Good morning, and welcome to Carrier's Third 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.

Thank you, and good morning, and welcome to Carrier's third quarter 2021 earnings conference call. 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 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 third quarter and discuss the full-year 2021 outlook. We'll leave time for questions at the end. Once the call is opened up for questions, we ask that you limit yourself to one question and one follow-up to give everyone the opportunity to participate. With that, I'd like to turn the call over to our Chairman and CEO, Dave Gitlin.

Thank you, Sam, and good morning, everyone. I'll start with a summary of our Q3 results on Slide 2. Q3 was another strong quarter for us, particularly in light of the widespread supply chain challenges. Our growth continues to benefit from our ability to leverage broad economic momentum, our position at the epicenter of important secular trends, and our strategic investments and execution on our growth initiatives. Demand and orders remain encouraging. We are experiencing record backlogs, positioning us well for continued growth in Q4 and 2022. Our key challenge remains operational, both in mitigating the continued inflationary headwind and supporting customer demand. I will provide more details on the next slide, but I want to thank our team who has been working tirelessly to support our customers and I also want to thank our customers and suppliers who continue to partner with us as we address these issues. You see the efforts of the team reflected in our Q3 results. Organic sales were up 4% over Q3 of last year and up 7% over Q3 of 2019. Adjusted EPS of $0.71 was better than we anticipated, helped by a lower tax rate. Given the rising input cost headwinds, we have been aggressive on price and controllable costs while preserving investments critical to differentiation and growth. Our HVAC team more effectively manage price cost and that was reflected in a segment margin of 19.1%. Our fire and security team also reacted aggressively, but it is our business that is most impacted by chip shortages. The refrigeration story is mixed. While the segment drove solid 14% organic growth and continued to gain traction on strategic initiatives, we did not react aggressively enough on both price and costs, resulting in disappointing segment margins. I am confident that Tim and the team are…

Thank you, Dave. And good morning, everyone. I'll start with comments about the quarter and provide details on our outlook. Please turn to Slide 7. As expected, the results were very similar to Q2. Price realization was better-than-expected, but that was offset by higher-than-expected input costs. All segments were on track to over-deliver on top-line growth, but increasing supply chain constraints impacted availability and lead to shipment delays, and contributed to record backlogs. Sales of $5.3 billion were up about 7% compared to last year. Currency was 1-point tailwind for sales in the quarter and acquisitions, mainly GE added another two points of growth. Given the unusually strong residential HVAC performance last year, this quarter had a more challenging comparison. Nonetheless, we delivered organic sales growth of 4%. Adjusted operating margin of 16.1% was down about 120 basis points compared to last year but was up about a 100 basis points from the second quarter on lower sales. The year-over-year margin decline was impacted by the absence of last year's cost containment activities. As expected, price cost was modestly negative in the quarter. I'll address our outlook for the balance of the year with respect to price and costs in a few slides but I'll share that we plan additional pricing actions to offset rising inflationary pressures throughout our supply chain. Some of these price increases were announced earlier this week, including up to double-digit price increases in our residential and light commercial HVAC businesses in North America. Fire & Security and Refrigeration are also planning additional price increases. Free cash flow was $505 million in the quarter and $1.1 billion through 9 months. Inventories are higher than expected as we incur shipping delays given component shortages. Last year, Q3 benefited from timing around payables which did not recur this…

Thanks, Patrick. We are very pleased with our performance as we are now 3 quarters of the way through 2021, and we remain confident in our team's ability to navigate supply chain challenges to support our customers and drive continued results in the fourth quarter and beyond. With that, we'll open this up for questions.

And thank you. [Operator instructions] And our first question is going to come from Andrew Obin from Bank of America. Your line is now open.

Yes. Good morning. Can you hear me?

Yeah, Andy. Good morning.

Yeah. Good morning. Just a question on just sort of philosophical approach to Carrier 700 in this inflationary environment, right, because you're actually are putting numbers, but sort of the optics of it seems like you're missing your targets despite the fact that your pricing is very, very strong. So how do you guys think about maybe changing the framework here to change incentives, right? Because clearly, it seems that this plan was designed for low inflation/deflationary environment and we're in a very, very different world. What are the thoughts? What are the management and the Board thoughts about it?

Yeah, Andrew, thanks. And let me start and Patrick and add. You're absolutely right. Carrier 700 is an all-in number. And what happened last year is that it was such a unique year where you had some one-time cost takeouts that we were doing with furloughs and other things and some one-time benefits we were doing seizing on the productivity side. And it got a bit tortured as we went through last year into this year, which is what we're seeing as sort of inflationary pressures that we haven't seen in a few decades. So, what we've really fixated on as an organization is doing everything we can to make sure that we are price-cost positive, which means aggressively pricing as much as we can, and also being -- controlling the controllables on all things that are related to cost. So, we are doing a lot with Carrier Alliance, we're driving productivity, we're managing commodities as best we can. So our focus as an organization is doing everything we can to make sure that in this very unique environment, we stay price cost positive. So we still mentioned where the Carrier 700 number is to make sure that we didn't lose that thread. But as we go into next year, obviously, Chubb will be gone, which will form a bit of a reset, and then we have to kind of step back and look at where we are. The underlying principle of Carrier 700 and having 56,000 people around the world focused every day on making sure that we control -- everything we can control on the cost side is still there and it will never stop. What we'll do in our February 22nd Investor Day is kind of give some context on where that is to reframe it going forward. But the underlying D&A of cost takeout will always be a part of Carrier.

Thank you. And then just a question about thinking about connection between orders and sales into next year, because I think this year has been very different in terms of how long the sales season was, right, the strength of the orders to comps. So how should we think about what the existing backlog and order rates in September, October? What's the early indication for 2022, given how unusual '21 was, specifically on HVAC?

Yes. I think if you look broadly, Andrew, the backlog almost across the portfolio is at record highs. So we feel very, very good about where we are in terms of our order, our sales forecast for the rest of this year. And as we start thinking about next year, we're more booked now for early next year than we normally would be at this time, given the record backlogs. If you think about our residential backlogs, we're up 40% in terms of our backlog sequentially, we're up 70% year-over-year. So, we're at very high level of bookings. Our challenge is making sure that we continue to keep up with the demand, but we feel very, very encouraged by our backlog positions pretty much across the portfolio.

Thank you very much.

Thank you.

And thank you. And our next question comes from Deane Dray from RBC Capital Markets. Your line is now open.

Thank you. Good morning, everyone.

Good morning, Deane.

Hey, I’d like to start with light commercial HVAC that 40%-plus orders really does standout. Just talk about the drivers, how much of this might be catch-up? Is it easy COVID comps, but is it part of an underlying rebound in non-resi construction? That'd be helpful. Thanks.

Well – yes, I mean, clearly the comps are a bit easy compared to last year, but there's just a lot of strength. What we had said when we were forecasting like commercial coming into this year, as we reminded people that it's 80% replacement, 20% new. So there was a lot of pent-up demand coming out of last year. Some of the key verticals that have been strong all year continue to be strong. We see a lot of demand in places like warehouse. K-12 has been extremely encouraging. We have a whole dedicated focus on making sure that we support that vertical. Retail restaurants are coming back online and we gained share. It looks to us like we gained 300 basis points of share year-to-date in light commercial. And I think part of that is driven by our ability to support the customer. It hasn't been without input cost pressures, but we've gone to great lengths to make sure that we can support our customers. So, when you look at all the different variables, order is up more than 40% year-over-year, when we look at the quarter. Field inventory is down significantly, which bodes well for the future. Our backlog is up sequentially. It's up almost 3x over 2020 and movement from our distributors into our end-customer base remains in the double-digit range. And we just announced a price increase of up to 12%. So, a lot to like in light commercial.

Got it. And then as a follow-up, can you comment on China? It looked like HVAC was a bit better, but it certainly overall, you bear more pressures and just give us a sense of what the demand is, any operating conditions that you would comment on?

China orders for HVAC were up in that mid-single-digit range. The rest of the portfolio did see some orders challenges. So the one watch area, given the Evergrande attention would have been commercial HVAC and what we're still seeing there is some orders tailwinds. I think -- look, the good news is that China is a very strategic important market for us. It's 8% of our sales and we continue over the long-term to lean into China. We want to be in China for China. And it's a very strategic market for us over the long-term. If you look at the Evergrande situation, that seems to be most acutely impacted in some of the Tier 3, Tier 4 cities focused on multi-family residential, which is for us is a very, very small percent of Carrier sales. It's probably 0.5% of our sales that specific area. So, I think we're well [Technical Difficulty] and well calibrated on some of those issues. Overall, when you look at China, real estate is a very important part of China. So, I do think the government is going to be incentivized to support that industry, the overall real estate industry. But we feel overall very well-positioned in China.

That's real helpful. Thank you.

Thank you.

Thank you. And our next question comes from Julian Mitchell from Barclays. Your line is now open.

Hi, good morning. Just wanted to focus on the HVAC segment and just a bit more clarity on your outlook for a residential HVAC in North America. I think you'd mentioned the sales are down very slightly in Q3, the orders down a little bit more. Maybe help us understand how you're thinking about that business for the next couple of quarters, how comfortable you feel with the inventory levels in the distribution channel, and the degree of your concerns around any sort of major step down in that market coming up?

Well, Julian Residential HVAC in North America continues to be encouraging for us. We did say that, Resi was down a couple of percent in the quarter, which was less than what we thought. We had previously thought it would be down in the 5% to 10% range. What it really means for us is that the second half is going to end up being probably up low single-digits and we previously thought the second half for us was going to be down 5 to 10. The good news is that movement continues to be positive. Field inventories, Patrick mentioned sequentially was actually down 7% versus Q2 and even splits are down versus prior year. And our backlog, as I mentioned to Andrew, is up significantly over the last quarter and even more significantly over previous years. Look, when we look at orders, there's some -- going to be some tough comps in the third quarter. We look at October, orders continued to be strong and all the underlying fundamentals with new housing starts this year is in the +13% range year-over-year. I think for the home builders there's going to be some push out into next year given some of the supply chain challenges that they and like the rest of us are seeing. But the work from home phenomenon units having a slightly shorter life. A lot of those underlying factors continue to give us some confidence as we go into next year. So, when we get into February, we will give more specificity. But for right now, a lot of the underlying factors that have been supporting the demand continue.

Thanks. And then just my second question.

I apologize, Julian. And look what it means for the full year is that we had said that we thought resi was going to be up low teens. We're now looking at it being up high teens. I know that it does naturally when you are in that range trigger questions about comps. But again, the -- and we 'll be very cognizant. We work extremely closely with our distributors to keep inventory levels in balance with them. But I think as we go in the next year, a lot of those encouraging signs that have been supporting us continue to be there.

That's great. And then maybe on refrigeration, you'd called out sluggish price increase and that helped drive that disappointing margin performance. Maybe help us understand how quickly you think you can catch up on that price cost aspects and in particular, how you're managing in transport refrigeration, where you've got extremely volatile orders and builds numbers in the market right now.

Yeah, Julian, Patrick here. So first of all, there are good things happening within that segment. So, you noticed the very strong sales growth, double-digit growth in transport, CCR, commercial refrigeration was about flat. But as we mentioned, the margin performance is disappointing given the strong sales growth. And so, focus in that segment now is a closer, a better control on the cost side, but also and I would say especially being more aggressive and timelier on price increases. You mentioned that we have significant backlogs there. Those started at the end of last year that has given us somewhat limited ability to pass on pricing. but that is changing now. And so, as that window opens up, and as we take on orders for next year, we are ensuring that one, the process for these orders are higher, and two, that we retain the flexibility for these orders to adjust pricing if raw material prices change. And so, it's a significant focus for Tim White and the team.

Perfect. Thanks.

Thanks, Julian.

And thank you. And our next one, next question comes from Nigel Coe from Wolfe Research. Your line is now open.

Thanks, good morning.

Good morning.

Interesting times. So very strong performance in light commercial plus 14% revenue, and obviously, very strong orders. We haven't got a whole lot of detail on the market right now. But when you compare that, it had a much weaker trends, the supply chain. I'm just wondering if there was some share shift around the quarter. Any context there would be good. And then within applied, that seems to be a little bit weaker than the first half run rate. Maybe I'm wrong there, but any color on applied trends by market.

When we look at Light Commercial, it's hard to look at share in just a quarter, but year-to-date, we do think that we've gained 300 bips of share. So that can swing, of course. We're not spiking any balls, but we do think that we've gained share in Light Commercial. It's a very core strategic market for us and we continue -- we will continue to lean in with new products and working with our distributor base and really making sure that that's a market that we go aggressively after. With commercial HVAC, look, there's a lot of encouraging signs there as well. ABI it's been higher than the architectural billing index. It's been higher than 50 now for 8 consecutive months. Patrick mentioned that overall, we were up mid-single-digits. North America was in line with that. Europe was a bit higher. China was a bit higher. Orders were up over 10% for commercial HVAC. And a really important thing for us is we really like our ALC controls business. That was up very strong. Those sales were up in the high-teens, high-margin, very differentiated, important business. And aftermarket has been very thematic for us and we grew double digits there. We're encouraged by commercial HVAC. Overall, when you look at just equipment applied orders, those were up 15%. our key focus for HVAC, like the rest of the portfolio, keep driving orders and then turn the world upside down to make sure we can deliver.

Thanks, Dave. And then on the residential, what kind of reaction are you getting from pricing pieces? How much of that headline price increase do you think will stick? And as we go into next year, what price increase? Well, are you planning another pricing? So, assume you offer Jan 1, and what kind of price premises or price range do you think will stick for 2022? And is that enough to offset the [Indiscernible] in patient?

I think the short answer is yes, we announced actually earlier this week that we would have a price increase effective January 1 of up to 10% for resi. We're seeing realization in the range of 6% last quarter. We probably will see about the same number this quarter, which is higher than historical price realization. These conversations are always difficult, the earlier question on transport, but we have to have these direct discussions with our direct and end customers because of the inflationary pressures we're seeing. So, we're very encouraged by the price stickiness we've seen this year. I would say the resi business has been the most effective within Carrier at ensuring that we try to stay out in front on these prices -- price increases. And I think that will bode well for us as we go into next year.

Great, thanks very much.

Thanks, Nigel.

Thank you. And our next question comes from Josh Pokrzywinski, from Morgan Stanley.

Yes. Can you hear me?

Yes.

Yes.

Great. Thanks for taking the question. Yeah, I guess so. First question, Patrick, you were probably one of the earlier ones out there in the industrial talking about the reset or wrapped around inflation into the first quarter of next year that you have contracts and other kind of locked in buys that will reset. Do you feel like you have enough price out there right now as we flip over the line into '22 to cover that in the first quarter? It sounds like you're okay in 4Q, but you've already made mentioned that that'll mechanically go higher sequentially.

Josh, good morning. I'll talk about our current thoughts about 2022 rather than being quarter-specific. But for planning purposes, we're actually including additional price increases to address the continued input cost headwinds, and the hedges that are rolling off from which we benefited last year. As Dave mentioned, just in HVAC this week, we've announced price increases of up to 12% in residential and light commercial. I think it is safe to say that we're assuming input cost headwinds next year that exceeded the $375 million we're seeing this year. And so, I think Dave mentioned in his comments that total headwinds this year are above $375 million input costs. So, we expect it to be more than that next year. If I look at the carryover of the pricing actions that we have taken this year. The carryover is about 350 to $400 million that excludes the additional price increases that we've announced this week in that -- for RESI and light commercial and excludes additional price increases that we will be announcing and implementing in the remainder of our businesses. And so, from an overall perspective, our goal remains for 2022 to be at least price cost neutral. Of course, we want to do better than that. But the key takeaway for our team is in this environment, we need to be very agile and be able to react quickly on what input costs are doing.

Got it. That's helpful. And then on the commercial business, Dave, appreciate the commentary on the earlier question there. I guess orders earlier in the year were pretty strong. I get comps are a factor. Anything that would've held back the quarter delivery-wise or order-wise, like a project getting pushed out or supply chain making delivery a little tougher. Just wondering how we square up the order commentary with the sales growth this quarter.

Yeah Josh, we do continue to see some supply chain challenges affecting some of the output. I would say that if you look at our Charlotte facility, which does a lot of the production for our Commercial HVAC business here in North America, we had some initial issues about a year ago that we then address. And just as we were coming out of those 3PL related type issues, we then ran into a bunch of supply chain issues. So, our sales could have clearly been higher in the quarter if we didn't have that. We're working closely with our customers to make sure that they know what they're going to get when, but order's strong, it's one of the factories that we would expect to start to recover as the supply chain issues from their tier-1 start to recover.

That is helpful. Thanks, guys. Best of luck.

Thank you.

Thank you, Josh.

And thank you. And our next question come from Joe Ritchie, from Goldman Sachs. Your line is now open.

Thanks. Good morning, everyone.

Hey, Joe.

Good morning, Joe.

I know we've talked a lot about price cost and touched on Carrier 700, but just to make sure we've got this straight for next year, Carrier 700 hasn't included the pricing increases. And so, is the way to think about the benefits we should expect next year, I think is being somewhat below the 225 I think that we were originally expecting but more than offset by these pricing increases that you're taking through the rest of your organization?

Yeah, I think, Joe, that the easiest way to think about this is a debt from a price -- overall price cost point of view. And that explains some of the pricing actions we announced this week and we 'll be announcing over the coming weeks. Their intention is to be neutral in worst-case. And so -- and that would include anything we do in the Carrier 700. And as Dave mentioned earlier in this first question -- the first question from Andrew is, however, we measure Carrier 700 gross or net, the most important thing is that the entire organization is focused on continuously to drive out costs and driving efficiencies to help offset any input cost increases, such as merit or inflation. And enabled us, of course, to continue to invest in our business long term.

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

Got it. That's helpful. And I guess the other question is clearly with Chubb coming out, you're going to have some proceeds to put capital to use, just any updated thoughts on your priorities for use of cash and offsetting some of the dilution associated with Chubb next year.

Yes, Joe, I would say very completely consistent what we mentioned in the last quarter. Our first priority, fund organic growth, then to fund inorganic growth, a -- then funding a growing and sustainable dividend, and then returning cash through shareholders through share repurchase. What we mentioned the last quarter with the proceeds, one, we expect to pay down about $750 million of debt that's prorated from a capital structure point-of-view with the EBITDA we lose from Chubb. But we've also said last quarter, we announced a share repurchase authorization of about $1.75 billion. We still expect to buy about 10 million shares this year. And with that, would leave us at the end of this year, will leave us with about $1.6 billion of authorization remaining at the end of this calendar year. And what we've said from a repurchase point-of-view, is that we would redeploy this over 12 to 18 months so would share repurchases. So that gives you an idea of the sequence for the share repurchases. But of course, as I mentioned, priority number 1, its funding growth, including inorganic growth. And obviously, we have significant capital that we can put to work. And that's why we have the growing pipeline of acquisitions. We've made some acquisitions this year. We covered them in some of the slides. But there are some acquisitions that are a little bit larger in size in the pipeline as well. And so, we're working hard on getting some of these onboard.

[Indiscernible], anything?

Very helpful, thank you.

Thank you.

Thank you. And our next question comes from Tommy Moll from Stephens. Your line is now open.

Good morning and thanks for taking my questions.

Hey, Tommy.

Appreciate all the commentary around price cost, Carrier 700, etc. If we boil it all down for 2022, is high 20s still a fair aspiration to think about for a core conversion. And then if you think about, sometimes we talk about core operational versus what's actually going to be reported in the P&L. Any big delta between those two that you would want to make sure to point out for folks, obviously, the Chubb divestiture would be one, but anything else you want to make sure to point out today?

Yes, Tommy Patrick here. I understand there lots of moving pieces and conversion. And this year, particularly what's playing an important role is one, some of the acquisitions we've made that in year one, don't contribute. I get us much earnings two the impact of currency and then of course, an important element this year is the whole price cost dynamic, where we're adding this year pricing of well over $300 million for the full year. Yet that is not falling through the bottom line. Of course, it has a negative impact on our conversion number. That being said, for next year, and I'm going to exclude any significant changes in mix because we don't want to get into that good or bad. But from an operational point of view, we absolutely would still target earnings conversion and at the high 20% to above 30% range. Depending on what we do on the acquisition side, depending on price costs, that might be slightly different. But operationally, that's absolutely something that we target and work towards. No change.

Great. Thank you, Patrick.

Thanks, Tom.

Dave, I wanted to follow up, a big picture question here. You've moved quickly as a pure play on a lot of fronts. I'm curious, what's the body of big body of work that remains in front of you maybe for next year just in terms of changes you envision making to the business with that pure-play flexibility? G&A transformation or process improvement is one area that comes to mind. But what are some of the big priorities in your mind at this point?

Tommy, we continue to stick with the playbook that we laid out at our February 10th, Investor Day of last year. We said that we would invest in growth. And this year, despite all the input cost challenges, we're going to continue to invest a 150 million in growth along the lines of our three pillars of growth. Continue to grow the core and continue to look at adjacencies like VRF and geographic expansion like you saw with caveats and then continue to really lean into recurring revenues aftermarket digital. We're in the first ending on that journey. We have a long way to go with our aftermarket growth and recurring revenues, and that will be very thematic for us. certainly, going into next year and for years to come. We said that we would be super aggressive on costs and despite the fact that the Carrier 700 number itself is what it is, the focus on costs within the organization. G&A transformation is a major theme for us. We've set up these global centers of excellence. We're going to be pushing more and more work into these low-cost centers of excellence, more G&A reductions. Simplification across the portfolio that will continue to be. And we've gone from 10 billion of net debt when we spun to now will end it after we sell Chubb to closer to 4 billion of net debt. So, our ability to play offense in organic and inorganic growth, is in a great place. So, we'll continue to look at where we can really complement our existing portfolio to play off. And so, we like our playbook, we like our focus. What we have to do is now transitioned from doing what we said we were going to do, to doing best-in-class in everything we do. And that's going to be our focus in '22 and beyond.

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

Thanks Tommy.

Thank you. And our next question comes from Steve Tusa from JP Morgan. Your line is now open.

Hi, Mr. Tusa.

I understand getting Josh wrong. But [Indiscernible]

Yes.

So just on the realized price in the quarter, what -- was that for total [Indiscernible] on an absolute basis?

You can think of pricing, Steve, about a $125 million in Q3, significantly better than Q2, growing to about 150 in Q4. And so, from a price realization point-of-view, you'll recall because you asked me the question, and after Q1, we started from less than half a point. In Q2, we're above 2 points, give or take, and in Q4, will be between 3% and 4% of overall Company price realization. We're seeing it pick up, but, of course, we've been at -- trailing a little bit of the input cost increases. But in Q4, we do expect price cost to be neutral --

Right.

-- so, it is clearly picking up.

And I had RESI around 65, $70 million of that.

Do we -- can think about RESI for both Q3 and Q4, about 6% realized. We did that in Q3, we expect the same in Q4. I don't know the exact dollar amount, but that's what we realized in RESI. Steve.

Okay, that makes a lot of sense. And then just try to parse this out a little more for -- to follow up on Joe's question. I mean, there was a pretty big number next year of carryover cost savings, if you will, in couple $100 million, at least. Are you now saying that's like -- that's not -- because of everything that's happened, it's still kind of a cultural mission statement, Carrier 700? But as far as the bridge is concerned, it's kind of been blown up by a lot of this stuff and that we just really shouldn't dial in that kind of -- those kinds of savings for thinking about a mechanical bridge for next year?

Yeah. Let me start and then Patrick can give some more specificity. We have really tried to be as specific as we can on what's the pricing costs we're seeing by quarter and will give it in that color next year. Carrier 700 when you see the input costs we're seeing, it did change. When it costs 10 times as much to get a container out of China into the U.S, when we're buying chips on the spot market, there have been some clear inflationary pressures that have affected the overall Carrier 700. Having said that, if you were to step foot in this building, you would see an entire war room focus on commodity management with our suppliers. You would see productivity being rolled out across the world. So, we will give specificity on cost carryover, inflationary pressures going into next year, and how we're going to offset that at a minimum with price -- again, like Patrick said, being price-cost positive is our clear intent. But the Carrier 700 number itself is lower this year than what we thought. Patrick, do you want to add to that?

Yes. I think, Steve, our -- we still intend to drive cost out next year compared to this year. That has not changed. And so, all those equal, we would expect our earnings conversion next year to be better than this year.

That makes -- that makes a lot of sense. Just a follow-up on that. All these kinds of like -- you said, you're going to more sources like dual-sourcing, etc. I guess in a stable environment that can lead to better margin because your kind of playing them against each other. My guess is, when you are dual-sourcing in this environment, it's actually, that's kind of like structurally higher costs you are trading off higher costs for availability. Is that being that the right way to look at it?

Go ahead.

Actually. Because there are shortages of some of the components, we do have to go to sources that otherwise, we would not have gone. And so that's one of the reasons why today we are incurring some higher costs just because our normal sources have some constraints as well. Some of the increases we see this year are associated with that but clearly, in a more stable environment, having more dual-sourcing should help from a cost point of view.

Right.

Yes. I would add Steve that, look, there is an investment when we say we've gone from, say, a million automation hours to 3 million this year on our way to 6 million, that's an investment. But what happens is that really starts to pay back when you look at the investment is set up dual sources, there's an investment. But when we get hopefully, towards the second half of next year as you get out there, then you have more supply demand imbalance and then we will feel much better about our ability to get back on the year over year cost reduction numbers that we're used to seeing.

Got it. And then sorry, a quick 1, Sam going to kill me. I did not myself believe anything on the table though. The 150 in investments, how much of that is like rebates to distribution or stuff like that, that you're investing in installed base if you will, in commercial or resi or something like that. How much of that is that kind of activity versus like R&D and pure sales dollars of hiring people and things?

For this year it's nothing.

Okay. Got it. Okay. Thanks. Appreciate it.

Fine.

Thank you. And our next question comes from Vlad Bystricky from Citigroup. Your line is now open.

Morning guys.

Good morning.

Giving Josh a run for his money there with that pronunciation. Thanks for taking my question. We've covered a lot of ground here, obviously. Just going back to labor. Obviously, labor availability seems to be a growing issue and we've now seen some labor actions in the U.S. in terms of strike activity. So, can you talk about what you're seeing in terms of wage inflation and labor availability in general. And then more broadly, how you're thinking about labor relations overall and the risk of potential disruptions.

Yeah Vlad, we are -- to set the stage, we have 80% of our people outside the U.S. And I would say the real labor challenges we have are at a couple of our sites in the U.S. And we have very close relationships with our union partners. And what we've -- in some areas in the U.S, we've had rage wages a bit and we've also put in place some bonus structures for output. But we stay very, very close with our, our union partners here and we feel confident that we continue to create the right environment where people want to work here, then we'll manage that.

Okay. That's helpful. And I think it makes a lot of sense around the incentives for production showed -- seems like it's helping with the results. Just following up, I think back to last year, I think you've added 600 or so sales people. Now that we're approaching the end of '21 and they've been onboard for a while, can you talk about what you've seen from those incremental resources in terms of them ramping sales productivity and just more broadly, how you're thinking about the sales force positioning today whether you see opportunity to continue to add incremental talent and resources there?

We're very pleased with the results of the additional sales folks that we've added. We've been very targeted where we've added them. We've been very focused in certain areas in North America and in China where we've added salespeople. We've seen very good additional sales. Look, we came in the year thinking that we were going to grow 5%. And after all is said and done, we're going to end up growing organically by 13%. And our investments in sales people and things like digital R and D, that's all contributing. So that's -- we felt we were underrepresented on the sales side. We've added the -- I think the right number, and we did say that our total investment starts to modulate a bit as we go into next year, we're going to end up with 50 additional investments. Clearly, salespeople take some years -- takes some time to pay back, but we look at it -- internally, we measure it on selling as a percentage of our gross margin, but pleased with the investment and the payback.

Great, that's helpful. Thanks, guys.

Thank you.

I t hink we're out of time.

And that was our last question. I'd now like to turn the call back over to Dave for closing remark.

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

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