Q2 2020 Earnings Call
Sam Sam.
[music].
Welcome to Johnson controls second quarter 2020 earnings call. Your lines have been placed on listen only until the question answer session to ask your question. Please press star one of your Touchtone phone. This conference is being recorded if you have any objections.
Please disconnect at this time I will turn over the call to Antonellis, Franzen, Vice President and Chief Investor Relations and Communications Officer.
Good morning, and thank you for joining our conference call to discuss Johnson controls second quarter fiscal 2020 results.
The press release and all related tables issued earlier this morning as well as the conference call Slide presentation can be found on the Investor Relations portion of our web site at Johnson controls Dot com.
What do you me on the call today are Johnson controls, Chairman and Chief Executive Officer, George Oliver and our Vice Chairman and Chief Financial Officer, Brian Steve.
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 read through the forward looking cautionary informational statements that we've included there.
In addition, we will use certain non-GAAP measures in our discussions and we ask that you read through the sections of our press release that address the use of these items.
Discussing our results during the call references to adjusted EBITDA, and adjusted EBIT margins exclude restructuring and integration costs as well as other special item.
These metrics are non-GAAP measures and are reconciled in the schedules attached to our press release and in the appendix.
Hosted on our website.
Additionally, all comparisons to the prior year or on a continuing operations basis, excluding the results of power solutions.
GAAP earnings per share from continuing operations attributable to Johnson controls ordinary shareholders was 28 cents for the quarter and included a net charge of 14 cents related to special items, primarily related to an asset impairment charge and integration costs.
Excluding these special items non-GAAP adjusted diluted earnings per share from continuing operations was 42 cents compared to 32 cents in the prior year quarter now, let me turn the call over to George.
Thanks to its an hour and good morning, everyone. Thank you for joining us on todays call I.
I Hope you on your families is staying safe and healthy during these extraordinary times.
You may have noticed from our slide presentation, we are taking a very different approach compared to our traditional quarterly earnings call format.
In order to focus our discussion on addressing the impacts from the coven 19 pandemic.
As well as the steps we've taken as a company to partially mitigate the financial impacts and position the company to capitalize on the eventual recovery.
Although we have withdrawn our guidance for the year I will provide some color commentary on how we're thinking about the second half later in the call will allow plenty of time for your questions.
Let's get started on slide three.
Clearly, we're navigating through unprecedented times.
Ongoing covert 19 pandemic has had profound impacts on the way we live our daily lives in the way companies run their businesses.
We believe most of these impacts are largely transitory, but the dramatic slowdown in global economic conditions present very real challenges.
However, I can assure you that Johnson controls has stepped up to the challenge taking decisive actions to manage through this crisis day by day.
We also have many opportunities to assist our communities and customers, which we will discuss.
Protecting the health and wellbeing of our employees customers and communities in which we live in work.
As always been a top priority Johnson controls.
That is never more apparent that in times of crises like the one we are facing today.
In anticipation of a deepening pandemic, we activated our business continuity plan, including a crisis command team led by our employee health and safety Division and comprised a regional leaders and members of my Executive Committee.
This team has been working day and night to ensure the safety of our employees and quickly implemented policies and procedures, ensuring our factories facilities and offices could operate safely and effectively.
Although we are still managing through various disruptions to our normal workflow as the virus rapidly spread.
We have remained fiercely committed to supporting our customers partners and other stakeholders, including ensuring beyond Anil interrupted operations of essential and critical infrastructure vital to combating this pandemic.
I'd be remiss, if I did not start by saying I couldn't be more proud of the way our employees around the globe have responded to this crisis since day one.
Our teams have been fixtures on the front lines, helping to design and build temporary hospitals and move on in the earliest days maintaining the essential and critical infrastructure of our customers everywhere in supporting government leaders around the world.
We have provided filtration materials used in the development of Weve replaceable respirators.
In our dedicated employees have volunteered their time and skills serving their communities.
Johnson controls has been at the heart of response efforts from the beginning and from my perspective, the level of cross function collaboration compassion and partnership has been truly extraordinary.
That said, we've also had to make some difficult but necessary decisions and took decisive actions in order to mitigate the pressure that built over the course of the quarter as a result of cobot 19.
Over the last few weeks, we have initiated significant actions to permanently lower our cost structure and strengthen our competitive position.
Which are based on the various scenarios analyses we have conducted.
From a balance sheet and liquidity standpoint, we entered into the crisis on strong footing.
Over the course of the last 12 months using a portion of the power solutions proceeds we took significant steps to strengthen our balance sheet paying down over $5 billion in gross debt and maintaining higher levels of cash on hand with virtually no reliance on commercial paper.
With respect to liquidity, we're in very good shape sufficient cash on the balance sheet and access to additional credit should we need it.
Brian will provide more details on some of the actions we have taken to further enhance our already strong liquidity to ensure we maintain plenty of financial flexibility as we move forward.
From a capital deployment standpoint, we are committed to maintaining our dividend given our strong balance sheet and liquidity positions.
Turning to slide four.
Our actions today will ensure we redefined the new norm to capitalize on the recovery.
Aside from protect protecting our employees one of the most pressing focus areas for us in terms of our emergency response during the current pandemic has been supporting our healthcare customers.
Health care is about a 4 billion dollar end market for Johnson controls globally offering end to end capabilities with a substantial global footprint in the history of deep industry expertise and digital innovation.
It is more important than ever that we have healthy buildings in Johnson controls is a leader in this area.
We had been working with our customers in all regions of the world to rapidly increased patient capacity, whether by converting existing patient rooms to negative pressure isolation units will converting unused infrastructure to isolation units.
To enhance communications by deploying temporary wireless nurse call systems, as well as real time equipment tracking solutions.
Maximizing safety first half and patients, including cloud based visitor management systems touchless credentials in thermal imaging cameras to assess occupants temperatures.
As well as prioritizing service and maintenance of essential infrastructure.
We have been responding in record time and move on for example, our teams in China were able to install and integrate critical systems for an additional 860 bed expansion facility within eight days.
And we did the same in New York City, where our team worked hand in hand with the US Army Corps of engineers to build a 1000 plus bed emergency health care Center in 21 days.
Next on slide five.
As we begin supporting our customers recovery plans. The feedback we have received over the last several weeks indicate how cobot 19 has the potential to have lasting impacts to our cities buildings and infrastructure.
More resilient are flexible building space will be required to adapt to changing capacity or utilization needs.
Safer environments will be created through seamless combinations of occupants screening tracing and credential management in more sophisticated ventilation systems.
Actual us or frictionless axis lighting and temperature controls will be implemented to minimize cross contamination and enhance the user experience.
Remote monitoring and service delivery, including condition base maintenance will significantly increase.
These types of solutions are being deployed in some of our marquee projects today in the list of ideas and offerings continues to expand.
I won't spend the time to go through each of these but these are several examples of the rapid solution innovation that has taken place over the last couple of months.
By closely engaging with our customers, we were able to create unique solutions to meet their immediate needs by leveraging the strength and breadth of our existing product portfolio.
I view this past 10, plus weeks as a testament to the strength of our business model and further validation of our strategies around digital transformation and building partner ecosystems.
Let's move to slide six.
As the pressure from Cobot 19 began to Mount we quickly instituted a set of immediate cost control actions across the enterprise to help mitigate the near term financial impacts.
Eliminating all discretionary spend suspending non essential business travel and decreasing contract labor and contingent workforces.
Is that pressure continued to spread we moved into the next phase of our playbook by implementing mandatory unpaid time off and furloughs for all salary salaried employees and flexing our early workforce, while executing permanent cost structure changes.
Turning to slide seven.
This is a quick look at the status of our major manufacturing regions.
As you can see it is a fairly mixed picture.
So there are a couple of isolated plant shutdowns North America in EMEA remain in relatively good shape running near normal capacity.
China continues to ramp back up or two primary primary facilities are now fully operational and we continue to monitor the progress there and in other parts of Asia.
We do have a couple of issues with plant shutdowns in Mexico in India within the last couple of weeks.
Along with some of our peers, we are leading an effort working closely with local authorities and would expect those to be back up and running over the next week or so.
Japan is in good shape now, but there is another there's another country. We continue to monitor closely as we are not completely out of the woods yet.
That said, we are using this downturn as an opportunity to take more aggressive actions to reduce our cost structure long term, including consolidating portions of our manufacturing network.
The same can be said with respect to our supply chain management.
Efforts to establish redundant capacity in multiple low cost regions dual qualified suppliers reduction of skew complexity in influencing our major suppliers to diversify their footprint have been underway.
These efforts were expanded with the announcements of tariffs in 2018 in our accelerating further now.
In the initial stages of this pandemic our existing continuity plans allowed us to mitigate a significant amount of supply chain risk we were able to apply the lessons learned in China to drive preemptive actions to reduce the impact to other affected regions.
And we're now working with our suppliers to plan for the recovery.
Turning to slide eight.
In the spirit of full transparency, we wanted to provide you with an estimate of the net impact of coben 19 in the quarter.
I won't spend time going through each line in detail, but clearly you can see we had a fairly material top line headwind of around $375 million.
That includes the impacts to our Asia Pac in global products businesses as a result of the shutdown in China as well as the spread to parts of Europe in the US which began to ramp in March as regional Lockdowns went into place across the various countries.
As a result of some of the quick cost actions, we implemented in anticipation of steep declines in demand in both the businesses and corporate we were able to hold the net impact of coven 19 to about a 25% decremental.
At the EPS level, we offset the Tencent gross impact with four cents of cost and other actions for a net impact of five to seven cents.
Which is basically in line with what we shared with you during a conference presentation in mid March.
Turning now to slide nine for a quick recap of the financial results in the quarter.
Sales of $5.4 billion declined 5% on an organic basis.
Within the field businesses total service revenues grew 1% in the quarter as strength in North America in a mailer was offset by a decline in Asia Pac.
Adjusted EBIT margin held flat with last year on an organic basis at 8.1%. Despite the volume decline as a result of both ongoing productivity in synergies in covered related cost actions taken in the quarter.
Adjusted EBIT of $440 million declined 4% on an organic basis.
Adjusted EPS of 42 cents increased 31% over the prior year as the benefit of synergies and productivity savings lower net financing charges and aggressive share repurchase that year to date more than offset the headwinds from cobot 19.
Adjusted free cash was just over $150 million in the quarter inline with our normal seasonal patton, bringing the year to date total to approximately $100 million.
With that I will turn it over to Brian to discuss our performance in a little more detail.
Thanks, George and good morning, everyone.
So let's start with a quick look at our year over year EPS bridge on slide 10.
Im and mix, including the estimated sales impact from coal that 19 of $350 million to $390 million was a 10 cents headwind and this was offset by four cents of mitigating actions and a two cents tailwind in non controlling interest as a result of the lower earnings in our consolidated Tachy JV.
Okay.
The net five to seven cents estimated Escobar head impact we discussed on slide eight is included in this through cost.
As expected synergies and productivity savings net financing charges on share count were tailwinds in the quarter.
Moving to slide 11 for a quick look at our balance sheet position.
As a result of planned capital deployment actions in the quarter net debt was up roughly $900 million sequentially due primarily to share repurchases in the quarter.
We remain very strong position with net debt to EBITDA leverage less than two times still below our target range of two to two and a half times and we ended the quarter with over $1 billion cash.
Turning to slide 12, let's take a look at some of the proactive steps we've taken to further bolster our balance sheet position and enhance liquidity.
I would point out within the quarter, we repaid a $500 million bond, which mature in march with existing cash.
In April we Opportunistically raised a total of $1.25 billion in shorter term debt.
650 million in European financing arrangements, and 575 million from our current Bank group and I'll just point out these were pretty track attractive rates in this environment.
From a strategic standpoint, these arrangements allow us to maintain a flexible capital structure and also provides an additional cash buffer as we work through what we expect to be a challenging period over the next few quarters.
Additionally, as a reminder, we have to undrawn revolving credit facilities, which together amount to another $3 billion available credit.
As you know is substantially all of our free cash flow generation occurs over the next two quarters. This provides additional support to our strong liquidity position as we navigate through this difficult period.
Further I would point out that in mid March we suspended our planned room share repurchase program with approximately $700 million remaining on our original $2.2 billion target for fiscal 2000.
And Additionally, we will continue to be very aggressive and managing our capex spend the remainder of this year.
So in summary, given all of these actions, we are well positioned to refinance our upcoming debt maturities, including the potential use of our active shelf registration statement.
So, let's turn to slide 13.
Q2 was another solid quarter with adjusted free cash flow of roughly $150 million, bringing our year to date free cash flow through approximately 100 million, which is in line with our normal seasonal pattern.
For the full year, given the decline net income from co that.
Accompanying with other cash accelerations, we're taking in response to call that.
We now expect to achieve greater than 100% free cash flow conversion for the year.
In addition, I would just note that given our planned Q through Q3 restructuring actions in response to covert 19, the onetime cash outflows of $300 million will be adjusted as appropriate on our Q3 call.
So let's move to slide 14 for a look at our consolidated segment results.
Sales were down 5% organically again, primarily due to the impact of coded 19, which had the most significant impact in the quarter on our businesses and APAC and global products.
Segment EBITDA of 619 million declined 7% organically.
Synergies and productivity save as well as an immediate cost actions, we took in the quarter or more than offset by the volume declines we saw related to covert 19.
And then lastly, Q1 segment EBITDA margin contracted by 20 basis points to 11.4% and if you take a look at the margin waterfall you can see volume and mix declined 120 basis points versus the prior year, which was due primarily to co had 19. However, this was offset.
By 60 basis points of coal that mitigation actions in the quarter.
I would highlight that our gross margin in the quarter expanded 120 basis points year over year to 33.1% and this was driven primarily by productivity in synergy savings and pricing.
We continue to realize our plan synergy and productivity say.
Which is in addition to the covert actions in the quarter and this contributed another 50 basis points.
So moving to slide 15.
Given the call that 19 impacts we've consolidated in our key segment results under one page in the interest as time and begin to your questions I won't go through this information is in as much detail as I normally do.
However, we have included all the details we would typically provide related to sub segment organic growth in the appendix.
I would highlight to highlight a few items for each segment North America was flat from a topline perspective as low growth in eight track and controls in high single digit growth through performance solutions was offset by declines in retail and fire and security.
EMEA revenues declined 1% organically with continued strength and industrial refrigeration more than offset by declines in eight tracking controls and to a lesser extent buyers Kerry.
Asia Pac, which was hit the hardest was down 14% led by systems integration is down 20%, primarily as a result of the widespread shutdowns across China in the quarter.
Finally global products revenue declined 8% organically, primarily due to low double digit decline in our each track and refrigeration portfolio. The largest decline was seen in residential HVAC and was driven by a significant decline in our taxi business as a result.
After shutdowns in countries like Japan.
Overall orders for our field businesses declined 7% organically year over year.
Through February order trends have been tracking to the mid single digit growth.
Which was more than offset by the SEC sharp declines we saw in March across all regions.
Our backlog of $9 billion at March 30, Onest increased 4% organically year over year.
And then finally on page 16, corporate expense declined 21% year over year in the quarters with that I'll turn the call back over to George you discussed the framework in second half of our fiscal year. Thanks, Brian.
Let me spend a few minutes on our thoughts for the second half of our fiscal year on slide 17.
We are planning for an organic revenue decline in the range of 15% to 20%.
The most significant impact expected in Q3.
As I mentioned, we have taken numerous actions both temporary and permanent in nature to help mitigate the financial impact.
The benefit of these actions will keep the net decrementals on the revenue decline in the low twentys, which speaks to the value of the mitigating actions we're taking.
It is important to keep in mind that the 400 $250 million of mitigating actions are in addition to the 150 million of synergies in productivity. We have committed for the year of which $80 million is expected to be delivered in the second half.
Our focus is on controlling what we can control and that is ensuring we are financially and strategically well positioned when we exit this crisis.
Permitted actions, we've taken will ensure we have a lean cost structure, while protecting our product and channel investments to lead the new norm as we go forward.
As the largest pure play buildings provider, we are leading the change to provide more resilient and flexible building spaces safer environments, touchless or frictionless axis in remote monitoring service delivery.
This combined with our position as a leader in intelligent and sustainable building solutions.
Enabled us to deliver the outcomes that matter most to our customers.
Depth and breadth of our product portfolio combined with proven expertise and expansive global footprint provides us with a unique advantage as the evolution of the built environment accelerates.
With that operator, please open up the lines for questions.
Thank you we will now be cannot question answer session she'd like to ask a question. Please press star one EMEA check Telenet record your name and respect a timely ashu limit yourself to one question on one follow up question.
Our first question comes from Jeff Sprague with vertical research your line is open.
Thank you good morning, everyone hope you're all well.
Good morning, Jeff Good morning, Good morning, just just.
Two from the real quickly.
George we did see.
A pretty abrupt impact on your orders and obviously this is.
Precedented type situation, but I wonder if you can spend a little time on what the forward order.
Patent horizon looks like.
Is there wavering in the pipeline how are people feeling about kind of new construction projects. Obviously, the backlog is nice and gives us support for awhile, but just wondering what's kind of on that on the new horizon that kind of backfill on the backlog.
Yeah, Let me start Jeff I, just given given my thoughts on the Nonresi construction and then I'll give you kind of a sense and where we are here in April.
We are tracking the macro trends in third party data closely I would say that we've had incredible.
Discussions with our customers and understanding what their plans are I.
I would say that through as we look at our order pipeline.
Although it's still up it has moved to the right purely timing, what I would say about a quarter.
Certainly because of that it is what drove us to take the actions that we're taking now both temporary as well as the the permanent cost the cost structure changes.
And I do believe that there'll be some continued disruptions here.
Which we have limited visibility today.
Don I think it's kind of tough to look beyond the next six to six to nine months I.
I believe short term our backlog position as Brian discussed positions us here to bridge the gap.
And if I were to play out what's happened here when I look at Q2, we did have an UN demand air pocket and started certainly in China, Hong Kong, Japan, some of our larger markets in Asia Pac and then with the shutdowns that occurred in North American a mailer that continued and we see that continuing here in third quarter.
We did see an impact on service a bit but that was mainly because of sites being shutdown. We do expect that to come back pretty well here as we get through the quarter.
As we laid out our plan based on what we learned on the second half of March.
Lastly, we we looked at April and we said orders with potentially be down somewhere.
Hi high teens, 20% based on the daily activity that I've seen and we're watching this every day, it's coming in at above that level.
What I would say within that.
Asia Pac is better and so what you can see in the in the pipeline in the orders suggested that we'll get back to a more normal.
By the fourth quarter and so that is encouraging based on what we're seeing happening in APAC, but certainly as you would expect with all of the shutdowns that occurred in.
May low as well as in North America until our customers come back to work and we're actively engaging with them. It's hard to put that clearer picture together, but based on the interactions I've seen I am feeling confident that over the next three months, we'll see continued improvement so although it's kind of high teens orders.
In April that will continue to approve as improve as we go through the second half.
Thanks for that and maybe a follow up maybe maybe it's for Brian but on the for the 450 million of cost reductions how much of that is a kind of structural in nature that we could kind of think about carrying over into next fiscal year.
Yeah. So as you would expect we we started early what we saw happening in China, obviously, we have a big footprint there and so we began immediate actions now somebody actions a temporary such as unpaid time off for lows other employee compensation reduced travel you can imagine all of those at.
Actions and then the other is looking at this from a structural standpoint that we've been able to now proceed with it will have a much bigger impact as we move forward.
As we look at the world today, and what has happened what I would tell you it has.
Has really changed the way, we're working virtually and very quickly we had all of our salary teams working remotely.
With full security as well as access to Microsoft teams in the light. So we could stay engaged and so with all of that happening as we look going forward. It gives us opportunities to to think differently and think about our cost structure and and ultimately enhance our productivity.
And so as you look at the actions we took a b the 400 to 450 of the mitigating actions.
Expected to come through in the second half about 80% or temporary and then the other impacting the quarter are the structural actions that we're taking recognizing that though that's only one quick one.
Totally really the benefit of about one quarter then as you project that in 2021, we actually have a margin structure that with the volumes that we're anticipating that will actually have a better margin structure.
And when you look at the the buckets of cost you will see about 60% is comp and Ben and Thats. The result of the furloughs and other employee comp and in some of the restructuring you've got 30% bids in indirect spend in about 10% in facilities Jeff.
Great. Thanks for that best of luck function.
Thank you. Our next question comes from Steve Tusa with JP Morgan Your line is open.
Hi, guys good morning.
Hi, good morning, owning say thanks for all the detail on on the breakout and all this at all this cost lots of big numbers being thrown out there temporary you guys seem to be done some structural stuff as well so.
That seems to be a positive on any any color at all on ER on kind of how this 15% to 20% break down kind of.
Quarter to quarter or should we just assumed that it see now within a band kind as stable for third and fourth quarter.
Yes, so Steve as we looked at the the third and fourth quarter and try to model this and how it's going to play out based on what we learned in March.
Certainly the the larger impact will be in Q3.
And that's where we're tracking Asia Pac will be better because they're now in the recovery mode.
But as you look at umbrella in North America April will be the toughest month and that will continue to get better through the quarter, but if you look at the two quarters. The larger impact is going to be in Q3.
And so that's why we as we saw this happening we took the actions that we took on a very proactively with the temporary actions and then really then went into the next phase of our permanent cost reductions, which is going to play out well not only in the second half, but will set us up well for for 2021.
And Thats, what gets us to the to the net decrementals to be in the in the low twentys in the second half and then when you look at that combined with the that combined with the addition of the 150 million of the of the plants and synergies and productivity that will achieve for the year in about $80 million of that is actually in the second to.
For the year.
Got it to help you just to help you with the models as well then below the Decrementals I mean.
We continue to take a hard look at our corporate cost structure I have taken additional actions really as a result, as the covance situation. So our corporate expense now.
Which original guidance was 330 to Threeforty, we've now being that to 65 to 275 range.
And then for net financing costs, even though we've taken on some more debt since we suspended our share repurchase program those two pretty much offset some net financing costs, we're going to retain effect to 45 to 255 level and then when you look at minority interests are non controlling interest.
As a result of some of the pressures that we're seeing in our touchy JV. Our original guy for non controlling interest was to tend to 20, and we're moving that down now to 150 to 170, given the pressure we're seeing in a tachy. So those are kind of three below the line.
Items that that will be helpful to you as you update your models great very very helpful. Just one last one.
For me.
So if you're down at kind of the lower end of the range of that in Threeq, you kind of the 15 to 20, I mean does that mean like install related stuff because I would think services would maybe hold up a little better or maybe there's some shutdown impacts.
Maybe that's the difference, but does that mean installed is down.
You know like in the 30.
No no and when you look at our the way. This plays out is is the installed the the pressure on install is actually access to sites and in all the shutdowns that have occurred.
May low it started in China. So when you look at what happened in China in the in the second quarter, our install was down about 30% I believe or thereabouts, and so that will be coming back in third third quarter and fourth quarter.
When you look at service in Asia Pac It was down about 7% now that was a lot of that is purely because of access to to facilities in the sites that we provide service to when you look at umbrella in North America, certainly that started at the end of March and Thats continuing through April so.
We do see an impact like I said.
Starting out and when I when I gave those previous numbers those orders.
As far as revenue.
We will be similarly at the at the higher end of the of the decline here in April, but we believe that that will.
Sequentially get better as a quarter plays out and so installs mainly access to two sites and then service was purely temporary because of the shutdowns, but we believe that that will it will be the toughest and will get better monthly on a go forward basis totally totally makes sense. Okay. Thanks, guys appreciate it.
Thank you. Our next question comes from Stat, Scott Davis, what Neely. Its research your line is open.
Hi, good morning, guys.
I wanted to Scott.
Thanks for the color on on everything so certainly in the morning, but its kind of curious George couple your comments about just what perhaps the building customer may do going forward from a.
Yes on whether its head you be light or filtration or some sort of retrofit the to perhaps just improve the air quality to building is is that.
Is it too early to have those conversations with your customers as interest and everybody is scrambling to stay alive right now and is that a real thing do you think that there'll be a fair amount of spend that needs to occur to take to clean air.
Yes, Scott what I would say is we're in very active engagement, so with our customers in defining what the new norm is going to be in what technology can do to ultimately address some of the new challenges.
Some of what you discussed is absolutely front and center.
Initially, it's as simple as adding IR scanners. So we can do temperature checks and and the like its itself sanitation, it's enhanced filtration in.
Other technologies that can ultimately drive purification of the year.
What I talked about in my my prepared remarks, I I would categorize it in four key buckets.
What we learned in this hospital response from this healthcare responses I think there's a view that space is going to be much more flexible.
And then that's across verticals and what can be done too to create flexible space, it's going to be safer environment. As you say not only the air purification, but then touch listen frictionless everything within within buildings and infrastructure, what I would say, it's it's going to be more automation that ties to more on.
Imations, which helped to ultimately plays ours plays to our strength. So those are the trends.
I would tell you Scott that very actively engaged with.
Other Ceos and a bunch of our customers and really defining what the new norm will be and then from an innovation standpoint, we're already deploying resources very actively working in partnership with our customers to be able to deliver on these type of solutions.
Okay sounds interesting so.
Just a somewhat separate less positive topic, just when you think about your backlog is there a certain percentage of at your teams that are at a high risk Alec hotels things like that that just the projects. This may not get off the ground. The next few years.
So right out of the gate, we have really gone through all of the backlog recognizing that there's going to be some industries that are going to be extremely challenged given what the impact is the impact that this has had and I would tell you that most of what we've seen.
From what from that has been where projects have been pushed to the right.
So although we've seen short term the inability to convert although I would tell you. The activity is still very high we've had thousands of of customer engagements via video meetings on continuing to stay engaged and ultimately executing on their demand and being able to support them.
And so when I look at the backlog were it was actually up 4% thats purely because of the way how things play doh from a revenue turn standpoint.
I believe that in the pipeline is actually up that although there'll be some that are going to be delayed and potentially canceled because of the state of the of the industry I think that there's new demand thats backfilling that that's coming into the pipeline as fast.
Given what we see today.
I would just to add to that we have done a backlog review of $9 million selling as George said.
Sitting here today, we have not seen a significant number of cancellations, we've seen more delays versus cancellation. So it's something we monitor every month and the ops meetings that we have with our business units and well keep a close eye on it.
Okay. Thank you that's encouraging and good luck guys. Thanks, Eric.
My pleasure thanks.
Thank you. Our next question comes from Nigel Coe with Wolfe Research. Your line is open.
Thanks, Good morning, guys.
Well.
Good morning.
Just so I wanted to back to the second how bad luck recognizing that the 15, 20% is a pending range.
Could you, maybe just see manachised cut dug into it a little bit but.
How do you see sidus within that 15, 20% and then if you could break out how you view.
Fire business acuity this HTC fitness within that within that kind of range you put out there.
Yes. So we look we look at well give you a sense on Q2, and then how that continues to play out here.
Over the third and fourth quarter when you look at.
Products will start with products down 8% in Q2 will continue at a that'll be a little bit worse in a worse in Q3, mainly because of the residential HVAC, which we talked about in the prepared remarks, and then when you look at the mix of that.
It will be pretty much across all of the domains, although BMS is actually holding up pretty well, our our digital businesses are holding up well. So most of the decline is being driven by H. back.
As well as fire and security.
When you look at the the field the field was down 3% service was up one but that was with the north American umbrella up offset with the decline in Asia Pac down seven and so as I said earlier I believe that service.
We will see some short term impacts and service even in a mailer in North America here over the next.
One to two months, but I believe that the service based on our backlog in the demand from LM that'll that'll continue to come back overtime on the install side as I said, we have a good backlog and purely it right now it's purely because of the shutdowns that's impacting our ability to be able to convert the install revenue.
So as we saw as I said, it's going to start off at the at the higher end of that impact.
In some cases, maybe a little bit worse, because even in China, we saw our install get impacted by 30% with the complete shutdown, but as that goes forward with more access to customer sites into projects, we see that continuing to improve through the quarter with service coming back sooner.
Then the total installed.
That would you expect it tends to be within that range at the low end so would it be below the low end to that 15%.
Yeah. So.
Nigel.
Everyone. We're trying to project what we we see happening. This is really based on what we've seen the last few weeks.
I am encouraged that because we've been deemed essential everywhere, we work across the globe recognize that we've stayed pretty much in operations. Although we've had some disruptions we maintained our operations because of the criticality of what we do supporting our customers and so most of the impact is purely because we haven't had.
Had the access to be able to to perform what we do it at customer sites and so a lot of it's dependent on that and how how.
Countries open up and how business is open up and sites open up so it's really dependent on that Nigel.
But based on what we see here in April I am encouraged based on what Weve, what Weve provided for a framework that were in line with that.
Okay, and I recognize another way to think about that Niger within our service business is roughly like 25, 30% of the consolidated we're giving a range here of 15 to 20 enterprise wide and then.
So if you look at that and say our products businesses about 8 billion. Our service business is six and the remaining as the install pace I think the service decline has going to be lower than in the 15% to 20% range were given and then install will be on will be higher a bit higher.
Sure on the high end and products is just somewhat dependent upon how we ramp up in some of our manufacturing facilities. George mentioned in his comments that right now we're in pretty good shape or what monitoring some things in Mexico in India, but some of it is dependent upon how quickly we can ramp backup from a manufacturing staff.
Point. So the 15 to 20 is intended to be kind of a broad guidepost here, but.
Service service would be.
Lower on the low end or lower Sir ladies and.
Then the 15% to 20% range.
Okay. That's what I was trying to get feedback recognizing that there's not a lot of.
Yes decimal points here on the numbers, but George can you quickly just addressing in China and Asia Pacific in April, which businesses, you've seen spring back quickly and which businesses of it was still somewhat depressed.
So when you look at Asia Pac and total is pretty mixed starting with China. Most companies are back to work I wouldn't say things are back to total normal, but I'd say, probably in the 80% to 90%.
Area, and we're coming back nicely, we've seen some nice pickup in orders and activity there.
Obviously, there's still travel restrictions within the country. We are watching what I would say, we're watching a couple of other areas closely Singapore in India because of the current Lockdowns and there are some some pressures there so.
When you look at our headquarters were back full operations at our headquarters in Shanghai. So overall I think it's we're using that as the model and understanding how that plays out across these other countries. We do expect to see continued challenges.
In the region in the second half of the year with the larger impact in Q3.
If you look at specifically your question on China, I would say the biggest impact as I said earlier. It overall, it's about 6% of our consolidated revenue the revenues were down about 35% organically in the field in the field based businesses in the in a lot of this was driven by by our install business in China.
But even with that the good news there is with the work we've done around around gross margins with pricing and productivity our margins were up nicely and so on a go forward basis, we feel good with the recovery that's going to play out there and that seems to be happening as we sit here today.
Through April and so with somewhat encouraged by that trend now on products. We also have had the impact in products it's about.
5% of the total segment as well as Brian talked about we do have our facilities back and running.
The customers are coming back up but it's not it I wouldn't say, it's at a 100%, but it's encouraging that the activity has has picked up pretty significantly here over the last few weeks.
Okay. Thanks.
Our next question comes from Julian Mitchell with Barclays. Your line is open.
Hi, good morning.
Maybe.
Good morning, maybe just following up on that mix.
Spec. So is it fair to assume that Youre decremental margin outlook for the second half.
That should be embedding will could be embedding.
Fairly hands to margin mix Tailwinds.
Just because you know service is down.
Less than the install.
Maybe just clarify that and also how are you seeing that discipline on pricing.
Cross vis install and products in terms of maybe the marketplace as well as garden discipline in pricing practices.
So let me start starwood. The the first question there Julien the when we talked about in the quarter in second quarter and install was down.
It was down greater than than than service in Asia Pac and that was true.
As well as in North American a mail it so that so that where.
We had.
A little bit of mix here in the quarter come through because service was down less than that install when you look at on a on a go forward basis.
That will probably still be true as it plays out right. So that the install will be there will be pressure there with the install coming back service, we believe we'll come back quicker.
But but we've seen pressure in both.
When you talk about pricing, we have been very successful and continuing to execute on price.
For the year, we're still expecting about a point on the top line coming through our price realization.
And that has continued even through this this period of time with the pandemic.
That's helpful. Thank you and then my second question.
Really just around the free cash flow conversion, so you've raised that.
Guidance for the year.
Maybe I missed it but if you could clarify perhaps what's changed on the capital spending from fiscal 20.
And how confident you are that you'll be able to get those sizeable working capital cash tailwinds in the second half are you seeing payment terms proving fairly regular.
Many of the easy to manage that balances.
With those of payables.
So the free cash flow conversion going now from 95% greater than 100%, it's really a function of the net net income pressure, we're going to see in the second half as it relates to.
Metrics I would tell you that we ended the second quarter trade working capital as a percentage of sales. We saw a 10 basis point improvement year over year, so not as much as we saw in the first quarter, but still we continue to make progress.
It is an area we're watching very closely in today's environment, I think dsos flat in the quarter and it's an area that we're watching very closely as we move forward, but I think with the.
Policies and practices that we've got in place now through our cash management office, it's going to be a challenging environment from a cash flow standpoint, we'll manage our trade working capital appropriately we feel pretty good about line of someplace north of 100% right now.
Great. Thanks.
Thank you. Our next question comes from Chow Ritchie with Goldman Sachs. Your line is open.
Thanks, Good morning, everyone to help grow well Echo morning.
George maybe my first question I know.
Touched on this that sat service versus install Pete.
But the clearly like dessert business held up better in China during during that.
Okay. Thank team.
Yeah, shutdowns and and clearly from an install perspective, you need to be on premise I guess the question that I think what we're trying to understand is just from a service perspective, how much of that business. It does not need to be on premise how much of it is kind of subscription based and can be more resilient.
Downturn.
Yes, so getting back to the service.
Service held up in Asia Pac better than the overall in install and in China was down almost in line with the install but coming back faster.
If I misled you there.
And so when you when we look at now and it's mainly because of access to facilities insights that we provide service too.
The rest of it overall Asia that only impacted overall Asia being down 7%.
With our installed in Asia down even greater than that in total.
So just to clarify on on the first question.
And then then the second part.
Well.
Could you repeat that yes, yes.
Yes.
[laughter], Yeah, obviously happy on product or service.
For you generate service revenue.
It is.
As the subscription based work.
Doug Aron.
Is there of course.
That is not located.
Hey, George why don't you, let me jump in on this one a little Jeff So Joe I think one way to think about it when you look at our total service revenue about half of it is performance service agreements and the other half would be more you know nonrecurring time and material and things of that nature now clearly when you look at that part that's performing service arrangements some of that.
Just still require to be on premise, but some of that will be Renault like monitoring the such so I mean don't have it all to that level of detail, but that's one split you can think of as you're trying to think about the piece that's more resilient and to the point you made earlier I mean, if you take the performance in Asia Pac during the quarter clearly you can see that service held.
In better then they install side of the business, even if you take a look at global financial recession in the late night period, you would see you know something very similar to that as well.
Service went down but clearly not to the extent that installed did say your point well taken service is much more defensive particularly in this type of environment and we'll definitely hold up better.
Hello, how call. Thank you and if I think maybe just follow up with Brian just from a balance sheet perspective.
Spending suspending the buyback at this point I.
I guess just from a timing standpoint, how would you guys think about reinstituting, a buyback and getting a little bit more aggressive capital deployment from here.
Yes, I think the current plan as well continue to.
Hold off on the buyback through the end of this year and we think Thats a prudent thing to do and we'll re evaluated as we think about.
2021, but at this point in time I would.
I would tell you that as far as your models and so forth I wouldn't assume any buyback for the remainder of fiscal 2000.
Okay fair enough. Thank you all.
Thank you. Our next question comes from Andrew Kaplowitz with Citi. Your line is open.
Good morning, guys will do well.
All right good morning.
Hi, how are you thinking about your fire and security businesses in general moving forward when you'll get apacs field is down 14%, but you see tightened security in the field can only low single digits. So how are you thinking that these businesses, which should be less cyclical and the rest of your portfolio versus that second half guide and down 15 or 20.
Yeah. The field when you look at fire and security.
For the quarter is the fire and security products were only down.
Low single digits and it was a mix so the what what really drove that was.
Fire suppression and a lot of that was just timing of projects and on the on the feel were down about.
2% and that was a low single digits and it was spread across the regions now when you play that out we're going to see similar type of impacts in the third quarter third and fourth quarter relative to the shutdowns in and how that plays out but it is a higher mix of service.
So you see less of an impact in total because of that.
That's what we've we've got modeled we've got we've got the businesses have been performing well in spite of the.
The challenges that we faced in.
We're prepared to continue to execute.
That's helpful. Maybe then obviously that is if I if I just think it applied h. back in product. She was down mid teens in Q2, I guess not for that was a pack related weakness, but does that suggest applied could be down more than 15, 20, maybe give us your outlook and sort of what you're seeing managed sort of larger projects are they just so.
Are they getting deferred and right now.
Yes, if you look at play a commercial applied age back revenue was down mid single digits, and it's mainly driven by the eight Asia Pac decline in being down high teens and that was the bulk of it when you. When you look at orders are about the same it was down low single digits in its mainly driven by a APAC.
In the full impacted that we saw during the quarter because of the.
Because of the virus and so as we look at our pipeline, we really as Brian said, we were trending pretty well and are on our secured orders right through February in a mailer in North America, and then that was true with applied.
So with the with the impact here, we think it's temporary the pipeline is still there some of the pipeline is being pushed to the right because of the timing of projects, but we still feel very good about our position what we see in the pipeline our ability to be able to convert now obviously pushed to the right.
And Andy just one thing to jump in here. If you think about the criticality of the things we do both within fire and security and H. back clearly both very important, especially in the environment. We're currently and I think the important point is what George said is there anything higher mix a service in the fire and security business versus H. back so to that point.
Service will hold up better that kind of gives you an indication of the two different platforms.
Very helpful below that.
Thanks, Operator, we have time for one more question.
Thank you our last question comes from John Walsh with Credit Suisse. Your line is open.
Hi, good morning.
Hi, good morning.
Maybe just a follow on.
To that question wanted to know what you were you talked about for healthcare vertical earlier why didn't I know you were hearing on kind of more on the public side, whether that you know municipality federal and maybe also.
It's increasing if you're if that's part of where that pushing to the right is this decisions are being slower coming out of those verticals, how you're thinking about that.
Yes, what we've seen there.
Short term, we've seen a push to the to the right within those projects also.
We do believe we have a pipeline now of new projects that are coming in based on the way that we have responded to the crisis and creating new capacity in new capabilities and so there is a lot of new projects that have been identified but when you look at the overall project base, it's been pushed to the right similar to what we've said.
With some of our other backlog I do believe that there's going to be.
Some stimulus here.
In the institutional verticals relative to two what's going to happen with the new norm as we discussed earlier, what's going to be required to get these facilities back and operating so we see an opportunity there. Although we're in the early stages of that and so that's something we're going to watch closely because I think.
Based on what we do in the buildings that we support I think there's going to be a lot more opportunities that all being said I think there's going to be some financial constraints and so we're going out the watch that closely as this plays out.
Great and I'll just leave it there the interest to try and appreciate the color.
Hi, Thank you.
Closing comment.
Yeah, just to wrap up the call I want to thank everyone again for joining our call. This morning.
We are as you as you know we're navigating through these challenging times very well, we're well positioned both financially and strategically to capitalize on the recovery as it plays out in a again I hope that you and your family's remain safe and I look forward to speaking with many of you soon.
So operator that concludes our call.
Thank you for your participation in today's conference. Please disconnect at this time.