15.1%. Strong sales growth and benefits from Carrier 700 were partially offset by investments and higher input costs. As we expected, price cost was negative in the quarter, Given the timing of price and cost increases, much stronger than expected demand combined with supply chain challenges negatively impacted Factory efficiency.

Speaker 3

It also meant material purchases went beyond block positions, and as a result, We bought some materials and components at spot prices and utilized expedited freight. I'll address our outlook For the balance of the year with respect to pricing costs in a few slides, they'll share that we already announced additional pricing actions to offset rising inflationary pressures throughout our supply chain. Reported earnings conversion of about 24% improved sequentially and excluding currency and acquisitions, conversion was in the high 20s. Free cash flow of 48 $2,000,000 in the quarter reflected better than expected net income and was similar to last year's 2nd quarter despite $180,000,000 of higher interest and tax payments. Finally, we repurchased about 2,000,000 shares at an average price of $44.33 during the quarter, bringing our year to date repurchases to about 3,000,000 shares.

Speaker 3

Let's now look at how the segments performed starting on Slide 8. HVAC organic sales were up 32% in the quarter with nearly 35% residential HVAC growth. As we previously said, we expected residential field inventory levels to finish 10% to 15% higher than the end of Q2 twenty nineteen. Strong distributor movement of over 20% compared to last year led to field inventories ending the quarter only 7% higher and at the end of Q2 of 2019, a much more balanced inventory level. The North American light commercial business saw a significant rebound with sales up over 60% in the quarter.

Speaker 3

Light commercial field inventory levels are now down just 3% year over year. Overall, commercial HVAC sales were up about 20% organically. The HVAC team expanded margins by 300 basis points year over year, driven by strong growth across all businesses in this segment, including services. The segment remains on track to generate about 16% adjusted operating margin this year. Moving to Refrigeration on Slide 9.

Speaker 3

Sales were up 38% organically as the cyclical recovery in transport that we see in orders continue to convert into sales. Transport refrigeration was up over 40% in the quarter with very strong growth in both global truck trailer and container. Our Sensatec business continued to benefit from the vaccine rollout and was up about 20% in the quarter. Commercial Refrigeration grew about 30% as re openings in Europe drove strong growth. Margins for this segment were up 3 20 basis points in the quarter compared to last year, mainly as a result of the higher sales.

Speaker 3

We continue to meet customer demand, but are incurring higher costs to do so, including airfreight. We expect operating margins to improve in the second half as the higher margin North America truck and trailer business recovery continues. Given the higher input costs, we now expect full year 2021 operating margin for this segment to be in the mid-thirteen percent range, a little lower than we previously expected. Moving on to Slide 10, organic sales at the Fire and Security segment Grew 25% and both the products and field businesses grew at similar rates. Within the products business, which represents about 60% of this segment sales.

Speaker 3

Residential and Commercial Fire continued to be solid. Given the easier comparisons, Access Solutions returned to double digit growth and our industrial businesses were up high single digits. In Industrial Fire, we saw the recovery for upgrades and retrofits begin in marine services and in the oil and gas markets. Higher sales and Carrier 700 performance helped drive the 140 basis point margin expansion in this segment. With a higher sales outlook and the timing of price and cost actions, we expect higher margins in the back of the year compared to the first half of the year and overall margins to be in the mid-thirty percent s for the year.

Speaker 3

Now let me review the order activity we saw in the 2nd quarter On Slide 11, as you can see, our residential and light commercial businesses continue to see strong demand. Backlog in residential is up sequentially and points to a better second half than we previously expected. Commercial HVAC orders were up over 30% compared to last year, and backlog increased almost 20% year over year and up mid to high single digits sequentially from last quarter. For Refrigeration, order activity for the truck trailer business continued to improve Strong order intake and backlogs exiting Q2 should position this segment to achieve the High teens organic sales growth for the full year. Order intake for our Fire and Security segment also continued to improve sequentially.

Speaker 3

Product orders were up a bit over 25% year over year, especially in residential and commercial fire. Field orders were up 25% to 30% organic. I'll skip Slide 12, So let's move to Slide 13, our updated outlook. To be clear, we will include Chubb in the outlook until the transaction closes. Based on stronger than expected Q2 performance and higher backlogs, we are increasing our organic sales outlook from a range of 5% to 8% to a new range of 10% to 12%.

Speaker 3

A bit more than half a point of the incremental organic growth Represents incremental pricing actions we already have or are taking to offset higher input costs versus our April guide. Last quarter, we said material and component input costs were about $120,000,000 or so higher than 2020. We now expect those input costs to be up an additional $125,000,000 We intend to offset this through additional pricing actions. We recently announced the 3rd price increase in our residential HVAC business for September, as well as the 3rd price increase and transport refrigeration, and we are implementing similar actions in other areas of our portfolio. Our new outlook includes $125,000,000 of additional pricing compared to our April guidance.

Speaker 3

For the full year, We expect price cost to be neutral, though we expect it to be a modest headwind in Q3, Offsetting higher input costs with incremental pricing on a dollar for dollar basis protects profitability, but of course hurts reported margin and conversion. Despite these cost inefficiencies, we now expect to deliver an adjusted operating margin of over 13.5% for the year, better than our previous outlook. Another way to think about the outlook is that revenues are now expected to be about $1,000,000,000 higher than the April guide. Of that, about $125,000,000 is priced to offset increased input costs and about $200,000,000 is acquisition related sales with little profit contribution this year. The conversion on the remaining $650,000,000 to $700,000,000 of sales approaches the 30% we would normally expect.

Speaker 3

This all leads to an adjusted EPS outlook range of $2.10 to $2.20 a $0.15 improvement at the midpoint from our prior guidance. We also now expect free cash flow to be about $1,900,000,000 up $200,000,000 from our prior guidance. Slide 14 shows a bridge for the $0.15 improvement in our adjusted EPS outlook from the midpoint of our prior guide to the midpoint of our current guidance. The biggest driver is the operational conversion on additional sales. Moving over to Slide 15.

Speaker 3

I'll provide more details regarding Chubb's transaction. You can see a brief profile of Chubb on the left side of the slide. We expect revenues for Chubb to be about $2,200,000,000 this year with high single digit operating margins. Excluding Chubb, Carrier's operating margins would be about 50 to 100 basis points higher, free cash flow conversion about 100%, and we would also expect to have a higher growth and modestly higher return on invested capital profile. The remaining Fire and Security segment will include a portfolio of differentiated high margin businesses with leading positions in their respective markets.

Speaker 3

Sales would be about $3,500,000,000 and operating margin in the high teens. With respect to the transaction details, the enterprise value is $3,100,000,000 and net after tax cash proceeds are expected to be about $2,600,000,000 As part of the transaction, about 2 thirds of Carrier's total pension and post retirement assets and liabilities will be transferred to API. That is over $2,000,000,000 and significantly simplifies and derisks our balance sheet. Related to the pension, we expect most to all of our non cash, non service pension benefit on the income statement to go away. While this generates about $70,000,000 in annual earnings, we do not believe it represents any economic value.

Speaker 3

As customary, The sale is subject to a consultation process and regulatory approvals. The expected close is late Q4 2021 or early Q1 2022. As to the use of proceeds, we intend to use the approximately $2,600,000,000 in net proceeds as well as available excess cash for a combination of acquisitions, share repurchases and debt repayment. We expect to delever by about $750,000,000 post transaction to maintain our leverage profile commensurate with the EBITDA reduction. We have a growing pipeline of acquisitions that align with our strategic priorities and our Board just approved an incremental $1,750,000,000 share repurchase authorization.

Speaker 3

We will be flexible between share repurchases and acquisitions and now expect 2021 repurchases to exceed the 5,000,000 shares we previously discussed. In closing, we had a good first half with strong double digit organic growth. Congratulations to our team in supporting stronger than expected demand in a very challenging supply chain environment. With our performance so far, along with the solid order activity and backlog growth, we feel confident meaningfully raising our full year guidance. And the Chuck transaction simplifies our portfolio, enhances management focus, creates a more attractive company profile generates cash to reinvest in higher share owner value creating opportunities.

Speaker 2

With that, I'll turn it back to you, Dave. Thanks, Patrick. We are very pleased with our performance as we are now halfway through 2021 and we remain confident and our team's ability to navigate supply chain challenges to support our customers and drive continued results in 2H and beyond. With that, we'll open this up for questions.

Operator

Thank you. Our first Question comes from Jeff Sprague with Vertical Research. Your line is open.

Speaker 4

Hey, thank you. Good morning, everyone. Good morning, Patrick. Yes, good morning. Congrats on getting a shovel off the boards.

Speaker 4

Just a couple of questions around that. And Patrick alluded to it a little bit on the repo comment, but just Kind of wondering how actionable some of the redeployment might be prior to the actual close of the deal, Whether you have the appetite maybe that you can get a more of a running start on share repo or some of the M and A that you're talking In the pipeline, possibly happens relatively quickly.

Speaker 3

Yes, Jeff, a couple of comments. One, I would say that what we're looking at from an inorganic growth Point of view and the acquisitions there, I would say that is really unrelated to the timing of the Chubb proceeds. As we look at what's in the pipeline and actionable, We will go after those opportunities prior to any potential proceeds. Frankly, we given the amount of cash we have on the balance sheet, We may not need those CHOP proceeds. In terms of share repurchases, the prior guide that we provide you was about 5,000,000 shares this year.

Speaker 3

At this point, we probably think it's going to be somewhat closer to $10,000,000 10,000,000 shares, not dollars.

Speaker 4

Great. And then also just thinking about maybe strategically the remaining fire and security assets from here. Although Chubb didn't pull through as much as you would have liked, I think it pulled through some. And I'm just wondering how you might be reorienting Your fire and security offering pulling it through HVAC channels and that sort of thing to really kind of augment the overall package that you're trying to push forward here.

Speaker 2

Yes, Jeff, we have a healthy channel. I mean Chubb was one of our many distribution channels. So it was it's an important piece of our channel, but it was agnostic Just as other parts of the channel would be to us. So when you look at our Fire and Security segment, call it $5,500,000,000 you got a couple of 1,000,000,000 with Chubb that was The single digit high single digit range for ROS and then the remaining 3.5 are products. You have highly differentiated products, number 1 or 2 in all of our segments.

Speaker 2

It fits well with the whole healthy building trend and the other parts of the HVAC Portfolio and the ROS is close to 20%. So very, very strategic, something that we really want to lean into. And I think that Martin Franklin and the team over at the API Group will really take what's a great business with Chubb to new levels. We had a choice, Should we kind of make the investments to take the margins higher, Chubb, or let someone else do it and redeploy that capital for Parts of our portfolio that are more core and more differentiated and we elected to do the latter.

Speaker 4

Great. Thank

Speaker 3

you. Thank you. Thank you, Jeff.

Operator

Thank you. Our next question comes from Nigel Coe with Wolfe Research. Your line is open.

Speaker 5

Thanks. Good morning, everyone, and again congrats on getting Chubb booked in Caveat as for the UTX, I don't think Greg Hayes would have given you the money, David.

Speaker 3

You definitely kept it.

Speaker 5

Just to clarify on the proceeds. So the way that it was framed earlier this week was $2,900,000,000 of cash, gross cash and then Point 2 of liabilities, but you're talking about $2,600,000,000 of net kind of cash proceeds. So I just want to confirm the tax leakage is $300,000,000 That's the first part of that question. And then secondly, how's the cash conversion for Chubb been over time? And I'm thinking here about things like Pension funding and the like.

Speaker 3

Yes, Nigel. Patrick here. Maybe I'll give you a walk of the 3,100,000,000 For Chubb, to the $2,600,000,000 the estimated net cash proceeds to us. So at the 3,100,000,000 Deduct from that assumed liabilities and other adjustments to the buyer that gets you to $2,900,000,000 which is The number that you've seen in some of the press releases that went out from the buyer. And then from the $2,900,000,000 to the $2,600,000,000 It's mainly taxes on a transaction because we are booking a gain, but it also includes some of the fees associated with the transaction.

Speaker 3

So that's kind of the walk of the 3.1 to the 2.6. In terms of free cash flow conversion on Chubb, Actually, Chubb was one of the reasons why our key cash flow conversion for the overall company was less than 100%. And part of that, of course, gets back to the non cash, non service pension benefit we saw on the income That's about $70,000,000 on an annual basis. We don't attribute any economic value to that. That headwind caused on free cash flow conversion I would also add that from an overall company perspective, whether it's from a working capital perspective or an ROIC perspective, Chubb was below the company average.

Speaker 3

And so without Chubb, all of these metrics, we expect them to improve, Including, of course, our operating margin.

Speaker 5

Right. And sticking with Chubb for my follow on question. Anything to think about from a stranded cost perspective For RemainCo, Fire and Security and any impact to the tax rate going forward?

Speaker 3

We don't expect a meaningful change on the tax rate going forward versus where we are today. And then stranded costs would be de minimis. When I say de minimis, a penny or less. And obviously, we will do our best to make that go away.

Speaker 6

Thanks Patrick.

Speaker 3

Thank you.

Operator

Thank you. Our next question comes from Joe Ritchie with Goldman Sachs. Your line is open.

Speaker 7

Thanks. Good morning, guys, and congrats on Chubb as well.

Speaker 1

We can't hear you all that well. Can you try and Speak up.

Speaker 8

Sorry, is that better? Yes, that's

Speaker 9

better. Okay, great.

Speaker 7

So first question, I guess, maybe just use of proceeds. Obviously, you've highlighted the buyback. I'm just curious from an M and A standpoint, And as you think about the portfolio today, where would you prioritize potential M and A in the portfolio today if you were to go down that path?

Speaker 2

We are going to go down that path, Joe. We've been clear that in terms of capital allocation, our priorities Our organic and inorganic growth, as Patrick said, of course, we'll do share buyback and debt pay down. But we've been trying to really aggressively build a pipeline. We start from our strategic mission, which is to be the world leader in healthy, safe, sustainable, intelligent building and cold chain solutions. So whatever we look at Needs to really tie into that overall North Star that we have.

Speaker 2

We've been clear on our 3 strategic Pillars of growth, we want to strengthen and grow our core, so that would be keeping it right in the center of the fairway. Product extensions and geographic coverage, You saw us put our toe in the water on VRF with Chigo and that would be in the category of a product extension. And then Enhance aftermarket and digital capabilities. So you'll see us really leaning into a focus on recurring revenue. We're still starting to build that pipeline, and we're excited to really start to play more offense.

Speaker 2

And I should mention by the way, when we talk about capital allocation, of course, as Patrick mentioned, the dividend as well, which is obviously a part of our priorities.

Speaker 7

Got it. That makes sense, Dave. And I guess maybe my follow on question. Clearly, you guys are dealing with inflationary pressure as is Every company that we cover and handling it well. I guess as you kind of think about the framework for 2022 and potentially the stickiness of some of Price increases, if we were to get into a more benign inflationary backdrop, what does that kind of mean for your margins If we do get more benign inflation.

Speaker 3

Yes, Joe, Patrick here. I'll take that question. I think it's fair to say that we probably spend more time on price cost for 2022 than we do for 2021. And so, 1st of all, this year, as you know, we're benefiting from some block positions. And so next year, when those roll off, We do need additional price to offset that.

Speaker 3

That's why we've announced additional price increases, our 3rd price increase across our segments this year. And so for next year, of course, we will focus on making sure that those price increases stick that we do get the yield. If price cost remains neutral next year, which frankly is our intention to be at least price cost neutral For margin, of course, that's a little bit of a headwind, but of course, we always target to do better than that. And if that were the case, then it could benefit our margins. But our first priority is ensuring that price cost next year remains neutral.

Speaker 7

Got it. Okay. Thank you both and congrats again.

Speaker 3

Thanks, John.

Operator

Thank you. Our next question comes from Julian Mitchell with Barclays. Your line is open.

Speaker 10

Hi, good morning. Maybe just a couple of questions on the core business. I heard your guidance on revenue for the year on Refrigeration organically, just wondered if you could put a finer point on the assumptions for HVAC and F and S, apologies if I missed it. And within HVAC, what are you assuming for second half residential revenues at this point?

Speaker 2

Yes, if you go through the you look at the portfolio and Patrick can jump in as well. We increased Overall sales, as you know, for the year, our organics now up 10% to 12%. So HVAC is going to be higher for the full year, up higher than 10%. Resi, we see up in the low teens. Prior, we had been thinking year over year it would be up Low to mid single digits, but we see resi up low teens and we're very encouraged by light commercial is probably up closer to high teens and appliance very strong, Probably up in the high single digit range.

Speaker 2

And then refrigeration is likely to be up in the high teens for the full year and then F and S is high single digits.

Speaker 10

Perfect. Thanks very much. And then just my follow-up question would be around You mentioned price cost in the profit bridge, also what's happening with M and A and FX. Just wondered if there was any update around Carrier 700 savings in aggregate and also investment spend? And Realizing seasonality is sort of messed up a bit for obvious reasons, anything you'd call out 3rd versus the 4th quarter?

Speaker 3

Yes. So Julian, for Carrier 700, you probably recall that we are targeting $225,000,000 This year, at this point and given that Carrier 700 is a net number, I. E. Takes into account some of the Headwinds from input cost inflation, we think that the Carrier 700 savings this year will be somewhat closer to $150,000,000 And so that's a $75,000,000 less due to higher material and component costs. And as I mentioned earlier, we intend to offset These headwinds as well as some other headwinds such as airfreight with incremental pricing actions in the balance of the year.

Speaker 10

Great. Thank you.

Speaker 3

Thank you, Julien.

Operator

Thank you. Our next question comes from Steve Tusa with JPMorgan. Your line is open.

Speaker 2

Steve, are you there?

Speaker 8

Hey, guys. Sorry about that. Good morning.

Speaker 3

Good morning.

Speaker 8

Can you maybe just talk about the resi markets and Dave, kind of what's your view around the status of like the cycle? There's been a lot of debate around, I guess, machines running more. I think the inventory is probably less of an issue, less of a debate now obviously. But what's kind of happening at kind of the end market kind of the end demand level And the state of the cycle, what's your opinion there?

Speaker 2

Sure, Steve. We were pleased that in 2Q movement remains Strong, which is obviously something that we're tracking very, very carefully. So we thought that our inventory levels at the end of 2Q were going to be up 10% to 15% versus the same time at the end of 2019, which is an indicator we had been watching closely and ended up inventory level in the field for us ended up only up 7% versus the same time in Q2 of 2019. And you look at A collection of factors that are driving the strength that we're seeing. Housing starts, it's going to be up 13% or so this year.

Speaker 2

We are seeing people obviously buying and selling more homes. And one of the things that happens when you buy a home is sometimes You replaced the air conditioning system. So I think that's a driver. There's been a lot of talk about work from home, of course, but I think it's Without being too quantitative about it, it just seems that units are running hotter and longer getting more cycles on them and that has to be And we've benefited from share gains. I mean, we're up if you look at the last 12 months, you really can't measure share 1 quarter at a time, but you can look at over the last 12 months, our shares up over 200 basis points.

Speaker 2

And it's a combination of converting dealers, but also I do believe that our operational performance, even though we have been far from flawless, has helped us, albeit frankly at a higher But we've gone out of our way to support our customers. So I think Steve, you put that all together and as we start looking ahead, we want When we come out of this year, our inventory levels should be in balance. We're going to carefully watch movement. We have announced Our 3rd price increase effective September 1st this year, which was really focused on 2022 as we announced that. And housing starts, we'll have to see how that plays out.

Speaker 2

The estimates are all over the map, but maybe round that to flattish for right now, but we'll see how that plays out. And then we'll start to see some perhaps early buys because of the 2023 change. So you put that all together, I think we're trying to stay very close to our Keep inventory levels in check and continue to support our customers.

Speaker 8

Is there a chance that you have a down year at any time in the next couple of years?

Speaker 2

Well, there's a chance of anything. I mean, you know, Steve, it's a short cycle business and That we're coming off some very we're coming off a lot of strength. But right now, we see between the pricing, the underlying factors That we've been seeing, orders have remained strong. I mean, we're very well booked not only for 3Q, we're booked into 4Q. And we see that we're very, very well And the nice thing with our portfolio is that light commercial remains strong.

Speaker 2

The applied business, we look at ABI indicators, which Give us confidence around the coming months years around the Applied business aftermarket growth. The whole portfolio, one of the things that I was particularly pleased about for 2Q is that every part of the portfolio showed strength. So working hard in resi, well positioned there. There's a lot of things to like and then we have the rest of the portfolio that looks positive as well.

Speaker 8

Got it. And then sorry, one more, what were applied orders up in the quarter?

Speaker 2

I think 20% or 30%. Let me before I answer it, I'm trying to get a cheat sheet to help me here.

Speaker 3

About 30%. Yes, 30%, 33%. Right. Across all regions basically. Actually, Very strong double digits across all regions, North America, EMEA, China, all up over 20%.

Speaker 8

Great. Thanks a lot guys.

Speaker 3

Thanks, Steve.

Operator

Thank you. Our next question comes from Tommy Moll with Stephens. Your line is open.

Speaker 11

Good morning and thanks for taking my questions.

Speaker 3

Hey, Tommy. Good morning, Tommy. I wanted

Speaker 11

to talk to your incremental margins. If I'm interpreting your guide And the script correctly, it looks like for this year on a reported basis, we ought to land somewhere between 20% 25%. But Patrick, I think I hear you saying operationally you're still high 20s or 30s. So if we could just confirm those. But then Also as we look into 2022, is there any reason we shouldn't continue to see that roughly 30% Conversion and then in terms of the operational side?

Speaker 3

Yes, Tommy, so your understanding is correct. So we expect Reported conversion to be between 20% and 25% and operational or core conversion to be in the high 20s. And the difference between the two is really FX, which is about a 4 point headwind for the full year on conversion And then the Chiggo acquisition, the 1st year with a lot of revenue and given some of the one time costs, not a lot of earnings contribution yet. And so that's really the walk between the Low 20s and the high 20s from an earnings conversion point of view. And then of course, what I'm not taking into account here is that As we raise price just to offset some input costs, that's somewhat of a headwind as well.

Speaker 3

For next year, We're really not a point where we can talk a lot about next year. What I can say is that, and I mentioned this before, we have a really strong focus within all three segments and ensuring that we take pricing actions now to offset any material cost and other inflation that we see in our businesses. And so if we are successful doing that, and I'm very comfortable with that, Then of course, we would expect an earnings conversion next year that would be in line with what we do this year. The biggest driver, of course, will be what are the levels of organic growth. And that is not something we're ready to talk about at this point.

Speaker 11

Fair enough. Thank you for that. It's helpful. I wanted to follow-up On Blue Edge, good to see the attach rate on chillers up to, I think, over a third in the second quarter. As we move forward from here towards your target of 50%, I think longer term, what are the levers you're pulling in the business?

Speaker 11

Is it Hiring more salespeople, is it tweaking the incentives for your existing sales force? What are the things you can do to drive that number higher? And then Assuming you hit that 50% range at some point in the future, is there any way to frame up what the impact could be in terms of your HVAC Growth rate or margin?

Speaker 2

Yes, Tommy. Well, look, in terms of the aftermarket, I mean, If you turn the clock back, we were in the 20%. We targeted 30% attachment rate last year, which we achieved. And it was nice to see The attachment rate in 2Q for our chiller business up over 35% in 2Q. And I think it's a combination of what you said.

Speaker 2

We've added more feet on the street. We've added sales People we've added more structure and thought around our IC structure globally. And I think digital enablement is a big factor. You look at providing more prognostics and diagnostics and more digital differentiation is a big factor to create the kind of Stickiness with our customers that really help differentiate us. So it's focus and it's those various things.

Speaker 2

And then in addition to attachment rate, we're very focused on Overall coverage, because attachment refers to you sell a chiller, it comes off the warranty period, are we signing a long term agreement? And our expectation is that we do. So I'd like to get that to 50% as soon as possible, then ultimately even higher because that's just how we run the business. Our other focus is overall coverage. We talked about going from 50,000 chillers that are covered by a long term agreement to 60,000.

Speaker 2

We're on track to do that. And that goes beyond the initial sale that goes into units that are out in the field that we're converting them to long term agreements covered by carriers. So Very pleased with the aftermarket growth. We make more money in the aftermarket than we do in the upfront equipment sales. So it will be margin accretive as well.

Speaker 12

Thank you both. I'll turn it back.

Speaker 3

Thank you. Thank you.

Operator

Thank you. Our next

Speaker 6

Hey, guys. So you highlighted K-twelve opportunity in your slide deck. Anything at this point that you can quantify in terms of Impact from the stimulus money that's already there, can you see any discernible impact in the channel on what's going on from the money from the government?

Speaker 2

Yes, we're encouraged, Andrew. You look at the stimulus bills that have been passed over the last 18 months, You combine all those together and there's been $190,000,000,000 that's been allocated to school reopenings, that K-twelve space. And that is we expect a real meaningful amount of that to go to HVAC. And what we've done is Put a dedicated focus on this effort through a sales force, through incentives, through A lot of structured intensity around making sure that we get our fair share of that. And you look, there's 16,000 school districts in the United States.

Speaker 2

When we look through The year to date, our K-twelve verticals up 15% to 20%, and we think it's directly correlated to the additional funding that is in that space. And I think with this new infrastructure bill, of course, we'll see how that plays out once it goes over to the House, but we expect more money to be allocated to schools. But also when I see infrastructure bills, it actually plays very well for our strategic focus, healthy buildings, especially in school sustainability, there's going to be funding And therefore things like sustainability for airports, that's exactly in our wheelhouse and then intelligence and our ability to use our balance system For both healthy and sustainable solutions and things like the schools and airports infrastructure, I think will be a really good opportunity. So we're encouraged by The infrastructure and the overall stimulus bills.

Speaker 6

Thank you. And just a follow-up question. How do you guys think about Carrier 700 program in a highly inflationary environment, right? Because if inflation continues the next year, Sort of the framework becomes less meaningful, right, just because you get penalized for the Inflation, which is not really in your control. Have you had the conversation with the Board about maybe changing some of the metrics?

Speaker 6

Or You think inflation goes away and would that contract?

Speaker 3

Andrew, what I would say is that In the current environment with higher input costs or in higher inflation, it really only enhances the focus on driving cost out Throughout our supply chain, actually within our ops organization, which was already very focused on driving our costs, we're just setting up a Tiger team, Adding additional people to get an incremental cost out. And frankly, in addition to that, it just enhance Our focus on what we can do on the G and A side as well to get incremental costs out. And so, yes, Carrier 700 is a net number, but I would I'll be very clear to say this does not at all negatively influence our focus on it. We're more focused on it than before. Same thing within our manufacturing facilities, a lot of focus on what we can do there also from an automation point of view, Given that as is well documented, we're not the only company that has some challenges with some localized labor.

Speaker 3

And so I'd say we're comfortable there that the focus will continue.

Speaker 6

I appreciate it. Thanks so much.

Speaker 3

Thank you, Ian.

Operator

Thank you. Our next question comes from Jeff Hammond with KeyBanc. Your line is open.

Speaker 13

Hey, just back on commercial, I think you called out light as being up 60%. Can you just talk about what was going on there? And was that just a comp thing? And then it seems like the applied backlog is maybe a little Just how that flows in?

Speaker 2

Yes, Jeff, light commercial is very encouraging, clearly easy comps, but when you're up 60 Year over year, there's underlying strength there. We see it not only in the warehouse vertical, but it is an indication that things are reopening. You see it in retail, you see it in restaurants and It's clearly been one of the beneficiaries of the spend on K-twelve. About half of our spend on K-twelve is light commercial, the other half applied. So I think we've benefited from that spend.

Speaker 2

We're also gaining share there as well. We've seen nice share gains probably in a similar range to what we've seen On the residential side over the last 12 months. So the thing that's particularly encouraging about light commercialers is that The field inventory levels are in check. They're low despite the strong sales, down only a few percent year over year, which Means that there's not inventory in the channel and as demand continues to increase and we continue to go to great lengths to support our customers, We feel quite encouraged by what we're seeing in light commercial right now.

Speaker 13

And then just, I think The Chubb decision is a great one. But just kind of thinking about near term dilution, is the thought that between Buyback and M and A, you can cover that up eventually? Or do you think there's a transition into 'twenty two where there's a little dilution? Thanks.

Speaker 3

Ed, the way we're thinking about this, first of all, we have capital available to us. I mentioned the cash on the balance sheet. We mentioned the proceeds. And so we will be focused on putting that capital to work in the best and most strategic way for us. And so think about we're looking at the next 12 months, 18 months that we're focused on redeploying capital.

Speaker 3

We're not going to get rushed into making any bad decisions or acquisitions that we will regret. We think about a 12, 18 months timeframe to kind of make that up.

Speaker 13

Okay, great. Thanks a lot.

Operator

Thank you. Our next question comes from Gautam Khanna with Cowen. Your line is open.

Speaker 9

Yes, thanks. Good morning, guys.

Speaker 3

Good

Speaker 9

morning. Two questions, I think. First, just following up on Steve's question about residential. Do you guys See any evidence of shortened life expectancy of resi HVAC units given Kind of the work from home and the high heat the last couple of years. I mean, I don't know if in your warranty data or elsewhere, have you seen any Evidence that the life expectancy has changed materially?

Speaker 2

Yes. It would indicate The life expectancy with the fact that units are running putting more cycles on them than previously, and I do think that They're running hotter too. So I do think there's clearly indications that the overall life expectancy In terms of the number of years, it's going to be shorter as you put more cycles on it in a shorter period of time. So we're working internally to Dimensionalize that better than we have in the past. So we're doing the data assessment on that.

Speaker 2

But I think anecdotally, I can tell you with high confidence that the life expectancy does seem to be coming down.

Speaker 9

Any order of magnitude on how much it may be coming down, 20%, 30%?

Speaker 2

I'm hesitant to say. No, I'm hesitant to say because when we do say it, I want to make sure that we've gone deep on the data assessment of that. Chris Nelson and Justin Cappy and the team are looking at that. And it really is critical, not only So we can answer your question more specifically, but for our planning purposes, we actually we came into this year underestimating Our demand and that's driving a lot of we're doing a lot of hiring that we didn't anticipate doing. So we need to get As precise on that answer for you and for ourselves as possible, but I'm hesitant to throw out a number on this call until we've gone deeper on it, but We will be coming back to you on that shortly.

Speaker 2

Okay.

Speaker 9

And then just a follow-up on the commercial HVAC demand, Up over 20% in aggregate. Any sense for how much of that is sort of a catch up Of deferred replacement last year, if you will, sort of any slice of what's the underlying demand versus A catch up, if you will.

Speaker 2

Well, what I'd say is that, what's really encouraging about commercial HVAC is you look at ABI, the Architectural Billing Index. And we did go through a stretch where it was quite low many months where it was below 50, which Obviously, we want to higher than 50 as an indication of strength. And it was 57 in June. It's the 5th straight month that is higher than 50. And I think it's a combination of probably Catch up the things that were put on hold and new construction that is now being built in anticipation of the economic momentum we're seeing more globally.

Speaker 2

We've had some key wins recently and not only things like data centers and warehouses, which generally were strong throughout the pandemic, but Commercial office buildings, we've had some nice wins there, both in our HVAC business, but also in our controls business, and of course in fire and security. So Education, healthcare, commercial buildings, there's a lot of indication that it's pretty broad based. And one thing that we found particularly encouraging was it wasn't A U. S. Phenomenon.

Speaker 2

Europe was quite strong. Your orders in Europe were up over 50% in the quarter and part of that easy compare, but part of it is you're seeing some real pent Demand there. And then of course, it's not only applied, but our focus on aftermarket, which was up 15% in just HVAC alone in the quarter. So Some encouraging signs.

Speaker 9

Thanks very much guys.

Speaker 3

Thank you. Thank you.

Operator

Thank you. Our next question comes from Deane Dray with RBC Capital Markets. Your line is open.

Speaker 14

Thank you. Good morning, everyone.

Speaker 1

Hey, Dave.

Speaker 3

Hey, I'd

Speaker 14

like to circle back on price cost this quarter for Patrick, some more specifics is, I know the policy, the practice is to lock in your input costs as best you can 100% for the current quarter. But you said you did have to go into the spot market. Was that strictly a function of increased demand above expectations? Or were there any Supplier issues and let's say steel or copper?

Speaker 12

I would

Speaker 3

say, Deane, it's really mostly driven by the much stronger demand that we expected. That is

Speaker 2

the main reason.

Speaker 3

In addition to that, of course, I would say the what we call Tier 2 It's playing a role as well. I think some of the component, the electronic components, particularly in our fire security business, we've seen that as well, spot prices as well as some expedited trade. And so that's really the main driver.

Speaker 14

Patrick, I'd rather hear you talk about a price Yes, increases on those or the costs of those components rather than supply issues. So are there any supply chain interruptions on anything electronic, printed circuit boards and so forth? Clearly,

Speaker 3

There are some issues, but I would say that they are spotty. We continue to meet customer demand. Are there pockets where we are a little late in some instances? Sure. But by and large, we are Managing our supply chain really well and we are managing customer demand.

Speaker 2

What I'd add, Dean is that I have to Give our kudos to the operations team who literally are working around the clock. So we have 20 fourseven coverage where we have folks Spanning both sides of the world, managing these challenges, they're real. They're acute. We came into the year Our sales will be up mid single digits. Now it's going to be up double digits.

Speaker 2

So what that means from practical terms is that you're adding 2,500,000 manufacturing hours. You have to go Aggressively hire talent, the talent in demand in places like Tennessee, we're competing for talent with Amazon and FedEx. So our operations team is dealing with challenges every day on the supply chain labor and really doing a phenomenal job to go to great lengths to support our customers. So I think we'll get out in front. We're doing a lot of things to make our supply chain more robust with more automation, more dual sourcing, but It's not for the faint of heart.

Speaker 2

There's real challenges that the team is addressing every day.

Speaker 14

Yes, that's all good to hear. And then second question, Abound has come up a couple times on the call, and I know it's still in a pilot program. But Dave, could you Take us through at a high level the economics of the platform, the percent of recurring revenues. And from the industry feedback that we've heard, the competitive advantage is really has a lot to do with the open architecture. And maybe you can address that as well.

Speaker 14

Thanks.

Speaker 2

Sure. Thanks, Dean. It's for us, a bound is really a long game. It's SaaS based, so it's all recurring Revenues, it's going to be a subscription model, it will be margin accretive, but the real focus of Abound is making indoor air quality visible. So We started with a commercial office building customer outside of the DC area.

Speaker 2

We've had it running in a K-twelve school outside of Atlanta. We've gotten great feedback because as people come back to the offices, as people go back into as people are going back into school in the spring, You can go into the school library and you have a dial that shows you that the air quality is good and it gives you confidence as you go back into these indoor environment. So I don't want to oversell like how many we've sold. What it is, is early phases. We've been working With the Atlanta Braves in Truist Park, we have it running in our corporate headquarters in Palm Beach Gardens, Florida.

Speaker 2

We've had a number of customers, very high profile customers Coming through and really trying to understand it, understand how it works not only for the tenants, but for the building operator. And I think it's going to be transformative. Early phases, as you said from a differentiation perspective, it is open architecture, it interfaces with others' Control systems, so it's not a proprietary that will only work with our ALC controls business. And I think it's one of the key enablers to make The whole focus on healthy and sustainable buildings sticky over the long term.

Speaker 14

All good to hear. Thank you.

Speaker 3

Thank you, Dean. And maybe before we take the next question, from a modeling perspective, I thought I'd add that we Expect for the balance of the year and particularly Q3, we expect Q3 sales and adjusted EPS to be very similar to our Q2 performance. And so that might be helpful as we do the models.

Operator

Thank you. Our next Question comes from John Walsh with Credit Suisse. Your line is open.

Speaker 15

Hi, good morning, everyone.

Speaker 3

Good morning.

Speaker 15

Appreciate all the details. As usual, wanted to come at the kind of input cost question a little bit differently. I was just Curious if your best estimate of when you kind of hit the peak pressure Either for raws or supply chain availability or labor, just curious if we've already hit it or if you're expecting it in the coming next quarters.

Speaker 3

That is A very good question. And I think the key takeaway that we have as a management team is our need to be able to be flexible and adjust quickly, Whether it's from a supply chain management point of view or whether it's from an ability of passing through prices to our customers to ensure that we remain price cost neutral. And so, of course, we've seen a tremendous increase in input cost. I mentioned that for the year now, we're sitting at about $250,000,000 of input costs. Early in the year, it was several tens of 1,000,000 of dollars.

Speaker 3

And so I'm not ready to call it this is it, we've seen the peak, but what I can tell you This is probably one of the most watched items within the company. We're doing as we always do at certain times, we block in positions for commodities for next year. And so that is happening per our practice. And as I mentioned, probably the most important Thing is our ability to remain nimble and to flex our supply chain and to pass through pricing. Stephen?

Speaker 2

Yes. The only thing I'd add, John, is that at the end of the day, we control the controllables. So we are that third price increase you saw it in resi, it's across the portfolio. There's really no part of our portfolio that has not been aggressive, not only announcing price increases, but realizing price increases. And then on the cost side, Patrick said it earlier, but it's across everything that we can control, including G and A and we've set up this carrier business services To really have a picture catcher model as we move stuff to low cost centers of excellence on the G and A side, we're being aggressive in the factories, aggressive on supply chain.

Speaker 2

Look, steel is very high. So we got to keep a close I mean, dollars 600 a ton up to $2,000 in the United States. So clearly, we would Hope and expect that starts to modulate a bit. And then copper has been hovering, so we've been taking some blocking positions there. I think Patrick and I have become more aware of Out of the pricing than we ever thought we would on a daily basis, but we're watching it and we'll see how things continue to play out.

Speaker 15

Great. Thanks. And then maybe just a follow-up. It seems to suggest on the residential side, New homeowners might be using the home purchase event as a way to replace a system before it goes end of life. Curious if on the commercial side, you're seeing any change in behavior from the customer, if they're proactively upgrading systems, Either for an ESG commitment or for a wellness commitment versus kind of letting everything run almost To failure before they replace a system?

Speaker 2

Yes. I think we're seeing and that's one of our biggest focus areas is modernizations and trying to Proactively work with customers to replace systems before their end of life and you can make a business case just on sustainability alone. If you look at the savings that you can get and there are some government incentives, but as you move to more sustainable Chillers that you can get a very significant savings and also help customers hit their own ESG targets. Our customers are no different than us that They've been very public about some form of carbon neutrality, many of them, and we're helping them not only get to their commitments, but help Quantify for them how they're getting to their commitments by an early replacement of a chiller and it also ties into healthy. I think Light Commercial and Applied customers are going to great lengths, many of them to put in more healthy solutions.

Speaker 2

So we're seeing some upselling And healthy solutions there as well.

Speaker 15

Great. Appreciate you taking the questions. Thank you.

Speaker 2

Thank you.

Operator

Thank you. We are taking our last question from Josh Pokrzywinski with Morgan Stanley. Your line is open.

Speaker 12

Hey, thanks for fitting me in guys.

Speaker 2

Hey, Josh.

Speaker 3

Good morning.

Speaker 12

Good morning. So on the Carrier 700, I think a couple of questions have sort of picked around

Speaker 2

the edges of this. But Patrick,

Speaker 12

on the $225,000,000 kind of going to $150,000,000 using your definition of net, you spelled out the incremental price That's in guidance. I think you had $75,000,000 of headwinds in the $225,000,000 definition, But an extra $125,000,000 of price. So maybe on more of kind of a double secret net basis, You guys come out ahead. Is there another item we're missing or is kind of the more fully netted number a little more positive?

Speaker 3

Actually, Josh, it's a good question and I recognize that sometimes it could be a little confusing. The way you can think about it is versus the prior guide, Carrier 700, as I mentioned, is worse by $75,000,000 That's mostly input costs in the material side. In addition to that, which is not part of Carrier 700, we have additional plant inefficiencies, actually Inefficiencies from last year from COVID that we thought would get better and they're not getting better or not they're not getting better to the extent that we expected. That's $25,000,000 in addition to the $75,000,000 And then the other part is $25,000,000 of higher Inbound freight costs, including airfreight. That gets you to $1.25 offset by the $1.25 in price.

Speaker 3

And so There is no net benefit. Of course, the objective is as we catch up price cost that going forward, we're no worse off and it becomes a little accretive. But for this year, it is a net zero.

Speaker 12

Got it. Got it. That's helpful. I appreciate that detail. And then just on resi, maybe a finer point question, but hard not to notice that the comp does get almost 60 points harder 2Q to 3Q.

Speaker 12

So any commentary

Speaker 3

you guys can give us

Speaker 12

on how July ended up, I think would be helpful in calibrating that?

Speaker 2

Look, July has continued where June left off. So we're very well booked For 3Q, I mean, obviously, as you get into 3Q, the orders compares, you would expect them to be down year over year. But you're still seeing healthy order rates if you look at versus historical levels. So right now, we feel certainly balanced in our guidance For Q3, I mean, remember, we had been saying that we thought the first half would be up 30, second half down 20. What we're now saying is that the first half was up a lot more than we thought and the second half is probably down closer to 5% to 10% year over year.

Speaker 2

So We're keeping a close eye on it. The number one thing we keep watching is movement and the movement continues to be very strong from our distributors to our dealers. So we'll keep a close eye on that and we're working distributor by distributor to make sure that we're managing with them in a very collaborative way their inventory levels.

Speaker 12

Great. Thanks, Dave. Thanks, Patrick.

Speaker 2

Thank you, Josh.

Speaker 3

Thank you, Josh.

Operator

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Dave Gitlin for closing remarks.

Speaker 2

Okay. Well, listen, thank you all for joining. Appreciate You accommodating the earlier start time and of course Sam is available for questions. Thank you all. Thank you.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Carrier Global Q2 2021
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