Q2 2021 Carrier Global Corp Earnings Call
[music].
Good morning, and welcome to carrier second quarter 2021earnings conference call. This call is being carried live on the Internet and there is the presentation.
The download from carriers website at IR Dot carrier Dot Com I would like to introduce your host for todays conference Sam Pearlstein, Vice President of Investor Relations. Please go ahead Sir.
Thank you and good morning, and welcome to carrier of second quarter 2021earnings conference call. We appreciate.
Date your flexibility in accommodating the earlier start time for the call since we plan to discuss the Chubb transaction as well as the second quarter earnings we have more flexibility of the call runs a little longer with me here today are David Caitlin, Chairman and Chief Executive Officer, and Patrick <unk>, Chief Financial Officer ex.
Sept as otherwise noted the company.
Available speaking to the results from operations, excluding restructuring costs and other significant items of the nonrecurring and or non operational 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 of subject.
Will the risks and uncertainties carrier 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 second quarter discuss the full year 2021 of the outlook in the agreement.
We announced Tuesday to sell our Chubb business, we will leave time for questions at the end once the call is open for questions. We ask that you limit yourself to 1 question and 1 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. It is great.
Subject to hosting this call from the carrier cooled New York Stock Exchange and we appreciate the support that we've received from the team here. Please turn to slide 2.
Before we discuss discuss the second quarter results, let me address the press release that we issued Tuesday announcing that we signed an agreement to sell our Chubb business. The API group for an enterprise value.
<unk> of $3.1 billion to.
To be clear cash.
<unk> Global fire and security products business is not part of this transaction and remains an integral part of carriers portfolio and are healthy safe sustainable and intelligent building strategy.
We committed at our Investor day last year to objectively assess.
To be portfolio and do so through a rigorous application of our strategic and financial priorities.
Within our fire and security portfolio, our products business is differentiated with leading market positions and attractive margins Chubb is an industry leader with 13000 employees that do a great job with installation.
<unk> and maintenance supporting our customers, but it is an agnostic business that does not pull through our products and yields lower margins.
We concluded that Chubb is more strategic to API group than it is to us.
Divesting Chubb will significantly simplify our business sharp represents over 20%.
Our plant of our employees of less than 10% of our adjusted operating earnings selling.
Selling child will increase our focus on our core businesses and enable us to reinvest the proceeds consistent with our capital allocation priorities to create long term shareholder value from it.
Patrick will discuss in more detail, but.
Our capital allocation priorities have remained consistent.
Ending organic and inorganic growth dividends and share buyback within a solid investment grade credit rating.
Our intention is to use the cash proceeds and excess cash on the balance sheet for acquisitions buybacks and debt pay down.
Out over 12 months to 18 months to help position the company.
The strategic growth and to generate attractive shareholder returns.
The net result will be a new more focused carrier with more product differentiation faster revenue growth higher margins and higher returns on invested capital. This was an important deal.
Deal for carrier and I want to thank our team of advisors for their tremendous work.
Now turning to our Q2 results on slide 3.
Q2 was another strong quarter for us our growth continues to be fueled by broad economic momentum are positioned at the epicenter of important secular trends.
And the benefit of our strategic investments managing the surge in growth is strained our extended supply chain, but our teams are navigating those challenges well to support our customers.
You see our progress are reflected in our <unk> results.
Organic sales were up over 30%.
Particularly encouraging was that the growth was strong across our portfolio and that we even grew 7% versus <unk> of 2019.
Orders were up about 35% organically compared to last year of driving our backlog up 8% sequentially and up over 20% year over year of position.
The us well for <unk> and the second half of the year <unk>.
We produced $821 million of adjusted operating profit up over 70% year over year and consistent with what we said during the April earnings call Q2 incremental margins improved sequentially from Q1.
Free cash flow continues to be strong with first half free cash flow up more than 30% over the first half of last year.
Given our first half performance strong backlog and expectations around the balance of the year. We are again, raising our full year guidance for sales earnings and cash.
We now expect organic sales.
Should grow 10% to 12% adjusted EPS to increase by about 30% compared to last year, and we are increasing our projected free cash flow by $200 million to about $1.9 billion.
Now turning to slide 4.
We remain confident in sustained growth in our end markets and that our new operating system.
The culture and team performance.
<unk> as well as the lead within our space.
Key secular trends are likely to propel of sustained growth for our industry.
With people spending 90% of their time in doors and increasingly returning to their offices and recreational activities, we see more spend being allocated to the health safety comfort.
And the intelligence of indoor environments of all types from homes to schools the hospitals the commercial office buildings.
Likewise, the need for safe Cold chain solutions has been intensified by the focus on vaccine distribution and the increasing global middle classes demand for more fresh produce and other refrigerated.
The products and of course the.
The need for sustainable solutions.
Given that the building sector contributes about 40% of carbon emissions in food waste contributes another 10% to 15%. We are confident that spend on sustainability will continue to drive demand for our green solutions.
Comfort and therefore remain laser focused on healthy safe sustainable and intelligent building and cold chain solutions, and we're leaning into those trends by executing on our 3 pronged growth strategy.
Growing our core.
The expanding product extensions and increasing recurring revenues through digitally enabled aftermarket offer.
And we are seeing strong progress as you can see on slide 5.
We have book $250 million and healthy building orders year to date and our active pipeline sits at $500 million.
We are confident that spend on healthy buildings is not only sticky.
But then it will accelerate as.
<unk> owners will play both defense and offense on behalf of their occupants.
Defense of spend is largely focused on defending against the spread of airborne illnesses for example.
40% of classrooms in the United States of insufficient ventilation and studies show that better ventilation and filtration materially reduce the spread.
Building on <unk> part of Particulates light Covid and other illnesses like the flu and common colds.
Building owners are also starting to invest in better ventilation to play offense.
Recent studies have shown that people performed twice as well when the indoor environment is optimized.
Ico, 2 levels, which can occur in.
Of my classrooms, and offices with poor ventilation have been proven to impact impact brain based skills, while better ventilation and filtration significantly improve kind of cognitive.
Cognitive function.
Because of the many benefits of healthy indoor air environment. Our goal is to make indoor air of visible.
So good air quality.
Quality becomes as important and expected as safe drinking water.
<unk> is a key enabler to make that happen.
We received favorable feedback from our key launch customers, which include of commercial office building in an elementary school and we have deployed in our company headquarters, where we have been demonstrating its.
Crowded to customers.
We are now leveraging our global sales force to deploy about and have had significant interest from marquee customers.
In addition to of bound.
We recently launched our Wi Fi enabled carrier home Air Purifier with the hepa level filter as 1 of our latest healthy home offerings.
Power, we have now sold over 38000 optically on units.
On K through 12, we of a dedicated team offering kitted solutions to our customers, resulting in sales to about 15% to 20% more school districts. So far this year compared to last year as part of what we expect to be a significant opportunity.
<unk> over the next few years.
Similarly, our connected cold chain offerings are gaining traction.
Our cloud based digital links offering that we are building in partnership with AWS was recognized by fast company as 1 of 2020 ones world changing ideas.
In the container space we are at.
Adding connectivity for thousands of units each month and now can support mixed sweets carrier and non carrier, thereby increasing our recurring revenues and reducing our customer maintenance and logistic costs.
We had significant links wins this quarter with truck trailer, including 1700 more trailer.
The refrigeration units for prime and a 3 year supply agreement with the UK grocers sands berries for all of its truck and trailer transport refrigeration equipment.
Cortex is carriers AI and Iot platform that offers predictive insights recommendations and autonomous actions to optimize equipment performance of building.
<unk> operations, while minimizing our customers' energy consumption per.
Currently over 220000 pieces of equipment are connected to cortex.
Digital solutions are helping to drive increased aftermarket and recurring revenues.
Aftermarket sales per carrier, we're up about 20% in Q2.
The last year.
All helped by our differentiated blue edge tiered offerings, our attachment rate in commercial HVAC was more than 35% in Q2.
And we are on track to add another 10000 chillers to long term contracts this year from about 50000 to.
The 60000.
Likewise in our refrigeration business.
Our Europe truck trailer business sold nearly 6000 blue edge service agreements in the first half of the year.
In addition, our fire and security segment continues to expand our key digital offerings earlier. This year <unk> was featured in the Apple <unk>.
Worldwide developers conference and we're excited to work with Apple on providing blue Diamond mobile credentials in Apple wallet on iPhone and Apple watch as employees come back. The office buildings. This work can increase the profile of access control solutions that help reduce touch points enhanced occupant experience and increase.
Confidence in indoor environments.
So very significant progress on healthy safe and intelligent offerings and recurring revenues and on slide 6 you see similar progress on our focus on sustainability.
In short we are committed to providing environmentally sustainable solutions and our.
Our performance over the past year reflects just that.
We are on track to meet our commitment of reducing our customers' carbon emissions by more than 1 gigaton and ensuring our operations are carbon neutral by 2030.
Electrification of energy efficiency, our major focus areas for us <unk>.
Commercial.
Heat pumps in Europe, and residential heat pumps in North America were both up 20% to 30% in the quarter.
Electrification is equally critical to our refrigeration business interest in our Vectra equal unit in Europe remains high and our backlog continues to grow this is the only 100.
Per cent electric trail of the Reefer unit in the market today.
Our efforts in helping customers reduce emissions and creating more energy efficient solutions are starting to be reflected in some of our external ratings, including improvements in both our MSCI and sustain the lytic scores in the past year.
As you can see on the slide.
<unk> hundred <unk>, we are now considered a leader in the industry.
So great progress on ESG, which is a fundamental aspect of who we are.
So before I turn it over to Patrick a word on our leadership change that we recently announced and a couple of weeks, Tim why will join us as president of our refrigeration segment.
Tim has been.
Running ge's multibillion dollars of onshore wind business for the Americas region, and he ran key P&L within Collin Aerospace <unk> Aerospace that included electric systems Environmental control systems and engine control systems. He is the perfect leader to take this well positioned business to the next level as we focus on electrification.
The digitalization and sustainable solutions.
I also want to thank David Apple for his tremendous leadership of the segment. We are fortunate to have David moving to Paris, where our commercial refrigeration business is headquartered to provide the focus that that business needs to improve operational strategic and financial performance.
We appreciate David taking on this critical assignment so with that let me turn it over to Patrick.
Thank you, Dave and good morning, everyone.
I'll start with comments about the quarter and the outlook and then provide additional color on the <unk> transaction.
Please turn to slide 7 as Dave mentioned Q2 was a good quarter with sales.
<unk> hitting earnings adjusted EPS and free cash flow all exceeding our expectations.
<unk> of $5.4 billion were up 37, 37% compared to last year.
Currency was a 5 point tailwind for sales in the quarter or about $200 million in acquisitions, that's mainly ciego added.
Another point of growth.
Given the impact from Covid last year. This quarter, obviously had an easy comparison, nonetheless organic sales growth of 31% was significantly better than we expected across all our businesses.
Adjusted operating margin expanded over 300 basis points to 15, 1%.
<unk> strong.
Strong sales growth and benefits from carrier 700 were partially offset by investments and higher input costs as we expected price cost was negative in the quarter, given the timing of price and cost increase.
Much stronger than expected demand combined with supply chain.
Jane challenges negatively impacted factory efficiency.
It also meant material purchases when beyond block positions and as a result, we bought the materials and components of spot prices and utilize the expedited freight.
I'll address our outlook for the balance of the year with respect of pricing.
Price and cost in a few slides that will share that we are that we already announced additional pricing actions to offset rising inflationary pressures throughout our supply chain.
Reported earnings conversion of about 24% improved sequentially and excluding currency and acquisitions conversion.
<unk> of high twenties.
Free cash flow of $482 million in the quarter reflected better than expected net income and was similar to last year's second quarter, despite of $180 million of higher interest and tax payments.
Finally, we repurchased about 2 million shares at an average.
Average price of $44.33 during the quarter, bringing our year to date repurchases to about 3.3 million shares.
Let's now look at how the segments performed starting on slide 8.
HVAC organic sales were up 32% in the quarter with nearly 35%.
Percent residential HVAC growth.
As we previously said, we expected the residential field inventory levels to finish of approximately 10% to 15% higher than the end of Q2.2019.
The strong distributor movement of over 20% compared to last year.
Led to field inventories ending the quarter only 7% higher than at the end of Q2 of 2019, a much more balanced inventory level.
In North American light commercial business saw a significant rebound with sales up over 60% in the quarter.
Light commercial field the <unk>.
Inventory levels are now down just 3% year over year.
Overall commercial HVAC sales were up about 20% organically.
The HVAC team expanded margins by 300 basis points year over year, driven by strong growth across all businesses in the segments, including services the segment.
We're on track to generate about 16% adjusted operating margin this year.
Moving to refrigeration on slide 9.
Sales were up 38% organically as the cyclical recovery in transport that we see in orders continued to convert into sales.
Transport refrigeration was up.
Over 40% in the quarter with very strong growth in both global truck trailer and container.
Our sense of Tech business continued to benefit from the vaccine rollout and was up about 20% in the quarter.
Commercial refrigeration grew about 30% as reopening in Europe drove stronger.
Remained low.
Margins for the segment were up 320 basis points in the quarter compared to last year, mainly as a result of the higher sales. We continue to meet customer demand, but are incurring higher cost to do so including airfreight.
We expect operating margins to improve in the second half.
As the higher margin North America truck and trailer business recovery continues.
Given the higher input costs, we now expect full year 2021 operating margin for this segment to be in the midst, 13% range of little lower than we previously expected.
Moving on to slide.
<unk> growth organic sales at the fire and security segment grew 25% and both the products and fuel businesses grew at similar rates.
Within the products business, which represents about 60% of the segment sales residential and commercial fire continue to be solid.
Given the easier.
10 of comparisons access solutions returned to double digit growth in our industrial businesses were up high single digits.
In industrial fire, we saw the recovery upgrades and retrofits begin in marine services and in the oil and gas markets.
Higher sales and carrier 700 performance.
<unk> helped drive the 140 basis points of margin expansion in the segment.
With the higher sales outlook and the timing of price and cost actions, we expect higher margins in the back of the year compared to the first half of the year and overall margins to be in the midst <unk> for the year.
Now let me review of the order activity, we saw in the second quarter on slide 11.
As you can see our residential and light commercial businesses continued to see strong demand.
<unk> residential is up sequentially and points to a better second half than we previously expected.
Commercial HVAC.
<unk> orders were up over 30% compared to last year and backlog increased almost 20% year over year and up and up mid to high single digit sequentially from last quarter.
For refrigeration order activity for the truck trailer business continued to improve sequentially strong order intake.
Taken backlogs exiting Q2 should position this segment to achieve the expected high teens organic sales growth for the full year.
Order intake for our fire and security segment also continued to improve sequentially.
Product orders were up a bit over 25% year over year.
Especially in residential and commercial fire.
Fueled the orders were up 25% to 30% organic.
I'll Skip slide 12, so let's move to slide 13, our updated outlook to.
To be clear, we will include Chubb and the outlook until the transaction closes.
And stronger than expected Q2 performance and higher backlogs, we are increasing our organic sales outlook from a range of 5% to 8% to a new range of 10% to 12%.
More than half of point of the incremental organic growth represents incremental pricing actions, we already have.
Based on taking to offset higher input cost versus our April guidance.
Last quarter, we said material and component of input costs were about $120 million or so of higher than 2020.
We now expect those input costs to be up an additional $125 million.
Our intent to offset this through additional pricing actions.
We recently announced the third price increase in our residential HVAC business for September as well as the third price increase in transport refrigeration and we're implementing similar actions in other areas of our portfolio.
Our new outlook income.
With the 100 to.
$125 million of.
Of additional pricing compared to our April guidance.
For the full year, we expect price cost to be neutral do we expect it to be of modest headwinds in Q3.
Offsetting higher input costs with incremental pricing on $1 per <unk>.
Increases protect profitability EBIT of course hurts reported margin and conversion.
Despite these cost inefficiencies, we now expect to deliver on adjusted operating margin of over 13, 5% for the year better than our previous outlook.
Another way to think about the outlook.
Is that the revenues are now expected to be about $1 billion higher than the April guidance of that about $125 million. This price to offset increased input costs and about $200 million.
These acquisition related sales with little of profit contribution this year.
The conversion of the remaining 600.
The $700 million.
Of sales approaches the 30% we would normally expect.
This all leads to an adjusted EPS outlook range of $2.10 to $2.20.
A 15% improvement at the midpoint from our prior guidance.
We also now expect free cash.
Cash flow to be about $1.9 billion up.
$200 million.
From our prior guidance.
Slide 14 shows the bridge for the 15% improvement in our adjusted EPS outlook.
From the midpoint of our prior guidance of the midpoint of our current guidance.
The biggest driver is the operational conversion.
The <unk> sales.
Moving over to slide 15, I'll provide more details regarding chubb transaction.
You can see a brief profile of Chubb on the left side of the slide we expect revenues for <unk> to be about $2.2 billion. This year with high single digit operating margins.
Excluding chubb.
On the the various operating margins would be about 50 to 100 basis points higher free cash flow conversion of about 100% and we would also expect to have a higher growth and modestly higher return on invested capital profile.
The remaining fire and security segments will include a portfolio of differentiated.
High margin businesses with leading positions in their respective markets.
Sales would be about $3.5 billion and operating margin in the high teens.
With respect to transaction details.
On the enterprise value of $3.1 billion and net after tax cash proceeds.
<unk> are expected to be about $2.6 billion.
As part of the transaction about 2 thirds of carriers total pension and post retirement assets and liabilities will be transferred to API that is over $2 billion and significantly seat and significantly simplifies and.
And de risks our balance sheet.
Related to the pension we expect most to all of our noncash non service pension benefit on the income statement to go away.
While this generates about $70 million in annual earnings we do not believe it represents any economic value.
As customary the sale of subject to a consultation process and regulatory approvals.
Expected close as of late Q4, 2021 or early Q1.2022.
As to US is through the use of proceeds we intend to use the approximately $2.6 billion of net proceeds as well.
The available excess cash.
For a combination of acquisitions share repurchases and debt repayment.
We expect to de lever by about $750 million post transaction to maintain our leverage profile commensurate with the EBITDA reduction.
We have a growing pipeline.
Of acquisitions that align with our strategic priorities and our board just approved an incremental $1.75 billion share repurchase authorization.
We will be flexible between share repurchases and acquisitions and now expect 2021 repurchases to exceed the 5.
Well as the shares we previously discussed.
In closing we added good first half with strong double digit organic growth.
Congratulations to our team and supporting stronger than expected demand in a very challenging supply chain environment.
With our performance so far along with the solid order activity.
Activity and backlog growth, we feel confident meaningfully raising our full year guidance.
And of chip transactions simplifies our portfolio enhances management focus.
Create some more attractive company profile and generates cash to reinvest in higher share owner value creating.
The opportunities.
With that I'll turn it back to your day.
Thanks, Patrick we are very pleased with our performance as we are now halfway through 2021, and we remain confident in our team's ability to navigate supply chain challenges to support our customers and drive continued results in <unk> and beyond.
With that we'll open this up for questions.
Thank you as a reminder to ask the question you will need the press star 1 on your telephone.
John Your question press the pound key please standby will be compiled the kind of day of Austin.
Our first question comes from Jeff's value with vertical research your.
Your line is open.
Hey, Thank you good morning, everyone.
Martin in a matter of it.
Yeah. Good morning, congrats on getting the shove off of the boards.
Just a couple of questions around that and on Patrick alluded to it a little bit on the repo comment but just.
Kind of wondering how.
Actionable some of the redeployment might be prior to the actual close of the deal.
Whether you have the appetite of the even get a more of a running start on share repo or some of the M&A that you are talking about on the pipeline, possibly happens relatively quickly.
Did you have a couple of comments.
1 I would say that what we're looking at from an inorganic growth point of view and the acquisitions. There I would say that is really unrelated to the timing of the Chubb proceeds as we look at what's in the pipeline and actionable.
We will go after those opportunities prior to any potential proceeds frankly, we.
Given the amount of cash we have on the balance sheet, we may not need those chubb proceeds in terms of share repurchases the prior guy.
Guy that we provide you was about 5 million shares. This year at this point, we probably think it's going to be somewhat closer to $10 million of 10 million shares not dollars.
Great.
And then also just thinking about the maybe strategically.
The fire in the <unk>.
The fire and security assets from here.
Although chubb didn't pull through as much as you would've liked it they get pulled through some of that I'm just wondering.
How you might be reorienting.
Yeah.
The fire and security offering pulling it through HVAC channels and that sort of thing to really kind of.
Kind of augment the overall package that you are trying to push forward here.
Yes, Jeff we have of healthy channel I mean, Chubb was 1 of our many distribution channel so.
It was it's an important piece of our channel, but it was agnostic just as other parts of the channel.
Would be to us so.
When you look at our fire and security segment call. It $5.5 billion, you've got a couple of billion which of that was in the.
The single digit high single digit range from Ross and then the remaining 3.5 per products you have highly differentiated products number 1 or 2 on all of our segments it fits well.
No.
The whole of healthy building trend in the other parts of the HVAC HVAC portfolio in the gross is close to 20%. So very very strategic something that we really want to lean into and I think that Martin Franklin and the team over at the API Group, we'll really take what's a great business, which up to new levels, we had of choice.
Should we kind of make the investments to take the margins higher charter, let someone else do it and redeploy that capital for parts of our portfolio of that are more core and more differentiated and we elected to do the latter.
Great. Thank you.
Thank you Jeff.
Thank you our next question.
It's been Nigel Coe with Wolfe Research your line is open.
Thanks, Good morning, everyone.
The point again, congrats on getting Chubb book and caveat I'd put the UK ex Greg Hayes with giving you the money.
David.
It definitely kept the.
Just to clarify.
<unk> kind of proceeds so the way it was framed.
Earlier. This week was $2.9 billion on the cash gross cash and then 2 of liabilities, but you're talking about $2.6 billion of net kind of cash proceeds. So I just want to confirm the tax leakage at the point of $3 billion.
The first part of the question and then secondly, how does how is the.
The cash conversion for Chubb been over time, and I'm thinking here, but things like.
The pension funding and the like.
Yes, Nigel the Patrick here.
Maybe I'll give you a walk of the $3.1 billion for Chubb 2 to $2.6 billion. The estimate of net cash proceeds to us.
So the.
By on the $1 billion deduct from that assumed liabilities and other adjustments.
2 the buyer that gets you to $2.9 billion, which is probably the number that you've seen on some of the press releases of that 1.
And out from the buyer and then from the 2.9% to the $2.6 billion.
It's mainly taxes on the transaction.
The action because we are booking a gain but it also includes some of the fees associated with the transaction.
So that's the kind of the walk of the 3.1% to 2.6 in terms of free cash flow conversion on Chubb actually Chubb was 1 of the the reasons why our cash flow conversion for the overall company was.
Less than a 100% and part of that of course gets back to the non cash non service pension benefit we saw on the income statement, that's about $70 million on on annual basis, We don't have to review that.
Any economic value to that.
That headwind called on free cash flow conversion will go away.
I would also add the from an overall company perspective.
Whether it's from the working capital perspective all of them.
Our ROIC perspective of Chubb was below the company average and so without Chubb all of these metrics, we expect them to improve including of course of operating margin.
And sticking with Chubb from my follow on question anything to think about from stranded cost perspective.
For remain co of funds acuity and any impact of the tax rates.
Going forward.
We don't expect a meaningful change on the tax rate going forward versus where we are today and then standard.
<unk> could be de Minimis.
I'd say de Minimis, a penny or less and obviously, we will do our best to make that go away.
Thanks, Patrick.
Thank you.
Thank you. Our next question comes from Joe Ritchie with Goldman Sachs. Your line is open.
Thanks, Good morning, guys and congrats.
On the job as well.
Okay.
We can't hear you all of that well can you try them.
Speak up.
Sorry is that better or is that better yes, better okay.
Okay great.
So first question I guess, maybe maybe just use of proceeds obviously you've highlighted.
The buyback I'm, just curious from from an M&A standpoint, and as you think about the portfolio today.
Where would you prioritize potential M&A.
On the portfolio today, if you were to go down that path on that.
We are going to go down that path Joe are we.
<unk>.
It's been clear that in terms of capital.
Cash and our priorities are organic and inorganic growth as Patrick said of course, we'll do share buyback and debt pay down, but we've been trying to really aggressively build the pipeline.
We started from our strategic mission, which is to be the world leader in healthy safe sustainable intelligent building in cold chain solution. So whenever we look at needs to really.
Tie into that overall north star that we have we've been clear on our 3 strategic pillars of growth, we want to strengthen and grow our core so that would be keeping it right in the center of the fairway product extensions of the geographic coverage you saw us put our toe on the water on VR app with <unk> and that would be in the category of the product extension.
And then.
Enhanced aftermarket and digital capabilities, so youll see us really leaning into a focus on recurring revenue. So we're still starting to build that pipeline.
And we're excited to really start to play more offense and I should mention by the way of when we talk about capital.
Location of course as Patrick mentioned.
The dividend as well, which is obviously a part of our priorities.
Got it that makes sense, Dave and I guess, maybe my follow on question. Clearly you guys are dealing with inflationary pressure as as you know every company that we cover and handling it well I guess.
Capital I think about the framework for 2022 and potentially the stickiness of some of those price increases if we were to get into a more benign inflationary backdrop.
What does that kind of mean for your margins.
We do get more benign inflation.
Yes, Joe Patrick here ill take that question.
Could you kind of I think it's fair to say that we probably spend more time on price cost for 2022 than we do for 2020.1.
And so first of all of this year as you know we were.
Benefiting from some blocks positions and so next year when those roll off we do need additional price to offset that.
That's why we've announced the additional price increases are third price increase across our segments.
This year and so for next year of course, we will focus on making sure that those price increases stick that we do get the yield.
If price cost remains neutral next year, which frankly is our.
It needs to be at least price cost neutral from margin of course, thats a little bit of the.
The headwind, but of course, we always target to do better than net and if that were the case that it could benefit our margins, but our first priority is ensuring that price cost next year.
<unk> neutral.
Got it okay. Thank you both and congrats again.
Thanks, Sean.
Thank you. Our next question comes from Julian Mitchell with Barclays. Your line is open.
Hi, good morning.
Maybe just a couple of questions on the coal business.
I heard your guidance on revenue for the year on refrigeration organically just wondered if you.
You could put a finer point on the assumptions for HVAC.
And as the apologies if I missed it then within HVAC what are you assuming for the second half residential revenues at this point.
Yes, if you go through the.
You look at the portfolio and Patrick of jump in as well we increased overall.
Sales as you know for the year.
<unk> now of 10 to 12, so HVAC is going to be higher for the full year up higher than 10%.
We see up in the low teens prior we had been thinking year over year it'd be up low to mid low to mid single digits, but we see raise the up low teens and we're very encouraged by <unk>.
Commercial is probably up closer to high teens and applied is very strong.
Probably up in the high single digit range and then on.
Refrigeration <unk> likely to be up in the high teens for the full year and then FNF is high single digits.
Perfect. Thanks, very much and then just my follow up question would be around.
<unk>.
You.
The price cost and the profit bridge.
Most of what's happening with M&A and FX just wondering if there was any updates around.
Carrier 700 savings in aggregate on also investment spends and.
Realizing seasonality of sort of.
Of messed up a bit.
Obvious reasons anything you'd call out third versus fourth quarter.
Yes, so Julian for carrier 700.
You, probably recall that we're targeting $225 million.
This year at this point and given the carrier.
Carrier 700 is the net number I E. The takes into accounts some of the headwinds from input cost inflation, we think that the carrier of 700 savings this year will be somewhat closer to $250 million and so that's the $775 million less.
Due to higher material and component costs and as I mentioned earlier, we intend to.
To offset these headwinds as well as the motor headwinds such as the airfreight with incremental pricing actions in the balance of the year.
Great. Thank you.
Thank you Julien.
Thank you. The next question comes from.
Steve Tusa with Jpmorgan.
In my opinion on this kind of thing.
Yeah.
D var.
Hey, guys, sorry, sorry about that.
Good morning.
Good morning.
Can you maybe just talk about.
The.
The the.
Markets and the.
Any of kind of what what's your view around the status of like the cycle. There's been a lot of debate around I guess machines running more you know I think the inventory is probably less of an issue less of the debate now obviously, but what's kind of happening at the kind of the end market.
You know kind of the end demand level.
On the state of the cycle, what's your opinion there sure.
Sure. Steve We were we were pleased that in <unk> movement remains strong which is obviously something that we're tracking very very carefully. So we thought that our inventory levels at the end of <unk>, we're going to be up 10% to 15% versus the.
Same time at the end of 2019, which is an indicator we had been watching closely and of the inventory level in the field for us ended up only up 7% versus the same time.
In Q2 of 2019, and you look at a collection of factors that are driving the strength that we're seeing housing starts it's going to be up 13% or so.
Sir.
We are seeing people, obviously buying and selling more homes and 1 of the things that happens when you buy a home is sometimes you replace of the air conditioning system. So I think that's the driver.
There's been a lot of talk about work from home of course, but I think it's without being too quantitative about it just seems.
This year units are running hotter and longer getting more cycles on them and that has to be contributing to some of the strength that we're seeing in <unk>.
We benefited from share gains on the were up.
If you look at the last 12 months, you really can't measure of share 1 quarter at the time, but you can look at over the last 12 months of our share is up over 200 basis points and it's.
Is there a nation of converting dealers, but also I do believe that our operational performance, even though he had been far from flawless.
Has helped us, albeit frankly at a higher cost, but we've gone out of our way to support our customers. So.
I think Steve you put that all together and as we start looking ahead, we want to we expect that when we come out of this year our inventory levels.
<unk> sure.
Should be in balance we're going to carefully watch.
Movement, we have announced our third price increase effective September 1 this year, which was really focused on 2022 as we announce that.
And housing starts we will have to see how that plays out the the estimates are all over the map, but maybe round.
The kind of an Irish for right now, but we'll see how that plays out and then we'll start to see some perhaps early buy because of the 2023 change. So you put that altogether I think we're trying to stay very close to our distributors keep inventory levels in check and continue to support our customers.
Is there a chance that you of a down year at anytime in the next couple of years.
That theres the chance of anything I mean, you know, Steve it's a short cycle business.
And that.
That day that we're coming off of some very we're coming off a lot of strength, but right now we see between the pricing the underlying factors that we've been seeing orders of remains strong I mean, we're very well book not only for <unk> were booked into.
U S.
And we see we see that we're very very well positioned in the high margin resi business and the nice thing with our portfolio is that light commercial remains strong the applied business, we look at Abi indicators, which give us confidence around the coming the coming months and years around the applied business aftermarket growth.
<unk> portfolio of 1 of the things that I was particularly pleased about from <unk> is that every part of the portfolio showed strength. So working hard in resi well position. There. There is a lot of things to like and then we have the rest of the portfolio of debt was positive the small.
Got it and then sorry, 1 more of what were applied orders up in the quarter.
The 20% of over 30% of on let me before I answer it.
We're trying to get a cheat sheet to help them here.
30%, Yes, 30, 33, 3% across across all regions basically actually.
The strong double digits across all regions North America EMEA.
China, all up over 20%.
Great. Thanks, a lot guys.
Great. Thanks, Steve.
Thank you. Our next question comes from Tommy Moll Stephens. Your line is open.
Good morning, and thanks for taking my questions.
Good morning, Tommy.
I wanted to talk to your incremental.
It'll margins if I'm, if I'm interpreting your guide and in the script correctly. It looks like for this year on a reported basis, we ought to land somewhere between 20 and 25% of.
Patrick I think I hear you, saying operationally youre still high Twenty's or 30, so if we could just confirm those but then also.
Also as we look into 2022.
Is there any reason, we shouldn't continue to see the roughly 30%.
Conversion and and then in terms of the operational side.
Yes, Tommy so your understanding is correct. So we expect reported conversion.
Of the between 2020, 5 and operational the core conversion to be in the high <unk> and the difference between the 2 is really FX, which is about a 4 point headwind for the full year on conversion and then the <unk> acquisition. The first year with a lot of revenue and given some of the onetime costs not of lot of earnings contribution.
And yet and so that's really the walk between the.
Low twenty's and the high Twenty's from an earnings conversion point of view and then of course would not take into account here is that as we raise price just to offset some input cost.
That's somewhat of a headwind as well.
The next year.
We're reading out of point, where we can.
Talk a lot about next year, what I, what I can say is is that.
And I mentioned this before we have a really strong focus within all 3 segments and ensuring that we take pricing actions now to offset any.
Material cost and other inflation that we see in our businesses.
And so.
If we are successful doing that the and I'm very comfortable with that then of course, we would expect the in earnings conversion next year that would be in line. What we do this year. The biggest driver of course will be 1 of the levels of organic growth.
That is not something we're ready to talk about at this point.
Fair enough. Thank you for for that it's helpful. I wanted to follow up on on Blue edge.
See the attach rate on Chillers up to I think over a third.
In the second quarter.
As we move forward from here towards your target of 50% I think longer term.
What are the levers you're pulling in the.
The hiring more salespeople with the tweaking the incentives for your existing sales force.
What are the things you can do to drive that number of higher and then assuming you hit that 50% range at some point in the future is there anyway to frame up.
What the impact could be in terms of your HVAC.
The growth.
The rate or margin.
Yes, the Tommy well look in terms of the aftermarket I mean, if you turn the clock back we were on the 20% we targeted 30% of attachment rate last year, which we achieved and it was nice to see.
The attachment rate of <unk> for our chiller business up over 35% into 2 and.
The business the combination of what you said, we've added more feet on the street. We've added salespeople, we've added more structure and thought around our IC structure globally, and I think digital enablement is a big factor you look at.
Providing more of prognostics and diagnostics and more digital differentiation is a big factor.
I think it would create the kind of stickiness with our customers that really helped differentiate us so its focus on its those various things and then in addition to attachment rate. We're very focused on overall coverage because attachment refers to you sell a chiller. It comes off the warranty period are we signing of long term agreement and our.
Factor of patient is that we do so I'd like to get the 50% of service possible then ultimately even higher because that's just how we run the business.
Our other focus as overall coverage, we talked about going from 50000 Chillers that are covered by a long term agreement. The 60000, we're on track to do that and that goes beyond the initial.
I expect all of that goes into.
The whole units that are out in the field that we're converting them to long term agreements covered by carrier. So very pleased with the aftermarket growth we make more money in the aftermarket than we do in the.
Of the upfront equipment sales, so it will be margin accretive as well.
Thank you both I will turn it back.
Sales. Thank you.
Thank you. Our next question comes from Andrew <unk> with Bank of America. Your line is open.
Good morning.
Good morning, good morning.
Hey, guys.
So you highlighted K 12 opportunity in your slide deck anything at this point that you can quantify it.
The impact from the stimulus money that's already there can be seen any discernible impact from the channel on what's going on from the mining from the government.
Yes, we are encouraged Andrew if you look at the the.
On the stimulus bills that have been passed over the last 18 months you combine all of those together.
And there has been 190 billion that's been allocated to the school reopening that K 12 space and that is we expect a real meaningful amount of that to go to HVAC.
And what we've done is put a dedicated focus on this effort through our sales force through incentives through.
A lot of structured intensity around making sure that we get our fair share of that and you look there are 16000 school districts in the United States when we look through the.
The year to date, our K through 12 verticals up 15% to 20% and we think it's directly correlated to the additional funding that is in that space.
I think with this new infrastructure Bill of course, we'll see how that plays out once it goes over to the house, but we expect more money to be allocated to schools, but also when I see infrastructure bills. It actually plays very well for our strategic focus healthy buildings, especially in the school sustainability of Theres going to be funding in there for things like.
And the ability for airports, that's exactly in our wheelhouse, and then intelligence and our ability to use our balance system for both healthy and sustainable solutions and things like the schools in the airports infrastructure I think will be of really good opportunities. So we're encouraged by the infrastructure and the overall stimulus bills.
The state.
And just the follow up question.
How do you guys think about.
Carrier of 700 program in a highly inflationary environment right because.
Inflation on continuous next year sort of the framework becomes less meaningful right.
Adjusted.
You got penalized for the inflation, which was not really in your control.
We had the conversation was the board about maybe changing some of the metrics or.
Inflation goes away on we're back on track.
Andrew what I would say is net.
In the current environment with.
The current book costs and higher inflation.
It really only enhances the focus on driving costs out throughout our supply chain actually within our office organization, which was already very focused on driving our costs were just setting up the tiger team.
Adding additional people to get the incremental costs out.
With the higher end frankly.
In addition to that just enhances our focus on what we can do on the G&A side as well to get incremental costs out and so yes carrier 700 disease is a net number but I'll be very clear to say does not.
At all.
Negatively influence.
Our focus on it we're more focused on it than before.
Same thing within our manufacturing facilities a lot of focus on what we can do there also from an automation point of view.
Given that as is well documented we're not the only company that has some challenges with some localized.
Labor and so.
I'd say, we're comfortable there that the focus will continue.
I appreciate it thanks, so much.
Thanks, Ken.
Thank you. Our next question comes from Jeff Hammond with Keybanc. Your line is open.
Hey, just back on commercial I think you called out light is being.
And so on 30% can you just talk about what was going on there and it was that just the comp hanger and then it seems like the applied back.
Maybe a little longer data just just how that flows on.
Yes, Jeff light commercial is very encouraging clearly easy comps, but on Europe, 60% year over year, there is underlying strength.
There.
We see it not only in the warehouse vertical but it is an indication that things are reopening you see it in retail you see in restaurants.
It's clearly been 1 of the beneficiaries of the spend on K through 12 about half of our spend on K 12 is light commercial the other half of applied. So I think we benefited from from that spend we're also gaining share there as well.
Up 16, nice share gains probably in a similar range to what we've seen.
On the residential side over the last 12 months.
So the thing that is particularly encouraging about light commercial or is that the field inventory levels are on check their low despite the strong sales down only.
A few percent year over year, which means.
Well, there's not inventory on the channel.
As demand continues to increase and we continue to go to great lengths to support our customers, we feel quite encouraged by what we're seeing in light commercial right now.
And then just.
I think that the the Chubb decision is the great 1, but just kind of thinking.
Means that near term dilution of the thought the between.
Buyback and M&A you can cover that up eventually or do you think there is a transition in the 22, where theres a little dilution.
And the way we're thinking about this first of all we have capital available to us as I mentioned the cash on the balance sheet, we mentioned.
Thinking about the proceeds and so we will be focused on putting net capital to work in.
The.
The best and most strategic way for us and so think about where we're looking at the next 12 to 18 months and we're focused on redeploying capital, we're not going on going to get rushed into making any bad decisions.
<unk> or acquisitions that we will regret, but we think about of 12 to 18 months timeframe to kind of make that up.
Okay, great. Thanks, a lot.
Thank you. Our next question comes from Gautam Khanna with Cowen Your line is open.
Yeah. Thanks, good morning, guys.
Good morning.
2 questions I think first just following up on Steve's question about residential do you guys.
See any evidence of shorten life expectancy of of.
Resi HVAC in its Kevin.
Kind of the work from home and the.
The high heat the last couple of years.
I don't know if in your warranty data or elsewhere have you seen any evidence.
The evidence that the life expectancy of has changed materially.
Yes, it would indicate that.
The the life expectancy with the with the fact that units are running putting more.
It goes on them than previously and I do think that they are running hotter too. So I do think there is theres clearly indications that the overall life expectancy in terms of the number of years is going to be shorter as you put more cycles on it in a shorter period of time so.
We're working internally.
<unk>.
Dimensionalize that better better than we have in the past. So we're doing the data assessment on that but I think anecdotally I can tell you with high confidence that the life expectancy does seem to be coming down.
And any order of magnitude on how much is maybe coming down 20.
<unk> 30 per cent.
I'm hesitant to say anything.
No I've gone on.
Hesitant to say because when we do say it I wanted to make sure the debt that we've gone deep on the data assessment of that Kris Nelson and adjusted kept the and the team are looking at that and it really is critical.
Not only so we.
He can answer your question more specifically, but for our planning purposes, we actually we came into this year under estimating our demand and that's driving a lot of we're doing a lot of hiring that we didn't anticipate doing so we need to get.
As precise on that answer for you and for ourselves as possible, but I am hesitant to throw out a number on this.
Until we've gone deeper on it but we will be coming back to you on that shortly.
Okay, and then just a follow up on the commercial HVAC demand.
Over 20% in aggregate.
Any sense for how much of that is sort of a catch up of of a deferred replacement last.
Year, if you will sort of any any sport.
Of what's the underlying demand versus.
You know a catch up if you will.
Well, what I'd say is that.
What's really encouraging about commercial HVAC as you look at Abi you know the architectural billing index and we did go through a stretch.
This call was quite well quite low many months, where it was below 50, which obviously, we want a higher than 50 of an indication of strength.
And it was 57% in June its the fifth straight months of that is higher than 50% and I think it's the combination of probably.
Of the things that were put on hold and new construction that is now being built in anticipation.
The patient of the economic momentum were seeing more globally. We've had some key wins recently not only things like data centers and warehouses, which generally were strong throughout the pandemic, but commercial office buildings. We've had some nice wins there both in our HVAC business, but also on our controls business.
And of course on fire and security So education.
Location healthcare commercial buildings, there's a lot of indication that it's pretty broad based and 1 thing that we found particularly encouraging was it wasn't a U S phenomenon on Europe.
Quite strong your orders in Europe were up over 50% in the quarter on part of that easy compare of of part of it is youre seeing some real pent up demand there and then.
It's not only applied but our focus on aftermarket, which was up 15% of just HVAC alone in the quarter. So.
On some encouraging signs.
Thanks, very much guys.
Thank you. Thank you.
Thank you. Our next question comes from Deane Dray with RBC capital markets.
Of course something.
Thank you and good morning, everyone.
I'd like to circle back on price cost this quarter for Patrick some more specifics as I know the policy of the practices to lock in your input costs as best you can of 100% for the current quarter.
But you said you did have to go into the spot market was that strictly a function of increased demand above expectations of where there any supplier issues and let's say steel or copper.
I would say Deane, it's really mostly driven by the much stronger demand than we expected that is the that is the main reason.
In addition to that of course, I would say the what we call tier 2 is playing a role as well some of the component of the electric electronic components, particularly in the fire security business and we've seen net as well spot prices as well as some expedited free and so that's really the main driver.
Patrick I'd, rather hear you talk about a price increases on those or the cost of those components rather than supply issues. So are there any supply chain disruptions on anything electronic printed circuit boards and so forth.
I would.
Yeah.
Clearly there are.
Some issues, but I would say that they are spotty.
We continue to meet customer demand are there pockets, where we are a little late in some instances sure but by and large we are <unk>.
Managing our supply chain really well and we are managing customer demand what I'd add.
Is that I have to give.
Of our kudos to the operations team, who literally are working around the clock. So we have $24.7 coverage, where we have folks spanning both sides of the world managing these challenges they're real they're acute we came into the year thinking of our sales will be of mid single digits.
Now, it's going to be up double digits. So what that means from a practical terms is that youre, adding $2.5 million manufacturing hours you have to go aggressively hire talent the talent and demand.
<unk> like Tennessee, we're competing for talent with Amazon and Fedex. So our operations team is dealing with challenges every day on the supply.
Fly chain labor and really doing a phenomenal job to go to great lengths to support our customers. So I think we will get out in front, we're doing a lot of things to make our supply chain more robust with more automation more dual sourcing but.
It's not for the feint of heart Theres real challenges the team is addressing every day.
Yes, that's.
All good to hear.
And then second question abound has come up a couple times on the call and I know, it's still in the pilot program, but Dave could you take us through at a high level of the economics of.
On the platform the percentage of recurring revenues.
From.
From the industry feedback that we've heard the competitive advantage is really has a lot to do with the open architecture.
And maybe you can address that as well thanks.
Sure. Thanks, Deane, it's for us of bound is really a long game SaaS based so it's all recurring revenue, it's going to be of subscription model of there'll be margin accretive.
But the real focus of of bound is making indoor air quality visible. So we started with the commercial office building customer outside of the D. C area. We've had it running in the K through 12 school outside of Atlanta, We've gotten great feedback because as people come back to the office is as people go back into.
As people are going back into school in the spring you can go into the school Library and you have a dial that shows you that the air quality is good and it gives you confidence as you go back into these indoor environments. So I don't want to oversell like how many we've sold what it is is early phases, we've been working.
With the Atlanta Braves and tourist park, we havent running in our in our corporate headquarters in Palm Beach Gardens, Florida, We've had a number of customers very high profile customers coming through and really trying to understand it understand how it works not only for the tenants, but for the building operator and.
And I think it's going to be transformative early phases.
<unk> as.
As you said from a differentiation perspective. It is open architecture of interfaces with others control system. So it's not a it's not a proprietary that will only work with our ALC controls business and I think it's 1 of the key enablers to making the whole focus on healthy and sustainable buildings sticky over the long term.
Asus all good to hear thank you.
Thank you Dean and maybe before we take the next question from a modeling perspective, I thought I'd add that we expect for the balance of the year and particularly the Q3, we expect Q3 sales and adjusted EPS to be very similar to our Q2 performance and so that might be helpful.
You do the models.
Thank you. Our next question comes from John Walsh with Credit Suisse. Your line is open.
Hi, good morning, everyone.
Good morning.
I appreciate all the details as usual wanted to come at the.
Kind of input cost question, a little bit differently I was just curious if your best estimate on when you kind of hit the peak pressure.
Either for raws are supply chain availability or labor.
Curious if we if we've already hit it or if you're expecting.
On the coming next quarters.
It is.
A very good question and I think the key takeaway that we have of the management team is our need to be able to be flexible and.
And adjust quickly whether it's from a supply chain management point of view part of it is from an ability of.
In the passing through price to our to our customers to ensure that we remain price cost neutral and so of course, we've seen a tremendous increase in input costs.
Mentioned that for.
For the year now, we're sitting at about $250 million of input costs.
Early in the year it was several tens.
Tens of millions of dollars and so I.
I'm not ready to call at this this is it we've seen the peak but of what I can tell you is that this is probably 1 of the most of whats items within the company.
<unk> doing.
As we always do at certain times, we block in positions for commodities for next.
Next year, and so that is happening per our.
Per our practice and as I mentioned, probably the most important thing is our ability to remain nimble and 2 to flex our supply chain and to pass through pricing.
Yes, the only thing I would add John is that at the end of the day we.
We control the controllable so we are.
That third price increase you saw it in resi it's across the portfolio.
Theres really no part of our portfolio that has not been aggressive not only announcing price increases, but realizing price increases and then on the cost side, Patrick said it earlier, but it's across everything that we can control.
Control, including G&A and we've set up this carrier business services to really have a pitcher catcher model as we move stuff to low cost centers of excellence on the G&A side, we're being aggressive in the factories aggressive on supply chain.
Look steel is very high so we got to keep a close on <unk> $600 a ton up to 2000.
In the United States. So clearly, we would hope and expect that starts to modulate a bit.
And then copper has been hovering so we've been taking some blocking positions there.
I think Patrick and I have become more aware of commodity pricing than we ever thought we would on a daily basis, but we're watching it and we'll see how how's the things.
Continue to play out.
Great. Thanks, and then maybe just a follow up.
It seems to suggest on the residential side.
New homeowners might be using the home purchase event as a way to replace the system before it goes end of life curious if on.
On the commercial side Youre seeing any change in behavior from the customer if they are proactively upgrading systems either for an ESG commitment or 4 of wellness commitment versus kind of letting everything.
The failure before they replace the system.
I think we're seeing you know and that's a that's 1 of our biggest focus areas as modernizations and trying to proactively work with customers to replace systems before the end of life and you can make a business case just on sustainability alone. If you look at the savings that you can get and there are some government incentives, but as you move to.
More sustainable Chillers that you can get a very significant savings and also help customers hit their own ESG targets. Our customers are no different than us that they've been very public about some form of carbon neutrality, many of them and we're helping them not only get to their commitments, but help quantify for them how theyre getting.
Getting to their commitments by an early replacement of a chiller and it also ties into healthy I think light commercial and applied customers.
Are going to great lengths many of them to put in more healthy solution. So we're seeing some upselling.
On healthy solutions, there as well.
Great I appreciate you taking.
The questions. Thank you thank.
Thank you.
Thank you we are.
Taking your last question from Josh pencil Lynskey with Morgan Stanley. Your line is open.
Hey, Thanks for fitting me in guys.
Hey, Josh good morning.
Good morning, so on the carrier 700 of I think a couple of questions.
The sort of picked around the edges of this but you know Patrick on the 225 kind of go on to 150 using.
The definition of net you spelled out the incremental price that's in guidance.
Thank you you had $75 million of headwinds in the $2.25 definition, but an extra.
$125 million of price so maybe on more of kind of a double secret net basis you guys come out ahead of US is there another item, we're missing or is kind of the more fully netted number a little more positive.
Actually just it's a good question and I recognize that.
That's sometimes it could be a little confusing.
The way you can think about it is versus the prior guide carrier 700, as I mentioned.
First by $75 million, that's mostly input costs and the material side.
In addition to that which is not part of carrier 7 Hunter we have.
Additional plant inefficiencies actually.
<unk>.
Inefficiencies from last year from Covid that we thought would get better.
And they're not getting better or not they're not getting better to the extent that we expected that's $25 million. In addition to the 75 and then the other part of it is $25 million of higher inbound.
Inbound freight cost including error free.
Gets.
As of the weight of twenty-five offset by the 125 on price.
And so.
There is there is no net benefit of course of the objective is as we catch up price cost that going forward, we're nowhere soften as it becomes a little accretive.
But for this year. It is it is the net zero.
Got it got it that's helpful. I appreciate that detail.
And then just on ready now maybe a finer point question, but hard not to notice that the comp does get almost 60 points harder <unk>. So any commentary you guys can give us on how July ended up I think it would be helpful on calibrating that.
Go ahead.
Look July.
July has continued where June left off so were very well booked.
For the 3 Q I mean, obviously as you get into <unk>. The orders compares you would expect them to be down year over year.
But you are still seeing healthy order.
If you look at versus historical levels so right.
Right now we feel certainly balanced in our guidance for Q3, I mean remember we had been saying that we thought the first half would be up 32nd half down 20, what we're now saying is that the first half was up a lot more than we thought in the second half is probably down closer to 5%.
The 10% year over year, so we're keeping a close eye on it the number 1 thing we keep watching is movement and the movement continues to be very strong from our distributors to our dealers. So we'll keep a close eye on that and we're working distributor by distributor to make sure that we're managing with them in a very collaborative way of their inventory levels.
Order of Rick Thanks, Dave Thanks, Patrick.
Thank you John Thank you Josh.
Thank you I'm not showing any further questions at this time I would now like to turn the call back over to Dave Gitlin for closing remarks.
Okay, well listen thank you all for joining appreciate the you accommodating the earlier start time and of course Sam's available for questions.
Thank you all thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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