Q3 2021 Carrier Global Corp Earnings Call

October 28, 2021

Good morning, and welcome to carriers third quarter 2021 earnings Conference call. This call is being carried live on the Internet and there is a presentation available.

To download from carriers website, and 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 carriers third quarter 2021 earnings Conference call.

With me here today are David Gatlin, Chairman, and Chief Executive Officer, and Patrick <unk>, Chief Financial Officer, except as otherwise noted the company will be speaking to results from operations, excluding restructuring costs and other significant items of a nonrecurring <unk> nonoperational 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 details on important factors that could cause <unk>.

Actual results to differ materially from those anticipated in the forward looking statements. This morning, We will review our financial results for the third quarter and discuss the full year 2021 outlook, we'll 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.

Thank you Sam and good morning, everyone I'll start with a summary of our Q3 results on slide two.

Q3 was another strong quarter for us, particularly in light of the widespread supply chain challenges are.

Our growth continues to benefit from our ability to leverage broad economic momentum are positioned at the epicenter of important secular trends and our strategic investments and execution on our growth initiatives.

Demand and orders remain encouraging we are experiencing record backlogs positioning us well for continued growth in Q4 and 2022.

Our key challenge remains operational both in mitigating the continued inflationary headwinds and supporting customer demand.

I will provide more details on the next slide but I want to thank our team who has been working tirelessly to support our customers and I also want to thank our customers and suppliers, who continue to partner with us as we address these issues.

You see the efforts of the team reflected in our Q3 results.

Organic sales were up 4% over Q3 of last year and up 7% over Q3 of 2019.

Adjusted EPS of <unk> 71 was better than we anticipated helped by a lower tax rate.

Given the rising input cost headwinds, we have been aggressive on price and controllable costs, while preserving investments critical to differentiation and growth.

H vaccine more effectively manage price cost and that was reflected in a segment margin of 19, 1%.

Our fire and security team also reacted aggressively but it is our business that is most impacted by chip shortages.

The refrigeration story is mixed while the segment drove solid 14% organic growth and continued to gain traction on strategic initiatives. We did not react aggressively enough on both price and cost, resulting in disappointing segment margins I am confident that Tim and the team are taking the right actions to position us well for.

2022.

All in all this is shaping up to be a strong year for carrier.

We are raising our top line expectations from 10% to 12% organic growth to about 13% over last year, Indeed up 6% over 2019.

We are also raising adjusted EPS range to the high end of what we previously indicated now projecting approximately $2 20 up 33% over last year.

Despite inflationary challenges we remain on track to deliver over 70 basis points of margin expansion. This year, while generating about $1 9 billion and free cash flow.

Turning to slide three.

The supply chain challenges are significant between raw material escalation supplier price increases chip shortages in logistics costs full year input cost pressure has now increased from about $250 million in our July forecast to about $375 million.

We are tackling this situation, both tactically and strategically tactically we have a virtual global supply chain War room that operates 24 hours a day, we have devoted significant additional resources into supply chain management, many of whom are onsite at our suppliers we.

We have redirected ocean freight routes to avoid extended port delays using our newly implemented digital tool strategically.

Strategically we are taking actions to emerge from this period with a more resilient supply chain. For example, we are working to minimize single points of failure 2020 had roughly 25% dual sourcing of critical components.

We will end 2021 with over 35% we are targeting 75% <unk>.

Integrated circuits have our acute focus and we're working directly with our chip Oems on securing supply.

We're also localizing certain commodities to remain low cost and reduce logistics cost and complexity.

We have increased our investments in automation by 50%. This year, we will have more than 3 million automated manufacturing hours by the end of this year and we have a plan to have $6 million by the end of 2026.

Our investments in digital tools to provide better visibility and drive more proactive actions across our factories and supply chain and we are deploying carrier excellence to drive productivity.

For 2022, we expect inflationary headwinds at a minimum to be offset by the price increases that we have already implemented and others that we will be announcing by the end of this year.

Equally important is our focus on managing the controllable is on the cost side, including G&A.

We remain committed to investing and playing offense on growth and you see our progress on slide four.

Our north Star remains consistent to be the world leader in healthy safe sustainable and intelligent building in cold chain solutions.

In healthy buildings, we have over $350 million in orders and a pipeline of over $550 million ahead of our full year expectations.

We continue to see strong traction in key verticals, including K through 12 with a pipeline that is 30% higher than Q2.

We are very well positioned to address our customers' sustainability needs over 30% of our residential heating sales in North America are now heat pumps.

We're honored to win a prestigious innovation award at the recent HR Expo for our Infinity 24 heat pump with Green Bean intelligence.

The industry's most advanced heat pump with premium energy efficiency.

Globally, 33% of commercial heating sales are now heat pumps up from 15% five years ago, and we projected to be 50% within five years.

We plan to capture more than our fair share by driving differentiation. For example earlier this year, we launched our new air cooled Chillers heat pump platform in Europe, It's global warming potential is 70% lower than our previous chiller and improves our customers' energy efficiency by up to 30% versus ly.

C technologies, our chiller and heat pump sales for this platform were up 30% year over year through Q3 contributing to share gains.

On a bound it is the connective tissue for intelligent connected buildings. For example, I recently visited with Dr. Scott Boden from Emory at his newly opened state of the art health care facility.

Carrier and Emery, our innovation partners in this healthy intelligent and sustainable facility with the full suite of carrier technologies HVAC building automation systems fire detection access and video management digital solutions and are bound which ties it all together.

Our progress on Lynx is equally encouraging.

Our truck trailer and shipping fleet customers are increasingly adopting our subscription base connected fleet monitoring digital solutions.

We have seen mid teen growth in our subscription portfolio year to date, and we have a strong order book and pipeline.

We recently signed an agreement with one of the largest refrigerated truck fleets in the United States to provide subscription based telematics and Reefer fleet monitoring.

The customer will benefit from increased efficiencies less downtime and loss products and overall lower energy consumption and cost.

We continue to see progress on our three pillars of growth with share gains via RF expanded geographic coverage and increased digitally enabled aftermarket and recurring revenues, which I'll discuss more on slide five.

Q3 aftermarket revenues were up about 12% year over year, and we are tracking to double digit aftermarket growth this year.

We have launched a broad portfolio of aftermarket solutions, including spare parts preventative maintenance break fixed repairs midlife modifications and upgrades remote monitoring and other digital services.

Digital enablement is foundational in addition to about we recently launched <unk>, our new ecommerce platform focused on capturing high margin part sales with our national account customers in residential and light commercial HVAC.

Our service coverage levels are at all time highs in commercial HVAC, we remain on track to have 60000 Chillers under service contracts this year in.

In refrigeration, we signed a three year Blue edge service contract with Scotts RL, Australia's largest national refrigerated transport fleet.

Tangible progress on these strategies is driving strong organic growth in 2021 and positions us well for continued topline sticky growth in 2022 and beyond.

Another component of our growth is acquisitions.

As you can see on slide six we are making great progress in this area as well.

Our strong balance sheet enables us to play offense on capital deployment, including M&A, both focusing on digitally enabled recurring revenues for example.

And light is complementary to our ALC building management system offerings in the fast growing data center vertical.

Enlighten software Optimizes rack loads and monitors power and heat generation.

L C has market, leading technology, which automates the cooling systems to effectively and efficiently dissipate that generated heat.

Together, we provide an integrated solution to monitor and control both the power and the cooling systems to optimize data center operations.

Similarly broker Bay is complementary to our Super business Super Leverages, the mobile credentialing capabilities used across our broad security portfolio to give us high market share in locks that support residential real estate showings, enabling $45 million property showings in 2020 agents.

Our technology and have been pushing for more digital offerings, such as scheduling real time communication and actionable insights broker Bay brings a highly differentiated real estate management cloud ecosystem that adds the sought after capabilities together, we provide a one <unk>.

<unk> shop to improve agent productivity early customer response has been tremendous.

Last week, we announced the acquisition of Denmark, based caveat and innovative residential alarm company caveats has a complete range of smoke heat flood and carbon monoxide alarms, including the world's smallest photo electric smoke alarm.

In combination with Kidder, we can further enhance our innovative residential fire safety product offerings and strengthen our connected technologies innovation pipeline globally. The.

The market opportunity is very attractive as fire safety regulations expand across the globe we.

We continue to build out our M&A pipeline and we will remain focused on our strategic priorities with that let me turn it over to Patrick Patrick.

Thank you, Dave and good morning, everyone I'll start with comments about the quarter and provide details on our outlook. Please turn to slide seven.

As expected the results were very similar to Q2.

Price realization was better than expected, but that was offset by higher than expected input costs.

All segments were on track to over deliver on topline growth, but increasing supply chain constraints impacted the availability and lead to shipment delays and contributed to record backlogs.

Sales of $5 $3 billion were up about 7% compared to last year.

Currency was one point tailwind for sales in the quarter and acquisitions, mainly G. We added another two points of growth.

Given the unusually strong residential HVAC performance last year this quarter had a more challenging comparison.

Nonetheless, we delivered organic sales growth of 4%.

Adjusted operating margin of 16, 1% was down about 120 basis points compared to last year, but was up about 100 basis points from the second quarter on lower sales.

The year over year margin decline was impacted by the absence of last year's cost containment activities.

As expected price cost was modestly negative in the quarter.

I'll address our outlook for the balance of the year with respect to price and cost in a few slides, but I'll share that we plan additional pricing actions to offset rising inflationary pressures throughout our supply chain.

Some of these price increases were announced earlier this week, including up to double digit price increases in our residential and light commercial HVAC business in North America.

Finance security and refrigeration are also planning additional price increases.

Free cash flow was $505 million in the quarter and $1 1 billion to nine months.

Inventories are higher than expected as we incur shipping delays given component shortages last year Q3 benefited from timing around payables, which did not recur this year.

Finally, we repurchased about $2 7 million shares in the quarter for $146 million and we remain on track to repurchase about 10 million shares this year.

In the appendix we included the year over year Q3, adjusted EPS Bridge summarizing many of the points I just discussed.

You will note that Q3 operational performance reflected the impact of the absence of last year's temporary cost containment actions and benefited from <unk> and discrete tax items not included in our July guidance.

This benefit is separate from the tax charge of $136 million included in GAAP earnings.

Since we're in the process of some legal entity reorganization to enable depending chubb sale triggering tax liabilities.

On our balance sheet, you will note that chubb's assets and liabilities have now been reclassified as assets and liabilities held for sale.

As previously communicated we still expect to net about $2 $6 billion of cash from the sale of Chubb.

As to timing, we currently estimate the transaction to close in December or January.

Let's now look at how the segments performed starting on slide eight.

HVAC organic sales were up about 2% in the quarter, including the better than expected, 2% decline in residential HVAC given the tough compares.

Distributor movement was up about 3% over an exceptionally strong quarter last year.

The result is that residential field inventories were down high single digits sequentially from the end of Q2.

The North American light commercial business continued to growth we saw in the second quarter up 14% versus last year.

Distributor movement was about 9% and light commercial field inventory levels are now down about 11% year over year.

Overall commercial HVAC sales were up about 4% organically.

As expected HVAC margins were down about 160 basis points year over year, driven by the tough residential comparison last year's benefit from the temporary cost actions and the impact of additional pricing to offset cost inflation.

Margins were up about 40 bps from the second quarter and the segment remains on track to generate about 16% adjusted operating margin this year.

Moving to refrigeration on slide nine.

Sales were up 14% organically as the growth in transport demand continued to.

Transport refrigeration was up about 24% in the quarter with very strong growth in both global truck trailer and container.

Our <unk> business continued to benefit from the vaccine rollout and was up about 20% in the quarter.

Commercial refrigeration was slightly down year over year due to a mid single digit decline in China.

Margins were up about 40 bps in the quarter compared to last year as the benefit from higher sales was offset by substantial supply chain and labor challenges the timing of price increases as well as last year benefiting from temporary actions.

We continued to incur higher costs to meet customer demand in this segment.

As Dave mentioned, we're disappointed in the margin performance in this segment and we now expect 2021 operating margin to be in the mid 12% range lower than we previously expected.

Moving onto slide 10 org.

Organic sales for the fire and security segment grew about 2% as products were up about 3% while field was flat.

Within the product business.

Which represents about 60% of the segment sales.

<unk> fire was down slightly while commercial fire was up.

Access solutions and industrial fire were both up high single digits.

Operating margins were down about 100 bps compared to last year as last year benefited from the temporary cost actions.

Margins were up 240 basis points sequentially and we continue to expect overall margins for this segment to be in the midst.

For the year.

Now let me review the order activity, we saw in the third quarter on slide 11.

As you can see as you can see our residential and light commercial orders remains positive. Despite the very strong third quarter last year.

Within that business orders were down in residential in the high single digits on tough comparisons, but light commercial orders were up over 40% as the recovery in that business continues.

Backlog in residential is up sequentially and remains some 70% or so higher than at this point last year.

Commercial HVAC orders were up about 12% compared to last year and backlog increased about 5% sequentially and about 20% year over year.

For refrigeration order activity for the global truck trailer business remains solid and up about 15% year over year, driven by strong growth in Europe.

The order intake and backlog exiting Q3 continued to position the refrigeration segment to achieve the expected high teens organic sales growth.

For the year.

Order intake for fire and security segment also remains strong.

Product orders were up 10% year over year with strong double digit growth in access solutions and industrial fire.

Field orders were up mid to high single digits organically.

On the right you can see that orders are up in all geographies, except in China in China HVAC orders were up in the mid single digits, while orders in refrigeration and fire and security were down in the double digits.

Let's move to slide 12 updated outlook.

To reiterate what we said last quarter, we are including Chubb and the outlook until the transaction closes.

Based on our Q3 performance price realization and higher backlogs.

We now expect organic sales to be up about 13% for the year, which is higher than our prior 10% to 12% outlook.

The benefit of higher organic sales was offset by higher input costs.

We now expect to exit 2021 with price cost being neutral in Q4 versus our prior guide of positive price cost in Q4.

We continue to expect an adjusted operating margin of a little over 13, 5%.

Full year incremental investments are expected to be about $150 million consistent with prior guidance.

The Q3 discrete tax benefit of <unk> carries over so this all leads to an updated 2021 adjusted EPS outlook of about $2 20.

As you build your models note that Chubb represents about 24.

Of the 2021, and we will earnings including the noncash pension income.

Also if we thought 2021 outlook would be above $2 in 'twenty.

We would have included that in our range.

We continue to expect free cash flow to be about $1 9 billion.

Slide 13 shows the bridge from the midpoint of our prior guidance due to current guidance as you can see the biggest driver is the lower than expected adjusted tax rate.

Higher volume is offset by price cost.

Just to note about the fourth quarter.

We expect incremental investments this year to mostly offset the benefit of the absence of <unk> of unusual items in the last in last year's fourth quarter.

In closing.

The first nine months of the year was strong with double digit organic growth and 35% adjusted EPS growth. Thank.

Thank you all thank you to all of our colleagues and partners managing and supporting strong demand in a very challenging supply chain environment.

With that I'll turn it back to Dave for Slide 14.

Thanks, Patrick.

We are very pleased with our performance as we are now three quarters of the way 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 the fourth quarter and beyond with that we'll open this up for questions.

Yes.

Thank you.

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press. The pound key please be advised that we remind you to ask one question and one follow up.

First question is going to come from Andrew <unk> from Bank of America. Your line is now open.

Hi, Yes. Good morning can you hear me.

Good morning. Good morning, just a question on just sort of philosophical approach to carrier 700.

In this inflationary environment right.

Because you actually are putting numbers, but sort of the optics of it seems like you.

You are missing.

Despite the fact that your pricing is very very strong.

How do you guys think about maybe changing the framework here to change incentives right because clearly it seems that this plan was designed for low inflation slash deflationary environment and we're in a very very different world. What are the thoughts what are the management and the board thoughts about it.

Yes, Andrew Thanks, and let me start and Patrick can add Youre, absolutely right carrier 700.

<unk> is an all in number and what happened last year is that it was such a unique year, where you had some one time cost takeouts that we were doing with furloughs and other things and some onetime benefits we were doing seizing on the productivity side and it got a bit tortured as we went through last year into this year, which is what we're seeing is sort of.

<unk> pressures that we haven't seen in a few decades. So what we've really fixated on as an organization is doing everything we can to make sure that we are price cost positive, which means a great aggressively.

Pricing as much as we can and also being controlling the controllable on all things that are related to costs. So we are doing a lot with carrier alliance, we're driving productivity.

We're managing commodities as best we can so our focus as an organization is doing everything we can to make sure that in this very unique environment. We stay price cost positive. So we still mentioned where the carrier 700 number is to make sure that we didn't lose that thread.

Blog almost across the portfolio is at record high. So we feel very very good about where we are in terms of our order our sales forecast for the rest of this year and as we started thinking about next year. We're more book now for early next year than we normally would be at this time given the record backlogs if you think about.

A residential backlogs.

We're up 40% in terms of our backlog sequentially, we're up 70% year over year. So.

We're at very high level bookings, our challenge is making sure that we continue to keep up with the demand, but we feel very very encouraged by our backlog positions pretty much across the portfolio.

Thank you very much.

Thank you.

And thank you and our next question comes from Dean drank from RBC capital market. Your line is now open.

Thank you good morning, everyone.

Morning.

I'd like to start with light commercial H back that 40% plus orders I really does stand out.

Just talk about the drivers yeah, how much of this might be catch up is it easy COVID-19 comps.

What is it part of.

An underlying rebound and nonresident destruction.

That would be helpful.

Clearly the the cops are a bit easy compared to last year, but there's just a lot of strength. We had said when we were forecasting like commercial coming into this year as we reminded people that it's 80% replacement, 20% new so there was a lot of pent up demand coming out of last year. Some of the key verticals that had been strong all year continue to be strong we see.

A lot of demand in places like warehouse K through 12 has been extremely encouraging we have a whole dedicated focus on making sure that we support that vertical retail restaurants are coming back online and we gained sure it looks to us like we gained 300 basis points or share year to date and lay commercial and I think part of that is driven by our ability.

To support the customer it hasn't been without input cost pressures, but we've gone to great lengths to make sure that that we can support our customers. So when you look at all the different variables orders up more than 40% year over year, when we look at the quarter field inventories down.

Significantly, which bodes well for the future our backlog is up sequentially, it's up almost three X over 2020 and movement from our distributors into our customer base remains in the double digit range and we and we just announced a.

Price increase of up to up to 12%, so a lot to like and lay commercial.

Got it and then as a follow up can you comment on China. It look like.

<unk> was a bit better but.

It certainly overall you were more pressures it just give us a sense of what the demand is any operating conditions that you would comment on.

Yes, China orders for H back we're up in that mid single digit range. The rest of the portfolio did see some orders challenges. So the one watch area given the evergrande attention would've been commercial H back in what we're still seeing there is some orders tailwind I think look the good news is that China is.

Is a very strategic important market for us, it's 8% of our sales and we continue over the long term to lean into China, we want to be in China for China, and it's a very strategic market for us over the long term.

If you look at the Evergrande situation that seems to be most acutely impacted in some of the tier three tier four cities.

Focused on multi family residential which for US is a very very small percent of carry ourselves, it's probably 0.5% of our sales that specific area. So.

I think we're well and.

Well calibrated on some of those issues overall when you look at China Real estate is a very important part of China. So I do think the government is going to be incentivised to support that industry. The overall real estate.

Industry, but we feel overall very well positioned in China.

It's real helpful. Thank you.

Thank you and our next question comes from Julia Mitchell from Barclays. Your line is now open.

Hi, good morning.

Just wanted to focus on the the <unk> segment, and just a bit more clarity on your outlook sole residential H back in North America.

Thank you had mentioned.

Sales are down very slightly in Q3, the orders down a little bit more.

Maybe help us understand how you're thinking about that business for the next couple of quarters, how comfortable you feel with the inventory levels in the distribution channel.

And the degree of you'll concerns around any sort of major step down in that market coming up.

Well Julian residential Hvac's in North America continues to be encouraging for us we did say that.

Reddy was down a couple percent in the quarter, which was less than what we thought we had previously thought it would be down in the 5% to 10% range. So what it really means for us.

Is that the second half is going to end up being probably up low single digits and we previously thought the second half for us was going to be down five to 10. So the good news is that movement continues to be positive field inventories Patrick mentioned sequentially was was actually down 7%.

Versus Q too and even splits are down versus prior year and our backlog as I mentioned to Andrew is up significantly over the last quarter and even more significantly over previous year. So look when we look at orders, there's going to be some tough comps in the third quarter. We look at October orders continue to be strong.

And all the underlying fundamentals with new housing starts.

This year's in the past, 13% range year over year, I think for the homebuilders, there's going to be some push out into next year, given some of the supply chain challenges that they and like the rest of us are seeing but.

But the work from home phenomenon units kind of having a slightly shorter life a lot of those underlying factors continue to give us.

Some confidence as as we go into next year. So when we get into February we will give more specificity, but.

For right now a lot of the underlying factors that have been supporting the demand continue.

Thanks, and then just my question.

No.

I apologize Julian and look what it means for the full year is that we had said that we thought he was going to be up low teens. We're now looking at it being up high team. So I know that it does naturally when you are in that range trigger questions about comps, but again and we will be very cognizant, we work extremely closely with our.

Distributors to keep.

Inventory levels in balance with them, but I think as we go into next year a lot of those encouraging signs that have been.

Been been supporting us continue to be there.

That's great and then maybe on refrigeration.

You'd cold out the sort of sluggish price.

Increase in that helped drive that disappointing margin performance.

Maybe help us understand sort of how quickly you think you can catch up on that price cost.

Aspects and in particular sort of how you managing in transport refrigeration, where you build extremely volatile orders.

Builds numbers in the market right now.

Yes, Julian Patrick here. So first of all there are good things happening within that segment. So you'd noticed a very strong sales growth of <unk>.

Double digit growth and transport CCR commercial refrigeration was about flat, but as we mentioned the the margin performance is disappointing.

Given the strong sales growth and so ah focusing necessarily but now as the closer a better control on the cost side, but also and I would say, especially being more aggressive and timely on price increases you mentioned that we have significant backlogs there.

Started at the end of last year that has given us somewhat limited ability to pass on pricing, but that is changing now and so is that window opens up and as we take on orders for next year, we are ensuring that one the prices for these orders are higher and two that we retain the flexibility for.

For these orders to adjust pricing if raw material prices change and so it's a significant focus for Tim white than the team.

Perfect. Thanks.

Thanks Joanne.

And thank you and our next one next question comes from Nigel who move research. Your line is now open.

Thanks, Good morning.

Interesting times.

So based on performance and let commercial but 14th.

Revenue and it'll just be based on all of those.

We haven't got a whole lot of detail on the market right now, but one of your competitors.

Much weaker trends.

July change so I'm just wondering if there was some chefs.

Sure shifts around the around the quarter, so any any conflicts, though would be good and then with an appliance that seemed to be above the weaker than the first half one right. So I mean, I am wrong that but but any any color on apply trend bye bye market.

Yeah.

When we look at the light commercial it's hard to look at sharing just a quarter, but year to date. We do think that we have gained 300 bps of share. So that can swing of course, we're not spiking any balls.

But we do think that we have gained sharon like commercial it's a very core strategic.

Market for Us and we continued we will continue to lean in with new products.

And working with our distributor base and really making sure that that's a market that we go.

Aggressively after with commercial H back.

Look there's a lot of encouraging signs there as well.

It's been higher than the architectural billing index, it's been higher than 50 now for eight consecutive months.

Patrick mentioned that overall, we were up mid single digits North America was kind of in line with that Europe was a bit higher China was a bit higher orders were up over 10% for commercial H back and a really important thing for US is we really like our ALC controls business.

That was a very strong those sales were up in the high teens high margin very differentiated important business an aftermarket.

Has been very thematic for us and we grew double digits. There. So we were encouraged by commercial H back overall when you look at just equipment applied orders those were up 15%. So.

Our our key focus for CH back like the rest of the portfolio keep driving orders and then turn the world upside down to make sure we can deliver.

And then only residential what kind of reaction, maybe getting price increases how much of that.

Headline price increase do you think will stick and.

As we go into next year.

Price increase.

Are you planning another pricing seem you off of John one and what kind of price premises will price range do you do you think will stick.

Of 2022 and is that enough to offset the the room generalization.

Yeah, I think the short answer is yes, so we announced actually earlier this week that we.

We would have a price increase effective January one of up to 10% or is he we're seeing realisation in the range of 6% last quarter, we probably will see about the same number this quarter, which is higher than historical price realisation.

These these.

These conversations are always difficult to the earlier question on transport, but we have to we have to have these direct discussions with our direct and customers because of the inflationary pressures. We're seeing so we're very encouraged by the price stickiness. We've seen this year I would say the rest of your business has been the most effective within.

Within carrier at ensuring that we try to stay out in front on these prices price increases and I think that will bode well for us as we go into next year.

Great. Thanks very much.

Thanks in Idaho, Thank you and our next question comes from Josh <unk> for Morgan Stanley.

So you wanted to.

Yeah can you hear me.

Yes Yep.

Great.

Thanks for taking the question Yeah, I guess the first question.

Patrick you were probably one of the earlier ones out there in.

And the industrial talking about kind of the the reset a wraparound inflation into the first quarter of next year that you have contracts and other kind of locked in by that will reset.

You feel like you have enough price out there right now as we kind of flip over the line into twenty-two to cover that in the first quarter. It sounds like you're okay and four cube. Thank you you've already made mentioned that that'll kind of Mccain only go higher sequentially.

Yeah, Josh good morning, all.

I will talk about our current thoughts about 2022, rather than being a quarter specific but for planning purposes were actually including additional price increases to address the continued input costs headwinds and the hedges that are rolling off from which we benefited last year as Dave mentioned <unk>.

Just an age back this week, we've announced price increases.

Up to 12% in residential unlike commercial.

I think it is safe to say that.

We're assuming input costs headwinds next year that exceeded the $375 million, we're seeing this year.

And so I think they've mentioned in his comments that total headwinds this year at about $375 million input costs. So we expect it to be more than that next year.

If I look at the carryover of the pricing actions that we have taken this year.

The carryover is about 352 $400 million that excludes the additional price increases that we've announced this week in for rescue might commercial and excludes additional price increases that we will be announcing and implementing and the remainder of our businesses and so from an overall perspective.

Our goal remains for 2022 to be at least price cost neutral of course, we want to do better than that.

But the key to take we for our team is in this environment, we need to be very agile and be able to react quickly on on what input costs are doing.

Got it that's helpful and then on the commercial business.

Dave I appreciate the commentary on the earlier question there I guess.

Orders.

Earlier in the year, we're pretty strong I get comps are a factor.

Anything that would have held back the quarter delivery wise or order wise like a project getting pushed out or supply.

Supply chain kind of making delivery a little tougher just kind of wondering how we square up the order commentary.

With the with the sales growth this quarter.

Yeah, Josh we do continue to see some supply chain challenges affecting some of the output I would say that if you look at our Charlotte facility, which does a lot of the production for our commercial HVAC business here in North America. We had some initial issues about a year ago that we then addressed and just as we were coming out of those.

<unk> related type issues. We then ran into a bunch of supply chain issue. So our sales could have clearly been higher in the quarter. If we didn't have that we're working closely with our customers to make sure that they.

They know what they're going to get when but order strong. It's it's one of the factories that we would expect to start to recover as the supply chain issues from their tier one start to recover.

Got it it's helpful. If guys best of luck.

Thank you.

And thank you and our next question comes from Joe Ridgetree from Goldman Sachs. Your line is now open.

Thanks, Good morning, everyone.

Hey, Joe.

So I know, we've talked a lot about price cost and touched on carrier 700, but just just to make sure. We've got this straight for next year.

Carrier 700, Hasnt included the pricing increases and so is the way to think about the benefits. We should expect next year I think as being somewhat somewhat below that 225, I think that we were originally expecting but more than offset by these pricing increases that you are taking through the rest of your organization.

Yeah, I think Joe that the easiest way to think about this is that for my pride overall price cost point of view and that explains some of the pricing actions, we announced this week and we will be announcing over the over the coming weeks their intention is to be neutral.

In worst case.

And so and that would include anything we do on the carrier 700 us an <expletive>.

Dave mentioned earlier in this first question. The first question for man who is.

However, we measure carrier 700.

Gross or net the most important thing is is that the entire organization.

His focus on continuously to drive out costs and driving efficiencies to help offset any input cost increases such as marriage or inflation.

And will enable us of course due to continue to invest in our business long term.

What I would add Joe is that I think the good news is we're going into next year with eyes wide open on the inflationary pressures and I think our team is pricing accordingly.

Got it that's that's helpful and I guess the other the other question.

Is clear.

Clearly with with with with Chubb coming out you're going to have some some proceeds tip of capital to use just any updated thoughts on your priorities for use of cash in offsetting some of the dilution associated with Chubb next year.

Yes, Joe I would say very consist completely consistent what we mentioned last quarter, our first priority fun organic growth.

Then to fund.

Inorganic growth.

Then funding a growing and sustainable dividend and then returning cash through shareholders through share repurchase what we mentioned.

The last quarter with the proceeds one we expect to pay down about $750 million of that that's kind of prorated.

Capital structure point of view with EBITDA, we lose from Chubb, what if you've also said last quarter, we announced a share repurchase authorization of about $175 billion.

We still expect Dubai about 10 million shares this year and would that would leave us at the end of this year with leaves with about $1.6 billion of authorization remaining at the end of this calendar year and what we've said for movie purchase point of view is that we would redeployed. This over 12 to 18 months.

Charity share repurchase so it it kind of gives you an idea of the sequence for the share repurchase but of course that I mentioned priority number one that's funding growth, including inorganic growth and obviously, we have significant cat.

Capital that we can put to work and that's why we have a growing pipeline of acquisitions. We've made some acquisitions. This year, we covered them and some of the slides, but there are some acquisitions that are a little bit larger in size in the pipeline as well and so we're working hard on getting some of these onward.

There isn't anything.

Very helpful. Thank you.

Thank you.

Thank you and our next question comes from Tommy Moe from Stevens line is now open.

Good morning, and thanks for taking my questions.

Hey, Tommy.

I appreciate all the commentary around price cost.

Kerry or 700 et cetera, if we boil it all down for 2022.

Is high twenties still a fair aspiration to think about for a core conversion.

And and then if you think about.

Sometimes we talk about core operational versus what's actually going to be reported in the piano.

Any big Delta between those two that you would want to make sure to point out for folks obviously.

Divestiture would be one but anything else you want to make sure to point out today.

Yes, Tommy Patrick here.

I understand there are lots of moving pieces and conversion and this year, particularly what's playing an important role as one some of the acquisitions. We've made that in year, one don't contribute get us much earnings.

To the <unk>.

Act of currency and then of course, an important element. This year is this of course, the whole price cost dynamic.

Where we are adding this year pricing of of well over $300 million for the for the full year.

That is not falling through the bottom line of course, it has a negative impact on our conversion on that.

That being said for next year and I'm going to exclude any significant changes in mixed because we don't want to get into that a good or bad.

But from an operational point of view, we absolutely would still target earnings conversion in the high twenties to about 30% range.

Depending on what we do on the acquisition side, depending on price cost that might be slightly different but operationally, that's absolutely something that we targets and and work towards no change.

Great. Thank you Patrick.

Thanks, Tom Dave.

Dave I wanted to follow up.

Big Picture question here, you've you've moved quickly as a pure play on.

On a lot of fronts.

I'm curious.

What's the body of a big body of work that remains in front of view maybe for next year.

Just in terms of changes you you envision making to the business with the pure play flexibility I mean, G&A transformation or process improvement is one area that comes to mind, but what are some of the big priorities in your mind at this point.

Tommy we continue to stick with the playbook that we laid out at our February 10th Investor Day of last year, we said that.

We would invest in growth and this year. Despite all the input costs challenges, we're going to continue to invest $150 million and growth.

Along the lines of our three pillars of growth continue to to grow the core and continue to look at Adjacencies like B R. F and geographic expansion like you saw with caviar and and then continue to really lean into recurring revenues aftermarket digital where in the first ending on that journey, we have a long way to go with our aftermarket growth and recurring revenues and that will be very thematic for us.

Certainly going into next year and for years to come we said that we would be super aggressive on costs and despite the fact the carrier 700 number itself is what it is the focus on costs within the organization G&A transformation as a major theme for US we've set up these global centres of excellence, we're going to be pushing me.

More and more work into these low cost centres of excellence more G&A reductions simplification across the portfolio that will continue to be and we have we've gone from $10 billion of net debt. When we spun to now will end it after we so.

Chubb to closer to $4 billion of net debt, so our ability to play offense on organic and inorganic growth.

As in a great place. So we will continue to look at where we can really complement our existing portfolio to play offense. So we like our playbook, we like our focus while we have to do is now transition from doing what we said we were going to do to to doing best in class and everything we do and that's going to be our focus in 22 and beyond.

Thanks, Dave I appreciate it and I'll turn it back.

Thanks Tommy.

Thank you and our next question comes from Steve.

From J P. Morgan Your line is now open.

Hi, Mister <unk>.

[laughter], Yeah, I can understand I've been getting Josh wrong, but this.

This one.

[laughter].

So just on the realized price in the quarter, what what was that for total co on an absolute basis.

You can think of pricing Steve of about $125 million in Q3 significantly better than Q too.

Growing to about 150 in queue for and so from a price realisation point of view, you'll you'll recall because you asked me the question and after Q1, we started from less than half a point in Q2, we're above two points give or take and then.

Q4 will be between three and 4% of overall company price realization. So we're seeing it pick up but of course, we've been at trailing a little bit of the input cost increases but in queue for we do expect price cost to be neutral. So clearly picking up and then I have ready around like 65 70.

Million dollars of that.

The we can think about ready for both Q3 and Q4 about 6% realized.

We did that in Q3, we expect the same in queue for I don't I don't know the exact vulgar.

That would amount but.

That's kind of what we realize and Rosie yeah, Okay that makes a lot of sense.

And then just trying to kind of parse this out a little more for.

Follow up on Joe's question.

I mean, there was a pretty big number next year of kind of carryover.

Cost savings if you will.

In a couple of hundred million dollars at least are you now, saying that like that's not like because of everything that's happened like it's still kind of a cultural mission statement carrier 700, Budd Lake.

As far as the bridges concerned it's kind of been blown up by a lot of this stuff and that we just really.

Shouldnt dial and that kind of.

Those kind of savings if we're thinking about kind of a mechanical bridge for next year, yes.

Let me start and then Patrick and kind of give some more specificity.

The we have really tried to be as specific as we can on what's the pricing costs, we're seeing by quarter and we will give it in that color next year carrier 700, when you see the kind of input costs, we're seeing it did change.

When it costs 10 times as much to get a container out of China into the United States. When we're buying chips on the spot market. There have been some clear inflationary pressures that have affected the overall carrier 700, having said that if you were to set foot. In this building you would see an entire war I'm focused on commodity management with our suppliers.

You would see productivity being rolled out across the world. So we will give specificity on cost carryover inflationary pressures going into next year and how we're going to offset that at a minimum with price again like Patrick said being price cost positive as are clear intent, but the carrier 700 number itself is lower.

This year than what we thought Patrick you want to add to them.

I think Steve R.

We still intend to drive cost out next year compared to this year.

That has not changed and so all those equal we would expect their earnings conversion next year to be better than this year.

Okay.

That makes.

That makes a lot of sense, just a follow up on that.

All these kind of like you said, you're going to more sources like dual sourcing et cetera.

I mean I guess.

In a stable environment that can lead to better margin because you are kind of playing them against each other.

My guess is when you're dual sourcing in this environment. It's actually I mean, that's kind of like structurally higher costs, you're trading off higher cost for availability. I mean is that is that the right way to look at it.

Oh go ahead actually.

Because there is.

Shortages of some of the components, we do have to go to the sources that otherwise.

Are gone and so that's one of the reasons why today, we are incurring some higher cost just because our normal sources have some constraints as well and so some of the increases we see this year are associated with that but clearly in a more stable environment, having more dual sourcing should help from a cost point of view, yeah, I would I would add.

That look there is an investment when we say we've gone from say a million automation hours to $3 million. This year on our way to 6 million, that's an investment but what happens is that really starts to payback. When you look at the investment to setup dual sources, there is an investment but when we get.

Hopefully towards the second half of next year as you get out. There then you have more supply demand imbalance and then we will feel much better about our ability to get back on the kind of year over year cost reduction numbers that we're used to seeing got it and then one more quick one sounds going to kill me.

I did not myself believe anything on the table, though.

The 150 and investments how much of that is lake.

Rebates to distribution or stuff like that that.

You are kind of investing in installed base, if you will and commercial or or residue or something like that how much of that is that kind of activity versus like R&D and pure sales dollars of hiring people and things.

But this year it's nothing.

Okay got it.

Got it okay.

I appreciate it.

Thank you.

And our next question comes from led by strictly from Citigroup. Your line is now open.

Morning, guys.

Good morning Us run for his money in there with that.

Pronunciation.

Thanks for taking my question, we've covered a lot of ground you are obviously.

Just going back to labor.

Obviously labour availability seems to be a growing issue and now seen some labour actions in the U S. In terms of strike activity. So can you talk about what you're seeing in terms of wage inflation and labour availability in general and then more broadly.

How you are thinking about labor relations overall, and the risk of potential disruptions.

Yeah, I'm glad we are.

To set the stage, we have 80% of our people outside the United States and I would say the real labor challenges. We have are at a couple of our sites in the United States.

And we have very close relationships.

With our Union partners and what.

What we've we in some areas in the United States, we've had to.

Rage wages, a bit and we've also put in place in bonus structures for output, but we stay very very close.

With our with our Union partners here and we feel confident that we continue to create the right environment, where people want to work here then we'll manage that.

Okay.

That's helpful and I think it makes a lot of sense around the incentives for production shall seems like it's helping with the results just following up.

I think back to.

Last year, and then Q added.

600, or so salespeople.

Now that we're approaching the end of 21 and they have been on board for a while can you talk about what you've seen from those incremental resources in terms of them ramping sales productivity and just more broadly how you're thinking about.

Salesforce positioning today.

Whether you see opportunity to continue to add incremental talent and resources there.

We're very pleased with the results of the additional sales folks that we've added we've been very targeted where we've added we've been very focused in certain areas in North America and in China, where we've added salespeople we've seen.

Very good additional sales.

We came in the year thinking that we were going to grow 5% and after all of a sudden done we're going to end up growing organically by 13% in our investments and salespeople and things like digital R&D, that's all contributing so.

We felt we were under represented on the sales side we've added.

The I think the right number and we did say that our total investment starts to modulate a bit as we go into next year.

We're going to end up with 50 additional investments clearly salespeople.

Take some years it takes some time to pay back, but we look at it internally we measure it on selling as a percentage of our gross margin, but pleased with the investment in the payback.

Great. That's that's helpful. Thanks, Yes.

Okay, and where do you think we're out of time.

And that was the last question I would now like to turn the call back over to date.

Thank you. Thank you very much thanks to everyone. We appreciate you joining and we look forward to hosting you all here in our our West Palm headquarters in Florida on February 22nd for our analysts an Investor day of course is always Sam is around for follow up questions, but thanks to all of you.

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

[music].

Good morning, and welcome to carriers third quarter 2021 earnings Conference call. This call is being carried live on the Internet and there is a presentation available to 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 carriers third quarter 2021 earnings Conference call with me here today are David Gatlin, Chairman and Chief Executive Officer, and Patrick <unk>, Chief Financial Officer, except as otherwise noted the company will be speaking to results from operations, excluding restructuring costs.

Other significant items of a nonrecurring <unk> nonoperational nature, often referred to by management as well.

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 details on important factors that could cause actual results to.

Differ materially from those anticipated in the forward looking statements.

Morning will review, our financial results for the third quarter and discuss the full year 2021 outlook, we'll leave time for questions at the end once they 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 I'll start with a summary of our Q3 results on slide two.

Q3 was another strong quarter for us, particularly in light of the widespread supply chain challenges are.

Our growth continues to benefit from our ability to leverage broad economic momentum our position at the epicenter of important secular trends and our strategic investments and execution on our growth initiatives.

Demand and orders remain encouraging we are experiencing record backlogs positioning us well for continued growth in Q4 and 2022.

Our key challenge remains operational both in mitigating the continued inflationary headwinds and supporting customer demand.

You see the efforts of the team reflected in our Q3 results were organic sales were up 4% over Q3 of last year and up 7% over Q3 of 2019.

Adjusted EPS of <unk> 71 was better than we anticipated helped by a lower tax rate.

Given the rising input cost headwinds, we have been aggressive on price and controllable costs, while preserving investments critical to differentiation and growth.

H vaccine more effectively manage price cost and that was reflected in a segment margin of 19, 1%.

Our fire and security team also reacted aggressively but it is our business that is most impacted by chip shortages.

2022.

All in all this is shaping up to be a strong year for carrier.

We are raising our topline expectations from 10% to 12% organic growth to about 13% over last year, Indeed up 6% over 2019.

We are also raising adjusted EPS range to the high end of what we previously indicated now projecting approximately $2 20 up 33% over last year.

Despite inflationary challenges we remain on track to deliver over 70 basis points of margin expansion. This year, while generating about $1 9 billion and free cash flow.

Turning to slide three.

The supply chain challenges are significant between raw material escalation supplier price increases chip shortages on logistics costs full year input cost pressure has now increased from about $250 million in our July forecast to about $375 million.

We are tackling this situation, both tactically and strategically tactically, we have a virtual global supply chain War room. There operates 24 hours a day, we have devoted significant additional resources into supply chain management, many of whom are onsite at our suppliers, we have redirected ocean freight routes.

To avoid extended port delays using our newly implemented digital tool strategically.