Thank you, and good morning, and welcome to Carrier's Second Quarter 2021 Earnings Conference Call. We appreciate your flexibility in accommodating the earlier start time for the call. Since we plan to discuss the Chubb transaction as well as the second quarter earnings, we have more flexibility if the call runs a little longer. With me here today are David Gitlin, Chairman and Chief Executive Officer, and Patrick Goris, 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 and 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 actual results to differ materially from those anticipated in the forward-looking statements. This morning, we'll review our financial results for the second quarter, discuss the full year 2021 outlook and the agreement we announced Tuesday to sell our Chubb business. We will leave time for questions at the end. 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 to be hosting this call from the Carrier-cooled New York Stock Exchange, and we appreciate the support that we've received from the team here. Please turn to Slide 2. Before we discuss the second quarter results, let me address the press release that we issued Tuesday announcing that we signed an agreement to sell our Chubb business to APi Group for an enterprise value of $3.1 billion. To be clear, Carrier's Global Fire & Security products business is not part of this transaction and remains an integral part of Carrier's portfolio and our healthy, safe, sustainable, and intelligent building strategy. We committed at our Investor Day last year to objectively assess our portfolio and do so through a rigorous application of our strategic and financial priorities. Within our Fire & Security portfolio, our products business is differentiated with leading market positions and attractive margins. Chubb is an industry leader with 13,000 employees who do a great job with installation and maintenance supporting our customers, but it is an agnostic business that does not pull through our products and yields lower margins. We concluded that Chubb is more strategic to APi Group than it is to us. Divesting Chubb will significantly simplify our business. Chubb represents over 20% of our employees or less than 10% of our adjusted operating earnings. Selling Chubb will increase our focus on our core businesses and enable us to reinvest the proceeds consistent with our capital allocation priorities to create long-term shareholder value. Patrick will discuss in more detail, but our capital allocation priorities have remained consistent: funding organic and inorganic growth, dividends, and share buybacks 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 over 12 to 18 months to help position the company for strategic growth and to generate attractive shareholder returns. The net result will be a new, more focused Carrier with more product differentiation, faster revenue growth, higher margins, and higher returns on invested capital. This was an important deal for Carrier, and I want to thank our team and advisers 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, our position at the epicenter of important secular trends, and the benefit of our strategic investments. Managing the surge in growth has strained our extended supply chain, but our teams are navigating those challenges well to support our customers. You see our progress reflected in our 2Q results. Organic sales were up over 30%. Particularly encouraging was that the growth was strong across our portfolio and that we even grew 7% versus 2Q of 2019. Orders were up about 35% organically compared to last year, driving our backlog up 8% sequentially and up over 20% year-over-year, positioning us well for 3Q and the second half of the year. We produced $821 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 to 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, culture, and team performance position us well to lead within our space. Key secular trends are likely to propel sustained growth for our industry. With people spending 90% of their time indoors and increasingly returning to their offices and recreational activities, we see more spend being allocated to the health, safety, comfort, and intelligence of indoor environments of all types, from homes to schools to hospitals to commercial office buildings. Likewise, the need for safe cold chain solutions has been intensified by the focus on vaccine distribution and the increasing global middle classes' demand for more fresh produce and other refrigerated products. And of course, the need for sustainable solutions. Given that the building sector contributes about 40% of carbon emissions and food waste contributes another 10% to 15%, we are confident that spend on sustainability will continue to drive demand for our green solutions. We, therefore, remain laser-focused on healthy, safe, sustainable, and intelligent building and cold chain solutions, and we are leaning into those trends by executing on our 3-pronged growth strategy: Growing our core, expanding product extensions, and increasing recurring revenues through digitally enabled aftermarket offerings. And we are seeing strong progress, as you can see on Slide 5. We have booked $250 million in 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 that it will accelerate as building owners will play both defense and offense on behalf of their occupants. Defensive spend is largely focused on defending against the spread of airborne illnesses. For example, 40% of classrooms in the United States have insufficient ventilation and studies show that better ventilation and filtration materially reduces the spread of microscopic particulates like COVID and other illnesses like the flu and common colds. Building owners are also starting to invest in better ventilation to play offense. Recent studies have shown that people performed twice as well when the indoor environment is optimized. High CO2 levels, which can occur in crowded classrooms and offices with poor ventilation have been proven to impact brain-based skills while better ventilation and filtration significantly improve cognitive function. Because of the many benefits of healthy indoor air environments, our goal is to make indoor air visible. So that good air quality becomes as important and expected as safe drinking water. Abound is a key enabler to make that happen. We received favorable feedback from our key launch customers, which include a commercial office building and an elementary school, and we have deployed it in our company headquarters where we have been demonstrating its power to customers. We are now leveraging our global sales force to deploy Abound and have had significant interest from marquee customers. In addition to Abound, we recently launched a WiFi-enabled Carrier home air purifier with a HEPA-level filter as one of our latest healthy home offerings. We have now sold over 38,000 OptiClean units. On K-12, we have a dedicated team offering catered solutions to our customers, resulting in sales to about 15% to 20% more school districts so far this year compared to last year as part of what we expect to be a significant opportunity over the next few years. Similarly, our connected cold chain offerings are gaining traction. Our cloud-based digital Lynx offering that we are building in partnership with AWS was recognized by Fast Company as one of 2021's world-changing ideas. In the container space, we are adding connectivity for thousands of units each month and now can support mixed fleets Carrier and Non-Carrier, thereby increasing our recurring revenues and reducing our customer maintenance and logistic costs. We had significant Lynx wins this quarter with truck/trailer, including 1,700 more trailer refrigeration units for Prime and a 3-year supply agreement with U.K. grocer Sainsbury's for all of its truck and trailer transport refrigeration equipment. CORTIX is Carrier's AI and IoT platform that offers predictive insights, recommendations, and autonomous actions to optimize equipment performance and building operations while minimizing our customers' energy consumption. Currently, over 220,000 pieces of equipment are connected to CORTIX. Digital solutions are helping to drive increased aftermarket and recurring revenues. Aftermarket sales for Carrier were up about 20% in Q2 over last year, all helped by our differentiated BlueEdge tiered offerings. Our attachment rate in commercial HVAC was more than 35% in Q2, and we are on track to add another 10,000 chillers to long-term contracts this year from about 50,000 to 60,000. Likewise, in our Refrigeration business, our Europe truck trailer business sold nearly 6,000 BlueEdge service agreements in the first half of the year. In addition, our Fire & Security segment continues to expand our key digital offerings. Earlier this year, LenelS2 was featured in the Apple Worldwide Developers Conference, and we're excited to work with Apple on providing BlueDiamond mobile credentials in Apple Wallet, on iPhone and Apple Watch. As employees come back to office buildings, this work can increase the profile of access control solutions that help reduce touch points, enhance occupant experience, and increase confidence in indoor environments. So there has been very significant progress on healthy, safe, and intelligent offerings and recurring revenues. And on Slide 6, you see similar progress on our focus on sustainability. In short, we are committed to providing environmentally sustainable solutions, and our performance over the past year reflects just that. We are on track to meet our commitment of reducing our customers' carbon emissions by more than 1 gigaton and ensuring our operations are carbon neutral by 2030. Electrification and energy efficiency are major focus areas for us. Commercial heat pumps in Europe and residential heat pumps in North America were both up 20% to 30% in the quarter. Electrification is equally critical to our Refrigeration business. Interest in our Vector eCool unit in Europe remains high, and our backlog continues to grow. This is the only 100% electric trailer 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 Sustainalytics scores in the past year. As you can see on the slide, we are now considered a leader in the industry. So great progress on ESG, which is a fundamental aspect of who we are. So before I turn it over to Patrick, a word on a leadership change that we recently announced. In a couple of weeks, Tim White will join us as President of our Refrigeration segment. Tim has been running GE's multibillion-dollar onshore wind business for the Americas region, and he ran key P&Ls within Collins Aerospace that included electric systems, environmental control systems, and engine control systems. He is the perfect leader to take this well-positioned business to the next level as we focus on electrification, digitalization, and sustainable solutions. I also want to thank David Appel 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 Chubb transaction. Please turn to Slide 7. As Dave mentioned, Q2 was a good quarter with sales, operating earnings, adjusted EPS, and free cash flow all exceeding our expectations. Sales of $5.4 billion were up 37% compared to last year. Currency was a 5-point tailwind for sales in the quarter or about $200 million, and acquisitions, that's mainly Chigo, 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%. Strong sales growth and benefits from Carrier 700 were partially offset by investments and higher input costs. As we expected, price/cost was negative in the quarter given the timing of price and cost increases. Much stronger-than-expected demand, combined with supply chain challenges, negatively impacted factory efficiency. It also meant material purchases went beyond block positions. And as a result, we bought some materials and components at spot prices and utilized expedited freight. I'll address our outlook for the balance of the year with respect to price and cost in a few slides, but I'll share that we already announced additional pricing actions to offset rising inflationary pressures throughout our supply chain. Reported earnings conversion of about 24% improved sequentially, and excluding currency and acquisitions, conversion was in the high 20s. Free cash flow of $482 million in the quarter reflected better-than-expected net income and was similar to last year's second quarter despite $180 million of higher interest and tax payments. Finally, we repurchased about 2 million shares at an average price of $44.33 during the quarter, bringing our year-to-date repurchases to about 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% residential HVAC growth. As we previously said, we expect that residential field inventory levels to finish approximately 10% to 15% higher than the end of Q2 2019. 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. North American light commercial business saw a significant rebound with sales up over 60% in the quarter. Light commercial field inventory levels are now down just 3% year-over-year. Overall, commercial HVAC sales were up about 20% organically. The HVAC team expanded margins by 300 basis points year-over-year, driven by strong growth across all businesses in this segment, including services. The segment remains on track to generate about 60% 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 continues 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 Sensitech business continued to benefit from the vaccine rollout and was up about 20% in the quarter. Commercial refrigeration grew about 30% as reopenings in Europe drove strong growth. Margins for this 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 costs to do so, including air freight. 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 a full-year 2021 operating margin for this segment to be in the mid-13% range, a little lower than we previously expected. Moving on to Slide 10. Organic sales at the Fire & Security segment grew 25%, and both the products and field businesses grew at similar rates. Within the Products business, which represents about 60% of the segment sales, residential and commercial fire continued to be solid. Given the easier comparisons, Access Solutions returned to double-digit growth while our industrial businesses were up high single digits. In industrial fire, we saw the recovery for upgrades and retrofits begin in marine services and in the oil and gas markets. Higher sales and Carrier 700 performance helped drive a 140 basis point margin expansion in this segment. With the higher sales outlook and the timing of price and cost actions, we expect higher margins in the back half of the year compared to the first half of the year and overall margins to be in the mid-13s for the year. Now let me review 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. Backlog in residential is up sequentially and points to a better second half than we previously expected. Commercial HVAC orders were up over 30% compared to last year, and backlog increased almost 20% year-over-year and up mid- to high single digits sequentially from last quarter. For Refrigeration, order activity for the truck/trailer business continued to improve sequentially. Strong order intake and backlog exiting Q2 should position this segment to achieve the expected high teens organic sales growth for the full year. Order intake for our Fire & Security segment also continued to improve sequentially. The product orders were up a bit over 25% year-over-year, especially in residential and commercial fire. Field orders were up 25% to 30% organically. I'll skip Slide 12. So let's move to Slide 13, our updated outlook. To be clear, we will include Chubb in the outlook until the transaction closes. Based on stronger-than-expected Q2 performance and higher backlogs, we are increasing our organic sales outlook from a range of 5% to 8% to a new range of 10% to 12%. A bit more than half a point of the incremental organic growth represents incremental pricing actions we already have or are taking to offset higher input costs versus our April guidance. Last quarter, we said material and component input costs were about $120 million or so higher than 2020. We now expect those input costs to be up an additional $125 million. We intend to offset this through additional pricing actions. We recently announced the third price increase in our residential HVAC business for September as well as a third price increase in transport refrigeration, and we are implementing similar actions in other areas of our portfolio. Our new outlook includes $125 million of additional pricing compared to our April guidance. For the full year, we expect price/cost to be neutral, though we expect it to be a modest headwind in Q3, offsetting higher input costs with incremental pricing on a dollar-for-dollar basis protects profitability but, of course, hurts reported margin and conversion. Despite these cost inefficiencies, we now expect to deliver an adjusted operating margin of over 13.5% for the year, better than our previous outlook. Another way to think about the outlook is that the revenues are now expected to be about $1 billion higher than the April guide. Of that, about $125 million is priced to offset increased input costs and about $200 million is acquisition-related sales with little profit contribution this year. The conversion on the remaining $650 million to $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 $0.15 improvement at the midpoint from our prior guidance. We also now expect free cash flow to be about $1.9 billion, up $200 million from our prior guidance. Slide 14 shows a bridge for the $0.15 improvement in our adjusted EPS outlook from the midpoint of our prior guidance to the midpoint of our current guidance. The biggest driver is the operational conversion on additional sales. Moving over to Slide 15, I'll provide more details regarding Chubb's transaction. You can see a brief profile of Chubb on the left side of the slide. We expect revenues for Chubb to be about $2.2 billion this year with high single-digit operating margins. Excluding Chubb, Carrier's operating margins would be about 50 to 100 basis points higher, free cash flow conversion about 100%, and we would also expect to have higher growth and modestly higher return on invested capital profile. The remaining Fire & Security segment 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, the enterprise value is $3.1 billion, and net after-tax cash proceeds are expected to be about $2.6 billion. As part of the transaction, about two-thirds of Carrier's total pension and post-retirement assets and liabilities will be transferred to APi. That is over $2 billion and significantly simplifies and derisks our balance sheet. Related to the pension, we expect most to all of our noncash, nonservice 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 is subject to a consultation process and regulatory approvals. Expected close is late Q4 2021 or early Q1 2022. As to the use of proceeds, we intend to use the approximately $2.6 billion in net proceeds as well as available excess cash for a combination of acquisitions, share repurchases and debt repayment. We expect to deleverage 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 million shares we previously discussed. In closing, we had a good first half with strong double-digit organic growth. Congratulations to our team in supporting stronger-than-expected demand in a very challenging supply chain environment. With our performance so far, along with solid order activity and backlog growth, we feel confident meaningfully raising our full year guidance. And the Chubb transaction simplifies our portfolio, enhances management focus, creates a more attractive company profile, and generates cash to reinvest in higher shareowner value-creating opportunities. With that, I'll turn it back to you, David.

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 2H and beyond. With that, we'll open this up for questions.

Our first question comes from Jeff Sprague with Vertical Research.

Congrats on getting Chubb off the board. Just a couple of questions around that, and Patrick alluded to it a little bit on the repo comment. But just kind of wondering how actionable some of the redeployment might be prior to the actual close of the deal, whether you have the appetite maybe to even get a more of a running start on share repo or some of the M&A that you're talking about in the pipeline possibly happens relatively quickly.

Yes, Jeff, a couple of comments. One, I would say that what we're looking at from an inorganic growth point of view and the acquisitions there, I would say that is really unrelated to the timing of the Chubb proceeds. As we look at what's in the pipeline and actionable, we will go after those opportunities prior to any potential proceeds. Frankly, 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 guide that we provided you was about 5 million shares this year. At this point, we probably think it's going to be somewhat closer to 10 million shares, not dollars.

Great. Additionally, I'm considering how to strategically manage the remaining Fire and Security Field assets. Although Chubb didn't perform as well as anticipated, there were some positive results. I'm curious about how you may be adjusting your Fire and Security offerings, integrating them with HVAC channels and similar approaches to enhance the overall package you aim to advance.

Yes, Jeff, we have a strong distribution channel. Chubb is one of several channels we utilize. It's significant for us, but it operates independently like other parts of our network. In our Fire & Security segment, which is approximately $5.5 billion, Chubb contributes a couple of billion, achieving a high single-digit return on sales. The remaining $3.5 billion consists of highly differentiated products, ranked either first or second in all segments. These products align well with the healthy building trend and our HVAC portfolio, achieving close to a 20% return on sales. This is very strategic, and we are eager to invest in it. I believe Martin Franklin and the team at the APi Group will elevate Chubb's already strong business. We had the option to invest in enhancing Chubb's margins or to redeploy that capital towards more core and differentiated parts of our portfolio, and we chose the latter.

Our next question comes from Nigel Coe with Wolfe Research.

Congrats on getting Chubb booked in Carrier as opposed to UTX. I don't think Greg Hayes would have given you the money, David. Just to clarify on the proceeds. So the way that it was framed earlier this week was $2.9 billion of cash, gross cash and then $0.2 billion 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 is $0.3 billion. That's the first part of that question. And then secondly, how is the cash conversion for Chubb been over time? I'm thinking here about things like pension funding and the like.

Yes, Nigel, Patrick here. Maybe I'll give you a walk of the $3.1 billion for Chubb, $2 billion to $2.6 billion the estimated net cash proceeds to us. So at the $3.1 billion deduct from that assumed liabilities and other adjustments to the buyer that gets you to $2.9 billion, which is probably the number that you've seen in some of the press releases that went out from the buyer. And then from the $2.9 billion to the $2.6 billion, it's mainly taxes on a transaction because we are booking a gain, but it also includes some of the fees associated with the transaction. So that's the kind of the walk of the $3.1 billion to the $2.6 billion. In terms of free cash flow conversion on Chubb, actually, Chubb was one of the reasons why our key cash flow conversion for the overall company was less than 100%. And part of that, of course, gets back to the noncash, nonservice pension benefit we saw in the income statement. That's about $70 million on an annual basis. we don't attribute any economic value to that. That headwind called on free cash flow conversion will go away. I would also add that from an overall company perspective, whether it's from a working capital perspective or an ROIC perspective, Chubb was below the company average. And so without Chubb, all of these metrics, we expect them to improve, including, of course, our operating margin.

Right. And sticking with Chubb for my follow-on question. Anything to think about from a stranded cost perspective for the remainder of Fire & Security and any impact to 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 stranded costs would be de minimis. When I say de minimis $0.01 or less. And obviously, we will do our best to make that go away.

Our next question comes from Joe Ritchie with Goldman Sachs.

Congrats on Chubb as well.

Joe, we can't hear you all that well. Can you try and speak up?

Sorry, is that better?

Yes, much better.

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

We are going to go down that path, Joe. We've been clear that in terms of capital allocation, our priorities, our organic and inorganic growth, as Patrick said. Of course, we'll do share buyback and debt pay down, but we've been trying to really aggressively build the pipeline. We start from our strategic mission, which is to be the world leader in healthy, safe, sustainable, intelligent building and cold chain solutions. So whatever we look at needs to really tie into that overall North Star that we have. We've been clear on our 3 strategic pillars of growth. We want to strengthen and grow our core. So that would be keeping it right in the center of the fairway. Product extensions and geographic coverage. You saw us put our toe in the water on VRF with Chigo, and that would be in the category of a product extension. And then enhanced aftermarket and digital capabilities. So you'll 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, when we talk about capital allocation, 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 is every company that we cover and handling it well. I guess as you kind of think about the framework for 2022 and potentially the stickiness of some of those price increases, if we were to get into a more benign inflationary backdrop, what does that kind of mean for your margins if we do get more benign inflation?

Yes, Joe, Patrick here. I'll take that question. I think it's fair to say that we likely spent more time on price and cost for 2022 than we did for 2021. This year, we are benefiting from some block positions. Next year, when those roll off, we will need additional pricing to offset that. That's why we announced further price increases, marking our third across our segments this year. For next year, our focus will be on ensuring that these price increases are effective and that we achieve the desired yield. Our intention is to maintain at least price-cost neutrality for margins, though that may present some challenges. However, we always aim to exceed that target, and if we do achieve it, it could positively impact our margins. Our top priority is to keep price-cost neutral for the upcoming year.

Our next question comes from Julian Mitchell with Barclays.

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

Yes, if you look at the portfolio, we have increased overall sales for the year, with organic growth now up 10% to 12%. For HVAC, we expect growth for the full year to be above 10%. In residential, we anticipate growth in the low teens, compared to our earlier expectations of low to mid-single digits year-over-year. We're also very optimistic about light commercial, which we expect to be closer to high teens growth, with applied products showing strong performance, likely increasing in the high single digits. Refrigeration is expected to be up in the high teens for the full year, while F&S should see growth in the high single digits.

Perfect. And then just my follow-up question would be around you mentioned price cost in the profit bridge, also what's happening with M&A and FX. Just wondered if there was any updates around Carrier 700 savings in aggregate and also investment spend. And realizing seasonality has sort of messed up a bit for obvious reasons, anything you'd call out third versus the fourth quarter?

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

Next question comes from Steve Tusa with JPMorgan.

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

Sure, Steve. We were glad to see that in the second quarter movement remained strong, which we are monitoring very carefully. We initially expected our inventory levels at the end of the second quarter to be up 10% to 15% compared to the same time in 2019, which has been an important indicator for us. However, our actual inventory levels in the field ended up only being up 7% compared to Q2 of 2019. Several factors are contributing to the strength we are experiencing. Housing starts are projected to be up around 13% this year, and we are observing an increase in home buying and selling. One consequence of purchasing a home is often the replacement of the air conditioning system, which I believe is a contributing factor. There has been considerable discussion about remote work, but it appears that units are operating at higher capacities and for longer periods, which likely contributes to the strength we see. We've also gained market share; over the past 12 months, our share has improved by over 200 basis points. This is due to converting dealers, and while our operational performance has not been perfect, we have made significant efforts to support our customers, even at a higher cost. Looking ahead, we expect our inventory levels to be balanced by the end of the year. We will closely monitor movement and have announced our third price increase effective September 1, which is primarily focused on 2022. Housing starts will need further observation, as estimates vary widely, but for now, they appear to be flat. We may also see some early purchases due to changes expected in 2023. Putting it all together, we aim to stay closely connected with our distributors, keep our inventory levels in check, and continue supporting our customers.

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

There is the possibility of anything happening. It's important to note that this is a short-cycle business and we have recently experienced significant strength. Currently, we are observing that orders have remained strong due to pricing and other underlying factors. We are very well booked not just for the third quarter, but also into the fourth quarter. We're in a strong position in the high-margin residential business. Additionally, our portfolio shows that light commercial continues to perform well, and we have confidence in the applied business supported by ABI indicators, indicating growth in the aftermarket. I'm particularly pleased that all segments of our portfolio demonstrated strength in the second quarter. We are working hard in the residential sector and feel positive about the rest of our portfolio as well.

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

I think 20% or 30%. Let me get a cheat sheet to help you here.

About 30%.

Our next question comes from Tommy Moll with Stephens.

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

Yes, Tommy. Your understanding is correct. We expect reported conversion to be between 20 and 25, with operational or core conversion in the high 20s. The difference is primarily due to foreign exchange, which presents about a 4-point headwind for the full year on conversion. Additionally, the Chigo acquisition is in its first year, generating significant revenue but not contributing much to earnings yet due to one-time costs. This explains the gap between the low 20s and the high 20s from an earnings conversion perspective. Moreover, while we are raising prices to offset some input costs, this also presents some headwinds. Regarding next year, we aren't in a position to provide detailed insights. However, I want to emphasize that we are focusing on taking pricing actions across all three segments to counter any material costs and inflation we encounter. If we are successful in this, I am confident we can expect earnings conversion next year to align with this year. The main factor will be the levels of organic growth, but we are not ready to discuss that at this time.

Fair enough. That's helpful. I wanted to follow up on BlueEdge. Good to see the attach rate on chillers up to, I think, over 1/3 in the second quarter. As we move forward from here towards your target of 50%, I think, longer-term, what are the levers you're pulling in the business? Is it hiring more salespeople? Is it tweaking the incentives for your existing sales force? What are the things you can do to drive that number higher? And then assuming you hit that 50% range at some point in the future, is there any way to frame up what the impact could be in terms of your HVAC growth rate or margin?

Yes, Tommy. Well, look, in terms of the aftermarket, I mean, if you turn the clock back, we were in the 20%. We targeted 30% attachment rate last year, which we achieved. And it was nice to see the attachment rate in 2Q for our chiller business up over 35% in 2Q. And I think it's a combination of what you said. 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 prognostics and diagnostics and more digital differentiation is a big factor to create the kind of stickiness with our customers that helps differentiate us. So it's focus and it's 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 a long-term agreement. And our expectation is that we do. So I'd like to get that to 50% as soon as possible, then ultimately, even higher because that's just how we run the business. Our other focus is overall coverage. We talked about going from 50,000 chillers that are covered by a long-term agreement to 60,000. We're on track to do that. And that goes beyond the initial sale into 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 upfront equipment sales. So it will be margin accretive as well.

Our next question comes from Andrew Obin with Bank of America.

So you highlighted K-12 opportunity in your slide deck. Anything at this point that you can quantify in terms of impact from the stimulus money that's already there. Can you see any discernible impact in the channel on what's going on from the money from the government?

Yes. We're encouraged, Andrew. You look at the stimulus bills that have been passed over the last 18 months, you combine all those together, and there's been $190 billion that's been allocated to school reopenings, 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 a sales force, through incentives, through a lot of structured intensity around making sure that we get our fair share of that. And look, there are 16,000 school districts in the United States. When we look through the year-to-date, our K-12 vertical is up 15% to 20%, and we think it's directly correlated to the additional funding that is in that space. And I think with this new infrastructure bill, of course, we'll see how that plays out once it goes over to the House, but we expect more money to be allocated to schools. But also when I see infrastructure bills, it actually plays very well for our strategic focus, healthy buildings, especially in school. Sustainability, there's going to be funding in there for things like sustainability for airports, that's exactly in our wheelhouse and then intelligence and our ability to use our Abound system for both healthy and sustainable solutions in things like the schools and in airports, in infrastructure, I think will be a really good opportunity. So we're encouraged by the infrastructure and the overall stimulus bills.

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

In today's environment of increased input costs and inflation, our focus on reducing costs throughout our supply chain has intensified, particularly within our operations. We are establishing a specialized team and bringing in additional personnel to identify further cost-saving opportunities. This situation also prompts us to concentrate on reducing costs in our general and administrative areas. While the Carrier 700 program is a net figure, I want to emphasize that this does not detract from our commitment; in fact, we are more dedicated than ever. We are similarly focused on our manufacturing facilities, especially regarding automation, given the well-known challenges many companies face with localized labor shortages. We are confident that our commitment to cost reduction will persist.

Our next question comes from Jeff Hammond with KeyBanc.

Regarding the commercial side, you mentioned that light is up by 60%. Could you elaborate on what factors contributed to this, and whether it was primarily a comparison issue? Additionally, it appears that the applied backlog might have a longer timeline; could you explain how that operates?

Jeff, light commercial is very encouraging. Clearly, easy comps. But when you're up 60% year-over-year, there's underlying strength there. We see it not only in the warehouse vertical, but it is an indication that things are reopening. You see it in retail, you see it in restaurants. And it's clearly been one of the beneficiaries of the spend on K-12. About half of our spend on K-12 is light commercial, the other half applied. So I think we benefited from that spend. We're also gaining share there as well. We've seen nice share gains probably in a similar range to what we've seen on the residential side over the last 12 months. So the thing that's particularly encouraging about light commercial is that the field inventory levels are in check. They're low despite the strong sales, down only a few percent year-over-year, which means that there's not inventory in the channel. And as demand continues to increase and we continue to go to great lengths to support our customers, we feel quite encouraged by what we're seeing in light commercial right now.

And then just I think the Chubb decision is a great one. But just kind of thinking about near-term dilution, the thought that between buyback and M&A, you can cover that up eventually? Or do you think there's a transition into '22 where there's a little dilution?

Yes, we're considering this carefully. We have capital available, including the cash on our balance sheet and the proceeds we've mentioned. Our focus will be on strategically deploying that capital in the best possible way. We're looking at the next 12 to 18 months for redeploying capital. We want to avoid making any rushed decisions or acquisitions that we might later regret, and we see this timeframe as crucial for planning.

Our next question comes from Gautam Khanna with Cowen.

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

Yes, it suggests that the life expectancy is impacted by the increased usage, which means the units are experiencing more cycles than before, and they also appear to be operating at higher temperatures. As a result, it's likely that the overall life expectancy, in terms of years, is decreasing as more cycles are added in a shorter timeframe. We are currently working on improving our understanding of this internally and conducting a data assessment on the topic. However, I can confidently share that it seems the life expectancy is indeed decreasing.

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

I'm hesitant to provide specifics because I want to ensure we've thoroughly assessed the data. Chris Nelson, Justin Keppy, and the team are currently analyzing it. It's crucial for us to answer your question accurately and for our planning. We underestimated demand at the start of this year, which has led to more hiring than we expected. We need to refine our answer for both you and ourselves, so I prefer not to give a number until we have more detailed information. However, we will follow up with you on this soon.

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

Well, what I'd say is that what's really encouraging about commercial HVAC is you look at ABI, the Architectural Billing Index, and we did go through a stretch where it was quite low, many months where it was below 50, which obviously we want higher than 50 as an indication of strength. And it was 57 in June. It's the fifth straight month that is higher than 50. And I think it's a combination of probably catch-up to the things that were put on hold and new construction that is now being built in anticipation of the economic momentum we're seeing more globally. We've had some key wins recently and not only things like data centers and warehouses, which generally were strong throughout the pandemic, but commercial office buildings, we've had some nice wins there, both in our HVAC business, but also in our controls business. And of course, in Fire & Security. So education, health care, commercial buildings, there's a lot of indication that it's pretty broad-based. And one thing that we found particularly encouraging was it wasn't a U.S. phenomenon. Europe was quite strong. Your orders in Europe were up over 50% in the quarter, and part of that easy comparable part of it is you're seeing some real pent-up demand there. And then, of course, it's not only applied, but our focus on aftermarket, which was up 15% in just HVAC alone in the quarter. So some encouraging signs.

Our next question comes from Deane Dray with RBC Capital Markets.

I'd like to circle back on price cost this quarter for Patrick, some more specifics. I know the policy, the practice is to lock in your input costs as best you can, 100% for the current quarter, but you said you did have to go into the spot market. Was that strictly a function of increased demand above expectations? Or were there any supplier issues in, 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 main reason. In addition to that, I think what we call Tier 2 is also playing a role. Some of the electronic components, particularly in our Fire & Security business, have contributed to this, as we have seen spot prices increase and some expedited trade. So that's really the main driver.

Patrick, I would prefer to hear you discuss a price increase on those components instead of supply issues. Are there any supply chain disruptions affecting electronic printed circuit boards and similar items?

There are some issues, but they are inconsistent. We continue to meet customer demand. Are there areas where we are slightly behind in some cases? Yes. However, overall, we are effectively managing our supply chain and customer demand.

What I'd add, Dean, is that I have to give our kudos to the operations team who literally are working around the clock. So we have 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 our sales will be up mid-single digits. Now it's going to be up double digits. So what that means from practical terms is that you're adding 2.5 million manufacturing hours, you have to go aggressively hire talent and demand. In places like Tennessee, we're competing for talent with Amazon and FedEx. So our operations team is dealing with challenges every day on the supply chain labor and really doing a phenomenal job to go to great lengths to support our customers. So I think we'll get out in front. We're doing a lot of things to make our supply chain more robust, with more automation, more dual sourcing. But it's not for the faint of heart. There's real challenges that the team is addressing every day.

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

Abound represents a long-term strategy for us. It operates on a subscription model, generating recurring revenues and improving margins. The main goal of Abound is to enhance visibility around indoor air quality. We began by working with a commercial office building client near Washington, D.C., and have also implemented it in a K-12 school outside Atlanta. We're receiving positive feedback, as individuals return to offices and schools, the air quality visibility provides reassurance. I don’t want to exaggerate our sales figures since we are still in the early stages. We’re collaborating with the Atlanta Braves at Truist Park and have it set up at our corporate headquarters in Palm Beach Gardens, Florida. Numerous high-profile clients have visited to learn about how it benefits both tenants and building operators. I believe it will be transformative. We are in the early phases of differentiating it from other products. Abound features an open architecture that interfaces with various control systems, rather than being tied only to our ALC controls business. I see it as a crucial component in promoting a sustained focus on healthy and sustainable buildings over time.

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

Our next question comes from John Walsh with Credit Suisse.

Appreciate all the details as usual. I 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 ROS or supply chain availability or labor? Just curious if we've already hit it or if you're expecting it in the coming next quarters?

That is a very good question. And I think the key takeaway that we have as a management team is our need to be able to be flexible and adjust quickly, whether it's from a supply chain management point of view or what is from an ability of passing through prices to our customers to ensure that we remain price/cost-neutral. And so of course, we've seen a tremendous increase in input cost. I mentioned that for the year now, we're sitting at about $250 million of input costs. Early in the year, it was several tens of millions of dollars. And so I'm not ready to call it this is it, we've seen the peak. But what I can tell you is that this is probably one of the most watched items within the company. We're doing, as we always do. At certain times, we block in positions for commodities for next year. And so that is happening per our practice. And as I mentioned, probably the most important thing is our ability to remain nimble and to flex our supply chain and to pass through pricing. Dave, any..?

Yes. I would like to emphasize that we focus on what we can control. The recent price increase is evident in residential and is applied across our entire portfolio. We are actively implementing price increases and successfully realizing them. On the cost side, as Patrick mentioned earlier, we are managing all controllable expenses, including general and administrative costs. We have established our Carrier business services to develop a model that improves efficiency by moving operations to low-cost centers of excellence. We are taking a proactive approach in our factories and our supply chain. The price of steel is notably high, ranging from $600 to $2000 a ton in the United States, so we must monitor this closely. Copper prices have been fluctuating as well, and we have been securing some positions in anticipation. Patrick and I are more attuned to commodity pricing now than we ever expected, and we are keeping a close watch on these developments as we move forward.

Great. 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 the commercial side, you're seeing any change in behavior from the customer. If they're proactively upgrading systems either for an ESG commitment or for a wellness commitment versus kind of letting everything run to almost a failure before they replace the system?

Yes. We're focusing on modernizations and working proactively with customers to replace systems before they reach the end of their life. There is a strong business case for this, especially in terms of sustainability. The savings are significant, and there are government incentives available. Transitioning to more sustainable chillers can yield considerable savings and assist customers in achieving their ESG targets. Many of our customers have publicly committed to carbon neutrality, and we are helping them meet those commitments by facilitating early chiller replacements, which also promotes healthier solutions. We are seeing an increase in demand for healthier options from light commercial and applied customers as well.

We are taking our last question from Josh Pokrzywinski with Morgan Stanley.

So on the Carrier 700, I think a couple of questions have sort of picked around the edges of this. But Patrick, on the 225 kind of going to 150 using your definition of net, you spelled out the incremental price that's in guidance. I think you had $75 million of headwinds in the 225 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. Is there another item we're missing? Or is there on the more fully netted number, a little more positive?

That's a great question, Josh, and I understand it can be a bit confusing. To clarify, compared to our previous guidance, Carrier 700 is down by $75 million primarily due to increased material input costs. Additionally, we are facing plant inefficiencies that persisted from last year due to COVID-19, which we anticipated would improve but have not to the extent we hoped, contributing another $25 million. There’s also an increase of $25 million from higher inbound freight costs, including air freight. This totals $125 million, which is offset by $125 million in price increases, resulting in no net benefit. Our goal is to close the gap between price and cost, and ideally, this will lead to a positive outcome in the future. However, for this year, it results in a net zero.

Got it. Got it. That's helpful. I appreciate that detail. And then just on resi, maybe a finer point question but hard not to notice that the comp does get almost 60 points harder 2Q to 3Q. So any commentary you guys can give us on how July ended up, I think, would be helpful in calibrating that.

Go ahead.

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

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. I appreciate you accommodating the earlier start time, and of course, Sam is available for questions. Thank you all.

Thank you.

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