Q1 2021 Carrier Global Corp Earnings Call

The nature, often referred to by management as other significant items 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-K, 10-Q, and 8-K provide detail.

On important factors that could cause actual results to differ materially from those anticipated in the forward looking statements. This morning, We will review our financial results for the first quarter and discuss the full year 2021 outlook and we will leave time for questions at the end once the call is opened up for questions. We ask that you limit yourself to one question and one follow up.

To give everyone the opportunity to participate with that I'd like to turn the call over to our chairman and CEO, Dave Gitlin.

Thank you Sam and good morning, everyone. Starting on slide two with an overview of the quarter Q1 was a great quarter for us and an early indication that a global economic recovery is underway areas.

Areas of our portfolio debt had been performing well have continued to improve in those businesses and verticals that we're acutely impacted by the pandemic are showing early indications of recovery.

Overall volume came in stronger than we plan reported sales were up over 20%, including organic growth of 17% driven by another very strong quarter in North American residential which was up 50%.

We also saw strong growth in commercial HVAC and transport refrigeration all of our segments contributed to the organic growth in Q1 as the organization continues to execute well on our growth initiatives, including the aftermarket which grew close to double digits.

Notably compared to the first quarter of 2019, we grew sales about 6% organically.

This was coupled with strong order trends, leading to a healthy backlog at the end of the quarter.

Orders were up over 30% compared to last year, driving the organic backlog up 13% sequentially and up close to 20% year over year.

We produced $608 million of adjusted operating profit up approximately 40% year over year.

Given the supply chain constraints, we are incurring some additional inflationary pressures and higher logistics costs in meeting customer demand. We are working to mitigate these headwinds through additional cost and pricing actions.

Finally, I am encouraged by our free cash flow generation in the first quarter.

So we do not expect of regularly adjust guidance for the full year. After just one quarter, we are increasing guidance on sales earnings and free cash flow given our stronger than expected Q1 results and confidence in the macro trends that we're seeing.

We now expect reported sales to grow 7% to 10%, including a 2% tailwind from FX.

We expect the adjusted EPS to increase by about 20% at the midpoint and we are increasing our projected free cash flow for the year by about $100 million to about $1 7 billion.

Slide three shows the flywheel that I've used in prior earnings calls to explain how our key focus areas will drive shareholder value.

In the upper left we continue to ensure that we drive a performance culture.

We are now one year into our journey as a standalone public company and we are building momentum we started off by putting a playbook in place and a year later I can say that we are a fundamentally different company from our culture to our strategy to our targeted investment prioritization balance sheet and capital position.

Carrier 700 is the cornerstone of our unrelenting focus on cost reduction and we achieved about $60 million in Q1 in a tough environment.

The increased input costs and put it are putting pressure on our $225 million target for the year. So we are driving additional cost and price actions to offset the unplanned headwind Ali.

Also core to our new culture is a focus on profitable growth. We are gaining traction on all three pillars of our growth strategy.

We are gaining share across the portfolio helped by innovation arising from our increasing R&D spend from $400 million in 2019 to about $475 million. This year and an additional 600 sales and sales support people that we've added over the past nine months.

Regarding aftermarket and digital offerings, we are gaining significant traction as we push our business models to focus more on recurring revenues. We are on track to deliver double digit aftermarket growth. This year and we continue to expect the number of Chillers under contract to increase from 50000 to.

The 60000 this year.

Increased service coverage and traction on our blue edge offerings are enabled by our digital solutions that we're implementing across all of our segments.

Lastly, we continue to take a very disciplined approach to capital allocation, which Patrick will cover. We also said that we would continue to invest in solutions for healthy safe and sustainable building and cold chain solutions and inorganic growth both of which I'll discuss on slide four.

In Q1, we.

We had over $80 million of orders for healthy building products and services and we currently have a global pipeline of sales opportunities of more than $500 million.

We created a new healthy building solutions organization under <unk> leadership with the seasoned team dedicated to this effort.

We also introduced differentiated sought after offerings and we're energized by this week's release of our new digital digital offering called abound. It is all about giving customers confidence to reenter crowded indoor environments, and providing a healthier indoor experience abound gathers performance data from disparate.

The system sensors and sources and presents it in a smart simple interface. It gives a clearer view of building systems and sensor performance data and identifies and helps to address anomalies.

This solution is not a simple rebranding of digital offerings that we had in our portfolio. It is an open architecture of SaaS cloud based platform and acts as an intelligence layer interfacing with not only our automated logic controls platform, but also with third party building management systems and sensors throughout the building we.

<unk> had pilots underway with key vertical customers in the office building space, the educational sector and the sports and entertainment vertical the.

Those have gone tremendously well a huge vote of confidence is that we signed the deal to support the Atlanta Braves as they start to welcome fans back the Truest Park.

Bound we'll monitor the indoor space covering a range of food and beverage locations and clubs basis for guests.

As the SaaS platform of bound is expected to drive more recurring revenues, including subscription and services and also to help pull through additional carrier equipment sales.

We are seeing equally strong progress on our other key ecosystem of focus healthy safe and sustainable cold chain solutions.

<unk>, our cargo monitoring business had a record Q1 with sales up 16% due in large parts of the demand related to the distribution of COVID-19 vaccines.

Similar to about a key differentiator is our cloud based digital offering that we are building in partnership with AWS called links.

As a key launch customer CQ <unk> selected the links fleet solution.

Liver enhanced digital capabilities for 2000 refrigerated containers.

And finally on the right side of the chart, we highlight our inorganic growth progress. We were very pleased to announce our agreement to acquire <unk>, which we referred to by its brand name of Ciego.

This acquisition will help accelerate our growth in the attractive variable refrigerant flow and international light commercial markets, which have consistently had outsized growth rates over traditional markets with the acquisition of Ciego, we will own important brs technology design capabilities and low cost.

On your factoring the we can scale globally, we expect to close the transaction with the majority shareholder in <unk> and we are excited to welcome the <unk> team to the carrier family.

We also continue to add and promote superb talent as we lean into the deployment of the carrier way as an example, we recently welcome Jennifer Andersen the carrier, leading corporate development strategy and serving as our chief sustainability Officer.

She will help drive another key strategic focus.

G. ESG remains a very important focal point for carrier as we work toward delivering on our 2030 commitments.

We are tracking to our commitment of reducing our customers' carbon emissions by more than one gigaton as we introduce more energy efficient and electric solutions.

Last week carrier improved to a top quartile score with sustainability and we are now number five within the building products category out of 129 companies.

And we also continue to make good progress on our DNI initiatives. Our number of diverse executives has increased significantly since 2015, and we are leaning in to making sustainable changes to ensure that we have a truly inclusive culture with that let me turn it over to Patrick.

Thank you, Dave and good morning, everyone.

Please turn to slide five as Dave discussed Q.

Q1 was a great start to the year.

Sales of $4 7 billion were up 21% versus the prior year.

Currency was a four point tailwind for the sales in the quarter about $150 million on.

On the top line, we saw a return to year over year organic growth in almost all of our businesses in Q1 and.

And all three segments exceeded the organic growth expectations for the quarter.

Organic sales growth of 17% was significantly better than we expected.

And March was particularly strong across our businesses.

Adjusted operating profit was up 39% compared to last year and operating margin expanded 170 basis points.

Strong sales growth and benefits from the carrier 700 were partially offset by investments.

Results also included some higher freight costs and a product trouble issue are the minority JV.

Price cost in the quarter was about neutral.

Earnings conversion was better than the high teens I shared with you in February driven by the stronger than expected sales performance.

We delivered 21% conversion despite the one the one time items, we previously discussed the.

The loss of buyer related income the.

The impact of deferred in equity compensation.

And lower conversion on currency.

Excluding these items conversion was about 30% in the quarter.

Free cash flow of $131 million in the quarter, mainly reflected better than expected net income and improved working capital performance.

During the quarter.

We repurchased about 900.

976000 shares at an average cost of $38 40 per share.

Let's now look at how the segments performed.

Starting on slide six.

<unk> organic sales were up 25% in the quarter.

Driven by the 48% residential growth.

The distributor movement was very strong at about 20% and we believe there was some earlier than expected seasonal inventory build in the channel.

Commercial HVAC sales were up in the mid teens organically.

Strong growth and apply the end service more than offset continued lower volume in North America light commercial which was down mid single digits.

Light commercial order rates were up over 10% in the quarter and field inventory levels are down over 30% compared to last year.

<unk> this business for a strong Q2.

The HVAC team expanded margins by 240 basis points driven by growth in residential and in service.

The segment remains on track to generate about 16% margins this year.

Over to refrigeration on slide seven.

Sales were up 19% organically as the cyclical recovery in transport and we've seen in orders has started to materialize in sales.

Transport refrigeration was up 22% in the quarter driven by over 40% growth in container.

And took in 300 recovery.

Particularly in Europe and Asia.

North America truck and trailer grew high single digits with each month improving.

Commercial refrigeration grew low double digits as pent up demand and reopening in Europe drove strong growth.

Margins were up 50 basis points in the quarter compared to last year.

We continue to meet customer demand.

But are incurring some higher cost do so including error free.

We expect operating margins to improve as growth in the higher margin North America truck trailer business accelerates.

Flipping to slide eight.

Organic sales at the fire and security segment grew 3% and both the products and field businesses grew at similar rates.

Within the products business, which represents about 60% of the segment sales.

Residential and commercial fire continued to be solid while access solutions and our industrial businesses remained challenging of.

Of note.

The product business.

The significant pickup in the month of March leading to a strong end of the quarter.

Our field business Chubb.

Generated organic sales growth of about 4%.

The growth was largely driven by Europe, and other and all of the rates were strong, especially in Asia.

As you can see on the slide Chubb.

The <unk> booked its largest installation order ever.

Strong carrier of 700 performance helped drive a 220 basis point margin improvement in the segment.

Now let me review of the order activity, we saw on the first quarter on slide nine.

As you can see on.

Our residential and light commercial businesses continued to see strong demand.

Backlog in residential is up sequentially and is still up almost three fold compared to a year ago and puts us in a solid position for shipments entering Q2 and the cooling season.

Commercial HVAC orders were up high teens compared to last year and backlog increased over 10% compared to the last compared to last quarter and net business.

For refrigeration order activity for the truck trailer business continued to improve sequentially nor.

North America truck trailer orders were up well over 100% in the quarter and Europe was up over 50%.

Strong order intake and backlog exiting Q1 should position the refrigeration segment to achieve closer to high teens organic sales growth for the year.

Order intake for our fire and security segments.

Also continued to improve sequentially.

Product orders were up 5% year over year with a strong end to the quarter, especially in residential and commercial fire.

Like prior quarters industrial end markets and the hospitality vertical remain weak the comparisons get better in Q2.

Field orders were up about 15% organically as activity begins to pick up in Europe.

And against an easier Asia comp.

Installation orders were solid and we continue to have a record backlog.

Let's walk through the EPS bridge on slide 10.

As I mentioned Q1, EPS of <unk> 48 was 13 cents higher than prior year and the growth comes largely from operational performance as you can see on the bridge.

Strong sales growth is the main driver here as well as carrier 700 savings of about $60 million.

Operational performance was also impacted by some of the headwinds I referred to earlier.

Including higher freight costs and the product trouble at the minority JV.

While the inflationary pressures continue we're working to offset this through additional cost and pricing actions.

We recently announced a second price increase in our residential HVAC business for June as well as an increase in transport refrigeration and we're implementing similar actions in other areas of our portfolio.

The loss of buyer related income and the year over year impact of deferred in equity comp was about a <unk> <unk> headwind in the quarter.

All of the other items on the bridge of pretty much in line with what we expected.

Except for the favorable tax items, which will carry through the year.

Let's move to slide 11 updated outlook.

Based on stronger than expected Q1 performance and an improving outlook, we are increasing our organic sales outlook from a range of 4% to 6% to a new range of 5% to 8%.

A bit less than half of point of the incremental organic growth represents incremental pricing actions, we already have or are taking to offset higher input costs.

We continue to expect price cost to be about neutral for the year.

We expect our adjusted operating margin now could be a bit over 13, 5%.

The Q1, the Q1 favorable discrete tax item means that our full year tax rate should be around 24% rather than 25% the.

This all leads to an adjusted EPS outlook range of $1 95 to $2 <unk>.

A 10% improvement at the midpoint from our initial guidance.

Our updated outlook does not include the <unk> transaction.

Finally, as Dave mentioned, we now expect free cash flow of about $1 7 billion.

Slide 12, Slide 12 shows the bridge for the 10% improvement in our adjusted EPS outlook from the midpoint of our prior guidance of the midpoint of our current guidance range.

The biggest driver is the operational conversion.

On the additional sales volume.

Lower interest expense and the tax items are each adding about <unk> <unk>.

Over to slide 13.

Reiterate our capital allocation priorities for 2021.

There are no changes to our priority since the Q4 call.

But yes started to see us execute on some of these items.

During Q1, we paid down $500 million of long term debt and with the transactions that have closed or have been announced to date cash.

The deployment on M&A will exceed $200 million this year.

Last week, we declared a quarterly dividend and on share repurchases, we are making progress towards towards the target for 5 million shares this year.

Before I turn it back to Dave Let me just.

Right that the volatile quarters in 2020 should continue to impact the comparisons in 2021, we.

We still expect strong double digit organic growth in the first half of 2021 and closer to flat in the second half given the residential comparisons.

We expect about half of the full year earnings to be in the first half.

So a good start to the year puts us in a position to raise our full year outlook across the board.

With that I'll turn it back to Dave.

Thanks, Patrick we are pleased with a very strong start to the year.

While much work remains to be done we are confident in our raised guidance for the balance of the year with debt will open this up for questions.

Ladies and gentlemen to ask the question you will need to press star one on your telephone.

And to withdraw your question just press the pound key.

Once again Thats stern on for questions. Our first question will come from the line of Julian Mitchell from Barclays. You may begin.

Hi, good morning.

Maybe good morning, maybe just wanted to circle back on the margin guidance. So you did a low twenties incremental margin all of the in Q1, it looks like the guide for the year, maybe embeds the.

Miller.

Hey, Joe.

So just wanted to understand sort of as you look out over the balance of the year versus Q1.

It sounds like price cost isn't very different from the first quarter, but refrigeration margin should improve.

Maybe help us understand some of the other moving parts around maybe the phasing of cost savings and investment spend.

Over the remaining nine months.

Yes, Julian good morning, Patrick here, maybe I'll answer it is as follows.

The reported conversion in the first quarter is about 21% for.

For the full year, we expect reported the conversion to be closer to 25%.

Adjusted debt for buyer and currency and the onetime items from last year, we get to 30% for the full year.

We expect reported conversion to improve from here on out and so in future quarters, we expect that converted to improve from the 21.

On up and for the full year of that sand as I mentioned closer to 25% earnings conversion reported operationally closer to 30.

In terms of the investments we did about $40 million in the first quarter I think we'll be pretty much evenly.

Split throughout the year and so I don't expect big swings from an investment point of view throughout the quarter.

I think you also asked about the the input costs.

Compared to our prior guidance.

In our prior guidance with several tens of millions of dollars of incremental headwinds from inflation in the current guide debt went up by another $70 million or so sort of $70 million and our current guide assumes that we're offsetting that with about $70 million of incremental pricing.

And so from a timing point of view.

For the full year price cost will remain neutral in the second quarter that may be the one quarter, where price cost is a little bit of unfavorable.

Thank you very much.

Then.

Maybe.

Secondly, just focusing on that refrigeration segment.

The Incrementals as you said global weighed down on little bit perhaps in the first quarter.

The mix and supply chain issues, maybe help us understand how quickly those improve the bal.

Of.

Of the year in terms of getting that refrigeration incremental.

Yes, Julien so within refrigeration, which had a good sales growth quarter of the growth was as we said, particularly container international truck and trailer commercial refrigeration does carry lower margins than our highest margin North America truck and trailer business we.

We expect North America truck and trailer would actually outperformed was up high single digits. In Q1, we expect that growth to accelerate from here on out and so for refrigeration. We expect the earnings conversion to improve from here on out we expect the margins to improve starting in Q2.

And for the full year for that segment, we expect segment margin to be about 14%.

Great. Thank you.

Thanks Joanne.

Our next question will come from the line of.

Andrew Oldman from Bank of America, maybe the yen.

Yes, good morning.

Good morning morning.

Just a question on the sales guidance and the organic increase how should we think about the impact of.

Of recent price increases because of the scope of price increases that we saw.

I think March.

Of course.

<unk> five 7% across the industry in resi on applied and it seems the most of them will become effective in May and June so how do you incorporate that in your outlook.

Yes, Andy So we have announced price increases in net throughout.

Our businesses at the timing of switching of the exact yield of that of course is always a little bit different than the actual announced.

Price increase the way.

Ray you can think about of this of the one five point increase in organic growth for the.

Full year at the mid points of going from 5% organic growth to six 5% organic growth at the midpoint, a little less than half of that relates to incremental pricing that gives you a give or take $70 million seven zero million of incremental pricing that we've assumed in our current guidance, which offset the $70 million and commence.

The headwinds on input cost that I referred to earlier the.

The balance of the increase in organic growth for the full year is really in.

H Vac, both resi and commercial some of that of course includes the price and in <unk>.

Transport refrigeration those are the areas, where we've really.

Pushed up our outlook for the year in terms of organic growth.

That was of Great answer Thank you and the second question I have for you.

With the recent stimulus bill.

I think you guys have highlight of train has highlighted we've heard from other folks.

A lot of money is going to schools.

I think something to the tune of $67 billion of year for the next three years.

The last stimulus 70% of this might end up being spending on capital projects riders. This designation that of should go for air quality improvement the HVAC system improvement.

On we've talked for the folks on the industry people have really hard time getting their hands around what it actually means.

I know that it hasnt been too long, but do you guys have a framework of how to think about the impact of the mining in the school vertical.

This year and what does it mean for demand for HVA C refurbishment upgrades.

Over the next two years. Thank you.

Well, Andy we think it's significant you look at the one nine trillion dollars of stimulus package of $130 billion of that went towards school reopening and then if you look at the President's New proposed infrastructure build the American jobs plan. It includes an additional $100 billion for schools.

How and when that gets spent will remain to be seen obviously needs to flow from the federal for the state of the local school districts, but it's significant because the <unk> had a report that said 40% of the school districts have insufficient HVAC.

So when you look at that potential $230 billion of spend we think of material amount of that will go towards upgrading the HVA systems, because it is long overdue and it's needed.

K 12 is an important part of our business. It represents about 10% of our sales in North American applied in light commercial we've come out with very targeted kit offering which makes it easy for the 16000 School district districts across the country to make a selection and moved quickly to implement it we have a dedicated sales team we have innovative.

<unk> that we've now come forward with things like of bound in our op the clean solutions.

And we also think it's important because these are sustainable solutions. So how it plays out this year on next you will have to see the specifics, but we do think this will provide us with multi year tailwind for our HVAC business.

Operator next one.

Sorry go on.

Andy.

Our next question on comes from the line of Josh.

The Winski for Morgan Stanley you may begin.

Hey, good morning, guys.

Hey, Josh.

Day, So maybe just first question on on residential.

You mentioned the strong sell in sell through still good but not quite as high backlogs still high so maybe the that the.

The channel was still low, but how are you thinking about <unk> here.

You guys match.

Sell out in <unk> or is inventory for for your distributors.

Brimming to the point, where maybe they need the destock a little bit.

For <unk>.

I still feel of strong we came in with the nice backlog into the <unk>. We do think that it's going to be hard to track quarter to quarter, you almost have to step back and look at the full year I think what we're going to see as normal growth rates for the year with abnormal calendar calendar of <unk>. So what we saw on the first quarter with sales up 50%.

And what we're looking at for the first half of sales probably up around 35% in the first half and then given the very difficult compare given the strength we had in the second half of last year. The second half is probably down closer to 20%. So we're raising we had originally thought the year would be low to mid single digits. It's clearly looking like its in the mid <unk>.

<unk> digit range for the year, which is not an abnormal kind of year. What's really encouraging is that movement was very strong in the first quarter was up over 20% and movements continued to be strong here in to Q now of the inventory levels. As you said there are higher.

Then the normal there at 30% year over year, but having said that if movement continues to say at the pace that we've been seeing and we think that we would end Q2 inventory levels, probably 10% to 15% higher than 2019, which is the better compare which is not completely.

<unk> of normal housing starts continue to be very strong there'll be up 11% to 12%. This year and we're seeing continued pent up demand and a lot of the strength, we saw or at least a material amount of strength. We saw on the first quarter was furnaces, which would not really indicate.

For a lot of pre stocking on inventories. So look we're going to have to keep an eye on it of course, because third quarter was up 54th quarter of <unk> 25. This quarter of 50, but we continue to take share we continue to support our customers. We continue to see strong movement. So we feel well positioned certainly in <unk> and then we'll have to see how the rest of the year plays out.

Got it that's helpful. And then I guess just thinking on carrier 700, and you guys are in the midst of a pretty substantial transformation across the board.

Including the I'm trying to build out the service organization I think that comes at a point in time, where maybe there is some bottlenecks out there whether it's finding the suppliers for sourcing initiatives hiring folks training them up.

Anything that youre seeing out there that may be kicking some of those initiatives for the right simply because it's it's hard to onboard new suppliers, new technicians, whatever it is across the board.

No Josh those are not I mean look theres challenges on carrier 700, but it's not driven by the ones you mentioned.

Clearly, we're seeing inflationary headwinds coming our way of commodities.

We're seeing some headwind there of course input costs from our tier one tier two suppliers, we have to manage that logistics remain a challenge and frankly, we have we have to manage productivity because there are some labor shortages in places like our collyer of El Tennessee factory, where we are in the process of hiring a few hundred people there and we got to we got to keep up with.

Not only the short term demand, but the sustained demand that we see coming over the coming quarters. So.

There is challenges out there I'm really proud of the operations team I think they are managing it.

The best in class, but it's certainly not without its without without its challenges, but I think the things you mentioned were actually tried to get out in front and one of the things that I think has helped US is as we saw this demand coming we actually pre stock some inventory of Patrick and I authorized a bit of inventory in December and then in January to make sure of that we had.

<unk> that we were going to need some buffer stock in the face of a lot of the the demand influx that we were anticipating.

Got it good call on that.

Kate the color I'll get back on one.

Thank you.

Our next question comes from the line of Nigel Coe from Wolfe Research you may begin.

Thanks, Good morning, everyone.

Marty.

So the commercial HVAC growth of mid teens.

It wouldn't have been something with the probably guests coming into the quarter.

And that's sort of like commercial down mid single digits in the U S. So I'm just wondering could you just maybe just dig into the net level in terms of the moving pieces.

On that mid teens.

Then you talked about light commercial.

And in.

And <unk> on a much much easier comp.

Maybe just talk about how you see commercial evolving over the balance of the year.

Sure let me start on the applied side.

We were very pleased.

With that mid teen growth, we saw on in on the commercial applied side, obviously, China had some easy compares but sales of their sales in China were up over 100%. We were pleased with the growth in Europe Europe was up in the mid teen range.

The North American equipment was the watch item. We did have a couple of very short term issues in one of our factories that probably is the short term issues that will we will catch up with that here in <unk>, So north American equipment for us was actually down a bit.

And the aftermarket in North America was up double digits. So I think the north American equipment is poised for a nice recovery, especially when you look at the Abi the architectural billing index, we looked at 11 months below 50, and it got as low as 29.

But now we've been above 50 in March it was at 55, which is very very good level. So of course, the big leading indicator of commercial construction activity. So we're very encouraged about what we're seeing in the applied space in North America, especially in the verticals like data centers and warehouses education, which I mentioned on the.

On the stimulus package and then health care so.

And we continue to lean into aftermarket growth, which we anticipate will be up double digits and the backlog of strong light commercial it.

It was down a bit.

It sequentially improved from the fourth quarter. So every quarter of light commercial it's been getting better, but as restaurants and retail starts to open up we're very encouraged by what we're seeing with order trend. So it's really set up for a nice growth. We were thinking that light commercial would be of mid single digit is probably going to be up around 10%. This year.

And what we're seeing.

In light commercial is strong order trends, we're seeing improved backlogs I mean, it's not a it's obviously a very easy compare but the the backlogs up of 100% and what's really encouraging is field inventory levels are down they're down about 35%. So it's set up for a nice rebound as we get into <unk> and beyond.

Amazing Amazing.

Great and then on the <unk> acquisition, so congratulations on the putting in the the Drs.

Based on that.

What's the plan.

Globalize that product and on bringing into the U S. And then how does the <unk> fit in with Toshiba.

The shape of thanks.

Yes, we look at <unk>.

<unk> is the first step of many of you look at the entire via RF space and International light commercial we see that as the $25 billion market out in 2025 and the reality is if you look back in 2015 Vrs I mentioned this in the prepared remarks, but <unk> with <unk>.

The size of the traditional chiller market and now they are about the same size. So you can imagine the CAGR for via RF is exponentially higher than than some of the other markets and the issue that we had is we really did not we didnt have design capabilities and we were not really of manufacturer and thats not what we are as an OEM were not of distributor. So this was one of the few but.

<unk> plays that we could make to become a design and manufacturing the RF player with a great operation there outside of the Guangzhou in China. So very very pleased that gets us to become a more meaningful player. We've been clear that we do have.

Partnerships with folks like the Sheba with Madea that we're very proud of these go back decades, and they are great partners.

Are there opportunities to more optimize those into win win relationships. We frankly believe that there are and we're in very constructive discussions with those partners, but we see the <unk> acquisition, enabling that to not only be of play for China, but for to for it to being a global play.

Thanks, David.

Thank you.

Our next question comes from the line.

Jeff Sprague from vertical research you may begin.

Thank you and good morning, everyone.

Good morning, Mr. Sprague.

I've gotten to spread news.

Earnings.

Yes.

Volume routes are coming through.

Yeah.

Sure.

Hey.

A lot of cover I guess I'd be interested in maybe the Dave circling back to kind of the healthy buildings.

The dynamic can you just elaborate a little bit more on how you are actually kind of defining that does that.

The pipeline.

Mean, it's kind of around the of bound opportunity or.

Just kind of flush that out a little bit for us how you.

The differentiate the pipeline there versus what you are seeing kind of maybe on the core business yes.

Yes, Jeff the way, we try to we tried to take a very.

Strict and disciplined definition, which is these are sales that we would not have gotten prior to the focus on really healthy buildings. So a lot of the IQ type offerings that really became much more prevalent.

When the pandemic hit we really put that in the healthy building $500 million pipeline that I talked about so examples would include optically.

We have orders for more than 30000 optic clean units and we put that in the healthy building category. When we sell upgrades that are really driven by filtration or UV lights, we put that in there and we're really really excited about the new of bound offering Bobby George and the team working on this with almost the <unk>.

<unk> type group over the last six months or so to come out with a differentiated digital offering and that will be of big enabler for healthy buildings, because what it will do is it will make it visible to the end consumer how how safe and healthy is the indoor environment, we think about it like an Intel inside strategy, where.

You started to have and consumers ask for certain chips in the RPC is what we're going to see of certain consumers, having expectations that before they make a restaurant reservation or go into a commercial office building or or come back into crowded indoor spaces, they're going to have an expectation that they can see the health of the indoor environment.

And that the building managers, taking steps to mitigate any anomalies with that and thats exactly what our balance will enable so we will put our balance subscription sales in the healthy building category as well.

We'll now for the second part of my question, you talked a little bit about chiller service attachment, which maybe kind of part of this equation.

Are you seeing of different kind of service attachment rate with these offerings.

And I guess, you kind of alluded to even some new evolving business models there.

Just a little more color on that.

We anticipate so Jeff, but it's too early to say I mean, we really we've been working for the last few months in the first quarter on pilot projects, where the commercial office building. We were very excited with the Atlanta Braves and welcoming as they welcome fans back the Truest Park that was a really profound win for us that we're excited about we worked with the.

Our school K through 12 school outside of Atlanta, as well, so we've really been proving out the technology. We made it an official offering earlier. This week. So it's too early to say in specific response to your question, but its clearly we had this tiered blue blue edge offering and we believe of bound will drive more recurring revenues.

Subscription sales, but also pull through more LTA is in more of our elite blue edge offerings and equipment sales.

Great. Thanks, I'll pass the thank you. Thank.

Thank you.

Yeah.

Our next question comes from the line.

Deane Dray of RBC capital markets you may begin.

Hey, good morning, everyone.

Good morning, I, just wanted to follow up on on Jeff's line of questions. There just to.

Clarify that the admission of the indoor air quality is the all of the.

Of the school.

Upgrades of the HVAC systems, because that is a COVID-19 related concern.

And probably would not have had the kind of.

Focus had there not been the pandemic are you, including that of indoor air quality opportunity.

No we will base it more on the offering that we provide as opposed to the driver behind it. So if we go to a school district and what ends up happening is it is much more of.

Kind of an energy efficient play, which is what we do all the time and the modernization is more around energy efficiency, we probably would not put it in that healthy building category.

But if the offering is driven by the underlying premise of.

Driving more healthy and safe indoor environments, Yes, we would put those in.

Okay. Good so that's helpful in terms of of framing what's.

Whats in that indoor air quality bucket and then second question is I know, it's relatively small but it did get called out is this operational issue at our minority owned JV. Just if you could flesh out what the issue was does it broadly.

On the spotlight on carriers.

Portfolio of minority Jv's, and what's the approach and timeframe to address.

That the.

The number of them, there and how might that get rationalized.

Well on the second part of your question Deane, Yes, I mean, one of our big themes for carrier since we since we spun has been focused on simplification. So if you think about our JV portfolio. We started with 40 minority JV and we will end this year of closer to 32. So we have been taking a very.

<unk> <unk>.

Clinical approach to reducing the number of JV is for for various reasons. There are some debt really pose risk, but not of lot of value to the overall business. So we have reduced some of those.

And then there are some that we still have that we are in discussions to reframe.

<unk> them a bit, especially if its in a very strategic area for us and we're not can say on consolidating sales of our EBIT. That's an area that we're in discussions with our partners on.

With respect to the specific product issue that was in one of our minority JV I wish I could say that in things we control, we've never had our own product issues. So.

Not disparaging the JV because of that one issue, but it does highlight that we do want to have more controls in place and some of our critically strategic areas.

Okay. Thank you Andy.

In terms of the size of it was about a penny.

I appreciate it thank you.

Our next question comes from the line of Joe Ritchie.

Goldman Sachs you may begin.

Yes, Thank you and good morning, everybody.

Joe.

The importance since around the topic of healthy buildings of that nasal asking the question as well the so it seems like you've grown your opportunity I think you highlighted 500.

$500 million this quarter I think on its $200 million last quarter.

The teams also like the opportunity is pretty pretty bought fraud day. So just any any commentary around like where you're really seeing the uptick and then also 500, probably isn't the stopping point I guess, how youre thinking about the addressable opportunity for you guys.

Well, we we think Joe that the opportunity.

As significant and it is it's broad based on broad based across.

A number of verticals, so clearly education.

K through 12 is the key focus area, but even universities, we've been in discussions with universities as they look at their very complex. They have a very broad footprint at most of the universities in the United States, but globally as well health care and hospital is a key focus area for us as well commercial office buildings as people re imagine the the future.

Our of work in <unk>.

Various models there they do want to make sure of that as people come back into the office to providing a safe indoor environment stadiums I mentioned the deal with the Braves, but we.

We are optimistic that that would be the first of of other deals. We would do so anywhere where you have kind of people in a somewhat crowded indoor environment theyre starting to be more of discussions I had dinner with a friend who owns restaurants, a couple of weeks ago and he wants to add up the clean units. The his various restaurants. So we're seeing a lot of interim.

As you know the question, we get a lot is going to be how sticky is that we know that sustainability of sticky theme and healthy once the pandemic is is more under control of globally will healthy buildings be a thing of the past and I think that especially when you think about our are bound offering that is one of the keys to really making sure that this is a.

Sticky trend for years to come because what it's taught us is that COVID-19 isn't the first.

Airborne transmitted.

Disease and it won't be the last and people are much more in tune with having safe indoor environments. So to make it visible to them and then ultimately use AI and ml to anticipate and correct any deficiencies with indoor environments. I do think this is the trend that will withstand the test of time.

That's helpful color day, Thanks, and then maybe maybe my on my follow on for Patrick You gave a lot of details around the the guidance for the year I guess, if I try to look at it slightly differently. The first quarter came in much better than the expected at the segment level I think about $100 million better the guidance for the full year.

Your only kind of implies like maybe even half of that at the segment level and so I guess I'm just trying to understand like the conservatism that's baked into the rest of the year vs versus like what you expect from incremental headwinds for the rest of the year.

Yes, I think Joe the way you can look at is this on <unk>.

Always one one element of this within the residential HVAC, we mentioned that some of the strength. We've seen we believe could have been some of the.

Acceleration of the inland the seasonal inventory build so that would not necessarily change the full year outlook for.

<unk>, although we did receive a little bit for the year, but not as much of the the H. One beat the second element of this is for fire and security we saw a very strong end to the quarter in March.

So its quick turn business.

We have not updated our full year outlook for that segment at this point and so we're taking other card there in terms of prop.

Profitability.

Full year, and as I said $70 million more of price offsetting $70 million more of the headwind.

And then a little bit more volume leverage from what we raised we did dial in a little bit more.

Of the air freight costs as well for the full year.

So that's the kind of the a little bit more detail and color around the full year outlook.

Got it thanks, Patrick the create it.

Thank you Joe.

Our next question will come from the line of Jeff.

Yes, I'm on from Keybanc you may begin.

Hey, good morning, guys.

Good morning.

Just a clarification on North America applied how much of that was the cash.

Watch are the more the supply issue.

Versus kind of demand still being choppy there.

No. It had nothing really we did as we transfer it over on a three PL and we made we had a couple of issues as we did that so it was a very short term issue, which is now which is now behind us.

Okay, and then any supply chain issues leak.

Leaking into the transport piece, we've heard a lot about just truck, but but anything youre seeing in transport.

Yes, I mean the <unk>.

Fly chain issues are.

Fairly broad based I mean, there are.

Electronic their electronic issues, there of raw material issues, even things like resins that we put into our injection molding process.

We have to work with a couple of key tier one suppliers and our transport refrigeration business that that our key watch items. So I think the team is managing it well but.

There are some things that the team is having to do in some cases are afraid of over ocean, which we would have done in the past so it's not without its cost and challenges, but just like the rest of the portfolio I'm really really proud of how the team is working with the supply chain to manage them, but there are certainly issues that the teams battling every day.

Jeff we are meeting customer demand with just having a little bit more.

Input costs in doing so including free.

Okay, Great and then if I could just sneak one more in.

Maybe just.

Through through a lot of the pandemic reopening demand seems to be.

And selecting here and just beyond maybe just the.

The minority interest Stakes.

How are you thinking about portfolio reshaping that of bigger level.

And some of the businesses that maybe don't fit longer term. Thanks.

Well look we said that we.

We would take a very clinical and structured review of our existing portfolio and I can share I can assure you that we started that on day, one and that's something that will continue forever. So we continue to look at every aspect of our portfolio and put it through a rigorous set of lenses. The determined is it the right kind of area for us to invest in it.

Prove or is it.

Worth more in the hands of someone else on we would use those proceeds to invest elsewhere. So we continue to look at all aspects of our current portfolio. We're very very energized by the playbook. We have in place we have great confidence as does our board and our strategic roadmap. We have our three pillars of growth funded by carrier 700, we have these two big ecosystems where for.

Just on healthy safe and sustainable building in cold chain solutions. So we will continue to look at rounding out those portfolios, we put our toe on the water with a bolt on M&A with <unk> and we'll look at obviously, we're looking at others. As we go forward and then we of course know theres more transformational opportunities out there on the portfolio, but where we're really energized.

And by our ability to execute on the strategic roadmap that we have in front of us.

Okay very helpful. Thanks, guys.

Thank you.

Our next question comes from the line of Steve Tusa from Jpmorgan you may begin.

Hey, guys good morning.

Thank you.

What was price and cost in the quarter for.

For you guys.

It was about neutral.

And actual price neutral.

The actual price capture.

A little bit the well.

Less than a point in the quarter itself is actually was in the quarter in Q1 of silver is less than half of point for the full year. It will be a little less than a point for the total company.

Yes, Okay got it.

And you're neutral on on commodity okay.

When you.

Talk to the channel and I know, we kind of talk to your channel as well, obviously, but when you talk to others in the channel maybe outside of Watsco.

What are they saying about what's actually happening on the ground the sell through is pretty good.

Is there a little bit of catch up from people not being able to get product last year. So they kind of of scheduled it for the spring I mean whats what are you hearing from like some of your key contractor customers.

What we hear from really both of our distributors and our contractors is that demand is strong that it's real demand and that that theyre pushing for the right mix from us. So they can support the customers obviously, new construction continues to be extremely strong and then what youre seeing is we had anticipated.

Did that in previous <unk>.

<unk> cycles, what you would've seen is more repair over replacement, we actually haven't seen any of that we've actually seen a lot more replacement of entire units entire condensing units of our entire systems and I think it's because partly because theres more stay at home and partly because theres more liquidity in this down cycle than we saw on previous so people are priced.

<unk> the.

The spend they have on their homes and we're also seeing people buy a lot of new homes and often when you buy a new home.

One of the things you do on your inspection is look at the HVAC system. So that's probably driving some of it but what we're hearing we were actually on the phone recently last week with a key distributor down in the Texas area and they said that they are very encouraged by.

By what they're seeing from their contractors, they're encouraged by carriers the ability it's not that we haven't had our hiccups, but our ability to support them and I think that has helped some of the share gains that we've seen and we'll have to see obviously there is there is inventory out there in the channel, but we'll have to see.

If move make and continue to be north of 20% then it's an encouraging sign.

And you mentioned share gains would you at the margin.

Given everybody else is kind of raising price dramatically I mean would you at the margin.

Make targeted efforts with price to to allow distribution the kind of.

Go after some share in local local markets selective low.

We've been consistent on the price that I think others have announced we came in with the price increase coming into the year, we announced for <unk> up to 7% increase.

The increase in June so.

Look there's clearly inflationary pressures on their on our side and we really have no choice, but to raise price is not only in resi, but.

Across the portfolio and I think customers expect it so we will be doing that and I think it seems like from what I've read from our peers that thats an industry wide phenomenon.

Is there anywhere where price is down and that's my final question sorry.

No.

Okay, great. Thanks, a lot.

Thank you Steve.

Our next question will come from the line gross Tom kind of from Cowen you may begin.

Yeah. Thanks, good morning.

Good morning, I, just wanted to ask I wanted to ask about the competitive environment last year, we had a couple whereas the competitors that couldnt produce.

To meet the.

<unk> for example, Lennox mentioned on their call that they have seen some.

Some issues among the resi competitors as well and I was curious.

Are you guys seeing that in.

So kind of how has that manifested in your orders if theres any way to quantify it.

Yes look we are we will never comment on our competitor we have.

Tremendous amount of respect for our competition and I think we all go through various challenges.

During different time, so I think that we're all experiencing various challenges I think our operations team has gone of great lengths to support our customers and I think that because we did pre stocks of inventory anticipating the ramp I think that has helped us.

I know our team has been working around the clock.

To support operationally, we've tried to be very strategic with our supply chain and on our own operations to have some level of redundancies. So if there is an issue on one place we can ramp up somewhere else.

So we're not by any means flawless, we have our challenges, but I do think the.

On the operational performance has helped us.

Pick up a bit of share along the way.

Thanks.

Yeah.

Thank you that's for all of the plan.

We have for questions and answers today I'd like to turn the call back over to the speakers for any closing remarks.

Okay well. Thank you. Thank you everyone for joining clearly where we're very energized by the first quarter on what we see in our performance and some of the macro trends. So we're energized by the quarter on what lies ahead and we encourage you. Please reach out the sandwich the any follow up questions. Thank you all.

Thanks.

This concludes today's program you may now disconnect.

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Good morning, all of them to carrier as first quarter of 2021 earnings Conference call. This call is being carried live on the Internet.

There is a presentation available to download from the carrier's website.

I R of Das carrier Dotcom.

I'd now like to introduce your host for today's conference.

Sam Pearlstein, Vice President of Investor Relations. Please go ahead Sir.

Thank you and good morning, and welcome to carrier first quarter 2021 earnings Conference call with me here today are David Gatlin, Chairman and CEO, and Patrick Goris, Chief Financial Officer, except as otherwise noted the company will be speaking to the results from operations, excluding restructuring costs and other significant item.

Of the nonrecurring Andrew of Nonoperational nature, often referred to by management as other significant items. The company remind listeners of the sales earnings and cash flow expectations and any other forward looking statements provided during the call are subject to risks and uncertainties carriers, the SEC filings, including forms 10-K.

10-Q, and 8-K provide details on important factors that could cause actual results to differ materially from those anticipated in the forward looking statements. This morning, We will review our financial results for the first quarter and discuss the full year 2021 outlook and we'll leave time for questions at the end once the call is opened up for questions. We ask of you.

At yourself to one question and one follow up to give everyone. The opportunity to participate with that I'd like to turn the call over to our chairman and CEO, Dave Gitlin.

Thank you Sam and good morning, everyone. Starting on slide two with an overview of the quarter Q1 was a great quarter for us and an early indication that a global economic recovery is underway areas.

Areas of our portfolio of that had been performing well have continued to improve in those businesses and verticals that we're acutely impacted by the pandemic are showing early indications of recovery.

Overall volume came in stronger than we plan reported sales were up over 20%, including organic growth of 17% driven by another very strong quarter in North American residential which was up 50%.

We also saw strong growth in commercial HVAC and transport refrigeration all of our segments contributed to the organic growth in Q1 as the organization continues to execute well on our growth initiatives, including the aftermarket which grew close to double digits.

Notably compared to the first quarter of 2019, we grew sales about 6% organically.

This was coupled with strong order trends, leading to a healthy backlog at the end of the quarter on.

Orders were up over 30% compared to last year, driving the organic backlog up 13% sequentially and up close to 20% year over year, we produced $608 million of adjusted operating profit up approximately 40% year over year.

Given the supply chain constraints, we are incurring some additional inflationary pressures and higher logistics costs in meeting customer demand.

We're working to mitigate these headwinds through additional cost and pricing actions.

Finally, I am encouraged by our free cash flow generation in the first quarter.

So we do not expect of regularly adjust guidance for the full year. After just one quarter, we are increasing guidance on sales earnings and free cash flow given our stronger than expected Q1 results and confidence in the macro trends that we're seeing.

We now expect reported sales to grow 7% of 10%, including a 2% tailwind from FX.

We expect the adjusted EPS to increase by about 20% at the midpoint and we are increasing our projected free cash flow for the year by about $100 million to about $1 7 billion.

Slide three shows the flywheel that I've used in prior earnings calls to explain how our key focus areas will drive shareholder value.

In the upper left we continue to ensure that we drive a performance culture.

We are now one year into our journey as a standalone public company and we are building momentum we started off by putting a playbook in place and a year later I can say that we are a fundamentally different company from our culture to our strategy to our targeted investment prioritization balance sheet and capital position.

Carrier 700 is the cornerstone of our unrelenting focus on cost reduction and we achieved about $60 million in Q1 in a tough environment.

Increased input costs and put it are putting pressure on our $225 million target for the year. So we are driving additional cost and price actions to offset the unplanned headwinds.

Also core to our new culture is our focus on profitable growth, we are gaining traction on all three pillars of our growth strategy.

We are gaining share across the portfolio helped by innovation arising from our increasing R&D spend from $400 million in 2019 to about $475 million. This year and an additional 600 sales and sales support people that we've added over the past nine months.

Regarding aftermarket and digital offerings, we are gaining significant traction as we push of our business models to focus more on recurring revenues. We are on track to deliver double digit aftermarket growth. This year and we continue to expect the number of Chillers under contract the increase from 50000 to.

To 60000 this year.

Increased service coverage on traction on our Blue wedge offerings are enabled by our digital solutions that we're implementing across all of our segments.

Lastly, we continue to take a very disciplined approach to capital allocation, which Patrick will cover. We also said that we would continue to invest in solutions for healthy safe and sustainable building and cold chain solutions, and our inorganic growth both of which I'll discuss on slide four.

In Q1, we.

We had over $80 million of orders for healthy building products and services and we currently have a global pipeline of sales opportunities of more than $500 million.

We created a new healthy building solutions organization under <unk> leadership with the seasoned team dedicated to this effort.

We also introduced differentiated sought after offerings and we're energized by this week's release of our new digital digital offering called abound. It is all about giving customers confidence to reenter crowded indoor environments, and providing a healthier indoor experience.

<unk> gathers performance data from disparate systems sensors and sources and presents it in a smart simple interface. It gives a clearer view of building systems and sensor performance data and identify and helps to address the anomalies.

This solution is not a simple rebranding of digital offerings that we had in our portfolio. It is an open architecture of SaaS cloud based platform and acts as an intelligence layer interfacing with not only our automated logic controls platform, but also of third party building management systems and sensors throughout the building.

<unk> had pilots underway with key vertical customers and the office building space, the educational sector and the sports and entertainment vertical the.

Those have gone tremendously well a huge vote of confidence is that we signed the deal to support the Atlanta Braves as they start to welcome fans back the true of spark.

Bound we'll monitor the indoor space covering a range of food and beverage locations and clubs basis for guests.

As a SaaS platform of bound is expected to drive more recurring revenues, including subscription and services and also to help pull through additional carrier equipment sales.

We are seeing equally strong progress on our other key ecosystem of focus healthy safe and sustainable cold chain solutions.

Sense of Tech our cargo monitoring business had a record Q1 with sales up 16% due in large parts of the demand related to the distribution of COVID-19 vaccines.

Similar to about a key differentiator is our cloud based digital offering that we are building in partnership with AWS called links.

As a key launch customer CQ <unk> selected the links fleet solution.

Liver enhanced digital capabilities for 2000 refrigerated containers.

And finally on the right side of the chart, we highlight our inorganic growth progress. We were very pleased to announce our agreement to acquire <unk>, which we referred to by its brand name of Ciego.

This acquisition will help accelerate our growth in the attractive variable refrigerant flow and international light commercial markets, which have consistently had outsized growth rates over traditional markets.

With the acquisition of Ciego, we will own important brs technology design capabilities and low cost manufacturing. The we can scale globally, we expect to close the transaction with the majority of shareholder in <unk> and we are excited to welcome the <unk> team to the carrier family.

We also continue to add and promote superb talent as we lean into the deployment of the carrier way as an example, we recently welcome Jennifer Andersen the carrier, leading corporate development strategy and serving as our chief sustainability Officer.

She will help drive another key strategic focus ESG.

<unk> remains a very important focal point for carrier as we work toward delivering on our 2030 commitments.

We are tracking to our commitment of reducing our customers' carbon emissions by more than one gigaton as we introduce more energy efficient and electric solutions.

Last week carrier improved to a top quartile score with sustainability and we are now number of five within the building products category out of 129 companies.

And we also continue to make good progress on our DNI initiatives are a number of diverse executives has increased significantly since 2015, and we are leaning in to making sustainable changes to ensure that we have a truly inclusive culture with that let me turn it over to Patrick.

Thank you, Dave and good morning, everyone.

Please turn to slide five as Dave discussed.

Q1 was a great start to the year.

Sales of $4 $7 billion were up 21% versus the prior year.

Currency was a four point tailwind for the sales in the quarter about $150 million on.

On the top line, we saw a return to year over year organic growth in almost all of our businesses in Q1.

And all three segments exceeded the organic growth expectations for the quarter.

Organic sales growth of 17% was significantly better than we expected.

And March was particularly strong across our businesses.

Adjusted operating profit was up 39% compared to last year and operating margin expanded 170 basis points.

Strong sales growth and benefits from the carrier 700 were partially offset by investments.

Results also included some higher freight costs and the product trouble issue are the minority JV.

Price cost in the quarter was about neutral.

Earnings conversion was better than the high teens I shared with you in February driven by the stronger than expected sales performance.

We delivered 21% conversion despite the one the.

One time items, we previously discussed.

The loss of buyer related income.

The impact of deferred in equity compensation.

And lower conversion on currency.

Excluding these items conversion was about 30% in the quarter.

Free cash flow of $131 million in the quarter, mainly reflected better than expected net income.

And improved working capital performance.

During the quarter.

We repurchased about 976 976000 shares at an average cost of $38 40 per share.

Let's now look at how the segments performed.

Starting on slide six.

HVAC organic sales were up 25% in the quarter driven.

Driven by the 48% residential growth.

The distributor movement was very strong at about 20% and we believe there was some earlier than expected seasonal inventory build in the channel.

Commercial HVAC sales were up in the mid teens organically.

<unk> growth and apply the end service more than offset continued lower volume in North America light commercial which was down mid single digits.

Light commercial order rates were up over 10% in the quarter and field inventory levels are down over 30% compared to last year.

<unk> this business for a strong Q2.

The HVAC team expanded margins by 240 basis points driven by growth in residential and in service.

The segment remains on track to generate about 16% margins this year.

Over to refrigeration on slide seven.

Sales were up 19% organically as the cyclical recovery in transport that we've seen in orders has started to materialize in sales.

Transport refrigeration was up 22% in the quarter driven by over 40% gross and container.

And took in 300 recovery per.

Particularly in Europe and Asia.

North America truck and trailer grew high single digits with each months improving.

Commercial refrigeration grew low double digits as pent up demand and reopening in Europe.

The strong growth.

Margins were up 50 basis points in the quarter compared to last year.

We continue to meet customer demand.

But are incurring some higher cost do so including airfreight.

We expect operating margins to improve as growth in the higher margin North America truck trailer business accelerates.

Flipping to slide eight.

Organic sales at the fire and security segment grew 3% and both of the products and field businesses grew at similar rates.

Within the products business, which represents about 60% of the segment sales.

<unk> on commercial fire continued to be solid while access solutions and our industrial businesses remained challenging of.

Of note.

The product business.

The significant pickup in the months of March leading to a strong end of the quarter.

Our field business Chubb.

Generated organic sales growth of above.

<unk>, 4%.

The growth was largely driven by Europe, and other and all of the rates were strong, especially in Asia.

As you can see on the slide.

The <unk> booked its largest installation order ever.

Strong carrier of 700 performance helped drive a 220 basis point margin improvement in the segment.

Now let me review of the order activity, we saw on the first quarter on slide nine.

As you can see.

Our residential and light commercial businesses continued to see strong demand.

Backlog in the residential is up sequentially and is still up almost three fold compared to a year ago and puts us in a solid position for shipments entering Q2 and the cooling season.

Commercial HVAC orders were up high teens compared to last year and backlog increased over 10% compared to the last compared to last quarter in that business.

For refrigeration order activity for the truck trailer business continued to improve sequentially.

North America truck trailer orders were up well over 100% in the quarter and Europe was up over 50%.

The strong order intake and backlog exiting Q1 should position the refrigeration segment to achieve closer to high teens organic sales growth for the year.

Order intake for our fire and security segment also continued to improve sequentially.

<unk> orders were up 5% year over year with a strong end to the quarter, especially in residential and commercial fire.

Like prior quarters.

Industrial end markets and the hospitality vertical remain weak the comparisons get better in Q2.

Field orders were up about 15% organically as activity begins to pick up in Europe and against an easier Asia comp.

Installation orders were solid and we continue to have a record backlog.

Let's walk through the EPS bridge on slide 10.

As I mentioned Q1, EPS of <unk> 48 was 13 cents higher than prior year and the growth comes largely from operational performance as you can see on the bridge.

Strong sales growth is the main driver here as well as carrier 700 savings of about $60 million.

Operational performance was also impacted by some of the headwinds I referred to earlier.

Including higher freight costs and the product trouble at of minority JV.

While inflationary pressures continue.

We're working to offset this through additional cost and pricing actions.

We recently announced a second price increase in our residential HVAC business for June as well as an increase in transport refrigeration and we're implementing similar actions in other areas of our portfolio.

The loss of buyer related income and the year over year impact of deferred in equity comp was about a <unk> <unk> headwind in the quarter.

All of the other items on the bridge of pretty much in line with what we expected ex.

<unk> for the favorable tax items, which will carry through the year.

Let's move to slide 11 updated outlook.

Based on stronger than expected Q1 performance and an improving outlook, we are increasing our organic sales outlook from a range of 4% to 6% to a new range of 5% to 8%.

A bit less than half of point of the incremental organic growth represents incremental pricing actions, we already have or are taking to offset higher input costs.

We continue to expect price cost to be about neutral for the year.

We expect our adjusted operating margin now could be a bit over 13, 5%.

The Q1, the Q1 favorable discrete tax item means that our full year tax rate should now be around 24% rather than 25% the.

This all leads to an adjusted EPS outlook range of $1 95 to $2 <unk>.

A 10% improvement at the midpoint from our initial guidance.

Our updated outlook does not include the <unk> transaction.

Finally, as Dave mentioned, we now expect free cash flow of about $1 7 billion.

Slide 12, Slide 12 shows the bridge for the 10% improvement in our adjusted EPS outlook from the midpoint of our prior guidance of the midpoint of our current guidance range.

The biggest driver is the operational conversion.

On the additional sales volume.

Lower interest expense and the tax items are each adding about <unk>.

Over to slide 13, we're on.

Reiterate our capital allocation priorities for 2021.

There are no changes to our priorities since the Q4 call.

But yes started to see us execute on some of these items.

During Q1, we paid down $500 million of long term debt and with the transactions that have closed or have been announced to date cash.

The deployment on M&A will exceed $200 million this year.

Last week, we declared a quarterly dividend and on share repurchases, we are making progress towards towards the target for 5 million shares this year.

Before I turn it back to Dave Let me just reiterate that the volatile quarters in 2020 should continue to impact the comparisons in 2021.

We still expect strong double digit organic growth in the first half of 2021 and closer to flat in the second half given the residential comparisons.

We expect about half of the full year earnings to be in the first half.

So a good start to the year puts us in a position to raise our full year outlook across the board.

With that I'll turn it back to Dave.

Thanks, Patrick we are pleased with a very strong start to the year.

While much work remains to be done we are confident in our raised guidance for the balance of the year with that we'll open this up for questions.

Right.

Ladies and gentlemen to ask the question you will need to press star one on your telephone.

And to withdraw your question just press the pound key.

Once again thats follow on for questions. Our first question will come from the line of Julian Mitchell from Barclays. You may begin.

Hi, good morning.

Maybe good morning, maybe just wanted to circle back on the margin guidance. So you did a low twenties incremental margin all the and then Q1 looks like the guide for the year, maybe embeds the.

Similar.

For that.

So just wanted to understand sort of as you look out over the balance of the year versus Q1.

It sounds like price cost isn't very different from the first quarter, but refrigeration margin should improve.

Maybe help us understand some of the other moving parts around maybe the phasing of cost savings and investment spend.

Over the remaining nine months.

Yes, Julian good morning, Patrick here, maybe I'll answer it is as follows.

Reported conversion in the first quarter is about 21% for.

For the full year, we expect reported the conversion to be closer to 25%.

Adjusted debt for buyer and currency and the onetime items from last year, we get to 30% for the full year.

We expect reported conversion to improve from here on out and so in future quarters, we expect that conversion to improve from the 21.

On up and for the full year of that as I mentioned closer to 25% earnings conversion reported operationally closer to 30.

In terms of the investments we did about $40 million in the first quarter I think we'll be pretty much evenly.

Split throughout the year and so I don't expect big swings from an investment point of view throughout the quarter.

I think you also asked about the the input costs.

Compared to our prior guidance.

In our prior guidance with several tens of millions of dollars of incremental headwinds from inflation and the current guide debt went up by another $70 million or so so of $70 million and our current guide assumes that we're offsetting that with about $70 million of incremental pricing.

And so from a timing point of view.

For the full year price cost will remain neutral in the second quarter that may be the one quarter, where price cost is a little bit of unfavorable.

Thank you very much.

Then.

Maybe.

Secondly, just focusing on that refrigeration segment.

The Incrementals as he said global weighed down on local debt, perhaps in the first quarter.

On the mix and supply chain issues, maybe help us understand how quickly those improve over the balance of.

Of the year in terms of getting that refrigeration incremental.

Yes, Julien so within refrigeration, which had a good sales growth quarter of the growth was as we said, particularly container international truck and trailer commercial refrigeration.

Carry lower margins than our highest margin North American truck and trailer business we.

We expect North America truck and trailer was actually up.

Performance was up high single digits in Q1, we expect that growth to accelerate from here on out and so for refrigeration. We expect the earnings conversion to improve from here on out we expect the margins to improve starting in Q2 and for the full year for that segment, we expect segment margin.

To be about 14%.

Great. Thank you.

Thanks Joanne.

Yeah.

Our next question comes from the line.

Andrew Oldman from Bank of America.

Yes.

Yes, good morning.

Good morning, Good morning Ann.

A question on the sales guidance and the organic increase how should we think about.

The impact of recent price increases because of the scope of price increases that we saw.

I think March was.

I think 5% to 7% across the industry in resi on applied.

It seems the most of them will become effective in May and June so how do you incorporate that in your outlook.

Yes, Andy So we have announced price increases in net throughout.

Throughout our businesses and the timing of which and the exact yield of that of course, there is always a little bit different than the actual announced.

Price increase the way you can think about it. This is of the one five point increase in organic growth for the.

Full year at the midpoint, so going from 5% organic growth to six 5% organic growth at the midpoint, a little less than half of that relates to incremental pricing that gives you a give or take $70 million seven zero of millions of incremental pricing that we've assumed in our current guidance, which offset the $70 million in <unk>.

INTL headwind on input cost that I referred to earlier the.

The balance of the increase in organic growth for the full year is really in <unk>.

<unk>, both <unk> and commercial some of that of course includes debt price and in.

Transport refrigeration.

These are the areas, where we've really.

Pushed up our outlook for the year in terms of organic growth.

That was of Great answer Thank you and the second question I have for you.

With the recent stimulus bill.

You guys have highlight of train has highlighted we refer to from other folks.

A lot of money is going to schools.

Something to the tune of $67 billion of year for the next three years I think last stimulus 70% of this might end up being spending on capital projects for either as this designation that of should go for air quality improvement the HVAC system improvement.

When we talk to the folks on the industry of people have really hard time getting their hands around what it actually means.

I know that it hasnt been too long, but do you guys have a framework of how to think about the impact of the mining in the school vertical.

This year and what does it mean for demand for HVA C refurbishment upgrades over the next two years. Thank you.

Well, Andy we think of significant you look at the $1 nine trillion dollar stimulus package of $130 billion of that went towards school reopening and then if you look at the President's New proposed infrastructure Bill of the American jobs plan. It includes an additional $100 billion for schools, so how and when that gets spent will remain to be.

<unk>, obviously needs to flow from the federal for the state of the local school districts, but it's significant because the <unk> had a report that said 40% of the school districts have insufficient HVAC.

So when you look at that potential $230 billion of spend we think of material amount of that will go towards upgrading the hvac's. This on this because it is long overdue and it's needed.

K 12 is an important part of our business. It represents about 10% of our sales in North American applied in light commercial we've come out with very targeted kit offering which makes it easy for the 16000 School district districts across the country to make a selection and moved quickly to implement it we have a dedicated sales team we have innovative.

<unk> that we've now come forward with things like of bound in our op day cleaning solutions.

And we also think it's important because these are sustainable solutions. So how it plays out this year on next you will have to see the specifics, but we do think this will provide us with multi year tailwind for our HVAC business.

Operator next one.

Oh, sorry go on.

Andy.

Our next question on comes from the line of Josh Firstly of Winski for Morgan Stanley You may begin.

Hey, good morning, guys.

Hey, Josh.

Day, So maybe just first question on on residential.

You mentioned the strong sell in sell through still good but not quite as high backlog still high.

So maybe the that the channel is still low, but how are you thinking about <unk> here.

Can you guys match.

All of our <unk> or inventory for for your distributors.

Bringing to the point, where maybe they need the destock a little bit.

Well the <unk>, Josh still feel strong.

<unk> with the nice backlog into <unk>, we do think that it's going to be hard to track quarter to quarter, you almost have to step back and look at the full year I think what we're going to see as normal growth rates for the year with abnormal calendar calendar of <unk>. So what we saw on the first quarter with sales up 50%.

And what we're looking at for the first half of sales probably up around 35% in the first half and then given the very difficult compare given the strength we had in the second half of last year. The second half is probably down closer to 20%. So we're raising we had originally thought the year would be low to mid single digits. It is clearly looking like it's in the.

Mid single digit range for the year, which is not an abnormal kind of year. What's really encouraging is that movement was very strong in the first quarter was up over 20% and movements continued to be strong here into Q now of the inventory levels. As you said there are higher.

Then the normal there at 30% year over year, but having said that if movement continues to say at the pace that we've been seeing and we think that we would end Q2 inventory level is probably 10% to 15% higher than 2019, which is the better compare which is not completely.

Completely abnormal housing starts continue to be very strong there'll be up 11, 12%. This year and we're seeing continued pent up demand and a lot of the strength, we saw or at least a material amount of the strength. We saw on the first quarter was furnaces, which would not really indicate.

For a lot of pre stocking on inventories. So look we're going to have to keep an eye on it of course, because third quarter was up 54th quarter of <unk> 25. This quarter up 50, while we continue to take share we continue to support our customers. We continue to see strong movement. So we feel well positioned certainly in <unk> and then we will have to see how the rest of the year plays out.

Got it that's helpful and then I.

Just thinking on carrier 700, you guys are in the midst of a pretty substantial transformation across the board.

Including the I'm trying to build out of service organization I think that comes at a point in time, where maybe there is some bottlenecks out there whether it's finding the suppliers for sourcing initiatives hiring folks training them up anything that youre seeing out there that may be kicking some of those initiatives for the right simply because it's it is hard to onboard new suppliers new tech.

Whatever it is across the board.

No Josh those are not I mean look theres challenges on carrier 700, but it's not driven by the ones you mentioned.

Clearly, we're seeing inflationary headwinds coming our way of commodities.

We're seeing some headwind there of course input costs from our tier one tier two suppliers, we have to manage that logistics remain a challenge and frankly, we have we have to manage productivity because there are some labor shortages in places like our Colorado, Tennessee factory, where we are in the process of hiring a few hundred people there and we got to we got to keep up with.

Not only the short term demand, but the sustained demand that we see coming over the coming quarters. So.

There is challenges out there I'm really proud of the operations team I think they are managing it.

The best in class, but it's certainly not without its without without its challenges, but I think the things you mentioned were actually tried to get out in front and one of the things that I think has helped US is as we saw this demand coming we actually pre stock some inventory of Patrick and I authorized a bit of inventory in December and then in January to make sure of that we had.

That we were going to need some buffer stock in the face of a lot of the the demand influx that we were anticipating.

Got a good call on that.

Right the color I'll get back on one.

Thank you.

Our next question comes from the line of Nigel Coe Wolfe Research you may begin.

Thanks, Good morning, everyone.

Marty.

Phil Hey for the commercial HVAC growth of mid teens.

It wasn't of being something with the probably guests coming into the quarter.

And that sort of light commercial down mid single digits in the U S. So I'm just wondering could you just maybe just dig into the next level in terms of the moving pieces.

On that mid teens.

Then you talked about like the muscle.

Operating in <unk> on a much much easier comp.

Maybe just talk about how you see commercial evolving over the balance of the year.

Sure let me start on the applied side.

We were very pleased.

With that mid teen growth, we saw on in on the commercial applied side, obviously, China had some easy compares but sales of their sales in China were up over 100%. We were pleased with the growth in Europe Europe was up in the mid teen range.

North American equipment was the watch item, we did have a couple of very short term issues in one of our factories that probably is the short term issues that will we will catch up with that here in <unk>, So north American equipment for us was actually down a bit.

And the aftermarket in North America was up double digits. So I think the north American equipment is poised for a nice recovery, especially when you look at the Abi the architectural billing index.

We looked at 11 months below 50, and it got as low as 29.

But now we've been above 50 in March it was at 55, which is very very good level. So of course, the big leading indicator of commercial construction activity. So we're very encouraged about what we're seeing in the applied space in North America, especially in the verticals like data centers and warehouses education, which I mentioned on the.

On the stimulus package and then health care so.

And we continue to lean into aftermarket growth, which we anticipate will be up double digits and the backlog of strong light commercial it.

It was down a bit.

It sequentially improved from the fourth quarter. So every quarter of light commercial has been getting better but as restaurants and retail starts to open up we're very encouraged by what we're seeing with order trends. So its really set up for a nice growth. We were thinking that light commercial would be of mid single digits, it's probably going to be up around 10%. This year.

And what we're seeing.

In light of commercial is strong order trends, we're seeing improved backlogs I mean, it's not a it's obviously a very easy compare but the the backlogs up of 100% and what's really encouraging is field inventory levels are down they're down about 35%. So it's set up for a nice rebound as we get into <unk> and beyond.

Amazing Amazing.

Great detail.

And then on the <unk> acquisition, so congratulations on putting in the the Drs.

But most of the plan.

Globalize that product on bringing into the U S. And then how does the <unk> fit in with Toshiba.

With the shape of thanks.

Yes, we look at.

<unk> is the first step of many of you look at the entire via RF space and International light commercial we see that as the $25 billion market out in 2025 and the reality is if you look back in 2015 Vrs I mentioned this in the prepared remarks, but <unk> with <unk>.

The size of the traditional chiller market and now they are about the same size. So you can imagine the CAGR for via RF is exponentially higher than than some of the other markets and the issue that we had is we really did not we didnt have designing capabilities and we were not really of manufacturer and that's not what we are as an OEM were not of distributor. So this was one of the few but.

<unk> plays that we could make to become a design and manufacturing via RF player with a great operation there outside of the Guangzhou in China. So very very pleased that gets us to become a more meaningful player. We've been clear that we do have.

Partnerships with folks like the Sheba with media that we're very proud of these go back decades, and they are great partners.

Are there opportunities to more optimize those into win win relationships. We frankly believe that there are and we're in very constructive discussions with those partners, but we see the <unk> acquisition, enabling that to not only be of play for China, but for to for it to being a global play.

Thanks, David.

Thank you.

Alright next question comes from the line.

Jack.

The Sprague from vertical research you may begin.

Thank you and good morning, everyone.

Good morning, Mr. Sprague Yeah.

Yes, I have gotten to spread.

On the earnings season.

The supply Italian routes my Italian routes are coming through.

Yes.

Hey.

A lot of cover I guess I'd be interested in maybe just circling back to kind of of the healthy buildings dining.

The dynamic can you just elaborate a little bit more on how you are actually kind of defining that.

What does that pipeline.

I mean, it's kind of around the of bound.

The opportunity or.

Just kind of flush that out a little bit for us how you would differentiate the pipeline there versus what you are seeing kind of maybe in the core business yes.

Yes, Jeff the way, we try to we tried to take a very.

Strict and disciplined definition, which is these are of sales that we would not have gotten prior to the focus on really healthy buildings. So a lot of the IQ type offerings that really became much more prevalent.

When the pandemic hit we really put that in the healthy building $500 million pipeline that I talked about so examples would include op the clean.

We have orders for more than 30000 op. The clean units and we put that in the healthy building category. When we sell upgrades that are really driven by filtration for UV lights, we put that in there and we're really really excited about the new of bound offering Bobby George and the team working on this with almost the <unk>.

<unk> type group over the last six months or so to come out with a differentiated digital offering and that will be of big enabler for healthy buildings, because what it will do is it will make it visible to the end consumer how how safe and healthy is the indoor environment, we think about it like an Intel inside strategy, where.

You started to have and consumers ask for certain chips in the RPC is what we're going to see of certain consumers, having expectations that before they make a restaurant reservation or go into a commercial office building or or come back into crowded indoor spaces, they're going to have an expectation that they can see the health of the indoor environment.

And that the building managers, taking steps to mitigate any anomalies with that and thats exactly what <unk> will enable so we will put our balance subscription sales in the healthy building category as well.

Well that was the second part of my question, you talked a little bit about chiller service attachment, which maybe kind of part of this equation, but.

Are you seeing of different kind of service attachment rate with these offerings.

And I guess, you've kind of alluded to even some new evolving business models there.

Just a little more color on that.

We anticipate so Jeff, but it's too early to say I mean, we really we've been working for the last few months in the first quarter on pilot projects for the commercial office building, we were very excited with the Atlanta Braves and welcoming as they welcome fans back the Truest Park that was a really profound win for us that we're excited about we worked with the.

Our school K through 12 school outside of Atlanta, as well, so we've really been proving out the technology. We made it an official offering earlier. This week. So it's too early to say.

Specific response to your question, but it's clearly we have this tiered blue blue edge offering and we believe of bound will drive more recurring revenues through subscription sales, but also pull through more LTA is in more of our elite blue edge offerings and equipment sales.

Great. Thanks ill pass the thank you. Thank.

Thank you.

Yes.

On our next question will come from the line.

Deane Dray of RBC capital markets you may begin.

Hey, good morning, everyone.

Good morning, I, just wanted to follow up on on Jeff's line of questions. There just to.

Clarify the definition of the indoor air quality is the all of the <unk>.

The school.

The upgrades of the HVAC systems, because that is a COVID-19 related concern.

And probably would not have had the kind of focus had there not been the pandemic are you, including that in indoor air quality opportunity.

No we will base it more on the offering that we provide as opposed to the driver behind it. So if we go to a school district and what ends up happening is it is much more of kind of an energy efficient play which is what we do all the time and the modernization is more around energy efficiency, we probably would not put it in that healthy building category.

But if the offering is driven by the underlying premise of.

Driving more healthy and safe indoor environments, Yes, we would put those in.

Okay. Good so that's helpful in terms of of framing what's.

What's in that indoor air quality bucket and then yes.

Second question is I know, it's relatively small but it did get called out is this operational issue at minority of LNG JV, just if you could flesh out what the issue was does it broadly.

On the spotlight on carriers.

Portfolio of minority Jv's, and what's the approach and timeframe to address.

That the.

The number of them, there and how might that get rationalized.

Well on the second part of your question Deane, Yes, I mean, one of our big themes for carrier since we since we spun has been focused on simplification. So if you think about our JV portfolio. We started with 40 minority JV and we will end this year of closer to 32. So we have been taking a very.

<unk> <unk>.

Clinical approach to reducing the number of JV is for for various reasons. There are some debt really pose risk, but not of lot of value to the overall business. So we have reduced some of those.

And then there are some that we still have that we are in discussions to reframe.

<unk> them a bit, especially if its in a very strategic area for us and we're not can say on consolidating sales of our EBIT. That's an area that we're in discussions with our partners on.

With respect to the specific product issue that was in one of our minority JV I wish I could say that in things we control, we've never had our own product issues. So.

Not disparaging the JV because of that one issue, but it does highlight that we do want to have more controls in place and some of our critically strategic areas.

Okay. Thank you Angie.

And Dana in terms of the size of it was about a penny.

I appreciate it thank you.

Our next question on income from the line of John.

Joe Ritchie.

With Goldman Sachs you may begin.

Yes. Thank you good morning, everybody.

Good morning, Joe.

So for instance around the topic of healthy buildings that may is all asking the question as well the.

It seems like you've grown your opportunity I think you highlighted 500.

$500 million this quarter I think it was $200 million last quarter the.

The teams also like the opportunity is pretty pretty bought fraud day. So just any any commentary around like where you're really seeing the uptick and then also 500, probably isn't the stopping point I guess, how youre thinking about the addressable opportunity for you guys.

Well, we we think Joe that the opportunity.

As significant and it is it's broad based on broad based across a number of verticals. So clearly education.

K 12 is the key focus area, but even universities, we've been in discussions with universities as they look at their very complex. They have a very broad footprint at most of the universities in the United States, but globally as well health care and hospital is a key focus area for us as well commercial office buildings as people re imagine the the fee.

<unk> of work in.

Various models there they do want to make sure of that as people come back into the office to providing a safe indoor environment stadiums I mentioned the deal with the Braves, but we we are optimistic.

Mystic debt that would be the first of of other deals we would do so anywhere where you have kind of people in a somewhat crowded indoor environment theyre starting to be more of discussions I had dinner with a friend who owns the restaurants, a couple of weeks ago and he wants to add up the clean units. The his various restaurants. So we're seeing a lot of interest.

The question, we get a lot is going to be how sticky is that we know that sustainability of sticky theme and healthy once the pandemic is is more under control of globally, well healthy buildings be a thing of the past and I think that especially when you think about our bound offering that is one of the keys to really making sure that this is a sticky trend.

For years to come because what it has taught US is that COVID-19 has sent the first.

Airborne transmitted.

Disease and it won't be the last and people are much more in tune with having safe into our environment. So to make it visible to them and then ultimately use AI and ml to anticipate and correct any deficiencies with indoor environments. I do think this is the trend that will withstand the test of time.

That's helpful color day, Thanks, and then maybe maybe my my follow on for Patrick You gave a lot of details around the guidance.

The guidance for the year I guess, if I try to look at it slightly differently. The first quarter came in much better than the expected at the segment level I think about $100 million better the guidance for the full year only kind of implies like maybe half of that at the segment level and so I guess I'm just trying to understand like the conservatism that space.

And for the rest of the year vs versus like what you expect for incremental headwinds for the rest of the year.

Yes, I think Joe the way you can look at is this.

Always one element is within the residential HVAC, we mentioned that some of the strength. We've seen we believe could have been some of the.

Acceleration of the inland the seasonal inventory build so that would not necessarily change the full year outlook for.

<unk>, although we did raise revenue a little bit for the year, but not as much of the as the H. One beat the second element of this is for fire and security we saw a very strong end to the quarter in March.

So its quick turn business.

We have not updated our full year outlook for that segment at this point and so we're taking out of card there in terms of prop.

Profitability.

Full year, and as I said $70 million more of price offsetting $70 million more of the headwind.

And then a little bit more volume leverage from what we raised we did dial in a little bit more.

Of the airfreight costs as well for the full year.

So thats kind of the a little bit more detail and color around the full year outlook.

Got it thanks Patrick.

Thank you Joe.

Our next question will come from the line of Jeff.

Yes, Hello on from Keybanc, you may begin.

Hey, good morning, guys.

Good morning.

Just a clarification on North America applied how much of that was the cash.

Watch are the more the supply issue.

Versus kind of demand still being choppy there.

No. It had nothing really we did as we transferred over on the three PL and we made we had a couple of issues as we did that so it was a very short term issue, which is now which is now behind us.

Okay, and then any supply chain issues.

Leaking into the transport piece, we've heard a lot about just truck, but for anything youre seeing in transport.

Yes, I mean the.

Supply chain issues are.

The fairly broad based I mean, there are.

Electronic their electronic issues, there of raw material issues, even things like resins that we put into our injection molding process.

We have to work with a couple of key tier one suppliers and our transport refrigeration business that that our key watch items. So.

I think the team is managing it well but.

There are some things that the team is having to do in some cases are afraid of over ocean, which we would have done in the past so it's not without its cost and challenges but.

Like the rest of the portfolio I'm really really proud of how the team is working with the supply chain to manage on but theres certainly issues that the teams battling every day, Jeff we are meeting customer demand with just having a little bit more.

Input costs in doing so including free.

Okay, Great and then if I could just sneak one more in.

Maybe just we're kind of through through a lot of the pandemic reopening demand seems to be.

And selecting hair and just beyond maybe just the.

The minority interest Stakes.

How are you thinking about portfolio reshaping that of bigger level.

On some of the businesses that maybe don't fit longer term.

<unk>.

Well look we said that we would take a very clinical and structured review of our existing portfolio and I can share I can assure you that we started that on day, one and Thats something that will continue forever. So we continue to look at every aspect of our portfolio and put it through a rigorous set of lenses the determined as it.

On the right kind of area for us to invest and improve or is it worth more in the hands of someone else on we would use those proceeds to invest elsewhere. So we continue to look at all aspects of our current portfolio. We are very very energized by the playbook. We have in place we have great confidence as does our board and our strategic roadmap, we have our three pillars of growth funded.

By carrier 700, we have these two big ecosystems, we're focused on healthy safe and sustainable building in cold chain solutions. So we will continue to look at rounding out those portfolios, we put our toe on the water with a bolt on M&A with <unk> and we'll look at obviously, we're looking at others. As we go forward and then we of course know theres more transformational on.

Opportunities out there on the portfolio, but where we're really energized by our ability to execute on the strategic roadmap that we have in front of us.

Okay very helpful. Thanks, guys.

Thank you.

Our next question comes from the line of Steve Tusa from Jpmorgan you may begin.

Hey, guys good morning, Hey.

Hey, Steve.

What.

Was price and cost in the quarter.

For you guys.

It was about neutral.

And actual price neutral.

The actual price capture.

A little bit well.

Less than a point in the quarter itself is actually was in the quarter in Q1 of <unk> less than half of point for the full year it will be a little less than of points for the total company.

Yes, Okay got it and you are neutral on on commodity okay.

You.

Yeah.

Talk to the channel and I know, we kind of talk to your channel as well, obviously, but when you talk to others in the channel maybe outside of Watsco.

What are they saying about what's actually happening on the ground the.

<unk> was pretty good.

Is there a little bit of catch up from <unk>.

People not being able to get product last year. So they are kind of of scheduled it for the spring I mean whats what are you hearing from like some of your key contractor customers.

What we hear from really both of our distributors and our contractors is that demand is strong that it's real demand and that that theyre pushing for the right mix from us. So they can support the customers obviously, new construction continues to be extremely strong and then what youre seeing is we had anticipated.

<unk>.

Net in previous down cycles, what you would've seen is more repair over replacement, we actually haven't seen any of that we've actually seen a lot more replacement of entire units entire condensing units of our entire systems and I think it's because partly because theres more stay at home and partly because there is more liquidity in this down cycle than we saw on <unk>.

So people are prioritizing the spend they have on their homes and we're also seeing people buy a lot of new homes and often when you buy a new home.

One of the things you do on your inspection is look at the HVAC system. So that's probably driving some of it but what we're hearing we were actually on the phone recently last week with a key distributor down in the Texas area and they said that they are very encouraged by.

By what they're seeing from their contractors, they're encouraged by carriers the ability it's not that we haven't had our hiccups, but our ability to support them and I think that's helped some of the share gains that we've seen and we will have to see obviously theres theres inventory out there in the channel, but we'll have to see.

If we will make and continue to be north of 20% then it's an encouraging sign.

And you mentioned share gains would you at the margin.

Given everybody else is kind of raising price dramatically I mean would you at the margin.

Make targeted efforts with price to to allow the distribution to kind of.

Go after some share in local local markets selectively.

<unk> been consistent on the price that I think others have announced we came in with the price increase coming into the year, we announced for <unk> up to 7% increase.

The increase in June so.

Look there's clearly inflationary pressures on their on our side and we really have no choice, but to raise price does not only in resi, but across the portfolio and I think customers expect it. So we'll be doing that and I think it seems like from what I've read from our peers that thats an industry wide phenomenon.

Is there anywhere where price is down that's my final question sorry.

No.

Okay, great. Thanks, a lot.

Thank you Steve.

On our next question will come from the line now brought Tom kind of from Cowen you may begin.

Yes, thanks, good morning.

Good morning, just wanted to ask I wanted to ask about the competitive environment last year, we had a couple of resi competitors that couldnt produce.

To meet the.

Goodman for example, Lennox mentioned on their call that they have seen some.

Some issues among the resi competitors as well and I was curious.

Are you guys seeing that in.

So kind of how has that manifested in your orders.

If there is any way to quantify it.

Yes look we are we will never comment on our <unk>.

<unk> we have.

Tremendous amount of respect for our competition and I think we all go through various challenges.

During different time, so I think that we're all experiencing various challenges I think our operations team has gone of great lengths to support our customers and I think debt because we did pre stock some inventory anticipating the ramp I think that's helped us.

I know our team has been working around the clock.

To support operationally, we've tried to be very strategic with our supply chain and on our own operations to have some level of redundancies. So if there is an issue on one place we can ramp up somewhere else. So we're not by any means flawless, we have our challenges, but I do think the.

On the operational performance has helped us.

Pick up a bit of share along the way.

Thanks.

Thank you that's part of the plan, we have for questions and answers today I'd like to turn the call back over to the speakers for any closing remarks.

Okay well. Thank you. Thank you everyone for joining clearly where we're very energized by the first quarter on what we see in our performance and some of the macro trends. So we're energized by the quarter on what lies ahead and we encourage you. Please reach out the sandwich the any follow up questions. Thank you all.

Thanks.

This concludes today's program you may now disconnect.