Q3 2020 Carrier Global Corp Earnings Call
[music].
Good morning, and welcome to the carriers third quarter 2020 earnings Conference call. This call is being carried live on the Internet and there is a presentation available to download from carries website at IR dot carried out.
I would now 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 third quarter 2020 earnings call Conference call with me here today are David Kaplan, President and Chief Executive Officer, and Tim a club as Chief Financial Officer, except as otherwise noted the company will be speaking to results from operations, excluding restructuring costs and other costs.
Significant items will be nonrecurring and or non operational nature, often referred to by management as other significant items. The company also reminds 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 and SEC filings, including carriers registration statement.
On form 10, and the 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 third quarter of 2020 discuss the full year 2020 outlook.
And we'll leave time for questions at the end once the call is opened up for questions. We ask that you limit yourself to one question and one follow up to give everyone. The opportunity to participate you may ask further questions by Reinserting yourself into the queue as time permits and with that I'd like to turn the call over to our president and CEO, Dave Gitlin.
Thank you Sam and good morning, everyone.
Before we get going let me first comment on the upcoming CFO transition that we announced last week.
Patrick Goris currently the CFO at Rockwell automation will be joining us as our CFO and a couple of weeks.
At that point, Tim will take on the role of senior advisor, helping us with the smooth transition of Patrick and taking on specific key projects until his retirement in mid February.
For context when.
When we hired Tim he was very clear with us.
That his role would be to help effectively stand us up as a public company, including building the finance team in function strengthening the balance sheet, helping us establish our strategic priorities working with the rating agencies and investment community and charting the course for his successor.
Doing all that and more Tim has been the perfect CFO at the perfect time.
I can't thank him enough for everything he has done for me personally and for carrier after.
After a thorough search I could not be happier to have Patrick joining us.
I suspect most of you know him well.
During his time at Rockwell Patrick transformed the finance function helped drive industry, leading top and bottom line performance and a shift toward a recurring revenue model and he was instrumental in guiding strategic capital allocation and portfolio optimization.
We look forward to welcoming Patrick to the carrier team.
With that please turn to slide two where I'll discuss our Q3 highlights.
In short Q3 was a very encouraging quarter sales of 5 billion were up 4% year over year and substantially exceeded our expectations.
Adjusted operating profit was up 6% year over year, we had strong incrementals in the quarter, putting our reported year to date decrementals at 30%, but operationally at 26% factoring in the $53 million of additional public company costs.
Our performance was driven by continued strength in North America residential HVAC, which was up 46% in the quarter and by continued traction on our costs and growth initiatives.
In resi this was our highest quarter ever for both sales and operating profit.
We are pretty pleased with our free cash flow generation in the quarter, which was $880 million, primarily driven by higher net income and better working capital performance and we realized $300 million of cash before taxes from our sale of 9 million shares and bear.
We continue to aggressively reduce costs via strategic disciplined approach, including reducing GNS and simplifying the back office.
As a result, we are now raising carrier 600 to carrier 700, which calls for $700 million of recurring cost take out by the end of 2022. This.
This will allow us to fund investments in growth, while driving margin expansion.
We remain on track to invest an incremental $100 million in growth initiatives. This year.
Based on our Q3 strength.
We are again, raising our 2020 full year outlook on sales.
Adjusted operating profit and free cash flow.
Given that we had $3.8 billion of cash at the end of the quarter, we pay and plan to pay down one and a half billion of debt in the fourth quarter next.
Next year, we expect to do more while supporting our dividend and preserving flexibility for M&A opportunities.
Pivoting now to slide three on our progress on our overall priorities.
We put in place a playbook that is gaining traction.
The percent.
In fire and security our Kid of fire systems business shipped its first orders for entellus site.
A remote health monitoring service for industrial fire alarm and suppression system control units.
At a carrier enterprise level, we are truly leaning into the emerging trends around healthy safe and sustainable building and cold chain solutions, which you see on slide four.
Starting with healthy safe and sustainable buildings.
Our strategy here is to be the leading one stop shop provider.
Which is driving strong customer interest and new product introductions that continue to gain traction.
We obtained independent validation through a rigorous testing process that our infinity air Purifiers capture and kill technology Inactivates, 99% of Corona virus trapped on the filter the first of its kind.
Orders for those filtration systems were up 140% year over year in the third quarter.
We also have orders for nearly 15000 opti clean units and we are working an active pipeline for thousands more.
Through our relationship with Cushman and Wakefield, we were able to upgrade a Denver area office campus with air purification systems with needlepoint bipolar I and as Asian technology for every rooftop unit on its campus along with service by carriers Blue edge platform.
And we just signed a strategic HVAC deal at the 54, one Court square tower in long Island City, which we estimate will save up to 20% and then energy cost annually and.
And deliver improved comfort and air quality.
For the healthy building space overall, we now have an active pipeline of potential order activity of $150 million and we're still in the early stages of putting the comprehensive strategy in place to maximize our offerings and capture the opportunity ahead of us.
Similarly, we recently launched our healthy safe and sustainable Cold chain program.
I am thrilled with our new relationship with Amazon Web services, with whom we are partnering to develop a robust and powerful data ecosystem for cold chain operations.
We also introduced carrier pods monitored by our sensitive business to support added mobile cold chain capacity and cargo insights.
With key partners, we're working to connect the dots to provide a one stop shop approach for cold chain solutions for both food and pharma distribution.
So we've made progress on our financial results, our performance culture strategic growth initiatives and capital allocation.
Before I turn it over to Tim Let me give you some color on current order trends.
Slide five outlines our three segments, which we have broken into two key business lines each.
We also provide color by geographic region, starting with HVAC.
You see here that our residential and light commercial orders were up 60% year over year in the quarter driven by resi.
Movement from distribution to dealers with strong and distribution inventory levels are now in balance.
For commercial HVAC orders improved from down about 15% in Q2 to almost flat in Q3.
In our refrigeration segments transport business order.
Order trends indicate that Q2 is the bottom for our truck trailer business unit.
Unit order rates more than doubled from June to September.
Container orders were down in Q3, but these tend to be lumpy and we have seen solid October orders.
Commercial refrigeration orders were also down in the quarter, but improved sequentially from Q2.
For fire and security products orders improved from down 20% in Q2 to down about 10% we.
We saw improvement in commercial and residential fire.
China and the controls business, while the small and medium sized business oil.
Oil and gas and hospitality markets were weak.
The FNF feel business orders improved from down almost 30% in Q2 down around 5% in Q3.
Installation and nonrecurring service orders were down around 10% given the discretionary nature of that work, while recurring service and monitoring orders were flat.
Our business has reflected the bifurcated microchip macro economy, where residential health care education, Datacenters and warehouses have remained strong.
While the oil and gas small and medium businesses and hospitality verticals remain challenge. Fortunately the latter verticals are a much smaller part of our portfolio.
We see the same bifurcation geographically, where the US in China remained strong Europe is recovering and Asia, excluding China is very challenged.
While we are encouraged by Q3 order trends, we recognize the continued global uncertainty and we remain prepared to adapt with.
With that I'll turn it over to Tim and then come back to summarize before QNX Tim.
Thanks, Dave Good morning.
Please turn to slide six.
As Dave just mentioned the quarter surpassed what we had expected as we saw very strong demand in residential HVAC and continued recovery in the broader markets in which we participate.
Recall that last quarter, we said that we believed the Q2 year on year sales decline would be the low point for the year.
That proved to be the case as Q3 sales of $5 billion did not decline, but in fact were up almost 4% over the prior year and 3% organically.
This was driven primarily by residential HVAC.
While we saw sequential improvement across the company since the second quarter, we still had modest year over year sales declines in the majority of our businesses in Q3.
GAAP operating profit was $1.1 billion and that includes the 252 million $252 million gain on the sale of about 9 million shares in Bayer.
Adjusted operating profit of 867 million was up 6% from last year.
Our incremental margin was 27% and this number would be materially higher absent the incremental public company and TSH costs.
Accelerated productivity and continued cost control drove the strong performance on margins.
Our Q3, GAAP EPS was 84 cents and adjusted EPS was 67 cents.
Since we were not a public company last year the year over year comparisons are not meaningful.
Our free cash flow was strong.
Considerably higher than we had expected.
The biggest driver was higher net income, but we also saw a working capital improvement and a favorable timing impact from interest and tax payments.
All things considered a very strong third quarter for carrier in a very difficult environment.
Let's now look at how the segments performed please turn to slide seven and note that the year over year numbers to which I will refer our organic comparisons.
The apex segment sales were up 11% from last year.
Within the segment residential was up 46%.
We are very proud of how well the team executed an unprecedented levels of demand that enable us to gain share.
Recall that we ended Q2 with field inventory levels down about 25%.
At the end of Q3, we saw field inventories back to prior year levels and expect a more normalized Q4 in that business.
Coded created very atypical seasonality for residential as Q2 was down materially and Q3 was unusually strong and we expect the full year 2020, we'll likely end up as a fairly normal year in total.
In North America light commercial we saw a sales decline of 13%.
We did see sequential improvement during the Q3 as Reopenings continued but we expect light commercial to continue to lag this year.
Commercial HVAC sales were down 7% with modest declines in most of its business lines.
We saw low single digit decline in applied and a high single digit decline in the services businesses.
Applied sales were down less than the overall commercial HVAC as we entered this slowed down with a healthy backlog in this longer cycle business.
All of these year over year declines improved from those in the second quarter.
From a regional perspective for commercial HVAC, China sales were up about 10% in the quarter.
But Asia, excluding China was weak, especially India as it remains heavily impacted by disruptions related to coded.
We are confident we gained share in China and North America in applied.
Now over to refrigeration, where segment sales were down 6%.
North America truck trailer was down about 30%, but that reflects almost a 50% improvement from the trough we saw in Q2.
Europe truck trailer was down close to 10% and container was up mid single digits.
We saw improving order trends for both North America, and Europe truck and trailer and believe we have turned the corner on the down cycle in both businesses.
Commercial refrigeration sales were flat in the quarter as a modest decline in EMEA was offset by mid single digit growth in Asia.
Moving over to fire and security segment, which was down 7%.
The products business was down consistent with the segment.
Declines in the Americas, and Europe were partially offset by double digit growth in China.
Within the Americas, our residential fire products business grew low single digits.
Which was offset by declines at some of our security businesses that are more impacted by the slowdown in the small business and hospitality markets.
The field business was also down in line with the segment.
As restricted building access and lagging commercial construction activity drove mid to high single digit declines on install and repair jobs.
That effect was partially offset by low single digit growth in the recurring service piece of the business.
Bottom line, we saw continued encouraging trends across the company with the pace of recovery deferring in some areas.
Well, we have observed more normalizing market conditions, we continue to focus on controlling the controllables and on aggressive cost management that will help us fund investments to position us for future growth.
Please turn to slide eight.
I will provide an update on our cost programs.
And each quarter. This year, we have accelerated our in year savings plan for carrier 600.
With that success, we are now confident in increasing the three year target to $700 million and renaming the program carrier 700.
On the slide you'll see that the $250 million target for 2020 for carrier 700, and the planned investment of $100 million remain unchanged.
We had previously discussed spending about $300 million over three years for our investments in R&D digital and sales and we still expect to do so.
You'll notice that our savings from cost containment actions is now $250 million down from 300 million that we discussed last quarter.
Because the business has been executing at a much higher level.
In the fourth quarter, we are restoring some of the temporary people related cost actions taken earlier this year.
Also updated from last quarter is the headwind from productivity and absorption issues related to the pandemic.
Better than expected volumes as well as strong execution has resulted in the absorption headwinds not being quite as bad as we had anticipated.
If you recall our original model for carrier 600 was at the savings we generated would fully fund our growth investments and the remainder will drop through.
With about $100 million in year over year headwind expected for 2021 from the reversal of onetime cost containment measures. It will require a larger portion of our carrier 700 benefits.
This means less of the savings should drop to the bottom line and could impact our incremental margins next year.
Continuing on slide nine as Weve said.
A key priority during the pandemic has been to maintain ample liquidity.
And as you see on this slide our strong focus on cash has enabled very good free cash flow, which was driven by better than expected earnings and tightly managed working capital.
We exited the quarter with $3.8 billion in cash on the balance sheet.
Which was helped by the partial sale of our shares in buyer.
As conditions in the market have improved we now plan to pay down $1.5 billion in debt before the end of the year.
A big step towards our debt repayment plans.
With a healthy balance sheet, we are well positioned to emerge from the pandemic on a stronger footing and capitalize on the opportunities as we return to a more normalized environment.
As a result, we expect to be in a position to communicate more details on our capital allocation priorities early next year.
Please turn to slide 10, and ill review our outlook.
On our Q2 call. We gave you guidance ranges that reflected the broader uncertainty associated with the economic climate, we were experiencing.
Now with two months to go in the year, we can provide a more precise and improved outlook from what we gave you in July.
We now expect sales to be about $17.3 billion higher than the high end of our prior guidance range.
This is based on the significant strength, we saw in residential HVAC in Q3, and the broader economic improvement.
We expect adjusted operating profit of approximately $2.2 billion, which is also above the high end of our prior range.
This reflects the drop through from the higher sales outlook.
On free cash flow, we now expect to generate about $1.5 billion in 2020.
A significant improvement from our prior outlook of at least $1.1 billion.
The biggest driver of the cash flow is higher net income.
Along with continued tight working capital management and a few timing items.
With that I'll hand, it back to Dave to wrap things up before Tonight.
Thanks, Tim.
Our results demonstrate that we are successfully navigating through this unprecedented environment.
We continue to focus on aggressive cost actions, while driving our key strategic growth initiatives.
We remain confident in our three to five year medium term outlook of mid single digit sales growth.
High single digit EPS growth and strong cash flow.
Given the lower base from the covert driven disruption in 2020 recent order trends and the execution of our strategy, we anticipate pulling those medium term growth rates into next year.
With that we'll open it up for questions.
Thank you as a reminder to ask the question you will need to press star one on your telephone switch on your question touched a chunky sorry.
First question comes from Joe Ritchie of Goldman Sachs. Your line is now open.
Thanks, Good morning, everybody.
Turning Jeff.
So I just want to understand that just the full year guidance.
A little bit better. So clearly threeq you turned out to be a lot stronger than we anticipated as I think about that for Q sequential.
Isn't isn't the way to think about it that sequentially Fourq you are going to be lower.
This year, just as the re queue. It turned out to be a lot stronger than expected driven by revenue Im just trying to understand the five point keybanc.
Yeah, Joe This is Tim.
Well for Q, we have some I mean, yes of revenue was particularly strong in Q3 and that drove a lot of our Q3 of favorability were expecting a bit more normalized of Q.
In Q4 as they are transitioning kind of from splits of air conditioners into furnaces will be a bit more normalized than we saw in Q3, but.
But also in Q4, we are anticipating remember we have about $25 million of quarterly impact from year on year effect from our public company costs and we do anticipate that we're going to spend about $75 million of the $100 million that we've set aside for investments.
You might ask the question why so back end loaded but the reality of it is this year, we started out with an expectation were going to invest 150 million before the cobot hit we scaled that back considerably and now we reinstated as things are looking better, but it takes a little bit of time to ramp down and ramp back up so we have baked in there about $75 million of.
Our investment to hit and there's about $20 million of other kind of transition related things from from UGC as we as we as we Standalone as public company. So adjusting for those things you would see that as much more normalized fourth quarter.
Got it.
It makes a lot of sense appreciate the color there and I guess my follow on question as you think about 2021, obviously im really encouraging to see.
Sorry, EUR 600 step up to carrier 700.
Also the nonrecurring cost containment actions stepping down this year.
As we kind of think about that that puts and takes especially on the margins for next year.
I guess is the way to think about this release that is probably going to be more goodness then from the cost reduction savings from carrier 700, and then less of a headwind also on the temporary cost actions that we took this year.
Joe This is Jim I mean on balance I mean, if you look at the the cost cost containment measures measures and we shut that down to 350, we probably will still get some carryover probably travel will not snap snap back fully but also we identified that were the impact from productivity.
Any related to the co bid is step down a little bit on balance across that we probably have $100 million of headwind net headwind from those actions and it probably is going to take a little bit more of the carrier 700 than typically we would experience I mean, we havent set up think about the the average remaining of 450 on a carrier.
700 versus the 250, we've experienced already.
And then subtract out the investments and then probably will use a little bit of the carrier 700 remaining to cover some of that that year on year decrement.
Okay, Great I'll get back in queue. Thank you all.
Thank you and our next question comes from Stephen Volkmann of Jefferies. Your line is now open.
Hi, good morning, everybody. Thanks for taking my questions.
Okay.
It appears.
But your share is improving pretty broadly so I guess I just wanted to touch on that maybe you could talk about areas, where you think you've done best in share relative to the market and Dave I think you said sales force was up like 450 people or something is that process kind of done now or is there anything.
And also that these guys are doing any change in incentive compensation, just kind of how or how are you managing the sales force and driving those share gains. Thanks.
Yes, let me.
Hit the first one first on on resi share gains, yes, I mean look we grew 46% in the quarter. We were really two X. The overall market. So clearly we picked up share in the third quarter, but it's really not I think fair for us to look at it just one quarter at a time if you look at it over a 12 month period, we we picked up about a 100 basis point there.
There, which is I think a better indicator but.
But look we've said that we were going to really lean into growth and focus on.
Really winning out in the marketplace and I think our team Chris Nelson just think happy and the team have done a really nice job of that partnering with our our distributors. So we've seen it really across the us and it's not just split so we've seen it on the furnace side as well I think part of it.
I was the fact that operationally, we were able to perform and provide units to the dealers. There has been some dealer conversion.
And I think the other factor is that we came into the quarter with somewhat depressed inventory levels with our distribution channels inventory levels coming into Threeq, you were down about 25% year over year, and then you kind of look at the sudden spike we saw in orders in June that carry for forward into July and August.
We really had to turn up the heat to make sure that we could support our customers and frankly it was a challenge our customers have done a great job working with us but.
We did it was quite a ramp to support them.
But on balance Weve been very pleased with the share gains. The key is that we sustain that going forward I think in terms of the salespeople. The fourfifty. We refer to is that's really mostly outside of resi where we've.
We've been looking at that in both the applied space on the OE side as well as in services in aftermarket and Thats, a very much a global phenomenon, we've been adding those mostly in China, and North America, a little bit in Europe, which has been a bit more challenged to add them there, but I don't think thats. The end of it we had come into this year, saying that.
We had a deficit versus some of our competitors. We said we'd add 500, we've added 450 and I think we'll end up adding more as we go into next year.
Great. Thanks, and then just quickly anything to call out relative to the revenue trends in October so far.
So far so good I mean.
The orders that we've seen.
In October have been strong so we'll have to see how things play out we're trying to work with our distributors to give them the product they need when they need it. So orders have remained strong and we're working with them to work on managing that that.
That delivery schedule normally at this time of year, we'd be ramping down.
And we're not doing that we're continuing to support our customers through the off season, as we kind of gear up for one Q and beyond.
Okay. Thank you guys.
Thank you and our next question comes from Julian Mitchell of Barclays. Your line is now open.
Hi, good morning.
Maybe.
Im going to say, Tim Thanks for all the help.
Since the spin, but maybe as a follow up question on the.
Savings versus investments.
So as you said thats sort of full 50 million of savings left off to this year.
Thank you implied maybe around 200 million of extra investment discipline into the check that.
And any thoughts around the split of that full 50 and 200 between next year and the year also.
And is there any sort of baseline operating leverage number we should debate I think you talked about 28% to 30% previously is there any kind of minimum level that you calibrate the route.
Yeah, Julien let me start at a high level and then asked Tim to add on I think as we as we think about 21.
And going forward you know, we do think ourselves.
Let me start even on the sales side is that we had said that we would grow on the topline.
Mid single digits.
What I would have told you a couple of months ago is that we were kind of at the high end of mid single digits, but we've been a bit surprised by the resi strength that we've seen over the last couple of months. So it's probably still mid single digits, but more at the at the low end of that and we've been consistent that incrementals would be in that 30% range.
Give or take various moving parts in the system and then you have all of these costs puts and takes between our increase on carrier 700. So we have 450 to go you could probably consider 225, a year next year and the year after that we.
We have the $100 million of sort of onetime headwind going into next year because of the onetime.
100 million of onetime.
Savings that we incur this year and then we have incremental investment so I think what you're really looking at it.
Is the sales growing mid single digits, probably at the lower end and then the drop through on those sales.
That's helpful.
Thank you, Dave and then maybe.
My second question would be around.
The sort of portfolio and you started I think some cleanup actions that parcel bay a stake sale a few weeks back.
Do you think the macro environment is now conducive to a sort of steady pace of maybe some of that portfolio rationalization.
And how quickly do you want to try and take that process to help with the balance sheet Delevering.
Yes, we've.
Weve remained consistent that the single best thing, we can do to create shareholder value is execute on our long range plan you actually just reviewed it with our board.
We've done a very detailed assessment by business unit, we've done our strong reviews, we've done our Lps and the way we run the business is that for all of our strategic initiatives we track those.
With a significant clarity and focus and we are very confident that we can create significant shareholder value by making sure that we have a performance culture that we are laser focused on the cost side, but also on our growth initiatives, which is really using some new muscles within carrier, but it's getting great traction and then we've said that we would take.
Very clinical look at our portfolio, including the 50 Jvs and you saw some actions that we did take in Twoq. We continue to look at every JV to make sure that they really are the best use of our capital and we'll look at some bolt on M&A and perhaps some divestitures over time, but in terms of sort of the bigger transformative.
Actions, our biggest focus right now is executing on our L. RP.
Great. Thank you.
Thank you. Thank you and our next question comes from Josh, Josh Vogel and GM Morgan Stanley. Your line is now open.
Hi, good morning, guys.
Good morning, Josh.
Yes, I just wanted to dig into the commercial side of the house.
Orders flat pretty spectacular there anything more that you can tell us on the order funds I know, it's not really a channel, especially on applied where there's inventory, but anything from a replenishment standpoint or a comp that we should keep in mind.
Because I guess, just given the mix of business, there and what we're seeing in Nonresi construction.
There should always be a little bit of headwind, so that that surprises me as being particularly strong.
Yeah, I look I think that it's quite bifurcated there's.
Theres some real strength in applied you when you look at things like data centers and health care and warehouses were.
We're seeing continued strength globally, especially in China and the U.S.
Education has picked up quite well not only K through 12 at universities commercial buildings a bit of a watch item. We know there is some.
There are some real headwinds things like retail hospitality restaurants that has a more acute impact on our light commercial business. So.
So when we look at it one encouraging.
Metric that we did see pop up a bit was able to you know the architectural billing index, which is a good.
Forward looking indicator, it's been hovering around 40, we saw it go up to 47, we would like to see that north of 50.
Dodge construction year to date is.
Is down about 20%, but only about 15% of our business ties to that metric. So I think when you put that all together.
It's a watch item there are some encouraging areas and where it's strong I think we've really lean into and seen some share gains China has been particularly strong and I'm quite proud of the team there in North America has been cut.
Continuing to recover so I look at it I think we're going to exit this year with our applied business backlog up around five or 10% going into next year, but it's clearly a watch item and we'll have to keep monitoring it.
Got it that's very helpful. And then I think that this whole kind of industry group has turned into the.
Collection basin for I.Q. and discussion around building energy efficiency.
And it sounds like you know the carrier is clearly part of that with some of your opening remarks.
And then the broader solution is ultimately going to be something that gets into independent assessments about the healthy and safe and indoor air quality will work on a digital solution. So tenants have visibility to whether or not the indoor air environment is up to standard and then.
We will be rolling that out in a more holistic way when we look at the market size. We you know we get this question a lot and here's what I'd say if.
If you look at the products that we sell into our H back systems are firing security systems that total market is about 90 to 100 billion.
And we think that the additional opportunity created through <unk> is about 10%. So call at nine to 10 billion and one thing I can tell you is that I'm extremely confident that will get more than our fair share of that piece now. It takes some time to build up I talked about a pipeline of 150 million.
We continue to see real traction real customers, making orders. So it's going to take some time to build up to that number but we do think it's it's certainly within our sites.
[noise] overtime, Hey, that's great color. Thanks, so much and I I feel like I've had forty-five years just in 2020, so I can certainly speak for myself [laughter] all indoors.
Thank you and our next question comes on National call as well as research line is that open.
Good morning, and.
Thanks for the help and and good luck next the next chopper.
I'm guessing that won't be too many covenant questions today so.
I'm I'm I'm, just guessing but going.
Going back to the rest of your performance on I understand the obviously benefits from shuttle so the but I'm. Just curious do you have any intelligence and you'll still through the carrier, Brian us or your channels, because obviously the market looks like it's up high teens, but I'm just curious how yourself to compare it will be back out that impact from the from the channel though.
Yeah, we we close the track the movement from our distributors to our dealers and it's been consistent with what we would've thought I think the night. The encouraging thing is the inventory levels at our distributors ending <unk> is about what we would have seen that those inventory levels last year. So.
When you look at the very unusual swings that you saw Q3 down something like 13% excuse me Q2, Q3 up 46%.
When we get into next year, there's going to be unbelievably unprecedented compares is we're trying to explain what happened and <unk> and <unk> and <unk> of next year, but when you look at it more holistically for the year. The whole market is going to be a mid single digits will be up high single digits. This year, so not an incredibly unusual.
Year, just unusual phasing within the year.
Yeah. That's for sure and then speaking of compares I think last year, you had a pretty tough compare on bonuses with the the the kind of the pay bill so that happens through the spring and summer.
So I'm expecting you to do quite well above the market's in full can you just give them that that on because that's.
Well I think that are for it you should be strong on Rosie clearly not 46%, but I would guess in the 15% to 20% range.
Okay. That's that's great color and then maybe just one more question can we just touch on the physician margins they were a little bit weakland, what we expected. So just wondering you know what we saw that in terms of mix and maybe you can put them deleverage and then as we kind of come into 2021, I'm expecting strong trends from talking trailer would you expect the front of margins to be.
North of about 50% main show up without segments.
Yeah. Neither all taken first of all I will say when you look at Decrementals for that for that segment of the business and refrigeration first of all you get kind of what I call. The law of small numbers. There was a 46 million dollar decline in sales.
And the operating profit decline was with a small piece of that but you within that you had a mix between CCR, our commercial refrigeration business and transport commercial was topline pretty flat and modestly down on the bottom line transport obviously are high margin business was down about 10%.
On balance across the across that business and down say say $15 million to $20 million on the bottom line. There were a couple of other small charges in there. So that really explains the very high detrimental for the business, but it I would say do your to your last question when we see that.
[noise] turnaround and we expect that we're kind of at the bottom or have seen the bottom of that cycle. You will see very strong incrementals on the way back up into the transport is a nice very attractive margin business and you will see strong incrementals as we as we see that recover.
Oh.
All right thanks very much.
Thank you and then next question comes from state to sounds J P. Morgan your lifestyle open.
Hey, guys. Good morning, good morning see.
What was.
Price realized in revenue.
For the company and then for for H back in the quarter.
[noise] flattish Steve.
Okay got it and both for the company in HVAC, Yes.
Okay.
When when you kind of looking at how the how you kind of move down from the the increase.
In.
In guidance to catch I think you said some timing items.
What were those timing items and do you think.
I assume you can grow cash next year, but maybe a little bit less in revenue as big lesson net income because of those timing items.
Yeah, most of the timing, we would expect actually to play out in the fourth quarter. If you kind of use a subtractive method of where we are year to date in cash flow and where we were our guidance is for the year, you'll see that the fourth quarter is not what is what we typically would see in the fourth quarter of this year. Some of that is the strength we haven't.
<unk> and the relatively short receivables of terms and the artist long payable term so you're seeing a lot of the the purchases we had for that as positive cash flown in Q3 that interchange between them will pay those mostly back in the fourth quarter, maybe a little bit of a bleed into the first quarter of next year.
And then also somewhat covid related and somewhat startup related we have some we have we have some tax some tax deferrals for practical purposes. So for instance, there's 50 $60 million of tax on the sale of a Bayer we obviously recognize the game of the third quarter, we will pay the tax for it in the fourth quarter.
And then there was some estimates as probably another 30 40 $50 million of tax timing. So it's really some working capital items some tax impact icy the timing in the fourth quarter I got it and then just lastly.
Dave what what's kind of your call on the <unk> market next year.
Linux has said mid singles.
I think trainshed up a bit.
Yeah, what's the what's kind of your view on on the on the high level on the <unk> market trend here.
I think it feels.
In that sort of low perhaps it gets up into the mid single digit range.
I think when.
When you look at some of the underlying factors I do think there is more demand for <unk>.
We are seeing we are seeing more demand for that will.
We will have to obviously see we'll see about whether but you look at the a lot of the underlying fundamentals that have driven the strength that we've seen now they will continue into next year, new construction should continue to be strong you know up mid this year, probably up mid next year and we we have good position with raising new construction.
We do see that the whole stay at home phenomenon of people putting additions on their house for their studies or people really prioritizing spend on Rosie residential.
Residential air conditioning, because their families are spending more time at home I think that will certainly continue into next year. So.
It's going to be some some compare issues, but it certainly would feel low and it may get up into the mid range, all and thanks, Hey, I Wanna, Tim Thanks for all the help and.
Congrats to both of you on a pretty good start to in a very tough environment coming out as a public company for sure. So.
Kudos to you guys on the execution great job.
Actually I appreciate it thank you Steve.
Thank you and our next question comes from just him and his Keybanc Caroline is not open.
Hey, good morning US good morning, Jeff.
Hey, just a couple of questions on commercial service I think you said it was down high single digits.
A little surprised that that's not starting to get more resilient here so what's the outlook.
As you look at service going forward and then just on the attachment right comment.
You seem encouraged you're adding feed on the street. What did you think entitlement is for attachment rates a coupla years out.
Yeah look we had we originally thought.
This year was going to be twenty-five and we test ourselves to get the 30, we're at 27% attachment right in Bullex at this year at 30, So we're getting really really strong traction there in our assurance. One program is helping that the playbook is clear we know what we have to do the feet on the street as you mentioned will help.
Look I I see that number getting up to 50% over the next few years, we just gotta keep chipping chipping away at it.
I will say that a couple of our peers.
Had a bit of a jumpstart on us what their focus on things like Modernizations, an attachment right. So.
All in all.
Candor were playing a little bit of catch up but we know we know what to do we know the we know the playbook, we have confidence in it if you look at our overall service backlog, it's actually up about 30% because some of the orders that we've had have been pushing out to the right. When you look at some customers pushing out modernizations and some other tests so.
As we get into next year, we think that we'll see some real growth on the service side.
Okay, and then just done they apply backlog it was encouraging to hear backlog up kind of mid singles exiting the year what.
What is the mix within that and and just kind of within the order rates. This quarter that kind of normalized forget more resilient what are the key and markets verticals that are kind of helping you there.
Yeah, I was mentioning a little bit around things that are helping us it's really it's by location and it's by vertical it's kind of like when you fish you go where the fish are right now you go where the customers are and they happen to be in places.
In places like data centers healthcare warehousing.
Education is showing some.
Positive trends so those have been quite positive or light commercial business is down 10% to 15%, but that's very much a replacement business 80 20 as a replacement. So eventually as as those start to come back we would expect that to recover as we get into too.
21.
But we have seen I'm really really proud of the China team they've continue to pick up sure and do a very nice job and in North America, we've seen some real traction here and some recent wins even over the last few weeks, so I feel confident that.
<unk>, even in a very challenge environment, where we're continuing to get some key wins here in North America.
Okay I appreciate the color.
<unk>.
Thank you and then the next question comes on just a second let me search your line is now open.
Thank you have good day, everyone hope you're doing well.
Yeah, two questions one first a little bit in the weeds on data center, we could I C. A L C struck.
An agreement with the data Center information management company Nightlight, not too long ago.
Maybe just a little color on what incrementally reviewing data centers on top of kind of decor.
On a cooling play that with all kind of thinking.
Yeah, you know you look at the data centers has been a big focus area for US we've actually had a number of key wins and when we look at data centers. It kind of plays into the carrier story overall, which is that we have a group that sells across carrier covers every one of our vertical so it will include.
Mood ALC and complete digital solutions that will include of course R. H back systems chillers than others, but it can include everything from our maryanne business that provides a very kind of purpose fit suppression system for things like data centers. The rest of your Oregon's portfolio on fire and security many aspects of that play well for data center. So.
When we look at our building systems group that we have that sells into verticals. We have a holistic data center solution. We do the same for things like hospitals, where we had a significant when with Emery University that we're now talking to other hospitals across the country on so that group can really look.
Look at holistic offerings.
Interesting and then just the.
Follow up on some of these kind of variance items just to be clear on on the investments spend that's $100 million incremental this year.
Are we at run right or you're suggesting that goes up to a higher level and 2021 and I also just kind of similar question on complex.
What kind of the variance might be end of 2021 on that thank you. Yeah. So let me start on the so if you recall back an investor day, we kind of Dimensionalize the investment back into the business to position. It for growth was 150 150, and his covid here to kind of change that that pacing. So we're 100 this year again.
I said earlier, we'd spend 25 to date most of the third quarter, we're anticipating 75 in the fourth quarter that'll be the 102021, we expect another hundred and then in 2022, we would expect to finish out that program at 100, and we'll have to see from there. What further investment may may may make sense.
So that's that's kind of that and that's all baked into what we said earlier from a capex standpoint, we do we expect to considerable still 120 $550 million of of capital spend in the fourth quarter of this year that also contributes to the you know what you might consider a a weaker cash flow in the fall.
Quarter. So there is a considerable capital spend there you you also may recall back Investor Day, We said, we would spend 350 to 400 is kind of foundational capital expenditure in 2020 that was scaled back considerably because of the covid, but we do expect that that will push out into 2021. So you would see that <unk>.
Evil in 2021, so there will be some cash headwind there.
Alright, thanks for the color.
Thank you and our next question comes from John Walsh of credits Nice China is now open.
Hi, good morning, everyone.
Good morning, John morning.
Uhm, obviously, when you talked about commercial earlier, you called out U S in China.
I'm curious about what you're seeing in Europe, especially around some of these green stimulus plans that are being announced I'm thinking about France in particular, where they're trying to really intact. Their installed base is that does that a big opportunity or is that an opportunity to you see going forward.
It sure is.
We just introduced are are 32 are cool.
Crow chiller.
That we've seen initial early traction, but you know that the GW P focus is probably globally most acute.
In Europe, we think we have some very strong technology on the sustainability side, we continue to invest with new products coming out next year. So I.
I think a real differentiator in Europe is going to be the focus on low GWB offerings, and we continue to lean into that that does present, an opportunity and look we were a little bit critical.
Of ourselves of our Europe performance <unk>, we've seen some nice order trends recently, we'll have to see how things play out with what's happening with Covid in Europe, but I do think the team is starting to gain some traction over the last couple of months.
But it sounds like you feel like you have the right product in the right position within the market to participate in that.
We do we feel well position I will tell you that we have more products on the come we have a mag bearing offering that's coming out next year. So we continue to invest in the technology in the portfolio. We like the products, we have but certainly innovation is going to be key as we get into next year and the year afterwards.
Great and then maybe just a separate question here.
As we think about in the next year.
And you gave that kind of bridge on on the investments a couple of times.
I still get asked the question why 300 is kind of the right number for the investments.
Obviously, that's probably a much larger discussion then and earnings call, but it seems like you're taking up your savings.
And so all else equal we have an extra $100 million a drop through relative to what we were thinking before is that right or could you actually over time take up that investment number to kind of offset it.
Look we'll have to assess the investment levels over the time, we have an LLP we've factored in what does it take to consistently grow in that mid single digit rain, and that's where we've come up with that investment level and we've also consistently said that we would expect to improve Ross 50 bps a year. So we keep all that imbalance in our <unk>.
Algorithm, but I could tell you something that is very a little bit new but very thematic a carrier is that we are gonna grow we are going to invest in growth and we're going to be consistent we're not going to do a lot of fits and starts we're going to make commitments on growth areas and we're going to stick to them.
Great. Thank you I appreciate it.
Yep.
Thank you and our next question comes from Jane J, a R. B C capital markets shyness that open.
Thank you good morning, everybody Martin guarantee.
He would just want to follow up on the indoor air quality seem and I. Appreciate that you. All are the first to size. This among the big H five players and that does make sense.
Terms of what the opportunity is.
And just if you just give us the context of the 150 million orders that you called out that would we should group that that's part of your.
The bucket of the assessment for the healthy buildings and so forth how does that split between equipment sales and then the recurring side of this the blue Diamond piece.
Yeah, the the 150.
That was a pipeline.
We are inactive they're not all firm orders yet we've.
We have actually we have a number of from orders like I mentioned with the App D clean and others and we actually have.
We this is something obviously, we review often and I was looking at our top 20 projects, where we've been pulled into the project that I mentioned in Colorado, where are through Cushman and Wakefield. We would have had a typical chiller sale, which would have been significant but we added.
A number of UV lights, and other kind of bipolar ionization other kind of filtration add ons too.
Two and otherwise typical order that was really quite significant we've seen it with a university in southeast Asia, where we had a very significant.
Dedicated <unk>, where they were very focused on as they were welcoming students back. So you know look some R firm order summer I think soon to be converted into farm and confirm orders and it. It really has been primarily on the <unk> side, but youre, Oregon and his team have some really creative offerings the blue Diamond.
This.
Is going to be part of our overall digital solution because that's the piece that can have that customer intimacy, where you can look at your smartphone and you can use that excuse me see how we're how are the actual.
Indicators for <unk>, whether it's your C. O. Two levels are your the amount of ventilation that you're seeing or other things that you you may be measuring we were looking at about seven attributes that that will be looking at and blue Diamond will be a great source for us to kind of monitor those seven seven attribute.
And also give the end customer insight.
Into those attributes.
Blue Diamond also gives you capabilities around contact tracing we have the announcement that juergen and team drove with flair around thermal scanning. So there's a number of things in his portfolio that are attractive, but become a lot more attractive when they're part of the carrier solution.
Terrific and look I know, we're at the top of the hour, but I did just want to squeeze in one last question your H back peers, all our stand.
Favorable within the ESG community in terms of holdings, you all a new a new public company really haven't cracked the top 10, yet would be interested in how do you expect to position carrier for this ESG demand that we expect is will be interested in those.
Stock.
What has to happen before you'll start seeing the espn's sustainability.
Investors.
Consider ran carrier.
Yeah.
I'm glad you ended on that question because we are very energized about ESG and we just reviewed with our board are specific.
Targets that we will be committing ourselves to and we'll be releasing publicly.
Basically it's going to be a big focus on sustainability and I think folks will be quite pleased by how we're stepping up around our sustainability targets, but it includes everything from DNI, where I'm really believe that we've leaned into the to the moment around diversity and inclusion and that's just.
Profound.
Impact that's had an assist year, that's going to be sustainable and all other aspects of DNI, how we deal with our suppliers and various elements in our own operation. So.
I think this will be very very thematic for carrier it's.
Its thematic for our space, but we're really looking to differentiate ourselves and I think you would expect us to be within the top quartile on an <unk> basis.
Great to hear thank you.
Thank you.
And ladies and gentlemen, this does contain a question and answer session and now my kitchen I'll call back over ticket Gentilesse any question Max.
Okay, well, thank you and thank you all for participating Sam is around of course, the rest of the day and beyond for any questions. Thank you all.
Ladies and gentlemen, this concludes today's conference call. Thank you. So if I can <unk> you can disconnect.
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