Sam Pearlstein - Vice President of Investor Relations David Gitlin - Chairman, Chief Executive Officer Patrick Goris - Chief Financial Officer

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

Thank you, and good morning, and welcome to Carrier's first quarter 2021 earnings conference call. With me here today are David Gitlin, Chairman and CEO; 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 non-recurring and/or non-operational 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 first quarter and discuss the full year 2021 outlook and we’ll leave time for questions at the end. Once the call is opened up for questions, we ask that you limit yourself to one question and one follow-up to give everyone the opportunity to participate. With that, I'd like to turn the call over to our Chairman and CEO, Dave Gitlin.

Thank you, Sam, and good morning everyone. Starting on slide two with an overview of the quarter. Q1 was a great quarter for us and an early indication that a global economic recovery is underway. Areas of our portfolio that have been performing well have continued to improve, and those businesses and verticals that were acutely impacted by the pandemic are showing early indications of recovery. Overall, volume came in stronger than we planned. Reported sales were up over 20%, including organic growth of 17% driven by another very strong quarter in North American Residential, which was up 50%. We also saw strong growth in commercial HVAC and transport refrigeration. All of our segments contributed to the organic growth in Q1 as the organization continued to execute well on our growth initiatives, including the aftermarket, which grew close to double digits. Notably, compared to the first quarter of 2019, we grew sales about 6% organically. This was coupled with strong order trends leading to a healthy backlog at the end of the quarter. Orders were up over 30% compared to last year driving the organic backlog up 13% sequentially and up close to 20% year-over-year. We produced $608 million of adjusted operating profit, up approximately 40% year-over-year. Given supply chain constraints, we are incurring some additional inflationary pressures and higher logistics costs and meeting customer demand. We are working to mitigate these headwinds through additional cost and pricing actions. Finally, I am encouraged by our free cash flow generation in the first quarter. Though we do not expect to regularly adjust guidance for the full year after just one quarter, we are increasing guidance on sales, earnings, and free cash flow given our stronger-than-expected Q1 results and confidence in the macro trends that we're seeing. We now expect reported sales to grow 7% to 10%, including a 2% tailwind from FX. We expect adjusted EPS to increase by about 20% at the midpoint, and we are increasing our projected free cash flow for the year by about $100 million to about $1.7 billion. Slide three shows the flywheel that I've used in prior earnings calls to explain how our key focus areas will drive shareholder value. In the upper left, we continue to ensure that we drive a performance culture. We are now one year into our journey as a standalone public company, and we are building momentum. We started off by putting a playbook in place, and a year later I can say that we are a fundamentally different company from our culture to our strategy, to our targeted investment prioritization, balance sheet, and capital position. Carrier 700 is the cornerstone of our unrelenting focus on cost reduction, and we achieved about $60 million in Q1 in a tough environment. Increased input costs are putting pressure on our $225 million target for the year, so we are driving additional cost and price actions to offset the unplanned headwind. Also core to our new culture is a focus on profitable growth. We are gaining traction on all three pillars of our growth strategy. We are gaining share across the portfolio helped by innovation arising from our increasing R&D spend from $400 million in 2019 to about $475 million this year, and an additional 600 sales and sales support people that we've added over the past nine months. Regarding aftermarket and digital offerings, we are gaining significant traction as we push our business models to focus more on recurring revenues. We are on track to deliver double-digit aftermarket growth this year, and we continue to expect a number of chillers under contract to increase from 50,000 to 60,000 this year. Increased service coverage and traction on our BluEdge offerings are enabled by our digital solutions that we are implementing across all of our segments. Lastly, we continue to take a very disciplined approach to capital allocation, which Patrick will cover. We also said that we would continue to invest in solutions for healthy, safe, and sustainable building and cold chain solutions and inorganic growth, both of which I'll discuss on slide four. In Q1, we had over $80 million of orders for healthy building products and services, and we currently have a global pipeline of sales opportunities of more than $500 million. We created a new healthy building solutions organization under Ajay Agrawal’s leadership with a seasoned team dedicated to this effort. We also introduced differentiated sought-after offerings, and we're energized by this week's release of our new digital offering called Abound. It is all about giving customers confidence to re-enter crowded indoor environments and providing a healthier indoor experience. Abound gathers performance data from different systems, sensors, and sources and presents it in a smart, simple interface. It gives a clear view of building systems and sensor performance data and identifies and helps to address anomalies. This solution is not a simple rebranding of digital offerings that we had in our portfolio. It is an open architecture SaaS, Coud-based platform and acts as an intelligent layer interfacing with not only our automated logic controls platform, but also with third-party building management systems and sensors throughout the building. We have had pilots under way with key vertical customers in the office building space, the educational sector, and the sports and entertainment vertical. Those have gone tremendously well. A huge vote of confidence is that we signed a deal to support the Atlanta Braves as they start to welcome fans back to Truist Park. Abound will monitor the indoor space covering a range of food and beverage locations and club spaces for guests. As a SaaS platform, Abound is expected to drive more recurring revenues, including subscription and services and also to help pull through additional Carrier equipment sales. We are seeing equally strong progress on our other key ecosystem of focus, healthy, safe, and sustainable cold chain solutions. Sensitech, our cargo monitoring business, had a record Q1 with sales up 16% due in large part to demand related to the distribution of COVID vaccines. Similar to Abound, a key differentiator is our cloud-based digital offering that we are building in partnership with AWS called Lynx. As a key launch customer, SeaCube recently selected the Lynx fleet solution to deliver enhanced digital capabilities for 2,000 refrigerated containers. And finally, on the right side of the chart, we highlight our inorganic growth progress. We were very pleased to announce our agreement to acquire Giwee, which we referred to by its brand name of CHIGO. This acquisition will help accelerate our growth in the attractive variable refrigerant flow and international light commercial markets, which have consistently had outsized growth rates over traditional markets. With the acquisition of CHIGO, we will own important VRF technology, design capabilities, and low-cost manufacturing that we can scale globally. We expect to close the transaction with a majority shareholder in 2Q, and we are excited to welcome the CHIGO team to the Carrier family. We also continued to add and promote superb talent as we lean into the deployment of the Carrier Way. As an example, we recently welcomed Jennifer Anderson to Carrier, leading corporate development strategy and serving as our Chief Sustainability Officer. She will help drive another key strategic focus ESG. ESG remains a very important focal point for Carrier as we work toward delivering on our 2030 commitments. We are tracking to our commitment of reducing our customers’ carbon emissions by more than one gigaton as we introduce more energy efficient and electric solutions. Last week Carrier improved to a top quartile score with Sustainalytics and we are now number five within the building products category out of 129 companies. And we also continue to make good progress on our D&I initiatives. Our number of diverse executives has increased significantly since 2015 and we are leaning in to making sustainable changes to ensure that we have a truly inclusive culture. With that, let me turn it over to Patrick.

Thank you, Dave, and good morning everyone. Please turn to Slide five. As Dave discussed, Q1 was a great start to the year. Sales of $4.7 billion were up 21% versus the prior year. Currency was a 4 point tailwind for sales in the quarter, about $150 million. On the top line, we saw a return to year-over-year organic growth in almost all of our businesses in Q1, and all three segments exceeded their organic growth expectations for the quarter. Organic sales growth of 17% was significantly better than we expected, and March was particularly strong across our businesses. Adjusted operating profit was up 39% compared to last year, and operating margin expanded 170 basis points. Strong sales growth and benefits from the Carrier 700 were partially offset by investments. Results also included some higher freight costs and a product trouble issue at a minority JV. Price/cost in the quarter was about neutral. Earnings conversion was better than the high teens I shared with you in February, driven by the stronger-than-expected sales performance. We delivered 21% conversion despite the one-time items we previously discussed; the loss of buyer related income, the impact of deferred and equity compensation, and lower conversion on currency. Excluding these items, conversion was about 30% in the quarter. Free cash flow of $131 million in the quarter mainly reflected better than expected net income and improved working capital performance. During the quarter we repurchased about 976,000 shares at an average cost of $38.40 per share. Let's now look at how the segments performed starting on Slide six. HVAC organic sales were up 25% in the quarter, driven by the 48% residential growth. Distributor movement was very strong at about 20%, and we believe there was some earlier than expected seasonal inventory build in the channel. Commercial HVAC sales were up in the mid-teens organically. Strong growth in applied and service more than offset continued lower volume in North America Light Commercial, which was down mid-single digits. Light Commercial order rates were up over 10% in the quarter and field inventory levels are down over 30% compared to last year, positioning this business for a strong Q2. The HVAC team expanded margins by 240 basis points driven by growth in residential and in services. The segment remains on track to generate about 16% margins this year. Over to refrigeration on slide seven. Sales were up 19% organically as the cyclical recovery in transport that we’ve seen in orders have started to materialize in sales. Transport refrigeration was up 22% in the quarter, driven by over 40% growth in container and truck and trailer recovery, particularly in Europe and Asia. North America truck and trailer grew high-single digits with each month improving. Commercial refrigeration grew low double digits as pent-up demand and re-openings in Europe drove strong growth. Margins were up 50 basis points in the quarter compared to last year. We continue to meet customer demand, but are incurring some higher costs to do so, including air freight. We expect operating margins to improve as growth in the higher margin North America truck trailer business accelerates. Flipping to slide eight, organic sales at the fire and security segment grew 3% and both the products and field businesses grew at similar rates. Within the products business, which represents about 60% of the segment sales, residential and commercial fire continued to be solid while access solutions in our industrial businesses remained challenging. Of note, the product business saw a significant pick up in the month of March, leading to a strong end of the quarter. Our field business Chubb generated organic sales growth of about 4%. The growth was largely driven by Europe and order rates were strong especially in Asia. As you can see on the slide, Chubb booked its largest installation order ever. Strong Carrier 700 performance helped drive a 220-basis-point margin improvement in this segment. Now, let me review the order activity we saw in the first quarter on slide nine. As you can see, our residential and light commercial businesses continued to see strong demand. Backlog in residential was up sequentially, and it's still up almost threefold compared to a year ago and puts us in a solid position for shipments entering Q2 and the cooling season. Commercial HVAC orders were up high teens compared to last year, and backlog increased over 10% compared to last quarter in that business. For refrigeration, order activity for the truck / trailer business continued to improve sequentially. North America truck / trailer orders were up well over 100% in the quarter, and Europe was up over 50%. Strong order intake and backlogs exiting Q1 should position the refrigeration segment to achieve closer to high teen’s organic sales growth for the year. Order intake for our fire and security segment also continued to improve sequentially. Product orders were up 5% year-over-year with a strong end to the quarter, especially in residential and commercial fire. Like prior quarters, industrial end markets and the hospitality vertical remained weak, but comparisons get better in Q2. Field orders were up about 15% organically as activity begins to pick up in Europe and against an easier Asia comp. Installation orders were solid, and we continue to have a record backlog. Let's walk through the EPS bridge on slide 10. As I mentioned, Q1 EPS of $0.48 was $0.13 higher than prior year, and the growth comes largely from operational performance as you can see on the bridge. Strong sales growth is the main driver here as well as Carrier 700 savings of about $60 million. Operational performance was also impacted by some of the headwinds I referred to earlier, including higher freight costs and the product trouble at a minority JV. While inflationary pressures continue, we're working to offset this through additional costs and pricing actions. We recently announced a second price increase in our residential HVAC business for June as well as an increase in transport refrigeration, and we're implementing similar actions in other areas of our portfolio. The loss of buyer-related income and the year-over-year impact of deferred and equity comp was about a $0.03 headwind in the quarter. All the other items on the bridge are pretty much in line with what we expected except for the favorable tax item, which will carry through the year. Let's move to slide 11, updated outlook. Based on stronger-than-expected Q1 performance and an improving outlook, we are increasing our organic sales outlook from a range of 4% to 6% to a new range of 5% to 8%. A bit less than 0.5 point of the incremental organic growth represents incremental pricing actions we already have or are taking to offset higher input costs. We continue to expect price/cost to be about neutral for the year. We expect our adjusted operating margin now could be a bit over 13.5%. The Q1 favorable discrete tax item means that our full year tax rate should now be around 24% rather than 25%. This all leads to an adjusted EPS outlook range of $1.95 to $2.05, a $0.10 improvement at the mid-point from our initial guidance. Our updated outlook does not include the CHIGO transaction. Finally, as Dave mentioned, we now expect free cash flow of about $1.7 billion. Slide 12 shows the bridge for the $0.10 improvement in our adjusted EPS outlook from the midpoint of our prior guidance to the midpoint of our current guidance range. The biggest driver is the operational conversion on the additional sales volume. Lower interest expense and the tax item are each adding about $0.02. Over to slide 13, where I’ll reiterate our capital allocation priorities for 2021. There are no changes to our priorities since the Q4 call, but you have started to see us execute on some of these items. During Q1, we paid down $500 million of long-term debt and with the transactions that have closed or have been announced to date, capital deployment on M&A will exceed $200 million this year. Last week, we declared a quarterly dividend, and our share repurchase we're making progress to work towards our target of 5 million shares this year. Before I turn it back to Dave, let me just reiterate that the volatile quarters in 2020 should continue to impact the comparisons in 2021. We still expect strong double-digit organic growth in the first half of 2021, and closer to flat in the second half given the residential comparisons. We expect about half of the full year earnings to be in the first half. So, a good start to the year puts us in a position to raise our full year outlook across the board. With that, I'll turn it back Dave.

Thanks Patrick. We are pleased with a very strong start to the year. Though much work remains to be done, we are confident in our raised guidance for the balance of the year. With that, we'll open this up for questions.

[Operator Instructions]. Our first question will come from the line of Julian Mitchell from Barclays. You may begin.

Hi, good morning.

Good morning.

Maybe I just wanted to circle back on the margin guidance, so you did a low 20s incremental margin all in, in Q1. It looks like the guide for the year maybe imbeds similar to that figure. So, I just wanted to understand, sort of as you look out over the balance of the year versus Q1, it sounds like price/cost isn’t very different from the first quarter, but refrigeration margins should improve. So, maybe help us understand some of the other moving parts around maybe the phasing of cost savings and investment spend over the remaining nine months.

Yes Julian, good morning, Patrick here. Maybe I’ll answer it as follows. Reported conversion in the first quarter is about 21%. For the full year, we expect reported conversion to be closer to 25%, adjust that for buyer and currency and the one-time items from last year, we get to 30% for the full year. We expect reported conversion to improve from here on out, and so in future quarters, we expect that conversion to improve from the 21% up, and for the full year as I mentioned closer to 25% earnings conversion reported, operationally closer to 30%. In terms of the investments, we did about 40 million in the first quarter. I think it will be pretty much evenly split throughout the year, and so I don't expect big swings from an investment point of view throughout the quarter. I think you also asked about the input costs compared to our prior guidance. You know, our prior guidance with several tens of millions of dollars of incremental headwinds from inflation and the current guide, that went up by another $70 million or so, so $70 million. And our current guide assumes that we're offsetting that with about $70 million of incremental pricing. And so, from a timing point of view, for the full year, price/costs will remain neutral. In the second quarter, that maybe the one quarter where price/cost is a little bit unfavorable.

Thank you very much. And then maybe secondly, just focusing on that refrigeration segment, the incrementals as you said were weighed down a little bit perhaps in the first quarter, some mix and supply chain issues, maybe help us understand how quickly those improve over the balance of the year in terms of getting that refrigeration incremental up.

Yes Julian. So, within refrigeration, which had a good sales growth quarter, the growth was as we said, particularly container, international truck and trailer commercial refrigeration. Those carry lower margins than our highest margin North American truck and trailer business. We expect North America truck and trailer would actually perform – was up high-single digits in Q1. We expect that growth to accelerate from here on out, and so for refrigeration we expect the earnings conversion to improve from here on out. We expect the margins to improve starting in Q2, and for the full year for that segment we expect segment margins to be about 14%.

Great, thank you.

Thanks Julian.

Our next question will come from the line of Andrew Obin from Bank of America. You may begin.

Yes, good morning.

Good morning, Andrew.

Just a question on the sales guidance and the organic increase. How should we think about the impact of recent price increases because the scope of price increases that we saw, I think in March was I think 5%, 7% across the industry in resi and applied, and it seems that most of them will become effective in May and June. So, how do you incorporate that in your outlook?

Yes Andy, so we have announced price increases throughout our businesses. The timing of which and the exact yield of that, of course is always a little bit different than the actual announced price increase. The way you can think about this is, of the 1.5 point increase in organic growth for the full year at the midpoint, so going from 5% organic growth to 6.5% organic growth at the midpoint, a little less than half of that relates to incremental pricing. That gives you, give or take, $70 million of incremental pricing that we’ve assumed in our current guidance, which offsets the $70 million incremental headwind on input costs that I referred to earlier. The balance of the increase in organic growth for the full year is really in HVAC, both resi and commercial, some of that of course includes that price and in transport refrigeration. Those are the areas where we've really pushed up our outlook for the year in terms of organic growth.

That was a great answer, thank you. And the second question I have for you, with the recent stimulus bill, I think you guys have highlighted – [indiscernible] has highlighted, we’ve heard it from other folks. You know, a lot of money is going to schools, I think something to the tune of $67 billion a year for the next three years. I think the last stimulus, 70% of this money ended up being spending on capital projects, right. There’s this designation that it should go for air quality improvement, HVAC system improvement. When we talk to the folks in the industry, people have a really hard time getting their hands around what it actually means. You know, I know that it hasn't been too long, but do you guys have a framework of how to think about the impact of this money in the school vertical (a) this year, and what does it mean for demand for HVAC refurbishment upgrades over the next two years. Thank you. A - David Gitlin: Well, Andy we think it's significant. You look at the $1.9 trillion stimulus package, $130 billion of that went toward school reopening, and then if you look at the President's new proposed infrastructure bill, the American Jobs Plan, it includes an additional $100 billion for schools. So how and when that gets spent will remain to be seen. Obviously, it needs to flow from the federal to the state to the local school districts, but it's significant because The GAO had a report that said 40% of the school districts have insufficient HVAC. So, when you look at that potential $230 billion of spend, we think a material amount of that will go towards upgrading the HVAC systems, because it's long overdue and it's needed. K-12 is an important part of our business. It represents about 10% of our sales in North America in applied in light commercial. We’ve come out with a very targeted kit offering, which makes it easy for the 16,000 school districts across the country to make a selection and move quickly to implement it. We have a dedicated sales team. We have innovative solutions that we've now come forward with things like Abound and our OptiClean solutions, and we also think it's important because these are sustainable solutions. So, how it plays out this year and next, you will have to see the specifics, but we do think this will provide us with multi-year tail end for our HVAC business. Operator, can we have the next question – [Cross Talk] oh! Sorry. Go ahead Andy.

Our next question will come from the line of Josh Pokrzywinski from Morgan Stanley. You may begin.

Hey, good morning guys. A - David Gitlin: Hey Josh!

Okay, so maybe just first question on residential. You know you mentioned the strong sell-in’s – you know sell-through still good, but not quite as high, backlog still high, so maybe that the channel was still low, but how are you thinking about 2Q here? Can you guys match sell out in 2Q or is inventory for your distributors brimming to the point where maybe they need to de-stock a little bit? A - David Gitlin: Well, 2Q Josh still feels strong. You know, we came in with a nice backlog into 2Q. We do think that it's going to be hard to track quarter-to-quarter. You almost have to step back and look at the full year. I think what we're going to see is normal growth rates for the year with abnormal calendarization. So, what we saw in the first quarter was sales up 50%, and what we're looking at for the first half is sales probably up around 35% in the first half, and then given the very difficult compare, given the strength we have in the second half of last year, the second half is probably down closer to 20%. So, we're raising – we had originally thought the year would be low-to-mid single digits. It's clearly looking like it's in the mid-single-digit range for the year, which is not an abnormal kind of year. What's really encouraging is that movement was very strong in the first quarter. It was up over 20% and movements continue to be strong here in 2Q. Now, the inventory levels as you said, they are higher than normal. They are at 30% year-over-year, but having said that, if movement continues to stay at the pace that we've been seeing it, we think that we would end Q2 inventory levels probably 10% to 15% higher than 2019, which is the better compare, which is not completely abnormal. Housing starts continued to be very strong. They'll be up 11%, 12% this year, and we're seeing continued pent up demand, and a lot of the strength we saw or at least a material amount of strength we saw in the first quarter was furnaces, which would not really indicate for a lot of pre-stocking and inventory. So look, we're going to have to keep an eye on it of course, because you know third quarter was up 50, fourth quarter up 25, this quarter up 50. While we continue to take share, we continue to support our customers, we continue to see strong movement, so we feel well positioned certainly in 2Q, and then we'll have to see how the rest of the year plays out.

That was helpful. And then I guess just thinking on Carrier 700 and you guys are in the midst of a pretty substantial transformation across the board, including in trying to build out a service organization. I think that comes at a point in time where maybe there’s some bottlenecks out there, whether it's finding new suppliers for sourcing initiatives, hiring folks, training them up. Anything that you're seeing out there that you know maybe kicking some of those initiatives to the right, simply because it's hard to onboard new suppliers, new technicians, you know whatever it is across the board. A - David Gitlin: No Josh. Those are not – I mean look, there's challenges on Carrier 700, but it is not driven by the ones you mentioned. Clearly, we're seeing inflationary headwinds coming our way. Commodities, we're seeing some headwind there. Of course, input costs from our tier one, tier two suppliers, we have to manage that. Logistics remain a challenge, and frankly we have to manage productivity because there are some labor shortages in places like our Collierville, Tennessee factory where we're in the process of hiring a few hundred people there, and we got to keep up with not only the short term demand, but the sustained demand that we see coming over the coming quarters. So, there's challenges out there, and I'm really proud of the operations team. I think they are managing it best-in-class, but it's certainly not without its challenges. But I think the things you mentioned were actually try to get out in front, and one of the things that I think has helped us is that as we saw this demand coming, we actually pre-stocked some inventory. Patrick and I authorized a bit of inventory in December and then in January to make sure that we had parts that we were going to need, some buffer stock in the face of a lot of the demand influx that we were anticipating.

Got it. Good call on that. I appreciate the color. I’ll get back in line. A - David Gitlin: Thank you.

Our next question will come from the line of Nigel Coe from Wolfe Research. You may begin.

Thanks. Good morning everyone. A - David Gitlin: Good morning, Nigel.

Hey! So, the commercial HVAC growth of mid-teens wouldn't have been something we would have probably guessed coming into the quarter, and that’s with like commercial down mid-single digits in the U.S. So, I am just wondering can you probably just dig in to the next level in terms of the moving pieces you know within that mid-teens. And then you talked about light commercial accelerating in 2Q on a much, much easier comp. Maybe just talk about how you see commercial evolving over the balance of the year? Thanks. A - David Gitlin: Sure. Let me start on the applied side. You know, we were very pleased with that mid-teen growth we saw on the commercial applied side. Obviously, China had some easy compares with sales up there. Sales in China were up over 100%. We were pleased with the growth in Europe. Europe was up in the mid-teen range. North American equipment was a watch item. We did have a couple of very short-term issues in one of our factories that probably is a short-term issue, so we'll catch up with that here in 2Q. So. North American equipment for us was actually down a bit, and the aftermarket in North America was up double digits. So, I think the North American equipment is poised for a nice recovery, especially when you look at the ABI, the Architectural Billing Index. You know, we looked at 11 months below 50, and it got as low as 29, but now we've been above 50, and in March, it was at 55, which is a very, very good level. So, of course, a big leading indicator of commercial construction activity, so we're very encouraged about what we're seeing in the applied space in North America, and especially in the verticals like data centers and warehouses, education, which I mentioned on the stimulus package and then healthcare, so – and we continue to lean into aftermarket growth, which we anticipate will be up double digits and the backlog is strong. Light commercial, it was down a bit. You know it sequentially improved from the fourth quarter. So, every quarter, light commercial has been getting better, but as restaurants and retail start to open up, we're very encouraged by what we're seeing with order trends. So, it's really set up for nice growth. We were thinking that light commercial would be up mid-single digits. It's probably going to be up around 10% this year, and what we're seeing in light commercial is strong order trends. We're seeing improved backlogs. I mean, it’s not a – it’s obviously a very easy compare, but the backlog is up 100%, and what's really encouraging is field inventory levels are down. They are down about 35%. So, it's set up for a nice rebound as we get into 2Q and beyond.

Amazing, amazing, thanks for that great detail. And then on CHIGO acquisition, congratulations on putting in the VRF whitespace, but what’s the plan? Are you going to globalize that product and bring it to the U.S. and then how does the CHIGO fit in with Toshiba, your relationship with Toshiba. Thanks. A - David Gitlin: Yeah, we look at CHIGO as a first step of many. You know, you look at the entire VRF space and international light commercial. We see that as a $25 billion market in 2025, and the reality is if you look back in 2015, VRF, I mentioned this in the prepared remarks, but VRF was half the size of the traditional chiller market, and now they're about the same size, so you can imagine the CAGR for VRF is exponentially higher than some of the other markets, and the issue that we had is we really did not – we didn't have design capabilities and we were not really a manufacturer, and that's not what we are as an OEM, we’re not a distributor. So, this was one of the few but important plays that we could make to become a design and manufacturing VRF player with a great operation there outside of Guangzhou in China. So very, very pleased. It gets us to become a more meaningful player. We've been clear that we do have partnerships with folks like Toshiba, with Midea that we're very proud of. I mean these go back decades, and they are great partners. Are there opportunities to more optimize those into win-win relationships? We frankly believe that there are, and we’re in very constructive discussions with those partners, but we see the CHIGO acquisition enabling that to not only be a player for China, but for it to being a global player.

Thanks David. A - David Gitlin: Thank you.

The next question will come from the line of Jeff Sprague from Vertical Research. You may begin.

Thank you. Good morning everyone. A - David Gitlin: Good morning Mr. Sprague.

Yeah, I've gotten two Spragues this earnings season. It’s like my Italian roots are coming through at the back [ph]. A lot to cover. I just would – I’d be interested in maybe just Dave circling back to kind of the Healthy Buildings, the dynamic. Can you just elaborate a little bit more on how you're actually kind of defining that, because you know does that pipeline mean it’s kind of around the Abound opportunity or just kind of flush it out a little bit for us, how you would differentiate the pipeline there versus what you're seeing kind of maybe in the core business? A - David Gitlin: Yeah Jeff, the way we try to -- we try to take a very strict and disciplined definition, which is these are sales that we would not have gotten prior to the focus on really Healthy Buildings. So, a lot of the IAQ-type offerings that really became much more prevalent when the pandemic hit, we really put that in the healthy building $500 million pipeline that I talked about. So, examples would include OptiClean, you know we have orders for more than 30,000 OptiClean units, and we put that in the Healthy Building category. When we sell upgrades that are really driven by filtration or UV lights, we put that in there, and you know we're really, really excited about the new Abound offering. You know Bobby George and the team have been working on this with almost a skunk works type group over the last six months or so to come out with a differentiated digital offering and that will be a big enabler for Healthy Buildings, because what it'll do is it'll make it visible to the end consumer, how safe and healthy is the indoor environment. You know, we think about it like an Intel Inside strategy, where you start to have end consumers ask for certain chips in their PCs. What we're going to see is certain consumers having expectations that before they make a restaurant reservation or go into a commercial office building or come back into crowded indoor spaces, they're going to have an expectation that they can see the health of the indoor environment, and that the building manager is taking steps to mitigate any anomalies with that, and that’s exactly what Abound will enable, so we will put Abound subscription sales in the Healthy Building category as well.

Yeah, well that was the second part of my question. You talked a little bit about chiller service attachment, which maybe kind of part of this equation, but are you seeing a different kind of service attachment rate with these offerings, and I guess you kind of alluded to even some new evolving business models there. Maybe just a little more color on that.

We anticipate so Jeff, but it's too early to say. I mean we really – we've been working for the last few months in the first quarter on pilot projects with a commercial office building. We were very excited with the Atlanta Braves and welcoming - as they welcome fans back to Truist Park. That was a really profound win for us that we are excited about. We worked with a school, a K-12 school outside of Atlanta as well. So, we've really been proving out the technology. We made it an official offering earlier this week. So, it's too early to say in specific response to your question, but it's clearly – we have this tiered BluEdge offering, and we believe Abound will drive more of recurring revenue through subscription sales, but also pull through more LTAs and more of our elite BluEdge offerings and equipment sales.

Right, thanks. I’ll pass the call.

Thank you.

Our next question will come from the line of Deane Dray from RBC Capital Markets. You may begin.

Hey, good morning everyone.

Good morning, Deane.

I just want to follow up on Jeff’s line of questions there, just to clarify the definition of the indoor air quality. Is all the school upgrades of the HVAC systems because that is a COVID-related concern and probably would not have had the kind of focus had there not been the pandemic? Are you including that in the indoor air quality opportunity?

No, we’ll base it more on the offering that we provide as opposed to the driver behind it. So, if we go to a school district and what ends up happening is it's a much more kind of an energy efficient play, which is what we do all the time, and the modernization is more around energy efficiency. We probably would not put it in that healthy building category, but if the offering is driven by the underlying premise of driving more healthy and safe indoor environments, yes, we would put those in.

Okay, good. So, that's helpful in terms of framing what's in that indoor air quality pocket. A - David Gitlin: Yes.

And then the second question is, I know it's relatively small, but it did get called out. Is this operational issue at a minority-owned JV? Just if you could flesh out what the issue was? Does it broadly put the spotlight on Carrier’s portfolio of minority JVs, and what's the approach and time frame to address that, you know the number of them there and how might that get rationalized?

Well, on the second part your question Deane, yes, I mean one of our big themes for Carrier since we spun has been focus and simplification. So, if you think about our JV portfolio, we started with 40 minority JVs, and we’ll end this year closer to 32. So, we have been taking a very clinical approach to reducing the number of JVs for various reasons. There are some that really pose risk, but not a lot of value to the overall business. So we have reduced some of those, and then there are some that we still have that we are in discussions to, you know, reframe them a bit, especially if it's in a very strategic area for us, and we're not consolidating sales or EBIT, that's an area that we're in discussions with our partners on. With respect to the specific product issue that was in one of our minority JVs, I wish I could say that in things we control we've never had our own product issues, so you know we're not disparaging the JV because of that one issue, but it does highlight that we do want to have more controls in place in some of our critically strategic areas.

Okay, thank you.

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

I appreciate it. Thank you.

Our next question will come from the line of Joe Ritchie from Goldman Sachs. You may begin.

Yes, thank you. Good morning everybody.

Good morning Joe.

Since we are on the topic of Healthy Buildings, I may as well ask the question as well. So, it seems like you've grown your opportunity. I think you highlighted 500 -- $500 million this quarter, I think it was $200 million last quarter. But it seems also like the opportunity is pretty broad based. Is there any commentary around like where you're really seeing the uptick, and then also $500 million probably isn't the stopping point? I guess how you're thinking about the addressable opportunity for you guys?

Well, we think Joe that the opportunity you know is significant, and it is, it's broad based across a number of verticals. So, clearly education, K-12 is a key focus area, but even universities. We've been in discussions with universities as they look at -- they are very – they have a very broad footprint at most of the universities in the United States, but globally as well. Healthcare and hospital is a key focus area for us as well. Commercial office buildings, as people reimagine the future of work and various models there, they do want to make sure that as people come back into the office to providing a safe indoor environment. Stadiums, you know I mentioned the deal with the Braves, but we are optimistic that that would be the first of other deals we would do. So, anywhere where you have kind of people in a somewhat crowded indoor environment, there are starting to be more discussions. I had dinner with a friend who owns restaurants a couple of weeks ago, and he wants to add OptiClean units for his various restaurants, so we're seeing a lot of interest. You know the question we get a lot is going to be how sticky is it. We know that sustainability is a sticky theme. In healthy, once the pandemic is more under control globally, will Healthy Building be a thing of the past, and I think that especially when you think about our Abound offering, that is one of the keys to really making sure that this is a sticky trend for years to come. Because what it's taught us is that COVID isn't the first airborne transmitted disease and it won't be the last, and people are much more in tune with having safe indoor environment. So, to make it visible to them and then how do you ultimately use AI and ML [ph] to anticipate and correct any deficiencies with indoor environments, I do think this is a trend that will withstand the test of time.

That’s helpful color Dave, thanks. And then maybe my follow-on for Patrick. I mean you gave a lot of details around the guidance for the year. I guess if I try to look, it looks like slightly differently. The first quarter came in much better than expected at the segment level, I think about $100 million better. The guidance for the full year only kind of implies like maybe even half of that at the segment level. And so, I guess I’m just trying to understand like the conservatism that's baked into the rest of the year versus like what you expect from incremental headwinds for the rest of the year.

I think Joe, the way you can look at it is, as always one element is within residential HVAC. We mentioned that some of the strength we've seen, we believe could have been some of the acceleration of the seasonal inventory build. So, that would not necessarily change the full year outlook for resi, although we did raise resi a little bit for the year, but not as much as the [indiscernible]. The second element, this is for fire and security, we saw a very strong end to the quarter in March, and so it's a quick turn business. We have not updated our full year outlook for that segment at this point, and so would take another card there. In terms of profitability, full year as I said $70 million more price, offsetting $70 million more of headwind, and then a little bit more volume leverage from what we raised. We did dial in a little bit more of the air freight costs as well for the full year. So that's kind of the – a little bit more detail and color around the full year outlook.

Got it. Thanks Patrick. I appreciate it.

Thank you, Joe.

Our next question will come from the line of Jeff Hammond from KeyBanc. You may begin.

Hey, good morning guys.

Good morning, Jeff.

Just a clarification on North America applied, how much of that was the watch item more of the supply issue versus kind of demand still being choppy there.

No, it had nothing really. We did -- as we transferred over on 3PL and we made it, we had a couple of issues as we did that. So, it was a very short-term issue which is now behind us.

Okay, and then any supply chain issues leaking into the transport piece. We've heard a lot about just truck, but anything you are seeing in transport.

Yes, I mean the supply chain issues are fairly broad based. I mean there are electron – there are electronic issues, there are raw material issues, even things like resins that we put into our injection molding process. We have to work with a couple of key tier one suppliers in our transport refrigeration business that are key watch items. So I think the team is managing it well, but there are some things that the team is having to do. In some cases, air freight over ocean which we would have done in the past, so it's not without its cost and challenges, but just like the rest of the portfolio, I'm really, really proud of how the team is working with the supply chain to manage them, but there are certainly issues that the team is battling every day.

Jeff, we are meeting customer demand. We are just having a little bit more input costs in doing so, including freight.

Okay, great. And then if I could just sneak one more in. Maybe just you know we are kind of through a lot of the pandemic, reopening, demand seems to be inflecting here. And just beyond, maybe just the minority interest stakes, how are you thinking about portfolio reshaping at a bigger level in some of the businesses that maybe don't fit longer term? Thanks.

Well look, we said that we would take a very clinical and structured review of our existing portfolio, and I can assure you that we started that on day one and that's something that will continue forever. So, we continue to look at every aspect of our portfolio and put it through a rigorous set of lenses to determine, is it the right kind of area for us to invest and improver or is it worth more in the hands of someone else and we would use those proceeds to invest elsewhere? So we continue to look at all aspects of our current portfolio. We are very, very energized by the playbook we have in place. We have great confidence as does our Board in our strategic roadmap. We have our three pillars of growth funded by Carrier 700. We have these two big ecosystems we are focused on, you know healthy, safe, and sustainable building and cold chain solutions, so we'll continue to look at rounding out those portfolios. We put our toe in the water with a bolt-on M&A with CHIGO, and we’ll look at -- obviously we're looking at others as we go forward. And then we of course know there's more transformational opportunities out there in the portfolio, but we're really energized by our ability to execute on the strategic road map that we have in front of us.

Okay, fair enough, well thank guys.

Thank you.

Our next question will come from the line of Steve Tusa from JPMorgan. You may begin.

Hey guys, good morning.

Hey Steve.

What was price and cost in the quarter for you guys?

It was about neutral, Steve.

And the actual price capture?

A little bit it – well, less than a point. In the quarter itself, it actually was – in the quarter, in Q1 itself, it was less than 0.5 point. For the full year, it will be a little less than 1 point for the total company.

Yeah, okay, got it. And you were neutral on commods [ph], okay. When you talk to the channel, and I know we kind of talked to your channel as well, obviously. But when you talk to others in the channel, maybe outside of Watsco, what are they saying about what’s actually happening on the ground. The sell-through is pretty good. Is there a little bit of catch up from people not be able to get product last year, so they kind of scheduled it for the spring? I mean what’s -- what are you hearing from like some of your key contractor customers?

Well, what we hear from really both our distributors and our contractors is that demand is strong. That it’s real demand and that they're pushing for the right mix from us so they can support the customers. Obviously, new construction continues to be extremely strong, and then what you're seeing is we had anticipated that in previous downcycles what you would have seen is more repair over replacement. We actually haven't seen any of that. We've actually seen a lot more replacement of entire units, entire condensing units or entire systems, and I think it's because -- partly because there's more stay-at-home, and partly because there's more liquidity in this down cycle than we saw in previous. So, people are prioritizing the spend they have on their homes, and we're also seeing people buy a lot of new homes and often when you buy a new home, one of the things you do in your inspection is look at the HVAC system, so that's probably driving some of it. But what we're hearing, we were actually on the phone recently last week with a key distributor down in the Texas area, and they said that they're very encouraged by what they're seeing from their contractors. They are encouraged by Carrier’s ability. It's not that we haven't had our hiccups, but our ability to support them and I think that's helped some of the share gains that we've seen, and we'll have to see. Obviously, there's inventory out there in the channel, but we'll have to see. If movement can continue to be north of 20%, then it’s an encouraging sign.

And you mentioned share gains, would you at the margin given everybody else’s kind of raising price dramatically, I mean would you at the margin make targeted efforts with price to allow distribution to kind of go after some share in local markets selectively?

We’ve been consistent on a price that I think others have announced. We came in with a price increase coming into the year. We announced for resi up to 7% increase in June, so look, there’s clearly inflationary pressures on there on our side, and we really have no choice but to raise prices, not only in resi, but across the portfolio and I think customers expect it. So, we'll be doing that, and I think it seems like from what I've read from our peers that that's an industry wide phenomenon.

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

No.

Okay, great. Thanks a lot.

Thank you.

Thank you, Steve.

Our next question will come from the line of Gautam Khanna from Cowen. You may begin.

Yes, thanks, good morning.

Good morning.

I want to ask about the competitive environment. You know last year, we had a couple resi competitors that couldn't produce to meet the – you know [inaudible] for example. Lennox mentioned on their call that they've seen some issues among resi competitors as well, and I was curious are you guys seeing that; and if so, kind of how is that manifested in your orders if there's any way to quantify it.

Yeah look, we will never comment on a competitor. We have a tremendous amount of respect for our competition, and I think we all go through various challenges during different times. So, I think that we are all experiencing various challenges. I think our operations team has gone a great length to support our customers, and I think that because we did pre-stock some inventory anticipating the ramp, I think that’s helped us. I know our team has been working around the clock to support operationally. We’ve tried to be very strategic with our supply chain and our own operations to have some level of redundancy, so if there is an issue in one place, we can ramp up somewhere else. So, we are not by any means flawless. We have our challenges, but I do think the operational performance has helped us pick up a bit of share along the way.

Thanks.

Thank you. And that’s all the time we have for questions and answers today. I like to turn the call back over to speakers for any closing remarks.

Okay, well thank you. Thank you everyone for joining. Clearly, we are very energized by the first quarter and what we see in our performance and some of the macro trends, so we are energized by the quarter and what lies ahead, and we encourage you to please reach out to Sam with any follow-up questions. Thank you, all.

This concludes today's program. You may now disconnect.