Q1 2020 Earnings Call
Dot com.
I like to introduce your host for todays conference call, Sam Pearlstein, Vice President Investor Relations. Please go ahead Sir.
Thank you operator, good morning, and welcome to carriers first quarter 2020 earnings Conference call with me here today, or Dave Gitlin, President and Chief Executive Officer, and chemical obvious example.
<unk> Chief Financial officer, except as otherwise noted the company will be speaking to results from operations, excluding restructuring costs and other significant items will be nonrecurring indoor nonoperational nature, often referred to by management as other significant items. The company also remind listeners that the earnings and cash flow expectations and any other forward.
Looking statements provided in the call are subject to risks and uncertainties carrier SEC filings, including carriers registration statement on form 10, and their reports on forms 10-Q, and 8-K provide details on important factors that could cause actual results to differ materially from those anticipated in the forward looking statements.
This morning will review our financial results for the first quarter 2020.
Sure what the remainder of 2020 could look like under a few scenarios and we'll leave time for questions at the end.
Once the calls opened up for questions. We ask the limit yourself to one question per caller to give everyone. The opportunity to participate you may ask further questions by Reinserting yourself into the queue. If time permits with that I'd like to turn the call over to our president and CEO, Dave Gitlin. Okay. Thank you Sam and good morning, everyone. I Hope that you and your families are all healthy.
Safe.
Our thoughts go out to everyone affected by this crisis and our thanks go to the frontline workers, who are fighting this pandemic I would also like to recognize the incredible efforts of our entire team at carrier.
Just continue to deliver essential products and services to our customers during these challenging times.
I've been so impressed with our 53000 employees.
Have stepped up in a truly profound way and I couldn't be more proud of this phenomenal team.
Clearly a lot has changed since we last spoke to you in February.
Therefore, we don't we're going to structure our comments as follows.
First.
I'll take you through the impact that Kobin 19 is having on our business and how we are addressing these dynamics head on.
Kim will then run you through our first quarter financials as well as provide more detail on our approach to managing our liquidity cash and balance sheet and then I'll provide more color on the remainder of 2020, starting with slide to.
In response to Coburn 19, we jumped into gear early and aggressively we started daily leadership team meetings that continue today and we established four priorities that have guided our decision making.
Our first priority is the safety of our employees.
Our office employees are generally working remotely while our factory personnel have largely continued in the workplace to support our customers, giving a critical nature of our products and services.
In our factories, we have gone to tremendous likes to keep our people say by implementing an extensive range of safety protocols and we're now applying those best practices to our offices as we begin to transition office employees back to the workplace.
Our second priority has been to maintain business continuity to deliver essential products and services to our customers.
Like other manufacturers, we did experience temporary closures and some of our 49 factories in China, where we have nine factories in about 1300 suppliers all of our sites where operational within a couple of weeks.
After the February 10th reopening after the lunar new year, and our output from our sites and from our local suppliers has been close to 100% for the past month.
We have had short term factory closures in India, Malaysia, Mexico, the either on the U.S., but our team has done a super job minimizing the length.
The occasional site closures and supporting our customers.
Well, we continue to experience episodic supplier challenges our supply chain team has been managing these issues as they arise.
Our third priority is to effectively manage our costs and preserve cash.
Tim will cover this topic in more detail, but I'm pleased with our proactive approach in early results, we accelerated and increased savings through carrier 600, which is our plan to eliminate 600 million in cost over three years.
Between our overdrive expectations on carrier 600 for this year together with other onetime cost actions, we will be driving 425 million in cost actions this year.
For example, we have implemented a 15% pay cut for our senior leadership team, including myself reduce the board of director pay instituted a 15 day furlough suspended merit increases.
We're driving down expected incremental public company costs by about 25 million for the year and we are aggressively managing our discretionary spend.
We will also be reducing our capex from our initial plan of 350 to 400 million into 200 to 225 million.
So we are aggressively containing spend we continue to invest in areas that are critical to our growth agenda, including R&D sales and digital.
All critical to our core strategy to get to sustain mid single digit growth levels.
On the cash side, we are comfortable with our liquidity position. We started with 1.3 billion in cash on April Threerd, and we are confident in our ability to generate more than a billion in free cash flow this year.
We have access to a $2 billion revolver if needed.
So we have a strong cash position and our carefully managing it.
Finally, our fourth priority has been to ensure that we emerge from this pandemic stronger by accelerating implementation of our strategic imperatives and I'll give you more color on that on the next slide so turning to slide three.
It highlights how we're positioning carrier for long term success.
Starting with our organization culture focus in values. This truly is a new carrier with a very different feel to it both internally and externally. We recently launched the carrier way, which lays out our vision values and behaviors. Our culture is focused on customers winning growth agility innovation and empowerment.
We are breaking down barriers to enable our people to be more externally focused and empowering them to drive our long term growth agenda.
On people, we have made great progress and assembling a world class leadership team with both external hires and promotions of internal talent.
We launched the new carrier operating system, which is both nimble and discipline and we are doubling down on our SG commitments with a laser focus on our commitment to the environment through not only our own factories, but also more innovative energy efficient products.
And we've supplemented our focus on the environment with initiatives that support the needs of our communities by playing our part in the fight against this pandemic for example, we design and produced our new optically negative air machines in just a few weeks and early feedback from the hospitals on our prototype units is very positive.
Turning to our strategy and growth pillars. These remain unchanged, we continue to deliver against our three strategic topline priorities funded by carrier 600.
In the first pillar growing our core we remain well positioned within each of our segments building off of our number one or two market positions. We are also adding 500 net sales employees, while we continue to make key strategic R&D and digital investments.
We've had significant wins across the portfolio, including our largest order ever of 19 Dv Chillers for data centers in Indonesia, and exclusive long term resi deal with Fisher homes in the U.S. and very significant wins across our refrigeration in Fms portfolios.
In our second pillar, extending our products and geographic coverage as a vote of confidence in our CFO to technology that we're using to enter warehouse refrigeration. We were selected to provide the cooling for the Beijing Olympics ice rink, and we secured a V. RF win for the Sanya Olympic village apartments for <unk> in China for third.
500 heat pumps and 1000 condensing units.
And in the third pillar driving aftermarket and digital we have a dedicated aftermarket team in place we indicated that we'd get to a 30% conversion rate in commercial h. backed by the end of next year and we are on track to do so this year, we're rolling out structure tiered offerings customize the customer's needs.
We have lean forward on digital as a differentiator through remote monitoring diagnostics and prognostics.
We've had some key aftermarket wins, including a four year Chiller service agreement with the Hong Kong International Airport for 52, Chillers across 17 buildings.
And support for Tim Hortons, China operations that is projected to scale to 1500 stores over the next 10 years.
And on the right side of this slide we're very proud of our essential and vital role in society, we support air conditioning systems in hospitals, and nursing homes, and the delivery of food and pharmaceuticals safely around the world.
Looking ahead as countries and regions around the world are preparing to reopen economies in society, we intend to play a critical role in anticipating and creating new normal.
For example, indoor air quality will be critical we're putting the v. back in HVAC and our unique electrostatic systems can filter microscopic size contaminants carrier will be a leader in transitioning buildings around the world from six to healthy buildings.
Addressing food safety in the new normal will be Paramount and we've been making tremendous progress on holistic cold chain solutions and in our fire and security business touched listen trace ability will be very dramatic in the future with our touchless Blue Diamond solution, we can eliminate 80% of typical contact points in an office bill.
I think by enabling employees to use their cell phones and said.
So with that let me turn it over to Tim to discuss one Q cost in cash and I'll come back to discuss our best sense of 20 to 20 Tim.
Thank you Dave good morning.
Please turn to slide four where I will walk you through our Q1 results, but before I start.
I want to point out that as we move from being a division of United technologies to becoming a fully independent public company. Some of the numbers. We report will not have a perfect comparison with last years.
The form 10, Carbout statements adjusted for that in some circumstances, but not all.
We'll try to help you understand those noncomparable with explanations, but a maybe a bit messy and we'll continue to be so for the remainder of the year.
With that caveat, let me jump into the results for our first quarter.
Despite significant macroeconomic headwinds in the back half of the quarter. It started out about how we had expected and reflected a solid start to the year.
Sales of $3.9 billion were down 10% from last year, 9% organically, which adjusts for a 1% FX headwind.
We reported at Investor day, we faced difficult year on year comparisons in each of our three segments.
And Hvdc, our residential results last year reflected a strong furnace season due to abnormally high shipments ahead of a new for regulation.
In refrigeration, our North American truck and trailer business came off a cyclical peak in Q1 last year.
And then FNF, we wound down or residential intrusion business, creating a year on year decline in 2020.
Additional pressure came from the warm winter this year and resulting softness in residential furnace sales.
These items accounted for about half of our Q1 decline.
The remainder resulted from the impact of Cobot 19 on our business in the latter part of the quarter.
It first in China were about 8% or $1.5 billion of our revenues are derived.
This had a material detrimental effect with domestic China sales down approximately 40%.
And in addition, a good part of our global factory production and supply chain sources come from China.
We did however managed through that disruption without a material impact on a rest of world business.
But then later in the quarter the virus move west into Europe, and then onto the Americas.
This pandemic accounted for about $230 million of our revenue decline in the quarter.
Our teams have worked tirelessly to keep factories operational and productive to serve our customers around the world and they continue to do so.
Moving down the BNL GAAP operating profit was $315 million.
Adjusted operating profit of 436 million was down 16% from last year.
But this adjusted number is still not comparable.
Our Q1 included about $24 million of public company costs that were not included in the same quarter of 2019.
Absent the impact of that the comparable year on year decline was 12%.
And of course, it was heavily in back impacted by Corbett 19.
But we're not happy about the negative signs here, a 12% decline for comparable adjusted operating profits versus a 9% decline in organic revenues shows we were able to offset a lot of the typical decrementals largely preserving our operating margin.
Our Q1 GAAP EPS was 11 cents, an adjusted EPS was 35 cents.
Since we're not a public company last year do your year over year comparisons of EPS are not meaningful.
I'm pleased to report that our free cash flow was favorable to last year by over $200 million.
Q1 is typically a seasonally user of cash so bringing to bring it in almost flat reflected a solid start to the year.
The decline in net income was more than offset by favorable working capital results and aided by some deferred tax payments.
All things considered our performance in the first quarter was solid with good mitigation of a very difficult environment.
Let's now look at how the segments performed please turn to slide five.
Hvdc was down 9% organically within North America residential was down 11% organically with roughly half the decline due to last years for driven accelerated gas for in shipments and the other half to slow shipments this year due to the unseasonably warm winter.
Overall foreign sales were down 30% year over year.
The commercial business was down 8% organically as a 5% decline in light commercial and 20% decline in applied driven by weakness in China, and Europe that was only partially offset by a flattish services business and strength in AOCI and Nebraska.
Refrigeration sales were down 14% organically with North American truck trailer down close to 30%.
Europe truck trailer down around 15% and container down around 7%.
A difficult truck trailer comparison for the quarter was expected as I mentioned earlier.
But the results did deteriorate as the quarter progressed.
Commercial refrigeration was down 13% organically with weakness in both Europe and Asia.
The fire and security segment was down 5% organically with the products business down 4% organically.
This was attributable to Kobin related project delays and shutdowns in Asia and Europe.
But was partially offset by growth in our longer cycle businesses water missed and gas suppression and also growth in global access solutions.
The field business was down 5% organically due to March lockdowns across regions with particular weakness in Hong Kong, Australasia and France.
In this world of uncertainty, we're focused on controlling the controllables and that includes aggressive cost containment actions.
Slide six provides a breakdown of our cost programs.
In February we told you that we expected to achieve $175 million of savings from our carrier 600 this year.
And that we would invest 150 million of that back into the business to support our growth strategies.
The current environment shifted some of our priorities to aggressively reduce cost yet to preserve critical investment initiatives.
The actions that we're taking are expected to generate $425 million of cost improvement this year.
Including accelerating carrier 600, reducing our planned investments.
Implementing an aggressive cost containment program.
First we will accelerate carrier 600, and expect to deliver an additional $50 million in 2024 total of $225 million.
Second.
We have scaled back our investments in the year by $75 million in a very surgical manner.
We're preserving the investments and initiatives that are most critical to our growth strategy to ensure we are well positioned as we exit this crisis.
We have also initiated a 300 million dollar cost containment program for 2020.
Lastly, while cobot 19 effect volume and the drop through margins. It also disrupts our factories and other areas of our cost base.
We're anticipating a 200 million dollar nonrecurring headwind this year on things like factory absorption supply chain disruption expediting costs and inefficiencies caused by precautions for the safety of our employees.
The $425 million of cost actions more than offsets this impact and our net savings are $250 million up from the 25 million, we laid out at Investor day in February.
Dave mentioned, our top priorities for 2021 of which is to maintain ample liquidity. Please turn to slide seven and I'll walk you through that.
I mentioned earlier that we performed well from a cash flow standpoint, and a quarter that is typically a big user of cash.
Our working capital usually seasonally spikes in Q1, as we start building for the spring summer selling season.
We managed to tightly this year and delivered better cash than planned by over $200 million.
We started the quarter with a cash position of 952 million.
Ended it with the balance of 768 million.
This resulted from a neutral free cash flow and the use of $184 million from other investing and financing activities, including a small debt repayment and the effective foreign exchange.
And that spin you Tc returned us approximately $560 million of cash so our opening balance sheet started with just over $1.3 billion on April threerd.
From this base, we will continue our efforts to preserve and enhance our liquidity.
We will intensify our focus on all the components and levers available to us.
This will include tightly managing working capital expanding and driving the program we began in Q1.
We've also done a deep scrub of our capex budget for the year and cut it by 40% to 50%.
It is now 200 225 million down from the 350 to 400, we had originally planned.
In pairing it back we have prioritize those projects targeted at our strategic priorities for growth and those projects, which have high returns and a quick payback.
We will also assessed the timing and amount of a dividend.
Our form 10 identified a possible dividends scenario that was appropriate at the time, but the environment. We face today is much different from what it was then.
With this foundation and these actions we expect good free cash flow for the year and it will add to our available cash.
In addition to our cash position, we have a $2 billion revolving credit agreement with a strong bank group.
That remain volatile remains undrawn and fully available to us.
And finally, I will remind you that we have no debt maturities until 2023.
So we feel quite good about our liquidity and are confident we have access to the capital we need to weather the storm and to operate and grow the business.
With that let me turn it back over to Dave to discuss how we're thinking about the balance of the year.
Thanks, Tim.
So what does this mean for our expectations for the full year.
For our scenario planning and this uncertain global economy, we looked at three key indicators to frame our thinking.
First macroeconomic projections like GDP second indicators more directly tied to our business like new housing starts and third order trends.
At a macro level, starting with GDP, our current guidepost for 2020 assume us GDP declines about 25% in the second quarter.
And 5% to 10% for the full year expectations for Europe are similar we assume China shows growth in Q2 and accelerates from there.
When we look at macro indicators specific to our segments, we assume headwinds from lower replacement volumes as unemployment rates impact homeowner purchases.
You as housing starts being down 10% to 20% this year and continued softness in Nonresi construction starts in North America, and Euro as we see from leading indicators like the architectural billing index.
And in our refrigeration business the forecast declines in North America, and Europe truck trailer will be even steeper than we had originally forecast.
HCT forecasts North American truck trailer production to be down 45% this year and European truck trailer is likely to be down 20% to 30%.
Container drops are likely to be far more muted.
So then on page eight let me share some color with you on orders, we start with our China experience Q on orders were down 40% year over year with February being the lowest month down 50%.
In the category of good news the China recovery has been very positive.
Our daily order rates returned to pre crisis levels in mid April and our April orders in China were flat overall.
The recovery has been a bit spotty in one month doesn't make a trend.
But for US China's decline and then its recovery both quite steep.
Our current thinking about the us any you.
Is that the decline will be a bit shallower, but the recovery will be longer for us.
Orders declined earlier in the EU than in the us, but we also expect an early recovery.
Orders in one Q were down 10% in Europe, but were down 5% in the us.
And that accelerated into April with Europe down, 30% and the USA down 25%.
The numbers that you see here as guide posts as we look at various scenarios scenarios playing out globally.
We see sales between 15, and 17 billion adjusted our profit between 1.7 billion in 2 billion and free cash flow over $1 billion.
Also with respect to the scenarios behind the sales decline for the whole company you should think about the H. back segment declined fairly aligned with the percentage range that you see here with refrigeration facing a bit more had when an F.N.S. expected to be a bit better end of the range.
Given that 80% of our sales or in the U.S. in Europe.
We expect the steepest declines to occur in two would improvements from there.
So.
We have done our best to analyze the rest of the year for ourselves and for you and we will continue to update you as is very fluid situation evolves.
And though the coming months are inherently uncertain, what I do know with great confidence is that we'll get through this crisis and over the long term mega trends such as climate change global urbanization and the shift towards did <unk> digitalization and operating in the new normal will remain tell ones for our business and this takes me to our last page on page 10.
We remain confident that the game plan that we laid out for you on February 10 will drive the results that you see here.
We are getting real traction on the three pillars of our top line strategy, which will propel sustain mid single digit top line grow.
We are tenaciously driving carrier 600 to investing growth in to help drive margin expansion to enable high single digit D.P.S. growth on a steady state basis.
And we are laser focused on driving working capital improvements needed to support free cash flow equal to net income.
We have a clear road map to success, we remain committed to executing on our plan with urgency conviction and effectiveness and with that will open this up precautions.
Thank you ladies and gentleman once again, if you have a question or comment at this time. Please press Star then why not your telephone keypad. If your question has been asked what are you wish to remove yourself from accuse simply press the pound cake.
Revisiting instructor, we asked would you please limit yourself to one question.
<unk>.
I first question or comment comes from the line Oh, Steve Tussle from J.P. Morgan Your line is open.
Egg morning, your morning, Steve.
Yeah, <unk> just on kind of the the the bridge a bit thanks for the color on on kind of the guide post.
The any kind of color on on price cost and what what you kind of expect to to run through what you're seeing out there for their.
Yeah, and the price I'd, Steve we're still looking at overall price tail end, but it's gonna be minor it's going to be in the range of 4 million.
We actually sell 4 million and the first quarter, it's probably 20 million for the full year keep in mind, we're coming off a couple of years have a lot of price pill and it was north of 200 million and 2018. It was closer to 175 last year, but we do think there's going to be a little bit more price challenges in the overall system, but we're.
They'll looking at some they'd tell when from price.
And then Tim took you through the costs side, we're going to be very aggressive you saw that we upped our terrier 600 for this year from 175 to 225.
We're being very aggressive, especially on the supply chain side, where we got some tell when from commodity price, saying, but a lot of aggressive this on the negotiations and Resourcing activity and we are also certainly seeing a lot of head when in a a factory productivity.
But we are really going after G.N.A. in this climate.
Right and then just last lastly on the balance sheet.
You know a little bit better cash I think that's an incremental positive, but you know you're still going to end with some pretty high leverage and I think there's a covenant out there that you guys have can you just talk about you know Ah what that Cub and then is and how you know kind of how much of a hard line. It it may be like how concerned.
We'd be about that and and any actions you're willing to kind of taking the intermediate term rather than just generating cash to you know shore up the balance sheet.
Yeah <unk>. So yes, we do have a covenant than covers both our revolving credit agreement and ER term loan.
And it is and it's a I think is attached to the form Tan you can see that it says that it's first measured in our third quarter at the end of our third quarter and the Covenant is four times a debt to to even <unk>.
According to their projections that <unk> you see in our scenario planning, we do anticipate that we will be in compliance with the covenants at that point and we're expecting that it only gets better from there we have some cushions. So we're not unduly concerned about that but <unk>, obviously, we want to ensure that we have look.
Quality you can assume that we're taking actions to ensure that we have access to that.
Okay, and what if you do breach it ultimately in the next several quarters you're wrong in your project and let's just say, we're going to make sure that we don't.
I mean, it would I mean, obviously it would preclude us from access to revolving credit agreement than it would what our.
Term loan and so and I guess into fall, but <unk>, we will assure that we're not gonna run into that problem.
We've already know Guy to doctors you you can be assured that we've already taken precautions were not going to put ourselves in jeopardy, yeah see if there's if they've first of all it is a it's net debt that for X. multiple and also liked him said behind the scenes. We are working it. So I I think we're we're in pretty good shape or managing it quite well.
Alright point out further do what they've said, it's not that and as it in any but as adjusted there are some carveouts exceptions do it. So again, we're we're comfortable late in compliance with it but again and we want to make sure.
Yep, Okay, great. Thanks.
Thank you.
Thank you are next question or comment comes from the line of module co from Wolf Research. Your line is open.
[noise] morning, Nigel Yeah, so nobody surprised that we've seen you know cutbacks Ah getting cut in this environment and and some an investment spendings put into the right. Okay. Maybe just talk about you know where you all done back a little bit on the best and spending and the cutbacks and whether we should think of this is more of a push as opposed to a <unk>.
Yeah, I would say Nigel it's probably more of a push you know we did scale back on a investments like automation.
We're really focused on keeping the shops running so to have industrial engineer is in the shop figuring out how to implement automation is not ideal timing. So we did push some of our automation span. We are doing E.R.P. consolidation, we push that to the right. So a lot of the discretionary actions like that that don't necessarily affect growth we have.
Pushed out we've been pretty tenacious at preserving investments that affect our growth agenda. So our view is that you know kind of like an outfielder it's easier to run forward and backward. We came out we were aggressive we saw what was happening we've made the right cuts to the budget, we'll see how the your progress as if things open.
Up a little bit will pull some of the investments we pushed out into next year will pull back into this year, but we really gone to great lengths to preserve investments that had the highest pay the <unk> payback that are going to protect our growth agenda.
Thanks to it and then you gave a number of new haven't stuff from the U.S. down 10% to 20% and then you've talked about replacement them on being down I struggled to think about how to think about replacements. You know in this environment given by unemployment is what's your view right now on regular placement.
Yeah, I mean look it's it's probably down in the 15% range or so as we look at it you know there were 3.8 million Americans last month that did not pay their mortgages. So it's going to be a tough climate for at least a while.
But you know where there's demand there's demand and there maybe a little bit of movements to a little bit more parts by for the next a few months to replacement, we haven't actually seen that just yet.
But we do you think there's going to be a little bit head went on the replacement cycle, but.
We'll see as we get into the summer months of employment of course, the numbers remain extremely challenging right now, but as folks come back to work and society starts to reopen will hopefully start to see a little bit more attraction there.
Crooklyn on free cash flow is is that all in free cash shows at some kind of concept of adjusted free cash flow is that is that including one time of.
You know the free cash flow is is is I mean is free cash flow is traditionally its operating cash flow you know gap operating cash flow plus Catholics running around less <unk>.
It was real cash great. Thanks, guys.
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Thank you are next question or comment comes from the line of Jeff Sprague from vertical research online is open.
Yeah.
Thanks could board and hope everyone's well.
<unk> <unk> first just on the on the cap bags of course, Dave So it does sound like you're.
<unk> not doing a good damage gross plans, but I would think that's also then pushes out some of your you know underlying productivity plans right. So you're taking temporary actions to contain costs, but automation an E.R.P. was.
No a big part of kind of future productivity, you just elaborate kind of on the interplay between those factors.
Yeah, Jeff when you look at.
Productivity. It was a key element and it is a key element of carrier 600, but I will tell you that only a a piece of that is automation. There's another piece that just comes from you know really application of the carrier operating system. So it will have a short term impact I actually think what you're going to see with the new normal is you're going to see if people leave.
More forward on automation as you get out into the end of this year and into future. You're so look we're going to free up the investments on automation as we get towards the end of this year into next year, because I think it's gonna be really critical to our overall story, we hadn't really break baked E.R.P. consolidations into our overall cost savings.
Number so I don't see that impacting a carrier 600, it impacts overall productivity and some of the manual nature of what we do but we'll have to catch up to those investments next year.
And perhaps it's early to talk about a different number but with this kind of acceleration does.
Carrier 600 on the path to be in 700, 750, something like that.
Well. It is early you know a a couple a couple of months doesn't make a trend, but I look I'm confident I I've always make common in the carrier 600 number and I think there's room to overdrive it but we'll see how the rest of the year plays out and we'll update that as as we get out into the into next in the end of this year.
And then just finally, so then so then on the dividend, we said expect that kind of sort of on hold until you get passive two three and a covenant make sure you're kind of clear the Dexter.
Think that would be directional <unk> fair, Jeff you recall that back in order to in our Ambassador day that we said that we would expect to 550 million dollar dividend. We thought that was a competitive dividend in a normal circumstance, obviously, we're not under normal circumstances and preservation of cash and addressing our high leverage is is is high priority.
Right now and so were differing a little bit the decision and and the level in this environment. We we we perhaps we'll are we likely will consider reducing that amount and still be competitive.
From a yield standpoint from from a payoff standpoint, but yes, you should anticipate here's something in the in the near future, but again is is not likely to be at the same level that we talk about investing.
Thanks makes sense good luck.
Thank you.
Thank you are next question or comment comes from the line of Julian Mitchell from Barclays Feline is open.
Hi, good morning.
Maybe I'm.
I'm just trying to stick to the bottom question rule, perhaps focusing on.
Oh margins for a second.
So I think at the mid points of the scenario plans go about it maybe at the 25, 30% decrease mental margin dialed in so the yeah.
Maybe just help US understand you know how you see the relative mix within that.
As transport refrigeration, probably one of the businesses that folds. The thought this this year in sales terms.
And then also related to that should we expect the decremental knowledge in so it'd be like this in the second cool to or you're assuming that t. comment rules that pretty level.
Oh the to to to queue for thank you.
[noise], Yeah, Julianne stem say you know as we as you know, we usually think of what we call. It dropped through raid detrimental use I like to think of it as incremental but unfortunately, it doesn't environment, we talk about a detrimentals how's about a 28% what you saw on the first quarter actually was.
Much favorable to that but that was largely because we had the better part of 10 percentage points worth of benefit from cost reduction in a quarter by 40 million dollar lower cost and that contributed to do a much lower drop through and interestingly our sales in China were hit during the quarter of the hardest some of.
<unk>, China tends to carry lower general margins through and we benefited by about 4%. So that's why you see the 14%.
You actually may not see the 14, you may see a 19%, but remember we talked about a $24 million standalone costs. That's the first quarter component of the hundred you know $170 million ultimately c. for the for the full year.
I will also point out that I think you may have seen from U.D.C.'s release yesterday numbers that are a little bit different there are $20 million differences in in profits. So if you adjust for for a bath or some unusual things where was different from us to them. They may have you may have construed at a 24% from them.
As we think about the rest of the year again going back to the 28 per cent, yes, I would say second quarter is likely to be the hardest hit quarter and the deeper the deeper the drop in revenues. It makes it difficult you know we aren't just scaling back production, we're shutting lines down we're closing shifts were in some case.
<unk>.
Holding factories and you go deeper into the to the costs pool, there and I would expect that to be in the second quarter. We we will experience you know some mix degradation. The reverse of what you saw me and some of our higher margin businesses or residential H.B.A.C. and others, we'll we'll we'll be.
We'll be hit how I simply think about rest of year Decrementals, though is that we have will be hit by the two or three points with with.
With J.V. income because there's no offsetting revenue component to the to the dropping in earnings that we're anticipating and then all other of cost the factory disruption et cetera.
Largely cover that in in in the margin mixes covered by our cost reduction. So we anticipate if you look at you know the the the projections will probably be about you know, 30% cobble points worse than the normal 28%.
Very helpful. Thank you.
Oh.
Thank you.
<unk> <unk> <unk> from RBC supermarkets. Your line is open.
Thank you good morning, everyone and let me also say congrats on the debut I'm not sure anyone was expecting quite as a tough environment as you've had to face in your debut here, but appreciate all the color and and all the actions that you're taking.
Thanks.
Hey, if we can start just we've heard the expression this too will pass.
It looking ahead could you expand on the comments are the examples you were giving on on how the buildings of the future are going to change we've heard some similar comments from your competitors discerning season about air purification touchless credentials and so forth, but are these just thoughts are or are these acts.
<unk> starting discussions with customers you know how close are you to marketing and and actually getting orders for these type of the new normal buildings. Thanks.
Well thanks for the question actually it's it's absolutely underway, we've been in discussions and we've actually seen <unk> real progress with customers, whether it's the state of Florida or with hospitals were we've distribute our our new I.D. clean negative air machines were coming out of the gate.
Fast on this one because we believe it's it's critical not only for our business, but it's critical for society. There are are shockingly number high number of sick buildings out there in one of the.
Characteristics of a <unk> sick building is the ventilation system. You know you look at the room I'm in right now you would expect a certain number of air changes per hour, saying, the 10 to 15 range and many buildings around the world have stagnant air and they don't have the number of changes per hour you look at the filtration system in many buildings as you have there were.
<unk>, we're going to through a filtration system you'd expect it to be able to filter out contaminants at a 0.1 0.3 micron level in many filtration systems don't have that we have that with our electric static filters for homes, you Avi are helping filters in commercial buildings.
Many buildings don't have that you want your ducks cleaned every three to five years and that doesn't happen. So as we look at the transition to healthy buildings. I think you should expect that carrier is going to be front and center on that and it's very real and it's the same in our other two segments. You know you mentioned touch lists in our fire and security business.
We already have a blue diamond <unk> that it can eliminate a lot of the touch points as say you go from your car to your office building, there's usually eight to 10 touch points and you know like I said in the earlier remarks, we can eliminate 80% of that as you go to open the turnstile or you press the elevator button or you adjust the the.
<unk> controls in your office or on your for there's a number of touch points that we can eliminate that are going to be critical and it also.
Combined with a trace ability elements, so as employers want to be able in the workplace to trace folks we have an apt second commingle with the other parts of the.
To be able to attract people in the workplace and you know the other segment that we have in our refrigeration business. The entire cold chain is going to be just foundationally and fundamentally different.
So you look at how people get their food today, and a place like China and there's a significant number of what Marx than we have what markets and we have farmers' markets here in the U.S. and in Europe.
But you're going to see a lot more home delivery of goods.
<unk> going to be critical for that and pharmaceuticals, and we're working on some telematics and other.
Well, we believe to be quite cutting edge innovative solutions to really connect the entire coal change. So we we think we can play a real pivotal role in the new normal.
Appreciate all that color and just a quick clarification from Tim if I could I, just with regard to capital allocation and cash preservation. Yeah. The expectation was that carrier was going to have investment grade rating with the expectation you'd be paying down debt.
So what's the the outlook in your discussions with a rating agencies are they giving you. Some leeway here in terms of yeah. The path of D. elaborate <unk>. Thanks [noise].
Well, it's still are intention to maintain investment braided, we haven't conversations with the agencies as I said, we're there. They recognize that you know short term liquidity is critically important in this crisis situation with the uncertainty about the economy.
We've we've been a regular discussion with them on I think they are supportive of all of our game plan and a and I think we'll be I think it will be just fine.
Great to hear thank you.
Thank you are next question or comment comes from the line of Carter Copeland from Middle East Research Your wine is open.
Hey, good morning, Dave Tim Hope, you're well thanks Carter.
Dave address I wondered if you could talk a little bit about the portfolio I mean, if these sorts of discontinuity isn't and changes have a tendency to to <unk> to make you kinda.
Think about the business in in different ways, and I know the sort of Optionality around you know the the long term you know appearance of the business is something you thought about it kinda mentioned tangentially, the Investor day, I Wonder how this a whole crisis, maybe changing that thinking if at all.
Yeah card or would I tell you is that what we said an investor day remains consistent today that our number one priority is on execution. You know, we really feel very strongly the weekend unleashed tremendous value just by doing what we said we were going to do as we get sales consistently and midsingle digit range and we get.
Yes at the high single digit rate and we get casual about equal to net income we know that that consistent track record of performance.
We'll have a significant impact on the overall evaluation of carrier and then we're playing from a position of straying. So our number one priority is focus on execution. Our number two priority is to really take a very dispassionate look at our current portfolio and of course, we've been doing that since.
For for quite some time, and we said that we would put our current portfolio through a very specific set of criteria are we the rightful on or does it strategically fit.
Doesn't meet the financial criteria that we've set out for ourselves and if it doesn't you.
You know, we'll be dispassionate and do the right thing about the best thing those parts of the portfolio I think once you make that.
Decision you of course have to look at the current environment and decide if you're going to do something like that when would be the right time and this is not <unk>.
Gives me the ideal time to do something like that but we'll look at we'll look at the right time. If there are parts of the portfolio that we decide don't meet the criteria that we've set and then in terms of that.
That third category overall, you know more strategic.
Types of transactions that is not our priority right now we know that our peers have made themselves more pure plays S.F., we but our focus right now is on that first category of execution and on the second category of the real portfolio analysis that we've been going through and and we'll deal with that second.
Okay, Great and Tim I I Wonder just a quick clarification. Thanks for the color on truck trailer. It can you tell us what the what the container orders looked like both them maybe end of the quarter or April trends.
Yeah, Carter's they've Ah container orders have actually been pretty steady. So you know we're going to see how how things play out.
But when we look at overall container orders in in there's been a couple of months, where it's been positive a couple of months, where it's been.
Ah negative overall Q1 was down 7% I believe.
You know when we got into her April it was positive so on balance it it's probably flat that down just low single digits right now.
Great. Thanks, Dave.
<unk>.
Thank you are next question or comment comes from the line <unk>.
<unk> Winski from Morgan Stanley you align itself.
Hi, good morning.
Marnie so understand we've we've covered a lot ground here already and appreciate the the color I guess you know in regards to the some of the cost action then carried or 600.
How do we think about operating leverage on on the way out Tim you talked about you know kind of that that's 28 per cent target number you know obviously a lot of things moving around some temporary some some pulled forward of the the total how should we think about you know exit rate incrementals being yellow ball.
Or or below that target number just as if somebody's temporary costs come back.
Yeah, but I've been generally again a lot of the the the recovery from from a higher you know higher detrimental came from the the costs actions are we identified as a kind of of this year impact again carrier 600 is kind of separate from that we took fees to offset the the higher decrementals.
The disruption so four so I would expect that we should be coming out of this as we increment back up at a similar rate, 28% give or take you know a presenter too.
God. That's helpful. And then just related to that I guess supply chain was a part of a carrier 600, obviously everyone's taking a harder will get their supply chain today with with somebody interruptions anything that changes with respect to that or needs to be recycled.
When you think about supply chain, we've talked about about 55% of the savings will come from supply chain and we're still on on that that level.
Well I remember David said, there's probably 6000 suppliers and we're going to consolidate probably cut it in half.
We become more meaningful were able to apartment about or we get some better pricing, we get some better terms, that's a big big component of it and that's tracking very well.
Great appreciate the detailed last August.
Thank you thank shush.
Fake give an x. question or comment comes from the line I've got some panel from count Your line is open.
Yeah. Thanks for the detail guys congrats on the first quarter.
<unk>.
I'm curious when you look at the commercial H.B.C. and fire security backlogs.
What do you perceived to be kind of at risk you know.
Perhaps serving industries that are going to be kind of very hard hit.
So you know whether hospitality or what have you. Just you know could you give us some framework on parts of a backlog that might stretch for an extended period, even when you have to fight access again.
Yeah for that.
Thanks, a lot. This is Dave the you know one piece of good news is that our sequential backlog in the first quarter was it was up about 6%.
In [noise].
Back in about a third of that in Reggie into thirds in commercial H. back. So the backlog position did improving the first quarter you know we look at.
To the extent that there's any shift from the left to the right.
It's really we think it's gonna be relatively minor we're talking a month here and there are we feel.
That there are some construction sites that are once they come back on there's going to be really some pent up demand you know what we are experiencing China was this was that after folks came back from the lunar new year that was factories were allowed to open February 10, basically all of our factories. They were generally online is you got into that February 20th.
Timeframe.
And we started we had the backlog and we started to ship the backlog what followed was a lot of the construction sites that had the migrant workers in China. They were quarantine a little bit longer and then they started to receive received the backlog and then that was followed by new order sticking up as we got into April and we think it will be a.
Similar phenomenon is that as the construction sites come back on site back on line in the U.S. in Europe, they'll start to take delivery of the backlog.
There may be some push out a month here or there, but frankly some of some places like a universities or education has been taking this opportunity with folks out to actually accelerate some of the construction. So some as being accelerated symbol naturally get pushed out, but where it gets pushed out we're talking maybe weeks or a month or two here.
I'm going to be significant.
Okay.
<unk>.
You actually.
Just the aggregate the for 25 of cost.
Into the structural versus variable.
I don't know if you said than on the opening remarks.
Yeah. So so <unk> go down on the on the charts instead of rubber for 25, the carrier 650 incremental will be a structural that will be a enduring.
The the investment if you recall, we said that our investment. This year originally was going to be 150 million, we expected it to scale back to an incremental hundred million next year, and then 50 before we will go back to normal.
<unk> you know 75 that we pulled out will be pushed in you know probably likely invested next year, so what kind of push out that schedule a little bit.
The 300 is really one time actions that was furloughing most all of our Erol's salaried employees that was.
It was it was differing merit there was cutting back on obviously it wasn't hard to cut back on travel because there isn't any travel anyway, but it's reducing services supplies et cetera that will likely I mean, it won't it won't be caught up but it will it will be it is not as far from change it will come back.
Thank you very much.
Thank you we have time for one final question or last question would be from the line of Lad strictly from City group. Your line is open.
[noise] morning goes thinks taking my question.
<unk>.
Can you talk about within fire and security business, just how much of the overall businesses is driven by.
Regulatory or statutory requirements and should therefore be more more resilient and can you don't talk about in that business what.
Restrictions on building access and social distancing measures could potentially mean for productivity.
Field business.
Yeah. Thanks for the question you know we look at there's a piece of the fire portfolio you think fires.
A much bigger piece then the security piece and there's a piece of the fire that's regulatory a nature you know if you look at.
We look at the fire and security Portfolioing two aspects, there's the products peace and then there's the chump piece products is about 60 per cent Chubb is about 40%.
Within a within the 40 per cent. That's Chubb you have a monitoring and installation into services peace and the services pieces, where you do see some regulatory in that has generally held up during this downturn better than the installation piece, which got hit pretty hard in the March timeframe into April, especially in Europe.
On the product side some of our businesses like Edwards you know that's how that's held up quite well because there is a regulatory piece of that and we've actually seen we actually saw a growth increases in parts of our Edwards business and others that like G.S.T., where we have a regulatory piece in China.
Some of the security portfolio is less regulatory in nature, but what's interesting there as we are starting to see a lot more demand for some of our products that are gonna be critical in this new normal so as a hotel start to think about how they're going to gear up in the new normal were in discussions with a number of with our identity system, where folks can bypass the front desk go directly.
To their room.
And use more touchless type applications, we're seeing that with real estate brokers for our our our super business, So even though it's not.
Regulatory you know some parts of the the security portfolio can be quite compelling in the new normal and we're in some pretty interesting discussions as folks as some of our key customers.
You're up for the new normal.
Okay. That's that's very helpful. And then just maybe one last one for me and I know you use the the order information. You gave was was very helpful. I guess, just going forward you know the U.S. and the and the me we're actually pretty similar in April so.
You know as as as we go through the year do you expect the U.S. in media to continue sort of trending <unk> similar directions or other differences in the.
You know covert 19 responses and protocols that that could push for more divergence amongst those two regions.
You know quite honestly, it's hard to say because it's even hard to generalize the U.S. and it's hard to generalize Europe, when we look at Europe.
Germany's been coming on back on line quite well recently received automotive manufacturers coming back you know we feel good about Germany.
Spain, and Italy have been coming back on line over the last two to three weeks in a fairly positive way, France is more delayed 80% of the construction sites in France are still not operational so I think France will be lagging and probably the U.K. lagging behind Germany, and some of the others and you're probably going to see a bit of a mixed bag in the United States is different.
States come on line it at different times I think if you were to compare the two.
Our experience so far over the last few months is that the U.S. has generally been three to four weeks behind Europe in terms of on the way down and on the way back up.
Thank you I'm sure I know additional question isn't Mchugh at this time I like to turn to call back over to management for any closing remarks.
Well I'd like to thank everyone for taking the time to join US today. Please know that Sam is at the ready for your questions and we appreciate.
Your time and attention. This morning, so thank you very much.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day.
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