Q1 2020 Earnings Call
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Welcome to Johnson controls first quarter 2020 earnings call.
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I will now turn the call over <unk> Franzen.
President and Chief Investor Relations and Communications Officer.
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Good morning, and thank you for joining our conference call to discuss Johnson controls first quarter fiscal 2020 result.
Press release, and all related tables issued earlier this morning as well the conference call Slide presentation can be found on the Investor Relations portion of our web site at Johnson controls dotcom.
With me today, our Johnson controls Chairman and Chief Executive Officer, George Oliver and our Vice Chairman and Chief Financial Officer, Brian steep.
Before we begin I'd like to remind you that during the course of today's call, we will be providing certain forward looking information.
We ask that you review today's press release and lead through the forward looking cautionary informational statements that we've included there.
In addition, we will use certain non-GAAP measures in our discussion and we ask that you read through the sections of our press release that address the use of these items.
In discussing our results during the call references to adjusted EBITDA, and adjusted EBIT margin exclude restructuring and integration costs as well as other special items.
These metrics are non-GAAP measures and are reconciled in the schedule attached to our press release and in the appendix to the presentation posted on our website.
Additionally, all comparisons to the prior year or on a continuing ops basis, excluding the result of power solutions.
GAAP earnings per share from continuing operations attributable to Johnston controlled ordinary shareholders was 21 cents for the quarter and included a net charge of 19 cents related to special items, which Brian will address in his comments.
Excluding these special items non-GAAP adjusted diluted earnings per share from continuing operations, what's 40 cents per share compared to 26 cents in the prior year quarter.
Now, let me turn the call over to George.
Hi, it's rational and good morning, everyone. Thank you for joining us on todays call.
Before we get into the details of the quarter I would like to provide a few thoughts as we look ahead to the rest of fiscal 2020.
Starting on slide three.
We continue to see good momentum across the majority of our key performance metrics.
Q1, providing a strong start to the year.
We saw a 70 basis points of margin expansion this quarter.
This resulted from a reduction in structural costs improved project execution accelerated service growth expense expansion in gross margins and driving innovation.
All of these initiatives will remain key focal points for us as we go forward.
We've also made significant progress in improving our cash generation profile with important steps towards better management of our trade working capital and continued discipline around capex spending.
We sold more work to do to bring free cash conversion up to 100% on a sustainable basis.
I am extremely pleased with the progress we have made to date.
As we will discuss on the next slide orders were flat in the quarter.
I am confident given the continued strength, we see in our pipeline.
We'll see acceleration in Q2.
Our primary end markets commercial H. back building controls fire and security remains healthy we are well positioned as leaders in each market.
We have significantly strengthened our balance sheet over the course last nine months with ample flexibility when it comes to future capital deployment opportunities.
Finally, as I've said many times on these calls over the last couple of years.
We remain intently focused on execution.
And building a strong performance culture to drive sustained performance and maximize shareholder value.
Turning to some of the details for the quarter, starting with orders on slide four.
What is for our appeal businesses were flat in aggregate in Q1.
As we faced tough prior year comparisons given the timing of announced price increases.
Last year or announced price increases were effective in January which resulted in a pull forward into Q1 fiscal 19.
This year, we accelerated our announced price increases to be effective in October which resulted in a pull forward into late fiscal 19.
Looking forward, our order pipeline remains robust with an attractive mix of service and a balanced profile of small and large projects.
We expect order growth in Q2 to be in the mid single digit range. We remain very confident in our low to mid single digit growth target for the full year.
Backlog ended the quarter at $9 billion up 6% organically versus the prior year end up 2% on a quarter sequential basis, which provides high visibility through 2020.
Turning now to slide five for a quick recap of the financial results in the quarter.
Sales of $5.6 billion increased 3% on an organic basis.
Within the field businesses total service revenues grew 3% in the quarter on top of mid single digit growth in the prior year.
Our service business represents over $6 billion in revenues.
Or little more than 40% of our appealed revenue base and provides us with a very profitable resilient revenue stream.
That's growing and expanding our service offering has been a key priority. We recently appointed a dedicated global services.
Good afternoon, Ramaswami joined the team from Danaher and will drive improved consistency of fundamentals across our global direct channel.
Leverage our infrastructure investments and work closely with regional leaders to execute on our strategic priorities.
With the strength in depth of our portfolio, we have a tremendous opportunity to strengthen our core service business, while building in deploying new service solutions, leveraging our digital capabilities.
Adjusted EBITDA of $448 million grew 13% on an organic basis.
Driven by solid 7% growth in segment profit and a continued focus on reducing corporate expense.
Overall underlying EBIT margins expanded 80 basis points year over year, excluding a 10 basis point headwind from FX.
Adjusted EPS of 40 cents increased 54% over the prior year with solid operational performance and a significant contribution from the deployment of proceeds related to the power solution sale.
Adjusted free cash was an outflow of under $100 million in the quarter.
In line with our normal seasonal pattern, but a significant improvement over the last two years.
With that I will turn it over to Brian to discuss our performance in more detail.
Thanks, George and good morning, everyone. So let's get started with the looked at our year over year EPS Bridge on slide six you can see that operational performance, including synergies and productivity save contributed six cents.
Deployment of the power solutions proceeds benefit both our year over year share count and its financing charges, which added six cents a three cents respectively.
Our net items in the first quarter roughly a penny.
This results in our first quarter adjusted EPS of 40 cents up 54% year on year.
So let's move to slide seven and looked at our segment results on a consolidated basis.
Sales of 5.6 billion increase 3% organically led by 4% growth in our field businesses and 2% level products.
Segment EBITDA of 625 million grew 7% organically driven by volume leverage from the feel strong price cost realization in our products businesses and continued productivity saving cost synergies.
Lastly, Q1 segment EBITDA margin expanded 40 basis points to 11.2%.
If you looked at the margin waterfall underlying operational improvement contributed 50 basis points and this included a 10 basis point headwind related to our retail business in North America.
This was partially offset by 10 bips related to other items in the quarter.
Now, let's take a look at each segment in more detail so starting on slide eight North America.
North American sales grew 3% organically.
Sales growth in both install and service activity.
Growth was led by fire and security, which grew mid single digits in the quarter led by higher install activity.
Our applied H., Frac and control businesses increased low single digits in the quarter, given the double digit growth in equipment last year.
Performance solutions declined low double digits this quarter due primarily to a tough prior year compare of over 30%.
As we expected adjusted EBITDA increased 2% an EBITDA margin was in line with the prior year at 12%.
Favorable volume leverage and benefits from synergy and productivity savings were offset by a 30 basis point headwind related to our retail business.
And as we mentioned on our Q4 call. We expected to see continued margin headwind in retail given the change in mix to increase project revenue.
Orders declined in the quarters. George mentioned this was primarily due to the timing of price increases and are applied HVAC business, which did provide a three percentage point headwind.
We expected to start the year off a bit slower North America. So we're confident that orders will accelerate in mid single digit range in Q2, given current pipeline activity.
Backlog in North America remains strong at 5.8 billion up 7% year over year.
Turning to a meal on slide nine sales grew 7% organically with install up 10% and service up 5%.
Growth was positive across all regions and across eight track and controls fire and security and industrial refrigeration.
Right, but I can control business grew high single digits helped in part by easier prior year compare but also benefiting from order strength in the back half of 2019 for shorter cycle controls business.
Growth was particularly strong in Europe , which increased low double digits and in the middle East, which was a soft spot through fiscal 19.
A mid single digit growth.
Fire and security grew mid single digits with solid growth across both installing service activity and in all regions led by mid teens growth in our subscriber business in Latin America.
Industrial refrigeration, which is predominantly in Europe remains a bright spot in the region. It was up high teens in the quarter was solid growth in both install in service.
Adjusted EBITDA increased 21%, an EBITDA margin expanded 120 basis points to 9.7%.
We continue to benefit from favorable volume leverage as well as our continued efforts around reducing structural costs and improving project execution in this business.
Our orders in EMEA increased 4%. This was led by continued strength in our control platform, particularly in Latin America.
What was in Europe were up slightly on a tough prior year compare.
Backlog ended the quarter at 1.7 billion up 8% year on year.
So let's move to slide 10 in April .
Our sales grew 3% organically led by higher demand for project installations, which grew 5% in the quarter.
Fire and security, which as you know represents about 30% of apex sales soft instant continued strength up low single digits overall.
Hey, tracking controls, which represents remained 70% of apex sales was relatively flat year over year.
Adjusted EBITDA increased 8% margins up 60 basis points to 11.4%.
Favorable volume leverage productivity in synergy save improved execution.
Partially offset by a higher mix of installed versus service in the quarter.
Asia Pac orders were up 1% against a tough 9% per year compare.
Insistent with the trend we've seen over the last several quarters.
Backlog in Asia Pac increased 2% year over year to 1.6.
I just point out the environment in Asia Pac remains competitive and economic conditions in some areas remain uncertain.
We continue to experience macro related headwinds and some of our key markets in Asia, including the ongoing trade dispute now the Columbia virus, which are overhangs in China as well as the ongoing unrest in Hong Kong.
That being said when you're seeing nice improvement in the underlying fundamentals in our apex businesses, but we are monitoring the situation is very closely.
So, let's turn to slide 11 global products.
Product sales in the quarter increased 2% organically driven primarily by strong price realization.
We saw Vms sales grow high single digits in this quarter, despite a low double digits compare to prior year.
Led by strength of security products business.
Hey track in refrigeration equivalent was flat with mixed performance across the individual platforms.
I'd also point out that.
We have recently restructured our distribution channels in Canada to allow us to better serve the residential and light commercial markets and to accelerate our growth.
Toll roads GH bass declined low single digits, driven by a high single digit decline in our a pack residential business as well as a mid single digit decline in our North American business.
Let me go through that.
More detail so as we detailed for you last quarter, we expected continued pressure in our APEC residential business, primarily due to the softer market conditions in Japan.
Our North American business was negatively impacted in the quarter by the Canadian distribution restructuring I mentioned previously and as well as lower than expected shipments in our furnace business due to lower heating degree days in the quarter.
Given the low double digit prior year compare we expect this weakness to continue into the second quarter.
Light commercial unitary grew low single digits on a low teens prior year compare with sales in North America flat due to weakness in our national accounts business.
Our Vrs business continues to outperform growing mid single digits War applied HVAC equipment declined mid single digits, primarily due to the pressures in April .
We continue to see very strong demand for replacement shop Chillers in North America.
I our equipment grew mid single digits in the quarter helped by a relatively easy prior year compare.
Finally specialty products grew low single digits on solid demand for fire suppression products, particularly in North America.
Product segments.
EBITDA increased 6% and the EBITDA margin expanded 40 basis points as the under absorption on lower volumes was more than offset by positive price costs and the ongoing benefit of cost synergies and productivity.
So let's move to slide 12, and corporate expense corporate expense was down 13% year over year to $81 million driven primarily by the continued benefits of synergy and productivity save as well as our ongoing actions to reduce our cost structure given the power solutions divestiture.
On slide 13 free cash flow reported Q1 free cash flow was just under $400 million.
Excluding a little more than 100 million, a onetime cash outflows related to integration.
And the 600 million dollar tax refund that we received in the quarter adjusted free cash was an outflow of less than $100 million, which is 100 million dollar improvement versus last year.
This was primarily due to continued improvement in working capital management as we saw a trade working capital as a percentage of sales declined 60 basis points.
We continue to expect adjusted free cash flow conversion of 95%, excluding the $300 million and onetime cash outflows related primarily integration and the 600 million tax refund.
So let me turn of the balance sheet on slide 14, net debt was up slightly as we continue to deploy cash towards share repurchases. Despite Q1, being our seasonally weak cash generation quarter.
You can see share repurchases in the quarter was 650 million roughly in line with the cadence that we expect for the full year.
Before I turn it back to George was closing remarks, I want to briefly mentioned a couple items on slide 15.
First during the quarter, we recorded a restructuring impairment charge of $111 million about half of that is cash in about half of that is non cash and cash impact to that we'll expect to see in the current year and is included in our guidance.
The cash restructuring charge reflects costs associated with the final year of the JCR Tyco merger integration activities as well as the ongoing reduction in costs related to the power solutions divestiture.
Secondly in quarter, we recorded a non cash stock charge of $30 million related to Swiss tax reform.
This will not impact our 13.5% rate for the year.
And then lastly, we also adopted a new accounting standard related to operating leases, which results in a gross up of other noncurrent assets and other current to Noncurrent liabilities.
And our balance sheet. So overall, we're off to a great start in fiscal 20 with strong earnings and cash flow and improving margins with that I'll turn it back what what's yours.
Thanks, Brian before we open up the line for questions I, just want to reiterate that we continue to expect our fiscal 2020 earnings per share before special items to be the range of $2.50 to $2.60, which represents earnings growth of 28% to 33%.
We have included the full details of our guidance as previously provided in the appendix slides.
Our first quarter reflects results reflect a strong start to the fiscal year and a continued commitment to solid execution into improving the underlying fundamentals of our business I'm confident that we are well positioned to deliver continued long term shareholder value.
With that operator, please open up the lines for questions.
Thank you Sir.
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First question is from Nigel Coe.
[music].
Mr. Cowen Your line is open.
Thanks, Good morning, guys.
All right.
Just.
The nice margin trends in the Asia Pac and you May Latin America segments.
You got some challenges, especially in Asia Pacific do you feel like you now and a better position going forward.
Based on the backlog and on the mix kind of outlook do you expect to continue to see sort of margin leadership from those two segments.
Nigel we've we've made really nice progress as Brian talked about within the margin structure within Asia Pac.
With growth being in low single digits. We worked this this quarter, we delivered 60 basis points year on year and that's also with the unfavorable mix with our install growth growing pessimists service.
But I think the the fundamentals the way that were pricing the way that we're selling value all of that is playing out.
Then the structure.
We believe that now with the fundamentals were going to continue to improve on a go forward basis.
I would just to add to that that in 2018, Nigel as you probably recall, we took a restructuring charge.
Charge in some of that related to our European businesses and I think we're really seeing the benefit in 19 now in the 20 of the.
Our results as some of those actions taken in 2018.
Great. Thank you and then my follow up is.
Your comments on the residential Hvdc markets.
We all know it's quite a warm winter but.
They will answer that but.
The the comments on can to John's into Q is that's more a function of the some of the restructuring you doing in Canada.
Oh is that affects them or the market.
No what I, what I would say, it's both when you look at our performance here in Q1.
It's been mainly globally were down a bit and lot of that's driven by our performance or the market in Japan, which were down in line with the March and.
Market in Japan in North America, it's been it's been too when you look at the overall furnace market were extremely strong in that space in that market is down kind of high single digits and right now that's continuing and when you look at our restructuring of our Canadian just distribution channels what we've.
Done as we've taken multiple channels, we've consolidated debt and now we're going to be expanding our points of distribution to be able to effectively now will be much better positioned to accelerate growth in that region that is all playing out here in the first and second quarter will be positioned in the second half to be able to pick up from a growth standpoint from there.
Thanks, George Thanks Bye.
Thank you for your question. Our next question from Jeff Sprague with vertical research, Sir Mr. Sprague Your line is open.
Thank you good morning, everyone and thanks for pulling your call up to the kind of accommodate all of us I appreciate that.
On the George on the on the price kind of pull forward on orders, we normally think of that being potentially kind of a residential phenomenon, but not something that would kind of.
Impact the larger company given the nature of kind of applied in commercial projects, you just kind of speak to.
How broadly.
Timing of orders might've been affected by pricing and you're kind of visibility on on on Q2 orders.
Yeah, I mean, we bought historically, we've had our price increases in January and as we've been working on on price cost over the last couple of years.
We've made a lot of progress and so as we had been planning for 2020, we made a decision to pull forward and would that with the announcement. There is a behavior that goes along with those announcements and when you look at last year in for instance, in North America, We had high teens.
Growth in our in our product last year in North America, because of the the price being effective in January .
When we announced the increase in coming being pulled into October certainly we benefited in the fourth quarter of last year because of the same the same phenomenon. So there is there is a behavior around our price increases what I would tell you Jeff is that the underlying activity is very strong across the board or.
Lifelines pretty much across the border our high single digits mid to high single digits.
And so my confidence in being able to deliver.
Low to mid single digit order growth in the second quarter and be positioned here for the year is very strong and that ultimately correlates to the revenue that we're projecting for the total year, Jeff just to quantify the impact of that for you. When you look at our overall field orders they would be up low single digits on an underlying basis.
Okay. Thank you for that and just on investment spend not called out in the bridge.
As this now kind of normalized and it will just kind of frac with with revenue growth from here or.
Should we expect kind of other initiatives, maybe the pop up and be part of the earnings equation.
As we've committed over the last couple of years, our reinvestment in the sales channels as well as the reinvestment and products now as a percent of revenue is flattening out in 22020 and beyond its whats happening Jeff is that we're continuing to add sales in line with what we see.
The market activity to be so we're continuing to add sales, what we're getting productivity with all of the the expansion that we've done over the last couple of years in engineering and R&D, We're continuing to obviously increased the dollars with the reinvestment, but maintaining that now as a percent of the overall revenue that's being achieved and so we feel good.
We're also similarly, we are doing.
Combining the footprint, making sure that we're getting good productivity on the dollars that we're spending and ultimately tracking that to the new product introductions that we're bringing to market to make sure that we're getting the appropriate volumes and returns on those investments.
Great. Thank you appreciate it.
Thank you for your question our next question.
With RBC capital markets.
One is open sir.
Thank you good morning.
I want to date I, just want to follow up on jeffs questions on pricing and George So just so we're clare will price increases be more of a dynamic decision based upon.
Material costs or will there be strategy around you know anticipating customer behavior, but just maybe address the timing of price increases going forward.
Yes, what I'd say Dean if you go back two years ago, we had.
Yeah negative price caused.
In the the market with the market changes, we weren't position to be able to move quickly to stay ahead of that.
We've made significant improvement no building out our strategic pricing capability across our businesses. So it is more dynamic where we're tracking the markets were tracking our win loss when making sure that we're we're selling value and bringing value propositions to our customers.
Instead of is just annual price increase no. There is historically, that's what's happened within the industry were in but I believe that now we're much more dynamic relative to what's happening in the markets that we're serving and as a result of that you saw nice progress with our with our price cost last year, where we actually turn the.
The headwind that we had an 18 to a tailwind in 19 and and that's continuing now in 2020 with probably I estimate over a point of our top line will be driven by continued very positive price cost.
Thank you and then just as a follow up now that they've declared the Corona virus say global health Emergency I know Youre 2020 guidance does not anticipate.
Pack spot, it's likely happening, giving all the shutdowns going on.
Any sense of where and how you're tracking.
Steps, you're taking internally just anything you could share would be helpful. Thanks.
What I would start by saying about 6% of our revenue or is achieved in China's overall. It is noted significant but in the Grand scheme.
Relatively small we've been working very well across all of our teams that are positioned in China. We've got not only all of the business units totally aligned but we've got full support of our aegis professionals, our facilities leaders and security, where we've got a daily updates from our Asia Pac leader certainly a talk.
Parity for us to to make sure that all of our people are safe and in protecting them.
As you know most provinces of have mandatory holiday extension now through February 10th.
And that most of the travel within China now has been curb to occur significantly.
So what we were also assessing the supply side to have a pulse on what's happening with our supply.
There could be some supply chain disruptions to date has been minimal what I would say it is a fluid situation and that we're monitoring it very closely at this stage Dean it's hard to to assess the who is difficult to assess but but.
Could have some deferral of activity.
Certainly we'll have to keep everyone updated.
Understood. Thank you.
Thank you for your question. Your next question from Scott Davis.
Research Your line is open Sir.
Hi, good morning, guys.
Hey, Scott.
The.
I want to pick say too much in the price mix, it's been beaten to death, but it's a it's pretty interesting that after all these years I'm pulling it forward October .
Where the competitors than did they do the same thing are you out there for a full quarter with higher prices generally than your competitors and that would have had some negative volume impact perhaps.
Yeah, I believe that given the the with the price increases occur within the industry were no ahead.
And so therefore, we had the issue that last year, we had a very strong.
First quarter with our HVAC equipment.
And then this year because we had pulled it forward we had seen some of that benefit Scott in the fourth quarter of last year and then what I would tell you is that when you look at the underlying pipeline and how the pipeline converts.
We have very strong pipeline, it's it's high single digits.
We usually there's pretty good predictability of how we convert and the percent and so I have confidence that we're going to get back to like I said kind of low to mid single digits order growth in the second quarter and for the year very strong pipeline to deliver the the mid single digits. So let me overall were.
Where we were in line with where we thought we'd be.
Okay, Yeah, just the mechanics.
Our interesting my follow up but just on the replacement show at the North America replacement Chiller market is there.
A sense I've never seen the data out there and kind of the age of the installed base when you're talking about the the bigger.
The bigger Chillers is there a sense that the installed bases.
Old and there's a long tail that theres, a greater sense of upgrading or replacement for energy efficiency any.
Just as some of that as a little bit obvious, but just trying to get a sense of how long that tail if demand is.
Yes, I mean, it's all the above I think given the value proposition with our new chillers and the ability to be able to reduce energy consumption and drive efficiency is certainly a big value proposition there and so it's looked at in total value. So when you look at what their current cost is to to maintain and what the energy consumption is.
We typically will go in and create a value proposition that not only we can improve their operating cost, but also reduce energy. So you got to look at it as in total cost.
And so I think as we know launch new products, we bring our digital capabilities and how we optimize the operation of the equipment, how that integrates with the overall building systems I think there's a real attractive.
Value proposition for our customers, who has seen a nice pickup there.
Okay Thats helpful. Thanks, Good good luck guys and good job this year. Thank you Scott.
Thank you for your question. Our next question from John Walsh with Credit Suisse. Your line is open Sir.
Hi, good morning.
Good morning.
I guess, a a question around the a the retail business.
You know you've kind of called it out the the last couple of quarters. It's it's now in the in the bridge.
Just wondering it can be lumpy, how long should we expect to kind of here you calling out the retail headwind as it relates to the North America business.
John our retail business when you size of business, it's roughly about 900 million. We have a presence globally. We are the industry leader on mid loss prevention inventory intelligence traffic insights, it's a very profitable business because of a high value proposition for our retail customers and now.
That all being said there's been lots of change in the industry given the proliferation of online shopping requiring as we looked at our overall overall offering would towards digital solutions a lot more installations on that occurred during the quarter, but I believe that with the value proposition. The way the were aligned we're going to continue to see.
See the business perform but it's going to be a different mix within the business. So it's something that we're watching carefully we're working very closely with each one of our retail customers and laying out what the year looks like in how we're going to be positioned to be able to support.
Support their year, but it is given given what's happening within the retail space. There is a lot of changes happening and we're going to make sure that we're positioned to be able to to capitalize on that change and support the customers through that.
Great. Thank you for that and then I guess some you know in the past you've talked about you know the impact around a p. hsas and the Triple S.
Wondering if you can just provide us any kind of update there.
John There's no change in our position.
You have to keep this in perspective, Tyco and getting kind of guard make life saving firefighting following up keep us chemicals and Tyco income guard purchase components to contain trace amounts of PFS, which they blend to make the phone.
In their firefighting foams made to exacting military standards. So majority of the form an issue as specified is used by the U.S. government military and therefore subject to the government contractors defense.
So tyco fire products income guard I've always acted responsibly in producing these firefighting foams and therefore, we feel confident in our ability to defend these claims.
But I also would like to share a few other effects pause chemicals have been used by other companies since the 19 forties in many many products and applications and we didnt start producing firefighting foam until the mid Ninetys seventies, which was over 30 years later.
And these phones are used only intimately and predominantly at very specific sites such as military bases.
And then last is when you look at third party scientific studies that that also recognize that firefighting foam accounts.
The only a very small percentage of people said has historically been used in this country. So overall position hasn't changed we feel very good given what we've done for our government military customers and certainly.
There's really no additional updates.
Great good quarter and thanks for the update.
Thank you for your question our next.
Question I'm sorry.
Steve Tusa with Jpmorgan. Your line is open Sir.
Good morning.
Well I think Steve.
What's going on in the so I think the one of your businesses in.
North America, I think was down it was a solutions business or somebody that like the performance contracting business you guys still do that stuff.
Yes, I mean, it's our solutions business or the large performance contract Steven.
As we've always talked to the order intake on that can be pretty choppy given the size of the contracts and then the flow of those contracts can give you some.
Pretty significant variations quarter to quarter, but.
It's not a huge part of our business, but it can impact when we talk about that particular business you can have some big swings quarter to quarter.
Okay, and then any I'm just to kind of level set people any color on a you know whether the second quarter anything stand out as far as abnormal seasonality anywhere you mentioned the orders we expect the orders to pick up a bit anything on free cash or the underlying business results that you know we need to.
Kind of keep in mind for for second quarter.
Steve I'll take that on the organic growth, we're looking at low single digits and that's that's again against the prior year compare of 6%.
You break that out the feel businesses will be low to mid single digit and that's too will compare a 5% and product. So we'll continue low single digits and that's that's will compare seven so overall continued.
Performance on the topline.
We'll be as Brian mentioned within products. Some additional pressure here in Q2 on North America resi, but as we go through the year, we still feel very good in the second half the year the EBITDA margins expanding in line with the the guidance for the year 40 to 60 basis points, and we see expansion across all segments and as.
You know the normal seasonality to our year is typically 30% in the first half 70% in the second half, but because of the the share repo. This year, it's a little bit more skewed to the first half.
And then when you look at the overall consensus. It's it is in line with our guidance for the year and the guidance that I reiterated earlier was vps range of 250 to 60 and that would be an increase Steve of 20% to 33%.
Great.
I would just add to that Steve I think from a corporate expense standpoint, we had a pretty.
Low quarter.
As you've probably seen in the past the second quarter tends to be a little bit higher. So I think were our guidance. That's out there for corporate expense is still pretty solid as we sit here today and then when it looks when you look at a cash flow I think cash flow, we would continue to to see some improvement like we saw in that.
First quarter. So I think all in all we feel real good about the second quarter, Hey, George just one more quick follow up.
On the on just the general strategic question I don't think a anybody's asset yet, but obviously a lot of these companies progressing on their splits.
Are you know how do you guys view any change in your view on kind of the strategic imperative to grow the residential business more structurally.
I mean, we've been focused so when you look at our strategies to we've we've been focused on executing and getting the fundamentals in place delivering on our commitments and ultimately driving results. That's the focus for US here in 2020, we've been returning inline with what we committed a significant amount of capitals to our capital to our shareholders.
And we have a lot of underlying momentum across the organization whether be the margin fundamentals on how we're launching new products, we're upgrading our leadership and and ultimately now deploying our digital strategy.
I think when you look at our positions that's one that we've been investing heavily in.
The residential spaces, we've been investing heavily with new new products and technology. We are seeing progress because it is a critical element of our line card and how we ultimately support our customers.
So we're going to continue to stay focused on executing and delivering on the commitments and and certainly keeping a pulse and what's happening within the industry as far as any any type of consolidation.
Great. Thanks for the detail guys always appreciate it.
Thank you for your question. Our next question from Julian Mitchell with Barclays. Your line is open.
Hi, good morning, maybe.
Good morning, maybe just a question around the immediate region a late in the Middle East Africa piece for you and a lot of yours.
Competitors, that's been pretty soft so much of the Pos sort of 12 18 months.
Lumpy I think you sounded that's Brian in the prepared remarks on trends in Middle East Africa. So maybe just help us.
Understands how you're looking at the applied markets that.
And also just remind us of the scale of that piece.
Today.
Yes, so I'll Julie I'll give you the overview a male or we've made a tremendous amount of progress in a male over the last couple of years not only in expanding our footprint.
From a sales from a service standpoint pretty much across the region and when you look at our performance in the first quarter organic growth, 7%. It was both installed and service HVAC and controls up high single digit fire and security up mid single digit and industrial refrigeration as Brian said to an easy compare but up high teens, we've made tremendous pro.
Great. So would that we've seen good leverage on the margin rate would be the volume good productivity savings in cost synergies and its overall, we are executing extremely well even within the current environment. We're seeing a pipeline continue to expand and we're converting orders kind of mid single digit with the backlog up 8% so over.
So we've done over the last couple of years of restructuring as Brian talked about work. We've done from a go to market is really beginning to play out.
Now that all being said in the middle East certainly part of that it does represent a boat about 10% to 12% of the overall revenue last year was a tough year 2019 was a tough year for us.
But we're beginning to see you obviously with easier comps the work that we're doing around service and and seeing some of the project installations come back.
You mean overall I'd say when you look at the whole region. We've made a lot or lot of good progress last couple of years and competitively I think will position that ended extremely strong strong position.
Brian you want to thank.
Thank you summarized it well I think we had a pretty easy comps during the fourth quarter or the first quarter of fiscal 19 in so that benefit certainly in the current year, but I think we're better positioned.
Today than we were a year ago for sure.
Thanks, and then my second question just around corporate costs had the color on.
Second quarter.
So as first quarter, but for the year as a whole.
Maybe just highlight.
The confidence in that range, a corporate cost that you've given on slide 21, particularly in light of a very good performance in Q1, and also where do we stand today in terms of realized stranded cost reduction since the pilot divestment and how much stranded cost is still less.
To come out from that and whether that view has changed in the past nine months.
So our corporate expense guide for the years 330 to Threeforty.
We ended up at 81 million in the first quarter.
That tends to be a lower quarter for us and so I think there is going to be a tick up in the second and third quarter. So I I think that guy of 330 to 340 is still a pretty good number maybe on the lower end of that but I think that's probably a good number to use for now.
Now.
As it relates to the power solutions stranded costs.
Take out I think we communicated that we were going to have about a $10 million benefit.
Now that we saw in 19 that was going to be about $30 million 20, Twond and then the full run rate 50 million benefit we would see and 21 forward.
We saw probably about.
What you would expect to pro rata portion of that 30 million here in the first quarter and we would expect that 30 million to be delivered throughout the course of the year.
Great. Thank you.
Thank you for your question. Our next question from Andrew Kaplowitz with Citi. Sir Your line is open.
Good morning, guys.
Good morning Pontiac.
Good brand advertising is nice to see that tax payment, helping your got cash, but adjusted cash maybe slightly better than your normal seasonal weakness. We look at 2020 in the issues that we can you give casting breaking down 95% pitches equity income from the JV Theres dividend intention did you see more improvement in trade working cap.
Well. This is your expectation that can help you in between 20 and how you're thinking about.
Well, you declare dividends from new JV than 2020.
So the trade working capital as a percentage of sales.
I mentioned did improve by 60 basis points quarter over quarter, we saw a day improvement DS. So a day improvement in deep PEO, we saw a five day improvement and days on hand in the inventory side. So all in all we made progress really across.
The three key metrics.
As we look at 95% for the year that type of improvement was contemplated when we gave the 95%.
Hi, Thanks.
I would tell you that as you know this is the the first year that we're going to end up in the situation, where we've got reported cash flow in excess of adjusted cash flow because of that 600 million dollar a tax refund we got in the first quarter, we still tend to be.
Little bit short of a 100% converter because of the level of our Capex. The fact that we don't get is the entire amount of our equity income out in terms of dividends from our.
From our Jvs and then we still have this pension income.
That doesn't come with any cash now that's offset with some amortization benefit. So I think longer term, we're going to get to that 100% level, but sitting here today. The headwinds are still a little bit more than the tailwinds. We've got so our targets a 100%, but but I think 95% is a good number for this year.
Thanks, Brian and then can you give us more color into the inventory destock situation that you had last quarter independent Taiwan, Let me check we pulled down in Q1, there, but it wasn't it didn't seem embedded last quarter I know you talked about the headwinds in North America impact in Q2, but we still see the apex situation not being.
Headwind as we go into Q2.
So the specifically on the unitary commercial is though you asked Andrew.
Yeah, you know on deck as you said you can sort to be an overhang as you go.
Q1 looks like that maybe getting a little better, but just hear your comments on Japan, Taiwan.
If you have in a couple of quarters.
Yes, so when you look at the we talked little bit about the softness we and our furnace.
Business, which the market itself was down about 9% well, we have a strong presence in that market and certainly that hit us.
And then Brian to talk a little bit about the restructuring that we're doing in our two Canadian distribution with short term, we did see a little bit of a headwind I think guy as we get through this first and second quarter, that's going to turn into a tailwind on a go forward basis, and we're going to significantly increase our points of distribution and so you see a little bit.
Where you get a lot of different factors playing plan together here, we think that Q2 will continue to be a little bit soft, but as we get through the year, we're going to be positioned to get back to above market growth within within the within our business.
So does that get at what your and Andy just specifically related to Taiwan, and Japan, as we said last quarter, we expected the de stocking to be complete in Taiwan in Q4, and it wants to work Taiwan business was fine on the APAC side and as expected. We did continue to have some pressure in Japan in our APAC residential business.
We do expect that to start flattening out as we get into the second quarter.
That's helpful that thank you.
Thank you for your questions. Our next question some data.
With Cowen Your line is open Sir.
Yes, thanks, good morning, guys.
A couple of questions first I was wondering could you comment on M&A pipeline I know you talked about a $1 billion sort of set aside for potential acquisitions, where do we stand there.
Yeah, we're we're constantly looking at bolt ons Gotham, we're continuing to reinvest organically, we've got a pipeline across our businesses, where where we have gaps technology or products looking at a bold bolt ons. So at this stage, there's nothing nothing significant but.
We are continuing to strengthen our regional footprint and and continuing to look at our product portfolio to make sure that we're making the appropriate plays well in line with you organic investments we're making.
Okay, and just as you look at the portfolio do you see any incremental potential for divestments as we move forward.
So we've been continuing to to review the portfolio across the board and we've been making small divestitures were businesses that are noncore and businesses that we don't want to continue to reinvest in but again, there's been nothing significant there, but that's a that's a process. So we.
Venue.
So looking at the portfolio golf.
Got them I would just say to that I think when you look at the activity in the current year you know, we've got our Herten truly business.
Held for sale right now we would expect that to close in the current year and there's some other investments that will probably make but I think you can almost look at our M&A activity in the current years at the inflows in the outflows will be relatively the same I don't think thats going to be anything significant in fiscal 2000.
That's helpful. Brian One last one for me just as we look out to fiscal 21, what do you think the lingering integration.
Hello.
Most of your Lauren.
Yes, let me.
Let me just frame 21 that we gave a framework that we gave guidance for 20 and what that ultimately would look like in 2021 as it relates to the deployment of capital with the buybacks and and the like and in addition to that I'm very confident that when you look at the the fundamentals that we're building across these business.
Says from margin standpoint on a go forward bases that we're going to be positioned we have a pipeline of productivity and savings that ultimately is going to position us to sustain margin improvement year on year similar to what we've seen here over the last couple of years. So.
I want everyone to understand that that's going to continue no with that there is some restructuring as it relates to some of the takeout of of.
Yes, some of the structure that we haven't place across the globe and.
Normally that would probably be in the 50, maybe the 50 million, maybe a little bit more range on an annual basis, but with very strong payback within the year relative to the margin rate that we can we can achieve so I feel very confident that would be the framework that we provided relative to the buybacks and how that's going to play out.
As we position for 2021 work that we've done and reducing the debt cost and then now with the margin rate. So we're achieving that we're going to be positioned to deliver.
What I would say is incrementals that are 30, plus on our incrementals and so that will position us extremely well to continue margin expansion and be able to deliver long longer term on the margin rate than we originally said, we could get too which is somewhere 50% to 60%.
Thank you very much guys.
Thanks.
Thank you for your question our next question from Noah.
Oppenheimer. Your line is open Sir.
Thanks, Good morning, if we could look at North America.
Seeing some improving indicators forward indicators it does.
Can you maybe just talk about.
The pace of quoting activity on the longer cycle project business, and what kind of confidence that gives you the sustainability of growing backlog.
Yeah. When you look at North America, and if you look at the quarter.
Organic growth was 3%.
Mix pretty much across all of the domains capabilities.
Margins was were flat, but overall the margin rate, we did offer operationally deliver not only with the volume in the productivity 40 basis points.
But that was offset with the within the retail mix and some of the cost pressure there.
When you look at order is we did talk about the orders down.
1% a lot of that was timed because of the price increases, but when you look at the backlog backlog was backlog year on year is up 7% to $5.8 billion. So when you look at the mix of that backlog that is both short and long term projects and as we project a year we.
Positioned here for kind of mid low to mid single digit topline growth. We are positioned you to continue to to deliver orders that are kind of mid single digit low to mid for the year mid single digits in the in the second quarter and then within the mix of those orders that will be positioned to be able to convert those orders similar.
Similar to what we're doing this year as we position for 2021, so the cadence that we have and how we look at backlog how we look at turn absolutely supports what we're going to achieve for this year and as we build the backlog as we plan for 2021, we feel confident that would be pipeline that we're currently working to convert that will position us well for 2020.
One.
And operator with that Im going to pass it over to George for some closing comments.
So thanks, everyone for joining our call. This morning again as.
We discussed we're off to a strong start for the year.
Positioned well to deliver on our full year commitments you know as it relates to orders I feel very confident and mid mid single digit order growth in Q2, which then tied to the overall guidance of low to mid single digit growth for the full year and with all of the discussions that are coming up I do look forward to see many of you soon so on that.
Operator that concludes our call.
Thank you everyone you may now disconnect.
We thank you for participating and have a great rescue your day.