Q2 2020 Carrier Global Corp Earnings Call
Good morning, and welcome to carrier second quarter 2020 earnings Conference call. This call is being carried live on the Internet and there is a presentation available to download from carriers website at <unk> IR.
Got carrier dotcom.
I would like to introduce your host for today's conference Sam Pearlstein, Vice President of Investor Relations. Please go ahead Sir.
Thank you and good morning, and welcome to carriers second quarter 2020 earnings Conference call with me here today, our David Gatland, President and Chief Executive Officer, and Tim a Clovis Chief Financial officer, except as otherwise noted the company will be speaking to results from operations, excluding restructuring costs and other significant items.
Turning into a non operational 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 during the call are subject to risks and uncertainties carriers FCC filings, including carriers registration statement on form 10.
And the reports on forms 10-Q, an 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 second quarter of 2020 discuss the full year 2020 outlook.
And we'll leave time for questions at the end once the calls opened up for questions. We ask that you limit yourself to one question and one follow up to give everyone. The opportunity to participate with that I'd like to turn the call over to our president and CEO Steve given.
Thank you Sam and good morning, everyone.
Here's a quick summary.
The second quarter was better than we expected driven by our continued cost reduction actions progress on our topline initiatives and improvement in the us in June.
We are raising the low end of our prior outlook for sales adjusted operating profit and cash flow, enabling us to add back some targeted growth investments that we had previously scale back.
Before we get into details on our Q2 results on the outlook for the rest of the year.
Let me start with some context.
Hi, two shows the fab four priorities that we established at the outset of decoded pandemic.
Our team has continued to respond aggressively and effectively on all of them.
It starts with protecting and supporting our people.
Our operations and feel teams have continued in the workplace with limited in interruption and we have gone to great lengths to ensure a safe environment for our people.
We have distributed two and a half million mass instituted instituted thermal screening for 100% of our employees at our scale locations.
And deployed carriers healthy building program solution in our facilities to provide our people with as safe and environment as we possibly can.
Our second priority has been to maintain business continuity to support our customers.
While we experienced some short term shutdowns by the end of the second quarter, our factories and suppliers have resumed operations and we're now more than 95% of our production capacity availability.
Our third priority is to effectively manage cost in cash.
Carrier 600, our program targeting 600 million of run rate savings within three years had initially targeted $175 million of savings in 2020.
After one Q, we increased that to $225 million of savings. This year and we are now tracking to 250 million of recurring in your savings.
We also announced onetime cost actions of 300 million, we remain on track, they're delivering 115 million in Q2.
On cash we have close to $5 billion of liquidity.
We have $2.7 billion in cash on the balance sheet, and we have access to a $2 billion revolver.
With updated covenants on that revolver and our term loan we're very comfortable with our liquidity position.
We are pleased that Q2 cash flow was materially higher than we had internally projected and we're now comfortable projecting at least $1.1 billion of free cash flow up from our prior estimate of at least 1 billion.
We also declared our first dividend in Q2, demonstrating our confidence in the business.
And fourth.
We remain laser focused on ensuring that we position carrier to emerge stronger from this pandemic.
We are accelerating implementation of our strategic initiatives and investing in two key emerging trends.
Healthy safe and sustainable buildings and cold chain solutions.
The cobot pandemic as underscore the role of buildings in helping.
Ensure public health and we moved quickly to launch our healthy buildings program.
On slide three where we stand on all our overall strategic priorities and our progress as a public company.
As a Standalone company, we launched the carrier operating system and the carrier way and both are yielding early results.
Our operating system includes a disciplined global deployment of lean in our factories.
I was recently in our Charlotte factory, and it was night and day versus a year ago.
And just one year our efficiency in that factory has improved by almost 15%.
Our quality has improved by over 25% and our on time delivery improved from 85% to 95% despite the challenging environment.
The carrier way speaks to our behaviors culture and values.
There is a new energy within carrier that is focused on customers, winning agility speed and innovation and that combination is resulting in some key new wins and as we advance in our mission of creating solutions that matter for people in our planet.
We recently released our first DSG reported that highlights our progress on our environmental targets, our commitment to effective and ethical corporate governance actions to significantly improve our diversity and inclusion and helping to establish carrier as the employer of choice.
As she is not aside activity a carrier is core to our business always has been and we take pride in being leaders in this effort.
We've also been consistent and focusing on our three strategic pillars to drive sustained growth.
In order to strengthen and grow our core business, which is our first pillar we continue to invest in R&D salespeople in digital.
We originally plan to spend an incremental $150 million in these three key areas this year and after cobot hit.
We scaled it back to 75 million.
As we said our incremental strategic investments would increase as we achieved more traction during the year.
So with our improved outlook, we are bringing our incremental strategic investments up to approximately $100 million for this year.
In terms of innovation, we continue to drive key new product introductions. For example in Q2, we launched the Infinity 26 Air Conditioner, and Infinity 24 heat pump that had the highest energy efficiency ratings amongst all ducted systems.
Carrier Transicold launch its innovative vector multi temperature trailer refrigeration unit that addresses a key market need an initial demand has been very positive.
And in our fire and security business kit is launching new true sense smoke detectors that our first to market compliant with the new you all standards and will significantly reduce nuisance alarms.
And we are on track to add the 500 sales and support people that we previously plant.
In our second pillar, which includes geographic expansion, we continue to make strong progress in China with a key vrs land with the Sanya International Sports Industrial Park and also in China, Our GSP fire business had an important win with launching layers 1.3 million square foot commercial complex.
Thanks.
And in the third pillar driving aftermarket and digital.
We introduced a blue edge service platform, providing customized tiered solutions across the business.
We remain on track to achieving 30% attachment rates in our commercial HVAC business. This year helped by the launch of our assurance one program.
And digitally enabled lifecycle offerings are a clear focus for us and we're seeing traction.
Our new digital platform for our residential and commercial National accounts achieved 100 million in E Commerce revenues in June.
Our Super business signed a contract with six Saint Louis area real its or associations to provide subscription based access solutions to over 9500 key holders and British supermarket retailer asked assigned a long term support and telematics deal in conjunction with its order of more than 165 carrier Transicold vector.
Refrigeration units.
And we are truly leaning in on the global imperative around healthy and save buildings, we have a comprehensive product offering that includes all aspects of indoor air quality, including filtration ventilation and humidity, along with sensing and controls we've complemented this with our fire and security portfolio to include Touchless.
And trace stability offerings.
And Arlon LS to business announced a strategic collaboration with FLIR systems, the world's largest and leading company specializing in thermal imaging cameras, where we will resell FLIR ESP thermal imaging screening solutions will enable us to on guard access control system.
We are integrating these multiple healthy and safe building offerings to provide our seven targeted verticals with a one stop shop solution.
Society needs confidence in the safety and health of indoor Inbar indoor environments and customers are increasingly turning to carrier for critical solutions as they reopen.
As recent proof points.
We signed a healthy buildings deal with Cushman and Wakefield to collaborate on deploying leading edge carrier solutions.
And we are working with Emory University to upgrade Q sensing and controls in their intelligent building focused on customer health and experience.
We continue to fund these exciting growth initiatives through tenacious progress on carrier 600, and Gionee transformation.
We remain focused on our overall business simplification that makes us more agile and externally focused.
We launched carrier alliance to reduce our 6000 suppliers and aligned with fewer more strategic partners.
We are reviewing our 58 jvs for opportunities to improve our focus on growth initiatives.
We have approved a project in our commercial HVAC business to digitize, our internal and customer facing interface points in our European operations.
And we are assessing our overall back office footprint for reduction and consolidation by moving to a back office shared service center of Excellence model.
So lots of exciting progress strategically let me give you some color on orders on page four.
We share trends back in Q1 that show the us in Europe still struggling while China had returned to prior year levels.
Here, we show detailed color on what we're seeing in this very fluid environment.
Recall that the us in the EU make up 80% of our sales.
In those regions April and May were weak as expected with April orders down, 25% and may down 15% year over year on a combined basis.
The surprise was the strength of us orders in June up 40% from last year.
Use strength was led by resi, where we saw orders up 100% in June helped by an increase in cooling degree days pent up demand and suppressed inventory levels.
Also in the US fire and security products orders grew in the high single digits in June after being down 30% to 40% in April and May.
And commercial HVAC orders were up low single digits in the us in June after being down 25% in April and May.
The encouraging trends that we saw in June of carried forward to July.
For us in China orders have been up more than 20%.
The orders have been down modestly compared to last year, while South Asia remains very challenged.
But despite a couple of good months of order trends Cobot cases continue to rise and economic visibility is uncertain.
Therefore, we will continue to focus on what we control effectively managing the business during times of uncertainty and volatility and remaining flexible and opportunistic.
With that let me turn it over to Tim and I'll come back to summarize before we open it up for QNX.
Thanks, Dave Good morning.
Please turn to slide five.
As Dave just mentioned April and May we're right on track with our expectations June However saw a significant pickup in activity in the us as the economy reopened.
That led to a substantial improvement in demand in North America residential HVAC residential fire and North America trailer.
Due to the strong North America shipments in June sales of almost $4 billion for the quarter were better than we had anticipated.
They were however, still down 20% compared to last year due to the Colgate related shutdowns.
And we continue to expect that the Q2 year on year sales decline will be the low point for the year.
GAAP operating profit was $442 million.
Adjusted operating profit of $476 million was down 42% from last year.
The coal good related volume and factor inefficiency pressure were partially offset by our aggressive cost actions.
Our decremental margin was 34%.
Absent some onetime items, the decremental margins would have been closer to 30%.
Our Q2, GAAP EPS was 30 cents and adjusted EPS was 33 cents.
Since we were not a public company last year the year over year comparisons are not meaningful.
Our free cash flow was considerably higher than our expectations.
This was largely attributable to favorable earnings and timing benefits in working capital and also the timing of other payments.
These results were higher than would normally be reflected in our seasonal pattern.
So all things considered our performance in the second quarter was better than we would've expected in a very difficult environment.
Let's now look at how the segments performed.
Please turn to slide six.
Note that the year over year numbers I will refer to on this slide our organic comparisons.
The age back segment sales were down 15% from last year.
Within the segment North America residential sales were down 13%.
As mentioned earlier, the opening up of many states combined with a warmer weather led to a substantial pickup in the month of June.
We exited the quarter with the backlog about twice last years level and inventories in the field down about 25%. So we expect strength to continue in the third quarter.
The commercial HVAC business was down 17% with declines in most of the businesses.
We saw a decline of around 20% in light commercial a low double digit decline in applied and a mid teens decline in the services business.
China sales were up high single digits in the quarter, but south Asia was weak, especially in India, which was heavily impacted by a prolonged lockdown.
Applied sales were down less than overall commercial HVAC due to entering this slowed down with a healthy backlog in this longer cycle business.
Light commercial was down more than the group because 80% of light commercial his replacement and many of those units are having very light duty if at all.
We did start to see an improvement in demand toward the end of the quarter as the markets began to reopen.
This is an encouraging sign but we still expected to remain down year over year in the second half.
Now over to refrigeration, where sales were down 25%.
North American truck trailer was down about 50% Europe truck trailer was down close to 30% and container was down about 10%.
We have however, seeing improved order activity was almost a tripling of the average weekly order rates from May to June for North America trailer.
Container order activity was also encouraging in June these are cyclical businesses that were declining from last year, but the recent activities suggest this Q2 could be the bottom for those markets.
Commercial refrigeration was down almost 20% with weakness in Europe that more than offset a mid teens increase in China.
But we are encouraged to see order in quotation activity improving in both geographies.
The fire and security segment was down 22%.
The products business was down consistent with the segment declines in the Americas in Europe were partially offset by a recovery in China.
We did see sequential improvements through the quarter as the declines in April and May tempered somewhat in June.
The point of sale data for our residential fire products improved in June and we expect that to continue into Q3.
The field business was down 23% due to March lockdowns across virtually all regions with particular weakness in Europe and Asia.
Well about 40% of this business is recurring.
Having no are limited access to sites did put pressure on the installation and service portion on the business.
Bottom line there were some encouraging signs in several of our businesses in the back half of the quarter.
But with the ever changing environment, we remain flexible as an organization and ready to pivot as needed to market conditions.
So we remain focused on controlling the controllables and an aggressive cost containment actions that will help us fund investments to position ourselves for future growth.
Please turn to slide seven.
I will provide an update on our cost programs.
In our Q1 call. We told you that we were taking aggressive cost actions in response to the economic weakness caused by the pandemic.
We accelerated carrier 600 savings reduced investment spending and initiated a 300 million dollar cost containment program.
These actions will more than offset.
The productivity and absorption impact from the lower volume by $250 million.
Through the first half the savings are tracking ahead of the pace of those for full year targets.
Our intense focus on managing through the crisis in Q2 resulted in lighter investment spend in the quarter.
As the markets recover and our results improve we plan to restore some of the earlier investment cutbacks.
We still expect to generate net savings of $250 million.
Well, we have upped the 2020 target for carrier 600 by $25 million and expect to redirect that increment to restore investments in R&D Salesforce and digital.
These are expected to support growth in 2021 and to enable us to capitalize on some of the market trends emerging from the crisis.
Continuing on slide eight as Dave mentioned, one of our top priorities for 2020 is to maintain ample liquidity.
We performed well from a cash flow standpoint in the quarter and for the first half.
The better than expected earnings tightly managed working capital aided by some timing benefits led to much stronger cash flows for the her first half than we had expected.
On our first quarter call. We showed you our cash balance walk from the beginning of the year.
With our favorable cash flow in Q2, and the issuance of $750 million in bonds, we ended the quarter with $2.7 billion in cash.
We were able to modify the covenants in our term loan and revolving credit agreement.
Together with the bond issuance the modifications further enhanced our liquidity and financial flexibility during this endemic.
With his solid cash balance and Undrawn revolver and expected cash flow, we feel quite good about our liquidity and are confident we have access to the capital we need to whether this storm and to operate and grow the business.
We told you last quarter, we would assess the timing and level of our dividend.
In June our board declared declared an eight cents per share dividend, which was paid just last week.
Please turn to slide nine and I'll review our outlook.
On our Q1 call we discussed a number of scenarios based on a combination of macroeconomic projections like GDP.
Indicators more directly tied to our business like new housing starts order trends reasonable expectations as the severity in duration of the crisis and likely recovery path.
In light of our more favorable second quarter performance combined with a broader improvement in the market conditions, we are raising the bottom end of our prior outlook range for full year 2020.
We now expect sales between 15, and a half a billion dollars in $17 billion given the pleasant surprise of a stronger demand in June, especially in the Americas.
This raises the lower end by $500 million.
We also increased the bottom end of the adjusted operating profit range by $100 million.
And are now projecting adjusted operating profit to be between 1.8 and $2 billion.
And as mentioned earlier, we have taken this opportunity to restore $25 million of the investment cutbacks, we announced in the Q1 call.
This is consistent with our comments at that time, that's a pace and timing of bringing it back would track the recovery.
Lastly, while much of the Q2 cash flow favorability was due to timing, we're now comfortable projecting at least $1.1 billion of free cash flow. This year up from at least $1 billion identified in our previous outlook.
This comes even after restoring some of the capital spending reductions we made earlier in the year.
Capital spending is now expected to be in the $250 million to $275 million range compared to the prior to $100 million to $225 million as we invest for future growth.
We continue to reiterate that our outlook expects the current momentum in orders and sales to continue.
One additional note is that a number of the items you may need to bridge. The adjusted operating profit EPS, such as interest expense tax rate and share count are in the appendix of this presentation.
With that let me turn it back over to Dave to say a few words before we open up for your questions.
Thanks, Tim.
We remain on track to navigating through this uncertain environment.
We continue to focus on aggressive cost actions, while driving key strategic initiatives.
The quarter was better than we expected that enables us to increase the low end of our previous outlook, while investing more in the second half to position us for growth in 2021 and 2022.
Key trends around healthy safe and sustainable buildings, and cold chain solutions position carrier well for sustained growth.
We feel confident in our medium term outlook of mid single digit sales growth high single digit EPS growth and cash flow equal to net income.
With that will open this up for questions.
As a reminder to ask a question wanted the press star one on your telephone towards the draw. Your question Brent Council. Please standby low with involve the culinary roster.
And our first question comes from the line of Nigel Coe Hello Research. Your line is now open now.
Thanks, good margins.
Good morning Nigel.
So just wanted to kick off on on on the by the did point I think you said down 13 or 14%.
In the in the quarter.
Yes, Youre, obviously old will pretty much all independent distribution. So you've got the selling that in select dynamic. So given that let's go had pretty significant inventory drawdown I'm. Just wondering if you go any intel on how the sell through look so we're going to judge how market share trended versus some of the concept beat my first question.
Yes, we look at resi and like you said Nigel we sell through distribution. So when you look at the share numbers from HR I you are really comparing the sales from our distributors direct to the dealer network comparing to some of our competitors that ship direct.
What was very encouraging to us is a few things coming out of the quarter number one.
As I mentioned in the remarks June was the highest orders month that we've had in our company's history was plus 100% and a lot of that strength. In orders has continued into July were resi orders in July have continued to be extremely strong north of 50% year over year.
The inventory levels at our distributors ending last quarter were down about 25%. So we're really we started the quarter with low inventory levels at our distributors. We've done our best to react to this very strong demand that we saw coming into July. This continued in into June has continued into July.
So we feel pretty well set up for Threeq you. The biggest challenge rewrite have right now is supporting that demand operationally in with our logistics team.
Good from how business.
And then enrollment on your revised.
Framework, obviously, a little bit of a bump to the Midpoints and I think the price of the primary Mccoll fall.
Mid teens declines in each fact security.
As downtime sent them, then refrigeration down 20, and Im sorry, if I missed this but how does that look right now maybe in the second half of the year would be better so data points.
How does that change relative to what you will you sold back in early May.
Yes, Nigel this is Tim I would say that I mean, the same impact is hitting all of our businesses in a roughly proportionally. So I would say that the the guidance. We gave our overall for the company would be largely reflected by each of the business units. The one exception from on it from an operating income standpoint would be.
Our operating profit that that we probably will have a bigger hit to profit for a track attributable to the decline in JV income and also that we probably have heavier investment of the $100 million incremental investment we talked about this portion of share, but we'll go into two to eight track.
But to be clear the performance of current security into Q doesn't.
Change your view that that's going to be bit more of a good guy relative to the EBIT segments.
Now I'd say, they're going to be pretty proportional.
Okay. Thank very much.
Thank you. Our next question comes on the line Julian Mitchell from Barclays. Your line is now open.
Hi, good morning.
Maybe just a.
First question around you overall perspectives on the nonresidential markets.
Across I suppose fire and security.
They track in particular.
But what are you seeing in terms of the what are you expecting rather for the order intake there over the balance of the year.
Maybe clarify for us what proportion of fuel nonresidential activities tied to greenfield investments as opposed to replacements or Austin market.
Okay well.
First Julien just a reminder, that when you look at our applied business it's about.
70, 30 were more heavily weighted towards OE versus service on the implied side. When we look back at Twoq, you and then we'll kind of look forward with yet.
We feel on the applied side that we had strengthened in the us in China I think in terms of share we fell positive we had committed.
Chris had committed to getting us to number one within five years, which really looks at about 50 bips of improvement a year and we felt pretty positive about the share gains that we saw in the us in China, we lagged in Europe.
And we need to fix that and we will.
But we feel positive about.
US in China.
On the OE side services is an area where.
When we look at it some of our peers.
Had a quicker jump on that trend than we did so we're playing a little bit a catch up there. There's a lot of focus a lot of momentum we're putting the framework in place to really lean forward on services, but.
Thats an area that theres a huge opportunity ahead.
When you look at some of the macro trends overall.
Hi, it's a really good leading indicator of course, the architectural billing index. It you want that north of 50. It had been north of 50 coming into March April may a dropdown into the Thirtys and then June it was back up to 40, so positive trend there and we'll see if that bodes well as we look out six months light commercial.
Was pretty rugged in April and May have started to show better signs of progress as we got into June and July but that.
That for US is 80 20 on replacement over OE. So we're starting to see more activity.
In the light commercial space, but some of those end markets remained challenged.
Thank you very much.
And then maybe just a second question on the margin profile.
You talked about.
A one time, perhaps weighing on decrementals.
Maybe if you could just clarify sort of what you meant.
With that.
And also as we look to the second half.
Looks like the implied decremental margin.
This is similar to what you had seen in Q2.
Just clarify that that's the case I.
I mean is the main driver as sort of narrower sales declined but perhaps some of those most stepped up.
Investments as you look ahead, yes, I think you've got about boat regimen. So the the the adjustments.
Just say view good the calculation and we come in about 34% decremental in Q2.
And there's about a 1% of it is the impact of the public company costs relative to last year and the second one is really an accounting adjustment to our long term liabilities was about 3%. So that brings you back to kind of the target 30% that we usually expect to see.
With respect to the second half again, if you do the calculations I mean, we are we would prefer not to for everybody to assume that we'll be at the midpoint of each of the sales operating income et cetera, but if you did take that you would calculate probably a 45% decremental and about 10 percentage points of that.
Is attributable to the investments you recall was so I mentioned in my prepared remarks that we really if you think about we didn't do much as were part of UGC in the first quarter second quarter, we were quite distracted by responding to the coded crisis and our customers and Kieran are poised save et cetera that Dave mentioned, so we spent very lightly on those and by.
And so the majority of the what we had said was $75 million now incremented by 25 million. So 100 million in the second half of the years about 10, 10 percentage points and the remainder about 5% brings down to that 30% range would be attributable to the public company costs that will step up in the second half of the year as we predict.
Early exit a lot of the the TSA phase and so forth from from United Technologies, and digital spend et cetera.
Great. Thank you.
Thank you Sir our next question comes on the line of full TOSA from JP Morgan. Your line is now open.
Hey, guys good morning.
Good morning, Steve.
100% increase.
Is it's not that bad can you give us some an idea of.
Just regionally kind as the complexity of what you saw in residential where there any differences by region whether its.
Shortages in certain areas of the clean a different types of behavior in different parts of the country is as the he came on here or obviously, 100% means everything was up a lot, but just kind of curious as to.
What you saw in the ground regionally or any major differences.
Yes.
Steve.
The northeast as the heat hit there, we did see a nice pickup there, including in the west and into the Midwest.
Yes.
The south and southwest was strong but it had been strong. So when you look at cooling degree is up 12% in June.
It was pretty widespread and I do think that areas that had been pretty well shut down there were some pent up demand. So we did see a nice snap back in some of those.
Regions that hadn't been as strong as they had been in other parts.
Mix also although you Didnt ask I just mentioned that.
On the product mix side and the last call. We said there was a bit of mixing down that we saw earlier on in April, but it kind of mix back up to sort of normal levels on the Sears side, so that was encouraging as well.
And then price.
For that pricing is on the quarter.
Yes, there is.
Look we had we had thought there'd be a little bit of price tailwind I mean, it's sort of flat to slightly up but it's prices really neutral right now.
Our biggest focus is honestly just supporting our customers. We we really did not anticipate of course, it's hard to anticipate orders being up 100%, but the tremendous order activity that we saw.
Has been significant we were a little bit fortunate in the sense that we had pre provision some inventory and we really did it because we were worried that cobot could impact operation. So we used some of that inventory.
That we had pre provision to help delivery, but the key right now is for our resi operations and our logistics to just keep supporting our customers.
And our suppliers like Copeland kind of keeping up with you guys.
Yeah, it's not an operational issue I mean, we're having good brute force it right now.
If you look at both our facilities in our suppliers everyone. It's all hands on Dec supporting the activity I in fact, the biggest challenge we have right now is on the warehouse and logistics side getting supporting warehouse activity into the trucking into.
Our logistics channel is the bigger challenge, we have right now operationally just given.
The the sudden spike in demand, but operationally I'm pretty proud of.
Our own team and our supplier partners, they've really stepped up.
And then one last one are you reevaluating at all.
And your portfolio analysis the value of.
The more security type assets on the commercial side with us with this.
Pandemic I know that some of gone after integrated buildings.
As a strategy I think you guys were I feel like you guys will kind of still making that decision around what you kind of wanted to do it portfolio does this change at all that portfolio analysis. When it comes to keeping that kind of content in that channel outside at H. back with with the security stuff.
Yes, Steve we've said that we would put every part of the portfolio.
Through a very rigorous and critical clinical set of lenses and if you look at the fire and security portfolio, It's really 60% products and 40% is that Chubb business.
Which is that field and installation business the field and insulation business is pretty agnostic it doesn't.
Pull through product so that gets a different assessment the products piece that 60% of the business.
What we are finding is there is tremendous.
Synergy on a product side between that and our healthy building initiative.
We're seeing it with some of our touchless offerings, we are seeing it even last night, we announced this partnership with the FLIR, where we're going to be reselling their thermal imaging.
Cameron capabilities, and we're going to integrate that into the blue Diamond Nap. So when you look at a holistic set of one stop shop ecosystem of healthy buildings, the fire and security product portfolio fits very very well and we see that in terms of real application normally we would measure Seo two levels.
And then adjust the ventilation system, but you can use the fire and security contact tracing to anticipate cotwo level rises and get into artificial intelligence and then use that to pre ventilate. So there is some really interesting parts of that portfolio in some synergies that seem to fit quite well.
Got it thanks a lot.
Q.
Thank you. Our next question comes from the line of Jeff Sprague from vertical research. Your line is now.
Thank you good day everyone.
Hey, Jim.
Maybe just to pick up on on Chubb there for a second.
Fully understand what you said about kind of the nature of it but but in essence. It's also kind of an important customer touch point isn't it kind of look back maybe your wish you had more distribution on the H. HVAC side in alike.
Is there something more creative to do with that yield forced on what's been done historically.
Yeah look Chubb is chubb is a very.
A solid business and the interesting thing about Chubb is there is tremendous room for improvement in growth. It's no. It's no secret that UGC had had it on the market and decided to take it off at at the end of 18, and that's been an obvious area that we assess their sort of two aspects to the assessment does it.
Strategically fit and if it does not when is the right time that you would look at.
Divesting it we're in the first phase of really assessing that right now.
And.
They Chubb was hit very hard because it's very European centric. So if you look at two Q. I think chubb was down around 25% so.
We we really have our work to do in the second half to get the EBITDA in the performance up to levels that we would expect of the business and then we'll assess the kind of question that you that you've asked is.
Does it does it fit from a distribution and touchpoint with customers or is it worth more in the hands of others and our focus right. Now is just on improving the performance for our customers and for ourselves.
And maybe second quarter related question you also have.
No other assets that maybe you could deemed non core not to size the chubb.
Yes, things like behavior, or pronouncing that correctly and other things.
What is your thought on.
Oh monetizing some of this stuff then and how it actually fits in your portfolio going forward.
Yeah, we've said that not only for every part of our product and service portfolio, but including our JV as you mentioned bear we do have.
A stake in.
Our European distributor of refrigeration other equipment and.
It's a 37% stake and we said that we would assess every every aspect of our portfolio, including the jvs.
And we will decide is it worth more to us to continue to invest in those or is it worth more to monetize those and we'll make those decisions as we go forward.
Great. Thanks for the color.
Thank you.
Thank you Sir our next question comes from the line our platform Carla from Cowen. Your line is now open.
Yes, good morning, thanks for the.
Great detail.
So I had two questions. The first just on the resi HVAC side can you speak to any trends on mix and how are you seeing patchwork repairs relative to system replacements any any sort of.
Trade down or what you would expect to be a trade down given the consumer.
Because under some pressure or we've just seen the opposite right now no we're not.
Right and we're not seeing any mix down.
And we're not seeing.
Customers favoring parts over full replacement so we had been.
Concerned about that we've been watching it closely and we haven't seen that materialize I think that we're seeing.
A very positive combination of a lot of forces that is driving a lot of near term activity people are spending more time at home, they're not eating out there not is traveling as much so theres a lot of.
Consumer spend on the home itself and I think thats, helping of course, the weather was some nice tailwind I think our distributors were a bit under provision coming in so we're catching up with that so theres a lot of forces in play to drive some very strong order demand, but we're not seeing a pickup in parts or.
Mixing down.
Okay, and just as a follow up on the indoor air quality assessments that you're going to do for.
The commercial customers.
How should we think about when these manifest in orders some of the solutions that you're now offering is this.
I just I mean, it's early days, but do you anticipate that will start to see meaningful bookings on this front in the second half of this year or is that more of a first half type of opportunity of next year.
This is thematic.
And we're at the early stages, but it's something that we would continue to anticipate would accelerate significantly as we go forward.
Yes, we were seeing orders into Q on some of our App, we introduced as Opti clean.
Have to filter and we have the air Scrubber machine and we've seen very solid order activity, whether it's a dentist office, adding or our K through 12, we've seen very strong demand there we've seen it where we've installed chillers and some of the building operators have come back and said can upgrade the filtration system.
So we would put that into healthy building category and we think that this is a trend that will withstand the test of time so.
Even post vaccine whenever that comes.
There is society shining a light on the criticality of the health and safety of indoor air environments, and the nice thing about carriers that we have a one stop shop ecosystem, where we can address all vectors of what would create healthy indoor environments. So we're in early stages I would call. The first phase of what Weve.
Don is taken our core offerings and put those together for our vertical customers.
In a one stop shop approach phase two which you saw with FLIR last night is we're starting to add partners and fill other gaps into the ecosystem. So carrier does become.
The the go to place for healthy and safe indoor environments.
Thank you.
Thank you Sir our next question comes on the line of going rate from RBC capital markets. Your line is now open.
Thank you good morning, everyone.
Good morning.
I'd like to stay with Us indoor air quality theme and just the idea of how does the market develop we understand holistically why there's a need but do you expect this to be regulatory driven building codes or will it start from just building.
By building engineers deciding this is what they need.
I think the answer is yes, I think it's going to be a combination of co driven and customer by customer.
I think what you're seeing is.
A lot of verticals looking to give their customers' confidence.
And coming back into these public environments. So.
You know whether its universities are K through 12 or other schools globally, they're stepping up and asking the right questions about what what changes do I need to make and you're seeing it for commercial office buildings, you're seeing it for hospitals and airports. So I think there's an element of individual customer cuts customer demand state by state country by.
Our country, but you're also seeing some of the regulatory bodies and it could be an organization like entre coming forward with specific standards that I know us in our competitors would all support.
So I think that there will be a balance between customer demand and and the regulatory piece, but I can tell you that the amount of activity and questions and quoting that we're doing is really picking up in a positive way.
That's great to hear can you spend a moment talking about how you are differentiated competitively in terms of your go to market.
The again on this indoor air quality, you mentioned the opt to clean the.
The filter are you looking at you the as.
As a potential add on and then and talk about the monitoring capability beyond just see alto.
Yes, I think what really differentiates carriers the holistic capabilities that we have so obviously, we have all aspects of hate HVAC within each Bakken indoor air quality, we have a multi prong approach to filtration. So yes for homes, we use electric static filters, we have had the filters, we're using bipolar I innovation.
And we have capabilities around you VC. So we have a pretty comprehensive portfolio. When it comes to filtration, but the same comes with our ability to do customize ventilation approaches because it is very application specific.
And the same with controlling humidity levels, then you get into the controls and we have our LC business that has a controls capability and then when you integrate all of the HVAC and sensing and controls capability that we have there with our fire and security security portfolio and then you can make it a one stop shop for customers through.
A natural interface point, where as you picture walking into a restaurant and you look at a computer screen. It can give you a red yellow green on all aspects of that healthy and safe indoor environment. So we can provide the controls we can provide the the user interface experience for our customers, whether it's through the control system.
Or an overlay control system, we have the ability to connect the dots I think in a fairly unique way for our customers.
That's real helpful color. Thank you.
Thank you.
Thank you can we just go to one last question Judy.
Of course, thank you. Our next question comes from the line of lab.
Okay cool from Citigroup. Your line is now from.
Good morning, guys. Thanks for taking my call.
So.
So let me just one more follow up on the healthy buildings and indoor air quality.
Maybe should be obvious, but you mentioned that you are.
Implementing this in your own facilities. So can you talk about as you've begun to roll. This out in your facilities, what you've become will you.
Started to learn about.
The ease or difficulty of implementing season.
Some of these measures and what the employee response has been in terms of.
Feedback, we're feeling of security in the facilities as these measures are come out.
Yes, that's the beauty of.
Even the building that we're doing this call from today is our center for intelligent buildings here in Palm Beach Guards in Florida, and this is basically a showcase of our capabilities and it's also kind of an existing lab, we have to make it the best in class building for healthy and safe indoor environments. So for example, we have significantly more.
Ambient air and this facility than most commercial buildings, we have a designated outdoor air system. So we continue to leverage that Tim maximize the amount of ambient air.
When cobot hit we started to use more bipolar.
Innovation, we have a relationship with a company called GPS So we implemented their capabilities in our.
Our filtration system there its combined with the help of filter as well.
So.
We've been using this building to really validate a lot of our apps. So we have our blue Diamond App, that's part of Arlon LS to business and what we're hearing from our employees in this building because right now for office employees, a carrier still voluntary whether to come back to the office, but we're seeing an uptake in people coming back to the office because they.
No we're investing in the health and safety of the indoor environment. They see it when they get their temperature taken when they come in in the morning. They can see it through their app interfaces. So it's really having a direct correlation to employees coming back in the investments that that we're making.
Thats great here and then maybe just a last follow up for me you had mentioned earlier in the call.
Hey.
Back Office review that was underway with the with the look to go to more of a shared services model over time, just clarify whether that cost and potential savings from that would that be fall under what you.
Anticipated under the carrier 600 umbrella or is that sort of a new initiative that can be incremental savings over time.
Well as initially this is Tim.
It's an initiative that we had envisioned for you know since kind of the inception. It is part of the carrier 600, we carved out about $100 million of the carrier 600 that what we call. The the DNA savings and we are setting up what we call I mean, it's a GBS as a global business services Center and we will.
Centralize a lot of the back office.
The the back office activity, we're starting with the you know the the cash application we're starting with.
Sounds payable were starting with some of the accounting back office routine activity we call.
The in in the in the reporting of accounting and we're setting up facilities and probably three or four places around the world. We have one in Prague today, we're going to set went up in India. We have one in the United States will put another one down in Mexico, and we anticipated labor arbitrage is the cost.
Sure, but it's also an efficiency will employ state of the arc tools.
To reduce costs and yes that is part of the carrier 600, and as well underway.
I won't say that to date, we have realized the savings were still in the process of setting it up but but it but you will see them soon.
Great. Thank you.
Thank you at this time I'm showing no further questions I would like to turn the call back over to date for closing remarks.
Okay. Thank you and thanks, everyone for joining as always Sam's available for follow up questions to look forward to speaking with many of you in the coming months and thank you for your time today.
Ladies and gentlemen, this concludes today's conference call. Thanks for participating you may now disconnect.
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