Edited Transcript of CARR.N earnings conference call or presentation 30-Jul-20 1:00pm GMT

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Q2 2020 Carrier Global Corp Earnings Call Jul 31, 2020 (Thomson StreetEvents) -- Edited Transcript of Carrier Global Corp earnings conference call or presentation Thursday, July 30, 2020 at 1:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * David L. Gitlin Carrier Global Corporation - CEO, President & Director * Samuel Joel Pearlstein Carrier Global Corporation - VP of IR * Timothy R. McLevish Carrier Global Corporation - CFO & Executive VP ================================================================================ Conference Call Participants ================================================================================ * Charles Stephen Tusa JPMorgan Chase & Co, Research Division - MD * Deane Michael Dray RBC Capital Markets, Research Division - MD of Multi-Industry & Electrical Equipment & Analyst * Gautam J. Khanna Cowen and Company, LLC, Research Division - MD & Senior Analyst * Jeffrey Todd Sprague Vertical Research Partners, LLC - Founder & Managing Partner * Julian C.H. Mitchell Barclays Bank PLC, Research Division - Research Analyst * Nigel Edward Coe Wolfe Research, LLC - MD & Senior Research Analyst * Vladimir Benjamin Bystricky Citigroup Inc., Research Division - VP and Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, and welcome to Carrier's Second Quarter 2020 Earnings Conference Call. This call is being carried live on the Internet, and there is a presentation available to download from Carrier's website at ir.carrier.com. I would like to introduce your host for today's conference, Sam Pearlstein, Vice President of Investor Relations. Please go ahead, sir. -------------------------------------------------------------------------------- Samuel Joel Pearlstein, Carrier Global Corporation - VP of IR [2] -------------------------------------------------------------------------------- Thank you, and good morning, and welcome to Carrier's Second Quarter 2020 Earnings Conference Call. With me here today are David Gitlin, President and Chief Executive Officer; and Tim McLevish, Chief Financial Officer. Except as otherwise noted, the company will be speaking to results from operations, excluding restructuring costs and other significant items of a nonrecurring and/or nonoperational 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. Carrier's SEC filings, including Carrier's 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, we 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. (Operator Instructions) With that, I'd like to turn the call over to our President and CEO, Dave Gitlin. -------------------------------------------------------------------------------- David L. Gitlin, Carrier Global Corporation - CEO, President & Director [3] -------------------------------------------------------------------------------- Thank you, Sam, and good morning, everyone. Here is the quick summary. The second quarter was better than we expected, driven by our continued cost reduction actions, progress on our top line initiatives and improvement in the U.S. 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 scaled back. Before we get into details on our Q2 results and the outlook for the rest of the year, let me start with some context. Slide 2 shows the 4 priorities that we established at the outset of the COVID 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 field teams have continued in the workplace with limited interruption, and we have gone to great lengths to ensure a safe environment for our people. We have distributed 2.5 million masks, instituted thermal screening for 100% of our employees at our scale locations and deployed Carrier's Healthy Building Program solution in our facilities to provide our people with a 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 had resumed operations, and we are now more than 95% of our production capacity availability. Our third priority is to effectively manage cost and cash. Carrier 600, our program targeting $600 million of run rate savings within 3 years had initially targeted $175 million of savings in 2020. After 1Q, 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 there, 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 are very comfortable with our liquidity position. We are pleased that Q2 cash flow was materially higher than we had internally projected, and we are 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 2 key emerging trends: healthy, safe and sustainable buildings and cold chain solutions. The COVID pandemic has underscored the role of buildings in helping ensure public health, and we moved quickly to launch our Healthy Buildings Program. You see on Slide 3, where we stand on all our overall strategic priorities and our progress as a public company. As a stand-alone 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. In just 1 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 and our planet, we recently released our first ESG report 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. ESG is not a side activity at Carrier. It's core to our business, always has been, and we take pride in being leaders in this effort. We've also been consistent in focusing on our 3 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 and digital. We originally plan to spend an incremental $150 million in these 3 key areas this year. And after COVID hit, we scaled it back to $75 million. As we said, our incremental strategic investments would increase as we achieve 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 have the highest energy efficiency ratings amongst all ducted systems. Carrier Transicold launched its innovative vector multi-temperature trailer refrigeration unit that addresses a key market need and initial demand has been very positive. And in our Fire & Security business, Kidde is launching new TruSense smoke detectors that are first-to-market compliant with the new UL standards and will significantly reduce nuisance alarms. And we are on track to add the 500 sales and support people that we previously planned. In our second pillar, which includes geographic expansion, we continue to make strong progress in China, with a key VRF win with the Sanya International Sports Industrial Park and also in China, our GST fire business had an important win with Zhongshan Lu's 1.3 million square foot commercial complex. And in the third pillar, driving aftermarket and digital. We introduced the BlueEdge 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 AssuranceONE program and digitally enabled life cycle 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 Supra business signed a contract with 6 St. Louis Area Realtor Associations to provide subscription-based access solutions to over 9,500 key holders. And British supermarket retailer Asda signed 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 safe 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 & Security portfolio to include touchless and traceability offerings. And our LenelS2 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's EST thermal imaging screening solutions with LenelS2's OnGuard access control system. We are integrating these multiple healthy and safe building offerings to provide our 7 targeted verticals with a one-stop-shop solution. Society needs confidence in the safety and health of 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 & Wakefield to collaborate on deploying leading-edge Carrier solutions. And we are working with Emory University to upgrade IAQ 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 G&A transformation. We remain focused on our overall business simplification that makes us more agile and externally focused. We launched Carrier Alliance to reduce our 6,000 suppliers and align 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 4. We shared trends back in Q1 that showed the U.S. and 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 U.S. and 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 U.S. orders in June, up 40% from last year. U.S. 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 U.S., Fire & 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 U.S. in June after being down 25% in April and May. The encouraging trends that we saw in June have carried forward to July, where U.S. and China orders have been up more than 20%. The EU 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, COVID 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 Q&A. -------------------------------------------------------------------------------- Timothy R. McLevish, Carrier Global Corporation - CFO & Executive VP [4] -------------------------------------------------------------------------------- Thanks, Dave. Good morning. Please turn to Slide 5. As Dave just mentioned, April and May were right on track with our expectations. June, however, saw a significant pickup in activity in the U.S. 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 COVID-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 COVID-related volume and factory 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 $0.30 and adjusted EPS was $0.33. 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 have expected in a very difficult environment. Let's now look at how the segments performed. Please turn to Slide 6. And note that the year-over-year numbers I will refer to on this slide are organic comparisons. The HVAC 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 the warmer weather, led to a substantial pickup in the month of June. We exited the quarter with a backlog about twice last year's level and inventories in the field down about 25%. So we expect strengths 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 slowdown with a healthy backlog in this longer cycle business. Light commercial was down more than the group because 80% of light commercial is 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 expect it to remain down year-over-year in the second half. Now over to Refrigeration, where sales were down 25%. North America truck/trailer was down about 50%. Europe truck/trailer was down close to 30% and container was down about 10%. We have, however, seen improved order activity with 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 and quotation activity improving in both geographies. The Fire & Security segment was down 22%. The products business was down consistent with the segment. Declines in the Americas and Europe were partially offset by a recovery in China. We did see sequential improvement 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. While about 40% of this business is recurring, having no or limited access to sites did put pressure on the installation and service portion of 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 7. 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 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. But we have upped the 2020 target for Carrier 600 by $25 million and expect to redirect that increment to restore investments in R&D, sales force 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 8. 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 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 pandemic. With this 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 weather 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 an $0.08 per share dividend, which was paid just last week. Please turn to Slide 9, 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 and 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 $15.5 billion and $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 billion 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 the 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 are 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 $200 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, the EPS, such as interest expense, tax rates 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. -------------------------------------------------------------------------------- David L. Gitlin, Carrier Global Corporation - CEO, President & Director [5] -------------------------------------------------------------------------------- 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 positioned 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, we'll open this up for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And our first question comes from the line of Nigel Coe from Wolfe Research. -------------------------------------------------------------------------------- Nigel Edward Coe, Wolfe Research, LLC - MD & Senior Research Analyst [2] -------------------------------------------------------------------------------- Just wanted to kick off on the resi data points. I think you said down 13% or 14% in the quarter. You're obviously all -- well, pretty much all independent distribution. So you've got the selling to -- sellout dynamics. So given that Moscow has pretty significant inventory drawdown. I'm just wondering if you've got any intel on how the sell-through looked so we can sort of judge how market share trended versus some of the comps? That would be my first question. -------------------------------------------------------------------------------- David L. Gitlin, Carrier Global Corporation - CEO, President & Director [3] -------------------------------------------------------------------------------- Yes. We look at resi. And like you said, Nigel, we sell-through distribution. So when you look at the share numbers from AHRI, you're 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, it was plus 100%. And a lot of that strength in orders has continued into July where 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. That's continued into June. That's continued into July. So we feel pretty well set up for 3Q. The biggest challenge we have right now is supporting that demand operationally and with our logistics team. -------------------------------------------------------------------------------- Nigel Edward Coe, Wolfe Research, LLC - MD & Senior Research Analyst [4] -------------------------------------------------------------------------------- It's a good problem to have those now. And then on your revised framework. Obviously, a little bit of a bump to the midpoint. And I think the prior framework call for mid-teens declines in HVAC, Fire & Security, because it was down 10% and then refrigeration down 20%. And I'm sorry if I missed this, but how does that look right now? Maybe in the second half of the year would be better sort of data points. How has that changed relative to what you saw back in early May? -------------------------------------------------------------------------------- Timothy R. McLevish, Carrier Global Corporation - CFO & Executive VP [5] -------------------------------------------------------------------------------- Yes, Nigel, this is Tim. I would say that -- I mean, the same impact is hitting all of our businesses and roughly proportionally. So I would say that the guidance we gave overall for the company would be largely reflected by each of the business units. The one exception from an operating income standpoint would be our operating profit that we probably will have a bigger hit to profits for HVAC attributable to the decline in JV income. And also that we probably have heavier investments of the $100 million incremental investment we talked about. This portion of share that will go into HVAC. -------------------------------------------------------------------------------- Nigel Edward Coe, Wolfe Research, LLC - MD & Senior Research Analyst [6] -------------------------------------------------------------------------------- But to be clear, the performance of Fire & Security in 2Q doesn't change your view that, that's going to be a bit more of a good guy relative to the other segments? -------------------------------------------------------------------------------- Timothy R. McLevish, Carrier Global Corporation - CFO & Executive VP [7] -------------------------------------------------------------------------------- No, I'd say they're going to be pretty proportional. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Our next question comes from the line of Julian Mitchell from Barclays. -------------------------------------------------------------------------------- Julian C.H. Mitchell, Barclays Bank PLC, Research Division - Research Analyst [9] -------------------------------------------------------------------------------- Maybe just a first question around your overall perspectives on the nonresidential markets across, I suppose, Fire & Security and HVAC, 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? And maybe clarify for us what proportion of your nonresidential activities are tied to greenfield investments as opposed to replacement or aftermarket? -------------------------------------------------------------------------------- David L. Gitlin, Carrier Global Corporation - CEO, President & Director [10] -------------------------------------------------------------------------------- Okay. Well, first, Julian, just a reminder that when you look at our applied business, it's about 70-30. We're more heavily weighted towards OE versus service on the applied side. When we look back at 2Q and then we'll kind of look forward with you. We feel on the applied side that we had strength in the U.S. and China, I think in terms of share, we felt positive. We had committed, Chris had committed to getting us to #1 within 5 years, which really looks at about 50 bps of improvement a year, and we felt pretty positive about the share gains that we saw in the U.S. and China. We lagged in Europe, and we need to fix that, and we will. But we felt positive about U.S. and 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 of 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 that's an area that there's a huge opportunity ahead. When you look at some of the macro trends overall, ABI is a really good leading indicator, of course, the Architectural Billing Index, you want that north of 50. It had been north of 50. Coming into March, April, May, it dropped down into the 30s. And then June, it was back up to 40s. So a positive trend there, and we'll see if that bodes well as we look out 6 months. Light commercial was pretty rugged in April and May. It's started to show a better signs of progress as we got into June and July, but 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. -------------------------------------------------------------------------------- Julian C.H. Mitchell, Barclays Bank PLC, Research Division - Research Analyst [11] -------------------------------------------------------------------------------- And then maybe just a second question on the margin profile. I think, Tim, you talked about a onetimer perhaps weighing on decrementals. Maybe if you could just clarify sort of what you meant by that. And then also, as we look to the second half, it looks like the implied decremental margin is similar to what you had seen in Q2? Just clarify that, that's the case. And is the main driver of sort of narrower sales decline, but perhaps some of those more stepped up investments as you look ahead? -------------------------------------------------------------------------------- Timothy R. McLevish, Carrier Global Corporation - CFO & Executive VP [12] -------------------------------------------------------------------------------- Yes. I think you've got it about right, Julian. So the adjustment. So I just say, if you do the calculation, and we come in about 34% decremental in Q2 and there's about 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 is 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 will 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 investments. You recall, so I mentioned in my prepared remarks that we really -- if you think about it, we didn't do much as we're part of UTC in the first quarter. Second quarter, we were quite distracted by responding to the COVID crisis and our customers and keeping our employees safe, et cetera, that Dave mentioned. So we spent very lightly on those investments. So the majority of what we had said was $75 million, now incremented by $25 million, so $100 million in the second half of the year is about 10 percentage points. And the remainder, about 5% to bring us 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 particularly exit a lot of the TSAs and so forth from United Technologies and digital spend, et cetera. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- Our next question comes from the line of Steve Tusa from JPMorgan. -------------------------------------------------------------------------------- Charles Stephen Tusa, JPMorgan Chase & Co, Research Division - MD [14] -------------------------------------------------------------------------------- 100% increase is not that bad. Can you give us an idea of just regionally, kind of the complexion of what you saw in residential? Were there any differences by region, whether it's shortages in certain areas of the -- different types of behavior in different parts of the country as the heat came on here? Or obviously, 100% means everything was up a lot, but just kind of curious as to what you saw on the ground regionally, if there were any major differences? -------------------------------------------------------------------------------- David L. Gitlin, Carrier Global Corporation - CEO, President & Director [15] -------------------------------------------------------------------------------- Yes. Steve, the Northeast, as the heat hit there, we did see a nice pickup there, including in the West and into the Midwest. The South and Southwest was strong, but it had been strong. So when you look at cooling degrees up 12% in June, it was pretty widespread. And I do think that areas that have been pretty well shut down. There were some pent-up demand. So we did see a nice netback in some of those regions that hadn't been as strong as they had been in other parts. Mix also, although you didn't ask, I'll just mention that on the product mix side, on the last call, we said there was a bit of mixing down that we saw earlier on in April, but it kind of mixed back up to sort of normal levels on the SEER's side. So that was encouraging as well. -------------------------------------------------------------------------------- Charles Stephen Tusa, JPMorgan Chase & Co, Research Division - MD [16] -------------------------------------------------------------------------------- And then price, for that business in the quarter? -------------------------------------------------------------------------------- David L. Gitlin, Carrier Global Corporation - CEO, President & Director [17] -------------------------------------------------------------------------------- Yes. There's -- look, 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 -- price is really neutral right now. Our biggest focus is honestly just supporting our customers. 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 preprovisioned some inventory, and we really did it because we were worried that COVID could impact operations. So we used some of that inventory that we have preprovisioned to help delivery, but the key right now is for our resi operations and our logistics to just keep supporting our customers. -------------------------------------------------------------------------------- Charles Stephen Tusa, JPMorgan Chase & Co, Research Division - MD [18] -------------------------------------------------------------------------------- And are suppliers like Copeland kind of keeping up with you guys? -------------------------------------------------------------------------------- David L. Gitlin, Carrier Global Corporation - CEO, President & Director [19] -------------------------------------------------------------------------------- Yes. It's not an operational issue. I mean we're having to brute force it right now, right? If you look at both our facilities and our suppliers, everyone's all hands on deck supporting the activity. 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 sudden spike in demand. But operationally, I'm pretty proud of our own team and our supplier partners. They've really stepped up. -------------------------------------------------------------------------------- Charles Stephen Tusa, JPMorgan Chase & Co, Research Division - MD [20] -------------------------------------------------------------------------------- And then one last one. Are you reevaluating it all in your portfolio analysis, the value of the more security-type assets on the commercial side with this pandemic? I know that some have gone after integrated buildings as a strategy. I think you guys were -- I feel like you guys were kind of still making that decision around what you kind of wanted to do with portfolio. Does this change at all that portfolio analysis when it comes to keeping that kind of content in that channel outside of HVAC with the security stuff? -------------------------------------------------------------------------------- David L. Gitlin, Carrier Global Corporation - CEO, President & Director [21] -------------------------------------------------------------------------------- Yes. Steve, we've said that we would put every part of the portfolio through a very rigorous and clinical set of lenses. And if you look at the Fire & Security portfolio, it's really 60% products and 40% is the Chubb business, which is that field and installation business. The field and installation business is pretty agnostic. It doesn't pull-through products. So that gets a different assessment. The products piece that 60% of the business, what we are finding is there is tremendous synergy on the product side between that and our healthy building initiative. We're seeing it with some of our touchless offerings. We're seeing it -- even last night, we announced this partnership with FLIR, where we're going to be reselling their thermal imaging camera capabilities, and we're going to integrate that into the BlueDiamond app. So when you look at a holistic set of one-stop-shop ecosystem of healthy buildings, the Fire & Security product portfolio fits very, very well. And we see that in terms of real application. Normally, we would measure CO2 levels and then adjust the ventilation system. But you can use the Fire & Security contact tracing to anticipate CO2 level rises and get into artificial intelligence and then use that to preventilate. So there are some really interesting parts of that portfolio and some synergies that seem to fit quite well. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- Our next question comes from the line of Jeff Sprague from Vertical Research. -------------------------------------------------------------------------------- Jeffrey Todd Sprague, Vertical Research Partners, LLC - Founder & Managing Partner [23] -------------------------------------------------------------------------------- Maybe just to pick up on Chubb there for a second. I fully understand what you said about kind of the nature of it. But in essence, it's also kind of an important customer touch point, isn't it? If you kind of look back, maybe you wish you had more distribution on the HVAC side and the like. Is there something more creative to do with that field force than what's been done historically? -------------------------------------------------------------------------------- David L. Gitlin, Carrier Global Corporation - CEO, President & Director [24] -------------------------------------------------------------------------------- Yes. Look, Chubb is a very solid business. And the interesting thing about Chubb is there's tremendous room for improvement in growth. It's no secret that UTC had, had it on the market and decided to take it off at the end of '18. And that's been an obvious area that we'd assess. There are sort of 2 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 2Q, I think Chubb was down around 25%. So we really have our work to do in the second half to get the EBITDA and the performance up to levels that we would expect of the business. And then we'll assess the kind of question that you've asked. Does it fit from a distribution and touch point 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. -------------------------------------------------------------------------------- Jeffrey Todd Sprague, Vertical Research Partners, LLC - Founder & Managing Partner [25] -------------------------------------------------------------------------------- And maybe second sort of related question. You also have other assets that maybe you could deem noncore, not the size of Chubb, things like Beijer, if I'm pronouncing that correctly, and other things. What is your thought on monetizing some of this stuff and how it actually fits in your portfolio going forward? -------------------------------------------------------------------------------- David L. Gitlin, Carrier Global Corporation - CEO, President & Director [26] -------------------------------------------------------------------------------- Yes. We've said that not only for every part of our product and service portfolio, but including our JVs, as you mentioned Beijer, we do have a stake in a European distributor of refrigeration and other equipment, and it's a 37% stake. And we said that we would assess 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. -------------------------------------------------------------------------------- Operator [27] -------------------------------------------------------------------------------- Our next question comes from the line of Gautam Khanna from Cowen. -------------------------------------------------------------------------------- Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD & Senior Analyst [28] -------------------------------------------------------------------------------- So I had 2 questions. First, just on the resi HVAC side, can you speak to any trends on mix? And are you seeing patchwork repairs relative to system replacements? Any sort of trade down or what you would expect to be a trade down given the consumer is under some pressure? Or are we just seeing the opposite right now? -------------------------------------------------------------------------------- David L. Gitlin, Carrier Global Corporation - CEO, President & Director [29] -------------------------------------------------------------------------------- No, we're not -- yes, Gautam, we're not seeing any mix down. And we're not seeing customers favoring parts over full replacements. 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. They're not as traveling as much. So there's a lot of consumer spend on the home itself, and I think that's 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 there's a lot of forces in play to drive some very strong order demand, but we are not seeing a pickup in parts or mixing down. -------------------------------------------------------------------------------- Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD & Senior Analyst [30] -------------------------------------------------------------------------------- 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 we'll start to see meaningful bookings on this front in the second half of this year? Or is it more of a first half type of opportunity of next year? -------------------------------------------------------------------------------- David L. Gitlin, Carrier Global Corporation - CEO, President & Director [31] -------------------------------------------------------------------------------- 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. We were seeing orders in 2Q on some of our -- we introduced this OptiClean HEPA filter, and we -- the air scrubber machine. And we've seen very solid order activity, whether it's a dentist office adding on or K-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 I upgrade the filtration system?" So we would put that in a 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 is shining a light on the criticality of the health and safety of indoor air environments. And the nice thing about Carrier is that we have a one-stop-shop ecosystem where we can address all vectors of what would create a healthy indoor environment. So we're in early stages. I would call the first phase of what we've done is taken our core offerings and put those together for our vertical customers in a one-stop-shop approach. Phase 2, 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 go-to place for healthy and safe indoor environments. -------------------------------------------------------------------------------- Operator [32] -------------------------------------------------------------------------------- Our next question comes from the line of Deane Dray from RBC Capital Markets. -------------------------------------------------------------------------------- Deane Michael Dray, RBC Capital Markets, Research Division - MD of Multi-Industry & Electrical Equipment & Analyst [33] -------------------------------------------------------------------------------- I'd like to stay with this 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? -------------------------------------------------------------------------------- David L. Gitlin, Carrier Global Corporation - CEO, President & Director [34] -------------------------------------------------------------------------------- I think the answer is yes. I think it's going to be a combination of code-driven and customer by customer. I think what you're seeing is a lot of verticals looking to give their customers confidence in coming back into these public environments. So whether it's universities or K-12 or other schools globally, they're stepping up and asking the right questions about 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 demand, state by state, country by country, but you're also seeing some of the regulatory bodies, and it could be an organization like ASHRAE coming forward with specific standards that I know us and our competitors would all support. So I think that there will be a balance between customer demand 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. -------------------------------------------------------------------------------- Deane Michael Dray, RBC Capital Markets, Research Division - MD of Multi-Industry & Electrical Equipment & Analyst [35] -------------------------------------------------------------------------------- That's great to hear. Can you spend a moment talking about how you're differentiated competitively in terms of your go-to-market? The -- again, on this indoor air quality, you mentioned the OptiClean, the filter. Are you looking at UV as a potential add on? And then -- and talk about the monitoring capability beyond just CO2? -------------------------------------------------------------------------------- David L. Gitlin, Carrier Global Corporation - CEO, President & Director [36] -------------------------------------------------------------------------------- Yes. I think what really differentiates Carrier is the holistic capabilities that we have. So obviously, we have all aspects of a HVAC. Within HVAC and indoor air quality, we have a multipronged approach to filtration. So yes, for homes we use electrostatic filters. We have HEPA filters. We're using bipolar ionization, and we have capabilities around UVC. So we have a pretty comprehensive portfolio when it comes to filtration. But the same comes with our ability to do customized 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 ALC 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 & 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 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. -------------------------------------------------------------------------------- Samuel Joel Pearlstein, Carrier Global Corporation - VP of IR [37] -------------------------------------------------------------------------------- Can we just go to one last question, Gigi? -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- Of course. Our next question comes from the line of Vlad Bystricky from Citigroup. -------------------------------------------------------------------------------- Vladimir Benjamin Bystricky, Citigroup Inc., Research Division - VP and Analyst [39] -------------------------------------------------------------------------------- So maybe just one more follow-up on the healthy buildings and indoor air quality. Maybe it 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, would you become -- what you've started to learn about the ease or difficulty of implementing some of these measures? And what the employee response has been in terms of the feedback or feeling of the security in the facilities as these measures are come out? -------------------------------------------------------------------------------- David L. Gitlin, Carrier Global Corporation - CEO, President & Director [40] -------------------------------------------------------------------------------- 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 Gardens 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 environment. So for example, we have significantly more ambient air in this facility than most commercial buildings. We have a designated outdoor air system. So we continue to leverage that to maximize the amount of ambient air. When COVID hit, we started to use more bipolar ionization. We have a relationship with a company called GPS. So we implemented their capabilities in our filtration system there. It's combined with a HEPA filter as well. So we've been using this building to really validate a lot of our apps. So we have our BlueDiamond app. That's part of our LenelS2 business. And what we're hearing from our employees in this building because right now, for office employees at Carrier, it's still voluntary whether to come back to the office. But we're seeing an uptake in people coming back to the office because they know 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 and the investments that we're making. -------------------------------------------------------------------------------- Vladimir Benjamin Bystricky, Citigroup Inc., Research Division - VP and Analyst [41] -------------------------------------------------------------------------------- That's great to hear. And then maybe just a last follow-up for me. You had mentioned earlier in the call, a back-office review that was underway with a look to go to more of a shared services model over time. Can you just clarify whether that cost -- potential savings from that, would that be -- fall under what you've anticipated under the Carrier 600 umbrella? Or is that sort of a new initiative that could be incremental savings over time? -------------------------------------------------------------------------------- Timothy R. McLevish, Carrier Global Corporation - CFO & Executive VP [42] -------------------------------------------------------------------------------- Well, this is Tim. It's an initiative that we had envisioned for -- since kind of the inception. It is part of the Carrier 600. We've carved out about $100 million of the Carrier 600, that what we call the G&A savings. And we are setting up what we call -- I mean, it's a GBS. It's a global business services center. And we will centralize a lot of the back office, the back-office activity. We're starting with the cash application. We're starting with accounts payable. We're starting with some of the accounting back-office routine activity. We call the -- in the reporting of the accounting. And we're setting up facilities in probably 3 or 4 places around the world. We have one in Prague today. We're going to set one up in India. We have one in the United States, we'll put another one down in Mexico. And we anticipate it's labor arbitrage. It's a cost structure, but it's also an efficiency. We'll employ a state-of-the-art tools to reduce costs. And yes, that is part of the Carrier 600, and it's well underway. I won't say that to date, we have realized the savings. We're still in the process of setting it up, but you'll see them soon. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Dave for closing remarks. -------------------------------------------------------------------------------- David L. Gitlin, Carrier Global Corporation - CEO, President & Director [44] -------------------------------------------------------------------------------- Okay. Thank you, and thanks, everyone, for joining. As always, Sam is available for follow-up questions and look forward to speaking with many of you in the coming months, and thank you for your time today. -------------------------------------------------------------------------------- Operator [45] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.