Carrier Global Corp

NYSE:CARR

Earnings Call Transcript 2021-Q2

[Operator]

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

[Samuel Pearlstein, VP, IR]

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/or 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. [Operator Instructions].

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

[David Gitlin, CEO & Chairman]

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 that do a great job with installation and maintenance supporting our customers but it is an agnostic business that does not pull through our products and yields lower margins.

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 buyback within a solid investment-grade credit rating.

Our intention is to use the cash proceeds and excess cash on the balance sheet for acquisitions, buybacks and debt pay down 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 reduced 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 improved cognitive function. Because of the many benefits of healthy indoor air environments, our goal is to make indoor air visible. So good air quality becomes as important and expected as safe drinking water. 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 increased confidence in indoor environments. So very significant progress on healthy, safe and intelligent offerings and recurring revenues. And on Slide 6, you see similar progress on our focus on sustainability. In short, we are committed to providing environmentally sustainable solutions and our 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.

[Patrick Goris, SVP & CFO]

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. 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 continue to convert into sales. Transport refrigeration was up over 40% in the quarter with very strong growth in both global truck/trailer and container. Our 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 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 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 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%, organic.

I'll skip Slide 12. So let's move to Slide 13, our updated outlook. To be clear, we will include Chubb in the outlook until the transaction closes. Based on stronger-than-expected Q2 performance and higher backlogs, we are increasing our organic sales outlook from a range of 5% to 8% to a new range of 10% to 12%. 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 guide 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 a 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 2/3 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 delever 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 a 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 share owner value-creating opportunities. With that, I'll turn it back to you, David.

[David Gitlin, CEO & Chairman]

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.

[Operator]

[Operator Instructions]. Our first question comes from Jeff Sprague with Vertical Research.

[Jeffrey Sprague, Vertical Research Partners]

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.

[Patrick Goris, SVP & CFO]

Yes, Jeff, a couple of comments. One, I would say that what we're looking at from an inorganic growth point of view and the acquisitions there, I would say that is really unrelated to the timing of the Chubb proceeds.

As we look at what's in the pipeline and actionable, we will go after those opportunities prior to any potential proceeds. Frankly, we -- given the amount of cash we have on the balance sheet, we may not need those 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 -- 10 million shares not dollars.

[Jeffrey Sprague, Vertical Research Partners]

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

[David Gitlin, CEO & Chairman]

Yes, Jeff, we have a healthy channel. I mean Chubb was one of our many distribution channels. So it was -- it's an important piece of our channel, but it was agnostic just as other parts of the channel would be to us. So when you look at our Fire & Security segment, call it, $5.5 billion, you got a couple of billion with Chubb that was in the single digit -- high single-digit range for ROS. And then the remaining $3.5 billion of products you have highly differentiated products, #1 or #2 in all of our segments. It fits well with the whole healthy building trend and the other parts of the HVAC portfolio and the ROS is close to 20%.

So very, very strategic, something that we really want to lean into. And I think that Martin Franklin and the team over at the APi Group will really take what's a great business with Chubb to new levels. We had a choice should we kind of make the investments to take the margins higher of Chubb or let someone else do it and redeploy that capital for parts of our portfolio that are more core and more differentiated, and we elected to do the latter.

[Operator]

Our next question comes from Nigel Coe with Wolfe Research.

[Nigel Coe, Wolfe Research]

Congrats on getting Chubb booked in Carrier as opposed to UTX. I don't think Greg Hayes would 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.

[Patrick Goris, SVP & CFO]

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.

[Nigel Coe, Wolfe Research]

Right. And sticking with Chubb for my follow-on question. Anything to think about from a stranded cost perspective for remainder of Fire & Security and any impact to the tax rates going forward?

[Patrick Goris, SVP & CFO]

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.

[Operator]

Our next question comes from Joe Ritchie with Goldman Sachs.

[Joseph Ritchie, Goldman Sachs Group]

Congrats on Chubb as well.

[Patrick Goris, SVP & CFO]

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

[Joseph Ritchie, Goldman Sachs Group]

Sorry, is that better?

[Patrick Goris, SVP & CFO]

Yes, much better.

[Joseph Ritchie, Goldman Sachs Group]

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.

[David Gitlin, CEO & Chairman]

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.

[Joseph Ritchie, Goldman Sachs Group]

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?

[Patrick Goris, SVP & CFO]

Yes, Joe, Patrick here. I'll take that question. It's -- I think it's fair to say that we probably spend more time on price/cost for 2022 than we do for 2021. And so first of all, this year, as you know, we're benefiting from some block positions. And so next year, when those roll off, we do need additional price to offset that. That's why we've announced additional price increases, our third price increase across our segments this year.

And so for next year, of course, we will focus on making sure that those price increases stick that we do get the yield, if price cost remains neutral next year, which frankly is our intention to be at least price/cost neutral for margin, of course, that's a little bit of a headwind. But of course, we always target to do better than that. And if that were the case, that it could benefit our margins. But our first priority is ensuring that price/cost next year remains neutral.

[Operator]

Our next question comes from Julian Mitchell with Barclays.

[Julian Mitchell, Barclays Bank]

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?

[David Gitlin, CEO & Chairman]

Yes, if you go through the -- you look at the portfolio and Patrick could jump in as well. We increased overall sales, as you know, for the year, our organic is now up 10% to 12%. So HVAC is going to be higher -- for the full year, up higher than 10%.

Resi, we see up in the low teens. Prior, we had been thinking year-over-year, it would be up low to mid-single digits. But we see resi up low teens. And we're very encouraged by light commercial, it's probably up closer to high teens and applied is very strong, probably up in the high single-digit range. And then Refrigeration is likely to be up in the high teens for the full year, and then F&S is high single digits.

[Julian Mitchell, Barclays Bank]

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?

[Patrick Goris, SVP & CFO]

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.

[Operator]

Next question comes from Steve Tusa with JPMorgan.

[Steve Tusa, JPMorgan Chase & Co.]

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

[David Gitlin, CEO & Chairman]

Sure, Steve. We were pleased that in 2Q movement remained strong, which is obviously something that we're tracking very, very carefully. So we thought that our inventory levels at the end of 2Q were going to be up 10% to 15% versus the same time at the end of 2019, which is an indicator we have been watching closely. And inventory level in the field for us ended up only up 7% versus the same time in Q2 of 2019.

And you look at a collection of factors that are driving the strength that we're seeing. Housing starts, it's going to be up 13% or so this year. We are seeing people obviously buying and selling more homes. And one of the things that happens when you buy a home is sometimes you replace the air conditioning system. So I think that's a driver.

There's been a lot of talk about work from home, of course, but I think it's -- without being too quantitative about it, it just seems that units are running hotter and longer getting more cycles on them, and that has to be contributing to some of the strength that we're seeing. And we benefited from share gains. I mean we're up -- if you look at the last 12 months, you really can't measure share 1 quarter at a time, but you can look at -- over the last 12 months, our share is up over 200 basis points.

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

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

[Steve Tusa, JPMorgan Chase & Co.]

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

[David Gitlin, CEO & Chairman]

Well, there's a chance of anything. I mean you know, Steve, it's a short-cycle business and that we're coming off some very -- we're coming off a lot of strength. But right now, we see between the pricing, the underlying factors that we've been seeing, orders have remained strong. I mean we're very well booked not only for 3Q, we're booked into 4Q. And we see that we're very, very well positioned in the high-margin resi business.

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

[Steve Tusa, JPMorgan Chase & Co.]

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

[David Gitlin, CEO & Chairman]

I think 20% or 30%. Let me -- before I answer it, we try to get a cheat sheet to help you here.

[Patrick Goris, SVP & CFO]

About 30%.

[David Gitlin, CEO & Chairman]

Yes, 30%.

[Patrick Goris, SVP & CFO]

Right, across all regions, basically. Actually, very strong double digits across all regions, North America, EMEA and China, all up over 20%.

[Operator]

Our next question comes from Tommy Moll with Stephens.

[Thomas Moll, Stephens Inc.]

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.

[Patrick Goris, SVP & CFO]

Yes, Tommy. So your understanding is correct. So we expect reported conversion to be between 20 and 25 and operational or core conversion to be in the high 20s. And the difference between the 2 is really FX, which is about a 4-point headwind for the full year on conversion. And then the Chigo acquisition, the first year with a lot of revenue and given some of the onetime costs, not a lot of earnings contribution yet.

And so that's really the walk between the low 20s and the high 20s from an earnings conversion point of view. And then, of course, what I'm not taking into account here is that as we raise price just to offset some input costs, that's somewhat of a headwind as well.

For next year, we're really not at a point where we can talk a lot about next year. What I can say is that, and I mentioned this before, we have a really strong focus within all 3 segments in ensuring that we take pricing actions now to offset any material cost and other inflation that we see in our businesses.

And so -- if we are successful doing that, and I'm very comfortable with that, then of course, we would expect an earnings conversion next year that would be in line what we do this year. The biggest driver, of course, will be what are the levels of organic growth. And that is not something we're ready to talk about at this point.

[Thomas Moll, Stephens Inc.]

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 sales people? 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?

[David Gitlin, CEO & Chairman]

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 really help 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 that goes 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.

[Operator]

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

[Andrew Obin, Bank of America Merrill Lynch]

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?

[David Gitlin, CEO & Chairman]

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's 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.

[Andrew Obin, Bank of America Merrill Lynch]

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 you think inflation goes away and we are back on track?

[Patrick Goris, SVP & CFO]

Andrew, what I would say is that in the current environment with higher input costs or in higher inflation, it really only enhances the focus on driving cost out throughout our supply chain, actually, within our ops organization, which was already very focused on driving our cost. We're just setting up a Tiger team, adding additional people to get incremental cost out. And frankly, in addition to that, it just enhances our focus on what we can do on the G&A side as well to get incremental costs out.

And so yes, Carrier 700 is a net number. But I would -- I'll be very clear to say this does not at all negatively influence our focus on it. We're more focused on it than before. Same thing within our manufacturing facilities, a lot of focus on what we can do there also from an automation point of view, given that, as is well documented, we're not the only company that has some challenges with some localized labor. And so I'd say we're comfortable there that the focus will continue.

[Operator]

Our next question comes from Jeff Hammond with KeyBanc.

[Jeffrey Hammond, KeyBanc Capital Markets]

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

[David Gitlin, CEO & Chairman]

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 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.

[Jeffrey Hammond, KeyBanc Capital Markets]

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.

[Patrick Goris, SVP & CFO]

Yes, the way we're thinking about this, first of all, we have capital available to us. I mentioned the cash on the balance sheet. We mentioned the proceeds. And so we will be focused on putting that capital to work in the best and most strategic way for us. And so think about -- we're looking at the next 12, 18 months that we're focused on redeploying capital. We're not going to get rushed into making any bad decisions or acquisitions that we will regret. But we think about a 12, 18 months' time frame to kind of make that up.

[Operator]

Our next question comes from Gautam Khanna with Cowen.

[Gautam Khanna, Cowen and Company]

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.

[David Gitlin, CEO & Chairman]

Yes. It would indicate that the life expectancy would be with the fact that units are running -- putting more cycles on them than previously, and I do think that they're running hotter too. So I do think there's clearly indications that the overall life expectancy in terms of the number of years is going to be shorter as you put more cycles on it in a shorter period of time.

So we're working internally to dimensionalize that better than we have in the past. So we're doing the data assessment on that. But I think anecdotally, I can tell you with high confidence that the life expectancy does seem to be coming down.

[Gautam Khanna, Cowen and Company]

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

[David Gitlin, CEO & Chairman]

I'm hesitant to say because when we do say it, I want to make sure that we've gone deep on the data assessment of that. Chris Nelson and Justin Keppy and the team are looking at that. And it really is critical not only so we can answer your question more specifically, but for our planning purposes, we actually -- we came into this year underestimating our demand, and that's driving a lot of -- we're doing a lot of hiring that we didn't anticipate doing.

So we need to get as precise on that answer for you and for ourselves as possible, but I'm hesitant to throw out a number on this call until we've gone deeper on it. But we will be coming back to you on that shortly.

[Gautam Khanna, Cowen and Company]

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.

[David Gitlin, CEO & Chairman]

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 well -- 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 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.

[Operator]

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

[Deane Dray, 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?

[Patrick Goris, SVP & CFO]

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, of course, I would say the -- what we call Tier 2 is playing a role as well. I think some of the component, the electronic components, particularly in our Fire & Security business, and we've seen that as well spot prices as well as some expedited trade. And so that's really the main driver.

[Deane Dray, RBC Capital Markets]

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

[Patrick Goris, SVP & CFO]

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

[David Gitlin, CEO & Chairman]

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.

[Deane Dray, RBC Capital Markets]

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

[David Gitlin, CEO & Chairman]

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

We've had it running in a K-12 school outside of Atlanta. We've gotten great feedback because as people come back to the office, as people go back into -- as people are going back into school in the spring, you can go into the school library and you have a dial that shows you that the air quality is good. And it gives you confidence as you go back into these indoor environment.

So I don't want to oversell like how many we've sold. What it is, is early phases. We've been working with the Atlanta Braves in Truist Park. We have it running in our corporate headquarters in Palm Beach Gardens, Florida.

We've had a number of customers, very high-profile customers coming through and really trying to understand it, understand how it works not only for the tenants, but for the building operator. And I think it's going to be transformative.

Early phases, as you said, from a differentiation perspective. It is open architecture. It interfaces with other control systems. So it's not a proprietary that will only work with our ALC controls business. And I think it's one of the key enablers to making the whole focus on healthy and sustainable buildings sticky over the long term.

[Patrick Goris, SVP & CFO]

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

[Operator]

Our next question comes from John Walsh with Credit Suisse.

[John Walsh, Crédit 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?

[Patrick Goris, SVP & CFO]

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..?

[David Gitlin, CEO & Chairman]

Yes. The only thing I'd add, John, is that at the end of the day, we control the controllables. So we are -- that third price increase, you saw it in resi, it's across the portfolio. There's really no part of our portfolio that has not been aggressive, not only announcing price increases, but realizing price increases.

And then on the cost side, Patrick said it earlier, but it's across everything that we can control, including G&A, and we've set up this Carrier business services to really have a picture of tetra model as we move stuff to low-cost centers of excellence on the G&A side.

We're being aggressive in the factories, aggressive on supply chain. Look, steel is very high. So we got to keep a close eye, I mean, $600 a ton up to 2000 in the United States. So clearly, we would hope and expect that starts to modulate a bit.

And then copper has been hovering. So we've been taking some blocking positions there. I think Patrick and I have become more aware of commodity pricing than we ever thought we would on a daily basis. But we're watching it, and we'll see how things continue to play out.

[John Walsh, Crédit Suisse]

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?

[David Gitlin, CEO & Chairman]

Yes. I think we're seeing -- and that's one of our biggest focus areas is modernizations and trying to proactively work with customers to replace systems before their end of life. And you can make a business case just on sustainability alone. If you look at the savings you can get and there are some government incentives. But as you move to more sustainable chillers then you can get very significant savings and also help customers hit their own ESG targets.

Our customers are no different than us that they've been very public about some form of carbon neutrality, many of them, and we're helping them not only get to their commitments, but help quantify for them how they're getting to their commitments by an early replacement of a chiller and it also ties into healthy. I think light commercial and applied customers are going to great lengths, many of them to put in more healthy solutions. So we're seeing some upselling in healthy solutions there as well.

[Operator]

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

[Josh Pokrzywinski, 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 they are on the more fully netted number, a little more positive?

[Patrick Goris, SVP & CFO]

Actually, Josh, it's a good question, and I recognize that sometimes it could be a little confusing. The way you can think about it is versus the prior guide Carrier 700, as I mentioned, is worse by $75 million. That's mostly input cost on the material side. In addition to that, which is not part of Carrier 700, we have additional plant inefficiencies, actually inefficiencies from last year from COVID that we thought would get better and they're not getting better or not -- they're not getting better to the extent that we expected. That's $25 million in addition to the $75 million. And then the other part of this $25 million of higher inbound freight costs, including air freight. That gets you to $125 million offset by the $125 million in price.

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

[Josh Pokrzywinski, Morgan Stanley]

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.

[David Gitlin, CEO & Chairman]

Go ahead.

[Patrick Goris, SVP & CFO]

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.

[Operator]

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.

[David Gitlin, CEO & Chairman]

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.

[Patrick Goris, SVP & CFO]

Thank you.

[Operator]

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