Q1 2020 Earnings Call
[music].
Thanks, operator.
Good morning, Thank you for joining us for three technologies first quarter 2020 earnings conference call.
This call being webcast on our website entry technologies Dot com real plenty accompanying presentation.
We're also recorded in our Kevin's call on a website.
Please go to slide two.
Statements made on today's call that in our historical facts are considered forward looking statements and are made pursuant to the safe Harbor provisions of Federal Securities Law.
You see or FCC filings for a description of some of the factors that may cause our actual results to differ materially from anticipated results.
This presentation also includes non-GAAP measures.
Which are explained in the financial tables attached to our news release.
Joining me on today's call or.
Mike Lamach, Chairman and CEO, Chris Q, Senior Vice President and CFO.
Diversionary President and COO.
With that please go to slide three ill turn the call over to Mike Mike.
Thanks, Zack and thanks, everyone for joining us on the call today.
Under normal circumstances I'd start today's call with a brief overview of our global business strategy and how Thats enabled us to delivered strong financial results to our shareholders.
So today, we're living through anything but normal times, so suffice it for today's call. Although we've got a new look and feel under our new train technologies branding or long term strategy is unchanged with that in mind I'm going to move directly to slide four and into the heart presentation today.
The focus of our call today is less about earnings in the quarter or even in 2020 and more about the long term health strengths and positioning train technologies as a pure play climate control company as business conditions adapt and eventually improve and oppose cobot 19 world.
The depth and duration of a downturn and subsequent recovery as a multivariate equation, it's impossible to solve none of us of ever experienced anything like this in our lifetimes and we can effectively draw conclusions from historical reference points, because there aren't any social distancing has never been part of a recession vernacular and provides.
Layers of complexity to our daily lives that as far reaching personal and professional impacts there were learning about in trying to adapt to as we go and for some of these impacts are more devastating and more personal than others.
As a global leader that our field working with thousands of customers and suppliers and touching the lives of exponentially more people, how we lead through this crisis and the things we prioritize matter deeply.
The implications of leading companies actions are far reaching.
Major employer acting with the Singler short term profit focus can take down a community.
You can take down one or dozens of companies and the unintended consequences can keep rolling down Hill, exacerbating already very challenging situation.
We strongly believe the right course of action for our employees, our customers and our shareholders is to lead authentically steadily and with a sense of purpose.
We will remain true to our strategy maintaining world class employee safety.
Acting with uncompromising ethics and integrity supporting the communities in which we live and work and steadfast in our commitment to building a more sustainable world.
Because of the fundamental building blocks that drive sustainable differentiated financial performance for our shareholders now and in the long term.
With this context in mind, our core operating principles through this downturn or clear.
First protecting the safety and security of our people is paramount.
The here I'll start by saying that we have retained more than 95% of our talented workforce annually for over a decade.
On a strong and talented employee base is the most important factor in creating great customer experiences and shareholder returns.
We have benchmark levels of employee engagement, which is core to our culture and values and this is a differentiator that is often overlooked.
Each time, we survey our employees the top three things that are people identify with our culture of engagement, our sustainability purpose and the belief that one company can change in industry and the industry can change the world.
Second, it's the ethics and values, we live and lead by.
And third its safety.
In fact with regard to our safety record I don't know of another company today with a better safety record than our own within or anywhere outside our industry.
Safety and respect for others are at the core revalue system.
We went into the downturn as the Premier climate control company and our relentless focus on continued high employee engagement will enable us to emerge on the other side of this downturn even stronger.
The crisis, we've gone a great lengths to keep our people safe across the globe.
It's not just about strictly PB protocols dramatically, increasing cleaning and disinfecting.
We're implementing employee activists raining in safe dispensing protocols.
It's about fundamentally rethinking the way tens of thousands people conducted their work in our offices factories and warehouses and the reconfiguring them for safe distancing through actions, such as reconstructing and rebalancing production lines, ratably, adjusting material and workflows and investing in new equipment.
To adjust for new lifting and positioning requirements and then every facet of how are people work and move through our facilities.
We're also actively helping our employees and communities with financial assistance through this challenging time through supporting national and local community organizations in through our employees funded train technologies, helping hands fund.
We are in a strong financial balance sheet and liquidity position and we'll continue to generate powerful free cash flow.
We will utilize our strength to play aggressive offense throughout the downturn.
It was strong management team a proven operating system and confidence we can execute our downturn scenario playbook to limit decrementals inline with our gross margins.
We announced the RMT transaction with Gardner Denver early in 2019.
By mid 2019, well ahead of the pandemic, we created an office a transformation the reports directly to me.
Blueprint any organizational design and developing transformational margin improvement opportunities for the pure play train technologies of the future.
Stack of projects related to these margin improvement opportunities are progressing well and many are already underway.
We're looking forward to discussing these opportunities in detail at our analyst day, which is still slated for the fall whether thats in person or virtually.
The transformation office also overseas or stranded cost reduction programs.
And this downturn has created an opportunity to accelerate the elimination of stranded costs.
We have now identified $90 million in permanent structural cost savings that we expect to take effect in 2020 with run rate savings in 2021 of 110 million.
Lastly.
I personally find useful to continue to look at the future through a holistic sustainability lines.
First sustaining the health welfare personal development in future of our talented people around the world.
Next keeping our communities safe healthy and thriving.
And finally of course.
Business sustainability.
Which means managing the business for the long term, including the opportunity we have to invest and build our capabilities. Even in this downturn. So we can emerge within even wider competitive advantage.
We have a tremendous opportunity to make this happen.
In fact looking back at the last downturn in 2008.
We couldn't be in a more different and preferential position in comparison or better suited to capitalize on our advantages.
Now, let's turn the call over to Dave to discuss covered 19, and our proactive response of the crisis in more detail Dave.
Thanks, Mike Please go to slide number five.
During the quarter the pace at which cobot 19 pandemic change the economic landscape is unparalleled moving from region to region impacting our employees customers and communities as it spread.
We're trying technologies, we began in early January forming crisis management teams to confront the pandemic with employee safety is our number one priority.
As we moved into February we closed all our facilities in China, we proactively began addressing employee safety.
As Mike alluded to on the previous slide the safety measures are more than just providing pp.
We took a holistic look at how we work our teams proactively reconfigured our facilities to address the pandemic.
We changed the way production lines flow the placement of machine operators and created physical barriers where necessary.
We implemented active screening staggered break times increase cleaning measures and frequency of cleaning measures and expedited pp.
By March as we ramped up production in China.
With protective measures in place the work of Reconfiguring, our facilities move to EMEA and the Americas.
We proactively sense employees home and ensure their pay would be held hole to reduce the number of employees in our facilities to deliver essential customer orders only.
This increase the safety for our employees and greatly reduced our facility output to provide time to implement the necessary safety measures fully in each facility.
To be Claire.
Safety measures were not limited to our plants.
We proactively addressed employee safety in our distribution centers offices and parts stores.
All facilities were in scope.
By the time April began our plans in Asia Pacific completed their ramp up our plants in EMEA and the Americas began to ramp their production and we expect most plants will be fully ramped early in may.
Throughout the quarter, our supply chain crisis management team proactively works with our suppliers as they address their own covert 19 challenges.
The team continues on a daily cadence to manage potential risks. This team has done an excellent job.
As we move into May we're running with new line rates and protocols and adjusting to meet customers' demands.
Please go to slide number six.
From the start training technology has been addressed in the crisis by bring expertise technology and services to bear on critical applications for hospitals and other healthcare facilities like clinics research laboratories and pharmaceutical production.
By ensuring proper air treatment filtration ventilation and decontamination, we're helping to keep patients and healthcare workers safe and more comfortable in the most challenging situations.
Providing and maintaining indoor air quality through solutions, such as train catalytic air cleaning systems.
Sure moved pathogens from air streams, and negative pressurization systems to isolate infections.
Our remote monitoring controls and building intelligent solutions are increasingly important in an environment of social distancing.
These technologies enable technicians to remotely monitor inspect and troubleshoot systems to keep critical environments running safely and efficiently.
Our transport refrigeration solutions are protecting the cold chain and helping to ensure the safe and reliable delivery of perishable food medicines and other critical goods.
Through telematics, we're putting data to work with the ability to track and trace deliveries across fleets monitor the location of assets and the temperature of individual deliveries in transit.
Please turn to slide number seven.
Train technologies has been addressing the impact of the pandemic on our communities.
Established a number of years ago in response to natural disasters and funded by donations from our own employees. The train technologies, helping hand fund is providing financial assistance to our own team members around the world dealing with financial hardship as a result of the pandemic.
According to our feeding America partners food donations and this environment have declined by nearly 60%.
In response through our train Technologies Foundation, we made a 100000 dollar contribution to feeding America and our team stepped up to help out with the effort. In one example, our thermo King and commercial Hvdc Americas team joined forces with feeding America, and a hand up.
International to host to drive through Pantries in Lynnhaven, Florida.
Providing more than 120000 pounds of food to nearly 6000 people.
Additionally teams are upgrading operating rooms air handlers, preparing patient isolation areas and expanding cobot 19 treatment facilities for hospitals in record time.
I am proud of how our team focused on employee safety and supported our customers and communities in response to this crisis and I am confident they will continue to address the challenges.
As evidenced by the pandemic as we move forward and now I'd like to turn it over to Chris to discuss our balance sheet and liquidity position Chris.
Thanks, Dave.
Please turn to slide number eight.
As Mike mentioned at the outset of the call. We are operating from a position of financial strength as we move through unchartered territory in 2020.
We have a strong balance sheet excellent liquidity and have maintained solid investment grade ratings over many years.
Additionally, our consistent track record of delivering free cash flow of equal to or better than 100% of adjusted net income over time with a five year average of 107%.
Including an outstanding year in 2019, which delivered under an 18% further bolsters our strong financial position the timing of the close of the reverse Morris Trust transaction with Gardner Denver on February 29th of 2020, and the receipt of 1.9 billion in cash also provides.
I'd.
Owing to the rapid pace both organizations tirelessly worked to finalize the transaction and 10 months time.
That money has been received and is reflected in our March 30, Onest cash balance.
In addition to cash on hand, we have full access to our revolving credit facilities.
First 1 billion facility expires in March of 2021, and we expect to refinance this prior to maturity.
The second 1 billion facility matures in April of 2023.
Even if we were to fully utilize both facilities, we remain well below our primary debt covenant of 65% debt to capital.
Both facilities were Undrawn at March 30, Onest and remain Undrawn today.
Lastly, we run a relatively capex light business model. So our capital requirements are pretty modest at around 1% to 2% of revenues.
Now I'd like to turn the call back over to Dave to provide details and color and what we saw in our end markets in the first quarter Dave.
Thanks, Chris Please turn to slide number nine.
Broadly speaking our Hvdc markets remained healthy in the first quarter with pre pandemic bookings and revenues largely in line with our full year expectations as the pandemic progressed across the globe bookings and revenue were heavily impacted first in Asia Pacific followed by EMEA than the amount.
Because in each region, our proactive safety measures temporarily limited our uptime and our utilization.
Despite the pandemic, our commercial Hvdc Americas business delivered strong broad based growth with bookings up mid teens and revenue up mid single digits.
We saw strong demand in datacenters and from institutional customers across education government and health care.
Our residential Hvdc business also saw strong demand with bookings up mid single digits.
With strong bookings growth in commercial and residential America's Hvdc backlog was up double digits versus first quarter of 2019.
The majority of the backlog is applied systems, which typically have lead times of six to 12 months.
Our transport business was heavily impacted by the pandemic in each region accelerating declines already expected from the correction cycle that began last year.
I'll give a more detailed update on our transport business later in the presentation.
With the Cobot 19 pandemic impacting EMEA for most of March our team saw low single digit declines in both bookings and revenue.
Despite the pandemic Europe commercial hvdc bookings and revenue were up low single digits.
During the quarter Asia Pacific was hit first and hit hardest by the pandemic with bookings and revenue down double digits.
Given the pervasive impacts of the crisis I'll give additional insights to our end markets later in the presentation based on order patterns. We saw in the month of April.
And now I'll turn it back to Chris to discuss the results for the quarter Chris.
Thanks again, Dave.
Please go to slide number 10.
The onset of the covert 19 pandemic significantly impacted our first quarter financial results as we took actions to protect employees and customers.
As Dave mentioned on the previous slide prior to the pandemic our global revenues in the first quarter started off largely in line with our full year expectations.
However, pandemic impacts limited, our global equipment and service revenues by approximately $150 million in the quarter.
With almost two thirds of the impact in Asia Pacific contributing to our 5% organic revenue decline.
Adjusted EBITDA margins were down 60 basis points in the quarter, primarily due to margin impacts from the volume declines related to both the pandemic and the transport correction cycle.
Negative product mix in the Americas more than offset positive price versus cost as we delivered mid single digit revenue growth in commercial hvdc.
As compared to approximately 30% revenue declines and transport.
We implemented proactive cost controls across the business and accelerated our stranded cost reduction actions contributing to a $16 million reduction in unallocated corporate costs and positive productivity versus other inflation in the quarter.
Please go to slide number 11.
During Q1, we delivered enterprise de leverage within gross margin rates on lower volume by managing all elements of the piano, including our decisive actions to accelerate cost reduction programs.
Within the Americas region, our transport revenues were down approximately 30%.
As the correction cycle and the end markets was accelerated by the pandemic.
Americans margins were heavily impacted by both the volume and mix impacts of the transport revenue declines.
Given the size of our Americas operations, our commitment to proactively invest in employee safety and security in our plants distribution centers offices in part stores added necessary costs and reduced absorption in the quarter negatively impacting margins.
Margins in EMEA and Asia Pacific were both impacted by topline headwinds related to the pandemic.
In each region Swift action and strong execution of cost reduction programs limited de leveraged within gross margin rates.
Please go to slide number 12.
As Mike discussed in his opening remarks, you have any onset of cobot 19, we're aggressively stepping up our efforts to remove $100 million in stranded costs related to the reverse Morris Trust transaction, we closed in Q1.
After announcing a transaction in April last year, we quickly mobilized a margin improvement and transformation office by mid summer to focus on these cost reductions, which gave us a nice head start in determining the best most value accretive ways to eliminate these costs, while simultaneously improving the overall capability.
Yes, and margin expansion opportunities across our businesses.
The quickly moved to implement zero based budgeting processes and principles across the company.
Entering 2020, we set a cost reduction target of $40 million in a year of the total $100 million and stranded costs.
We look for opportunities to accelerate the pace of savings in the first quarter.
And with the onset of covert 19 saw an opportunity to push ourselves further.
To date, we've identified savings of approximately $90 million to be realized in 2020 more than double our original target.
Further heading into 2021 the actions we will have taken in 2020 should yield permanent run rate savings of approximately $110 million in 2021.
Of the total 90 million dollar savings in 2020, we expect about 70 million to come from corporate unallocated expenses and approximately 20 million to come from the segments.
Lastly, we previously disclosed we won't incur onetime costs of approximately 100 million to $150 million to permanently eliminate the $100 million in stranded costs and the table on the bottom right of the slide shows our status to date.
We spent approximately 31 million in Q1.
I will update you quarterly on our progress.
Please go to slide number 13.
We remain committed to balance capital deployment going forward as we have consistently done for many years.
Given the unpredictability of depth and duration of the downturn related to covert 19, we wanted to highlight the modest adjustments. We have made for 2020 and equally important highlight the things that have not changed.
As Mike outlined we're going to manage through this downturn from a position our financial strength.
We see this at the time to lead and a time to aggressively invest in our most important asset our employees.
You also see this at the time to aggressively invest and to solidify or extend our market leading positions through value accretive investments that will make us an even stronger company coming out of this crisis than when we went in.
Importantly, we expect to maintain our dividend at current levels for 2020 and have already paid the quarterly dividend for the first quarter and declare the quarterly dividend for the second quarter.
We expect to pump the brakes on share repurchases in the second quarter, while maintaining optionality down the road.
Regarding debt obligations, we committed to and paid $300 million in April to retire debt maturity and we expect to pay down the next debt obligation of $300 million at maturity in February of 2021.
We will continue to evaluate strategic value accretive M&A.
Lastly, we expect to maintain a strong investment grade credit rating. This offers us continued optionality as markets evolve.
And now I'll turn it back to Dave to give an update on current Q2 trends Dave.
Thanks, Chris Please go to slide number 14.
During the month of April we've seen global orders down approximately 20%.
Looking across the regions orders in the Americas, and EMEA were both down over 20%.
Asia Pacific orders were also down but under 20% as China demand is near prior year levels.
Given the normal seasonality of our business and continued deterioration in economic indicators is unknown at these order trends will further deteriorate stabilize or improve.
In the Americas demand for our commercial applied products has been more resilient, particularly for essential end markets, including warehousing Datacenters and health care.
Unitary demand has been softening.
Broadly speaking during a downturn our service and parts businesses typically see strengthening demand as customers choose to extend the life of their hvdc equipment rather than replacing.
Since this downturn is driven by a pandemic traditional hvdc services and parts demand had been limited due to access constraints at customer sites.
Conversely, the pandemic has driven additional demand for our intelligence services, which include remote building monitoring and indoor air quality offerings.
In the residential market approximately 80% of our sales are replacement units.
Impacts from the pandemic have caused declines in consumer confidence and increases in unemployment, our two main replacement market indicators.
So the overall demand is down we are seeing orders for both lower seer products that appeal to value customers and higher seer products that appeal to customers looking to improve indoor air quality as more people are working from home.
I will speak about our transport market outlook on the next slide.
Our EMEA markets are seeing similar disruption to what we're seeing in the Americas, with France, Italy, Spain, and Portugal being significantly impacted.
In Asia Pacific, China demand is near prior year levels, while market demand in India, Singapore, Malaysia, and Japan remain restricted.
From an operation standpoint, we continue to proactively invest in employee safety across our facilities our plants in Asia have ramped up and our Americas EMEA plants are ramping as we speak.
Since China was the first area to be significantly impacted by Cobot 19, we have received questions asking what lessons we've learned from our efforts in this region.
Our number one learning was that early.
Proactive safety measures are absolutely Paramount.
And we have rolled out these measures globally.
Second.
Consistent focus supply chain cadence is critical to support equipment production and service delivery.
Those processes have been effective and implemented globally.
And our final learning is that no two countries are the same.
At this stage it is unclear if other countries will track to a similar recovery path as China, given the very to regional response to the pandemic.
Finally, as we highlighted in our earnings release. This morning for temporarily suspending our formal guidance and expect to reevaluate for Q2 earnings.
Please go to slide number 15.
Covert 19 has created obvious disruptions in the majority of our end markets as outlined on the prior slides.
The near term impacts on the transportation markets have been even more significant.
On our Q4 call we provided a good level of detail on our expectations for the transportation market in 2020.
Today, I would like to dive a little deeper and provide market forecast for North America and EMEA for each of the major product categories with truck trailer and Aipu broken out separately.
The cobot 19 impacts on the transport markets in 2020 are pronounced.
With dramatic forecast reductions across all major product categories in both North America and EMEA.
For North America. The trailer forecast has dropped from down 25% in January timeframe to down 46% as of a week ago.
North America Aipu forecast has moved from down 33% down nearly 60% for 2020, while the truck forecast has dropped from down 3% to down nearly 20%.
Likewise, Europe truck and trailer forecast declines have nearly doubled as well.
Additionally, while we don't have the same level of reliable detailed forecast available for the other businesses, including Marine bus and rail these markets are down similar numbers as well.
As you might expect cobot 19 has dramatically slowed global demand into distribution.
Which support hard hit businesses like restaurants, and long haul trucking has been significantly impact by the slowing of the overall global economic demand and cross border shipping.
Aftermarket parts is showing resilience and demand is expect continued to be solid as companies look to extend the life of their existing fleets.
In terms of the timing of the pandemic impacts on transport, we were generally seeing encouraging booking rates through the first two months of the year that supported our initial transport outlook for 2020 that we provided on our fourth quarter earnings call.
As we moved through March and the pandemic started shutting down major portions of the economy.
Booking rates dropped significantly consistent with the updated forecast view on this slide.
Today in April were seeing very slow bookings as most trucking companies have hit the pause button on activity to reflect the significant downturn in the economy and across major sectors of the refrigerated truck trailer in Aipu markets as I discussed earlier.
The forecast for the second quarter for North America trailers. For example is down approximately 80% from 2019.
April to date, our bookings across transport Americas for equipment is down about 80%.
Which is consistent with that outlook.
While aftermarket is relatively flat with prior year.
The act forecast has been revised lower several times since the pandemic hit so it's really too early to call. How 2020 ultimately will play out.
States reopened.
And economic activity gradually returns to normal we expect demand to significantly pick up from current levels as well.
Act initially called for a market correction in 2020, and then a return to growth in 2021, and Thats still seems directionally correct. Although cobot 19 impacts are likely driving a deeper and more prolonged market correction in a more cautious and gradual returned to growth.
And now I'll turn it back to Mike.
Thanks, Dave Please go to slide 16.
Our strong financial condition balance sheet and liquidity enables us to operate from a position of strength throughout the cobot 19 crisis as demonstrated through two significant revenue downturn scenarios. The first down 15% in the second down 25%.
Entry iterate because I've heard there has been some confusion on other company earnings calls these are not our forecast there just scenarios, we want to have a response under any scenario given the tremendous uncertainty that exists in the near term.
Two assuage investor concern are showing a breakeven free cash flow analysis, and the minus 25% scenario.
What's important to note. However is that in both scenarios, we have the financial strength to weather the storm pay dividends and continue to follow our core principles.
We're going to remain true and uncompromising to our purpose driven sustainability strategy, and our core values, including employee safety and well being and corporate citizenship and our communities.
Anyone who knows our company and our culture knows that this is something we believe in and our core.
It's who we are and it's how we win.
It's what has driven strong shareholder returns over the past decade since the last downturn and what we believe is a proven formula for sustainable strong shareholder returns in the future.
We're also going to play aggressive offense, we see this downturn as an opportunity to invest expand market share extend their leadership as the premier climate control company and emerge from the crisis, even stronger than when we went in.
We're going to continue to execute our playbook and take appropriate cost actions, we're going to be very strategic inner application. Our objective isn't to maximize 2020 earnings is to build a train technologies of the future and the win big over the long term.
Please go to slide 17.
Our long term strategy remains unchanged and is underpinned by strong secular sustainability mega trends.
Our end markets, our strategy and our products and services are all tied to the undeniable facts that the world is getting warmer cities are becoming more densely populated and the demand for fresh food is accelerating.
Fundamentally we excel, where these global mega trends and sustainability intersect with our innovation and capabilities, which drives high demand for our products and services and while short term demand may be impacted or pushed out longer term the challenges the secular mega trends present will not abate and require leadership and action post covidien.
Teen.
We also know at the post covered 19 world will evolve and adapt to the new reality and experiences we've gained through this crisis.
Accurate design installation service and monitoring of HIV assay systems will be more important than ever to ensure a proper filtration ventilation airflows and pressurization and high density areas and especially in critical environments like hospitals food and pharma office buildings hotels in homes buses and other.
The modes of mass transportation.
Remote monitoring diagnosis and artificial intelligence based service models have the potential for exponential growth and new service models will emerge.
These are just a sliver of the potential opportunities, we see now and we intend to evolve adapt and capitalize on them.
In the near term, we strongly believe it's imperative that premier companies like train technologies lead through this crisis authentically steadily and with a sense of purpose.
We will remain true to our strategy built on the fundamental building blocks that drive sustainable differentiated financial performance for our shareholders now and in the long term.
We also see this downturn as an opportunity to invest expand market share extend our leadership into emerge with an even stronger culture and a stronger company than ever before.
Even in the current crisis, we're confident and excited about the future of train technologies and our ability to bring all of our considerable resources to bear to deliver strong sustainable returns for our shareholders.
I want to thank our dedicated employees around the world for supporting all that is essential to flight the spend dynamic.
And all the frontline caregivers that our heroically battling for all of US every day.
And with that Chris David I'll be happy to take your questions operator.
To ask your question at this time.
Please press Star then the number one on your telephone keypad, we will limit questions to one question and one follow up we will pause for just a moment to compile the Q and a roster.
Your first question comes from the line of Scott Davis from Melius Research. Your line is open.
Hi, Good morning, guys look you can hear me okay.
Again good lag.
Well good morning, thanks for the the detail it's super helpful. But.
Hi, I'm intrigued by this whole indoor air quality theme overall.
I guess a question really is what did the building owners care is there a sense of urgency outside of obviously hospitals have always carry but.
When you when you think of the.
The other categories. If you sell into is is there.
Your phones lighting up people say, while we need to do a retrofit project here or is it just too early to add to really set.
Yes got its too early to say, but we're looking at just sort of human behavior and lasting effects of what a pandemic.
We do to society, and we see a little bit happening through our lens in China, Although you can't drugs that parallels between the two one thing for sure is that the ability to really monitor indoor air quality and into design and make sure that from a maintenance perspective, and all the controls and automation that go into making sure that its effect.
We'll be working.
I think I think youre going to see sort of.
More density per square foot with all that and perhaps codes that in some parts of the world, which may have not been up to US a particular standard I think will change.
As we will food transportation codes and standards change I think going forward as well so.
Probably when you when you get through this it puts an important and I think particularly as buildings become tighter and tighter in terms of their design Im talking about the envelope of the building is so critical to make sure that you're having a fresh air exchange. The building typical building depending on what it does might have half a dozen to dozens of 100% error change.
There isn't an hour and the ability to make sure thats happening and that you're killing pathogens.
And.
You know where you can in the system or pressurizing appropriately or diffusing here or diluting air is going to be even more critical. So I think it varies a lot of opportunity going forward I mean, it's hard to.
Did you get through this right now, but I think the other end of it probably has more opportunity than not.
Okay.
Okay. Good.
And then I'm just curious if the confidence that you have in your backlog I would assume a certain percentage of your backlog includes things like locales and.
Stuff like that that I would think.
Our at risk of not just delays that but the cancellation so perhaps.
The a sense of what's your confidence in the backlog is overall.
Yes, Scott this is Dave I'd say, we're pretty confident in our backlog, especially in the Hvdc space a lot of it is in the applied to a world we haven't seen.
A lot of cancellations there, it's actually haven't seen very many at all it's pretty normal.
Our T.K. backlog.
Little bit more concerned with that if we have seen some cancellations, but it's pretty low right now. So overall I'd say, we're pretty confident around the globe in our in our backlog and.
And we haven't seen anything that would lead us to believe that that won't happen, yes, Scott you think about.
You mentioned hotels, but you could throw light retail.
That's a small part of our business. Let me retails. An example, we've never over the last decade focused much on national accounts that all as an example, and so if you think about are relatively high share in Unitarian in light unitary the smaller share by design, we would have would be in retail and if you.
Go into hotels, the place where we play in hotels is sort of in the lobby and in the common areas and the and the larger more complicated spaces, we really don't play in sort of individual rooms, and so the vacancy of a hotel isn't going to matter at the hotels open.
We're going to be providing equipment and services. So so that is a little different maybe a decade ago. I would have said we would have had more focus on retail national accounts and thats changed over the decade.
Your next question comes from the line of Jeff Sprague from vertical research. Your line is open.
Thank you good day, everyone. Thus the logic the nutri grain.
Thank you jealous.
Yeah.
Sure.
Just first on the kind of working through the scenarios and what you're planning to do just want to be clear out of the comment about managing that deco metals around gross margin would require extra actions are you planning to take those actions are you suggesting to us that.
None of us as a crystal ball, but pick our revenue scenario and we should expect your decrementals to be around your gross margin right.
Yes, Thats a great question and the first thing I would tell you is that.
Your anybody that thinks they're going to forecast a number is only going to be surprised when the forecasts the meets the real world.
The first minute. So the notion of really doing scenario planning is something that we've been living with for a long long time, and although we would have done scenario planning in the past it would have been around a general recession. So pandemic is something new and with regard to just the behavioral changes in the way that say in our case buildings will even be closer look.
Limited in terms of access for service and so.
10 Dominic.
It was offered really sort of a different scenario, but once you move through.
The initial a pandemic phase and we think through discussed earlier question, where the opportunities lie going forward.
It's more useful then to think about scenarios in what ultimately will be a recession of course I mean, we're in one now it has done all the depth and duration of that recession. So.
For us we've looked at I would say in increments of five points of revenue decline what a series of actions that we need to take on top of the actions already taken and so having those lined up in advance and having a playbook to do that give us some confidence that we can maintain within plus or minus.
A reasonable amount gross your gross margin Decrementals would would would would be in line with that.
But in doing that we don't think theres, an opportunity that we want to miss.
About investing or even doubling down in areas of innovation and technology and channel.
We're doubling down in areas of productivity because the key to this for US is we entered this thing I think with a pretty wide gap relative to.
Some of the competition and we want to come out of us with an even wider gap and we've never done in a better position.
From a liquidity in the talent and technology perspective to be able to do that so you'd be a tragedy not to really invest but all that being said I think we can do two things at once we can manage the decrementals and we can continue to really double down the important investments for growth and productivity.
And as an unrelated kind of follow on second question.
Mike You mentioned M&A kind of prominently in your press release this morning in in the slides.
You give us a little thought of.
What you're thinking what's you're interested in.
And of the priorities for the new co on a on a standalone basis here.
Yes, it's always a strategy is what needs to drive M&A and so the you'd be ideas that we would have 80, 90% of the ideas that we would have would be really defined by the strategy and that hasn't changed around.
Technology and channel for us and they tend to be.
Really in buckets, it's the easy bolt on technologies that needed channel or it's the channel that adding our technology.
Would make that channel really.
Work those are easy for us to do I would tell you that is something that we're still very active Wes.
I think on some of the the larger more transformative things that accompany could do like ours I think the bid ask has widened in this environment.
But it makes sense over time really to have liquidity in the balance sheet to be able to look at those sorts of things if in fact.
You know the bid ask narrows and in fact, they become attractive so.
We will keep all options on the table and again this is about planning aggressive offense, where we can.
Hey, Jeff our timing.
It was unlucky.
We caught.
A large acquisition and had a Hong bridge loan in April and we Couldnt about in the worst position and then you fast forward in between announcing in closing the RMT transaction in 10 months, our luck couldn't have been any better.
And so we really need to capitalize on that good fortune and make sure that were parlaying that into a really good future.
That that we can invest for long run.
Great. Thanks, a lot.
Yes.
Your next question comes from the line of Steve Tusa from Jpmorgan. Your line is open.
Hi, guys good morning.
Hey, Steve Good morning.
What was in total thermo King down on read this for the quarter.
The.
Because I think days it was down as was down about 30%, yes, and then down.
About about 10% 15, I think analysts.
Okay got it and I think you guys it said that.
The total you said something about mid single digit growth in commercial was that the total commercial business in the quarter.
We talked about the EMEA Ami I'm, sorry, the Americas number was up the.
The mid single digits correct okay.
EMEA was.
Was slightly down and that was really driven by the middle East actually Europe was up.
And Asia Pacific was the hardest hit Steve by the pandemic as it obviously hit their first and it was it was down double digits right and global services. You mentioned it was weak kind of across the board what was that for globally just services for H. back.
Yes, obviously it was it was down it was down in Asia Pacific globally globally. It just did not perform as well as we thought it should have actually flattish in the Americas, but again, we expect more out of that and we have had some disruption.
Getting on job sites really in all aspects of the service business, whether it be service agreements whether it be break fix we have had some disruption, but with that said, Steve and take away. We've also saw some opportunities on it.
Our intelligence services and we've been added a long time getting buildings connected.
And we have over 20000 buildings connected now and we're really seeing the benefit their customers are really seeing the benefit of being able to have those buildings are serviced remotely and diagnose if there's something wrong as Mike said indoor air quality and buildings is obviously, there's a lot of talk about that.
It's very important aspect of our business, we're really good at it Theres a lot of science around it and as.
Office buildings around the world starts ramping back up.
Our service Techs are on call next year, we could help our customers.
One more quick one just on the earnings bridge.
Good obviously you guys for given some sub segment detail Mike Thanks for that.
But you guys don't give the earnings bridge anymore.
What was kind of price material inflation on on a margin on a margin basis year over year. This this quarter.
Yes, Steve This is Chris we're positive on a price in a cost basis on the margin bridge and to your comment.
I think that margin bridge is really served as well in the past when we've had especially the last couple of years higher tariffs and higher inflation.
Consciously going forward, we want to make sure we can tell the story, what's happening on a quarterly basis. So we.
Want to make sure we do that without the confines of a bridge, but to your question price cost was positive the quarter productivity was brought was positive.
The other inflation, although thats, where we also saw some of the investment in October 19 measures.
Okay. Thanks.
Your next question comes from the line of Andrew Kaplowitz from Citigroup. Your line is open.
Hey, good morning, guys. Thanks, one other Tyler.
Good morning anymore.
China back to flattish demand year over year is relatively quick can you give us more color that type of demand you're seeing is it more the indoor air quality products and services building need to be serviced or is it more delayed larger orders coming back.
Yes, I'm going to you again to give that to Dave here, but let me kick off just a thought kind of going forward.
Our business in China really is on institutional large commercial equipment.
With the growing service business that service business as you know a quarter to a third of the mix, which of course was heavily impacted.
So we recognize revenue when we ship like a chiller or we recognize revenue when we complete a service engagement and build a client.
Very little progress billing or percent complete accounting that will go on smooth that out so.
It would look out size for us because we weren't shipping.
Chillers I mean, Conversely, the backlog of Chillers to ship in China is fairly substantial and I think they will tell you is that.
You know, we're seeing it returned back to prior levels at this point, yes, we have all the incoming order rate for April was actually as we're still rolling up the number sales is going to be a little bit favorable.
So last year, although there is probably some pent up demand there I would tell you, though that as we track our pipeline and this is the orders that haven't yet been booked what theyre actively being quoted on the pipeline is actually starting to show positive movements as well and that's that's really what we start looking at as the pipeline.
Because that's a really good indicator as to.
What future activity would be we're still we're still watching it all but.
April was april's, a good sign and we'll certainly a lot of attention to it in the and the rest of the quarter.
So that's very encouraging I did want to follow up on services, you mentioned that being flat in Q1, a little disappointing. It service is going to outpace at 20% decline make you're talking about for Q2 and do you see services starting to snap back as the economy. It stuck it turned on.
Or is it too early to see that at this point yeah.
And maybe a little bit early to see that but first of all your first question, Yes, we do see services.
Outperforming the equipment in the second quarter, so it will not be down 20%.
We expect that to be more in the flattish range.
Your second question do we see opportunities in services absolutely.
One of the things that as we talk about our playbook, if we have a downturn one of the things that we're protecting his is our expertise in service really around our service technicians.
We are kind of ring fencing not to say that's that scenario, we're not going to go from and try to cut costs were protecting that because we know that as the economy snap steps back and individual start going back to offices to work indoor air quality is going to be super important and how you're able to help those customers understand indoor air.
Quality and have solutions for them, we are really going to leverage our service business and that way to Andy I would say that clearly a service business is not an antidote to a pandemic. It is an introductory recession and as we move through pandemic concerns no into whatever the new normal would be going forward.
For billing occupancy and services.
Absolutely we would expect to see as we haven't every downturn every recession youre going to see capital extended.
And here in particular youre going to have large commercial large institutional customers looking at.
Making sure that airflow aired changes diffusion dilution pressurization filters are all going to be in tiptop shape, so really for us.
I think that thats going to Dave's point.
Require every technician, we've got and it's going to require more connected buildings because customers are going to want that service as opposed to people that don't need to be in your building right. I mean, there's no point in coming out to a facility. If you don't need to if you can if you can diagnosis first in advance and maybe even fix it remotely which often we can do that is.
Good to be an opportunity and that's a great way for us to deliver services, even higher margins and physically delivering services.
Thanks, guys be well.
Thank you Andy do you to your your next question comes from the line of Julian Mitchell from Barclays. Your line is open.
Hi, good morning.
Maybe hey, maybe just the first question on the the decremental margin.
Understood that from why you're aiming for that.
Thank you can hold the line of that sort of 30 percentish level like you had in Q1.
But clearly I think Nick can play a massive role in school that rounds, you'll Americas Decrementals in Q1, mcwhite a bit higher than the gross margin for example, so maybe help us understand.
Nics assumptions you have for the balance of the year and.
Whether you are very confident that you can offset swings in mix with cost actions.
Julien first of all in the Americas, Yes, I'm in a $40 million revenue differential. So the absolute dollars are relatively small for the size of the business actually the decrementals there.
The cause the first cause was not the mix with transporter or the mix of service. It was really the response we took.
With regard to the co bid crisis and just to give you a science if you ever wonder if we actually walk the talk in terms of what we say about our values around safety.
We always think about March being half of the quarter and we always think about last week of March being.
Half of March and so a quarter over quarter. If you follow all that math is the last week of March we actually pull the end on cord March 23rd and shut down all of our factories in Europe and in the Americas and prioritized only the orders that were essential.
Going into fighting co that and that would have ranged you know and tend to fit 10% to 15% of the orders. We had a couple of factories, where for a short time it might have been 40%.
The orders.
During that time of course, you lose that absorption, but but when we sent people home.
We sent them home and topped up their pay to make sure they were paid.
The full wages or the equivalent.
So any gap with any unemployment benefits would have been topped up we've made all the wage increases around the globe for any hourly associate or any service technician preceded us plan. So we didn't delay those we actually put them through as planned.
We reclassified or medical plans that co that testing and preventive care would be at no cost to employees that telemedicine visits would be added at no cost to our employees, we amended our four one k. plans. So not only do we not cut our form 10-K match, we amended our plans.
To make sure that people could take out up to $100000 and delayed loan repayments three a year, we provided backup childcare an elder care programs for people with minimal some very small co pays that they could.
Come to work or take some of the stress off we extended our employee.
Assistance program.
To with programs for financial emotional legal other support hardships and so all those things are things, we took but but but the the biggest costs was taking some 25000 jobs and literally reconfiguring all the lines in workstations, and then making sure we had all the PPD in.
Before people came back to work.
So all of that was so that we can go faster in the long run and people would feel safer and when people feel safe. They come to work there is not absenteeism, we're not shutting down factories to clean them.
And that is where the costs came in.
So you look at the job in Asia, the job in Europe, the deleverage in the teens and look at the Americas on the small revenue kind of a decline of 40 million and I don't want anybody to read too much into that so before we start talking about taking costs out of which we've got all the actions loaded and we can talk about that if you'd like.
You have to think about sort of doing the right thing, which is what we did and what we always would do and we will do and I would make the decision every single time, if if given that decision again.
Thank you Thats reassuring to here, maybe just one.
Quick follow up and maybe it's Michael for Craig.
On Slide 16, you got the helpful scenarios laid out.
If I look at say scenario, one sales down about 15%.
Flow through the decremental you have talked about so maybe it's a 30% Joel in EBIT or EBITDA.
It looks like in that scenario the free cash flow decline is maybe a bit heavier than than the operating profit decline just wondered if if I had that correctly.
And whether idle not what you're assuming for working capital.
Within those cash flow scenarios.
I'll start Julian this Mike, Yes, I would tell you that if you go back to the Onein timeframe I want to say, we were three times three X three X plus cash to net income so we know how to.
Hi, good cash.
Out of the business in a significant downturn so.
I would look for extraordinary operating cash flow into down 25 scenario. Just just so you go back to the Onein timeframe you get approved positive on that point, so I'm not sure if that analysis that you're doing would be.
Correct in that regard, Chris you want to add to that yes ill add I mean, there's maybe a little bit of.
Recall that will conservatism in the numbers as well, we're still investing capital at the normal levels, you would have a 1% to 2% of revenues in both of those scenarios Julien.
Whether the investments and employees or capital or otherwise that cash is there to go fund so.
We can certainly talk offline, but I think thats, a reasonable scenario for us right now a little bit conservatism in there.
Perfect. Thank you.
Okay.
Your next question comes from the line of John Walsh from Credit Suisse. Your line is open.
Hi, good morning.
Hi, John John Martin.
I wanted to go back to the has a fair bit Conversely in and maybe find out how much of that business is really driven by contractual server versus needing to get.
Onto the site generating some type of bare park.
Or something that could drive the revenue.
Yes, John is good question contractual basis, our service business about 30% okay.
Within that 30% Theres lots of different service contracts that we have we have a whole portfolio different contracts. So some include part some do not so there is some parts demand that's generated from that 30%.
Yeah, when you move into the break fix world, where it's it's broken they give us a call we come out and we fix and then you also have a planned maintenance.
Where where you'll actually proactively plan with the customer.
To do a major replacement or major overhaul on a piece of equipment.
Got it breaks out to about even thirds on the service business. If you look at us out third a third a third.
Okay. Thank you for that and then obviously in the Americas.
Pending on what the urea theres different rules around construction the Buck.
Curious once again staying on the service topic, what you see in those states, where there's a big shelter in place order and only essential work is getting done versus.
States, where the restrictions might not be as stringent are you seeing real big bifurcation in how the businesses are acting in those.
Well I don't say to think about going forward.
Yes, John what it what I'd say.
More than anecdotally is if somebody is calling for service in the Americas right now they're going to be in a critical infrastructure a critical essential role.
Overall, so we're not getting phone calls from somebody you know thats not operating or not running so we're in hospitals were in pharma, we're in food and.
We're in.
Yes.
Data centers data centers would be huge.
Thats the places where we are today.
Great. Thank you for that.
And I don't know of any stayed.
Really thats block sort of that essential activities. So.
Even the most stringent states, obviously health care and such.
We're in their servicing.
Great stay healthy take care.
Thanks.
Hi.
Hey, Jason we had another question.
Okay, and if you will get here, but.
That will ramp of our call for today.
It will be around for any questions you may have.
Please feel free to reach out to myself or two Shane and we look forward to speak with you soon thank you.
Yeah.
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