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 Web site at ir.carrier.com. I would like to introduce your host for today's conference, Sam Perlstein, Vice President of Investor Relations. Please go ahead, sir.
Thank you, and good morning, and welcome to Carrier's Q2 2020 earnings conference call. With me here today are David Gitlin, President and Chief Executive Officer and Tim McLeves, 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 non recurring 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. Carrier's SEC filings, including Carrier's registration statement on Form 10 and the reports on Forms 10Q and 8 ks provide details on important factors that could cause actual results to differ materially from those anticipated in the forward looking statements.
This morning, we'll review results for the Q2 of 2020, discuss the full year 2020 outlook, and we'll leave time for questions at the end. Once the call is opened With that, I'd like to turn the call over to our President and CEO, Dave Gitlin.
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 2,500,000 masks, instituted thermal screening for 100% of our employees at our scale locations as safe an environment as we possibly can. Our second priority has been to maintain business continuity to support our customers. While we experienced some short term shutdowns, by the end of the second quarter, our factories and suppliers have resumed operations, and we are now more than 95% of our 600, our program targeting $600,000,000 of run rate savings within 3 years, had initially targeted 175 $1,000,000 of savings in 2020. After 1Q, we increased that to $225,000,000 of savings this year, we are now tracking to $250,000,000 of recurring in year savings.
We also announced one time cost actions close to $5,000,000,000 of liquidity. We have $2,700,000,000 in cash on the balance sheet and we have access to a 2,000,000,000 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 $1,100,000,000 of free cash flow up from our prior estimate of at least $1,000,000,000 We also declared our 1st dividend in Q2 demonstrating our confidence in the business. And 4th, we remain laser focused on ensuring that we position Carrier to emerge stronger from this pandemic.
We are accelerating and sustainable buildings and coal 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 a public company. As a standalone company, we launched the Carrier Operating System and the Carrier Way and both are yielding early 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 and at In order to strengthen and grow our core business, which is our first pillar, we continue to invest in R and D, salespeople and digital. We originally planned to spend an incremental $150,000,000 in these 3 key areas this year and after COVID hit, we scaled it back to $75,000,000 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 $100,000,000 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 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 BRF win with GST fire business had an important win with Hongxing Lear's 1,300,000 Square Foot Commercial Complex. And in the 3rd 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 Assurance 1 program,
and
and commercial national accounts achieved $100,000,000 in e commerce revenues in June. Our super 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 Asta signed a long term support and telematics deal in conjunction with its order of more than 165 carrier transit cold 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 and security to include touchless and traceability offerings. And our LANEL S2 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 solutions with Linnellis II'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, recent proof points, we signed a healthy buildings deal with Cushman and Wakefield to collaborate on deploying leading edge carrier solutions, and we are these exciting growth initiatives through tenacious progress on Carrier 6 100 and G and 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 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 and security products orders grew in the high single digits in June after being down 30% to 40% in April May, and commercial HVAC orders were up low single digits in the U. S. In June after being down 25% in April 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 what we control, effectively managing the business during times of uncertainty and volatility and remaining flexible and opportunistic. With that, let turn it over to Tim, and I'll come back to summarize before we open it up for Q and A.
Thanks, Dave. Good morning. Please turn to Slide 5. As Dave just mentioned, April May were right on track with our expectations. June, however, saw pickup in activity in the U.
S. As the economy reopened. That led to a substantial improvement in demand in North America residential HVAC, for the 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 $442,000,000 Adjusted operating profit of 476 dollars were partially offset by our aggressive cost actions. Our decremental margin was 34%. Absent some one time 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 HVAC segment sales were down 15% from last year. Within the segment, North America Residential sales were down 13 percent. As mentioned earlier, the opening up of many states combined with a 5%. So we expect strength to continue in the 3rd quarter. The commercial HVAC business was down 17% with declines in most of the businesses.
We saw a decline of around 20% in light 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 a healthy backlog in this longer cycle business. Light Commercial was down more than the group because 80% of light commercial is replacement, 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 America truck trailer was down about 50%, Europe truck trailer was down close to 30% and container was 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 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 and 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 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 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 and ready to pivot as needed to market conditions. So we remain focused on controlling the controllables and on 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 offset the productivity and absorption impact from the lower volume by $250,000,000 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 to generate net savings of $250,000,000 but we have upped the 2020 target for Carrier 600 by $25,000,000 and expect to redirect that increment to restore investments in R and D, sales force and digital. These are the 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 Q1 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 $750,000,000 in bonds, we ended the quarter with $2,700,000,000 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 to the severity and duration of the crisis and likely recovery path. In light of our more favorable 2nd 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 $15,500,000,000 $17,000,000,000 given the pleasant surprise of stronger demand in June, especially in the Americas. This raises the lower end by $500,000,000 We also increased the bottom end of the adjusted operating profit range by $100,000,000 and are now projecting adjusted operating profit to be between 1 point
$800,000,000
of the investment cutbacks we announced in the Q1 call. This is consistent with our comments at that time that the pace and timing bringing it back would track the recovery. Lastly, while much of the Q2 cash flow we are now comfortable projecting at least $1,100,000,000 of free cash flow this year, up from at least $1,000,000,000 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 $250,000,000 to the prior $200,000,000 to $225,000,000 as we invest for future growth.
We continue to growth. We continue to reiterate that our outlook expects the current momentum in orders and sales to continue. One additional note is that a a number of the items you may need to bridge the adjusted operating profit EPS, such as interest expense, tax rate and share count are in the appendix of this presentation. With that, let me turn it back over to Dave to say a few words before we open up for your
questions. Thanks, Tim. We remain on track to navigating through this uncertain environment. We continue to focus on aggressive cost actions while driving key strategic initiatives. The quarter was better than we expected.
That enables us to increase the low end of our previous outlook, while investing more in the second half to position us for growth in 2021 and 2022. Key trends around healthy, safe and sustainable buildings and cold chain solutions position Carrier well for sustained growth, we feel confident in our medium term outlook of mid single digit sales growth, high single digit EPS growth and cash flow equal to net income. With that, we'll open this up for questions.
And our first question comes from the line of Nigel Coe for Wolfe Research. Your line is now
open. Good morning, gents.
Good morning, Nigel.
So 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 dynamics. So given that Watsco had 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.
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 1, 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 percent. 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 with our logistics team.
That's a good problem. I'll have those 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, cybersecurity because it was down 10% and then the 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?
Yes, Nigel, this is Tim. I would say that I mean the same impact is hitting all of our businesses in 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 $100,000,000 incremental investment we talked about, a investment we talked about, a disproportionate share of what will go into HVAC.
But to be clear, the performance of France Q3 and 2Q doesn't change your view that that's going to be a bit more of a good guy relative to the other segments?
No, I'd say they're going to be pretty proportional.
Okay. Thanks very much.
Thank you. Our next question comes from the line of Julian Mitchell from Barclays. Your line is now open.
Hi, good morning. Maybe just the first question around your overall perspectives on the nonresidential markets across, I suppose, fire and 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 replacements or aftermarket?
Okay. Well, first, Julian, just a reminder that when you look at our applied business, it's about seventythirty. We're more heavily weighted towards OE versus service on the implied side. When we look back at 2Q and then we'll kind of look forward with you, we feel on the implied 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 number 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 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 40. So a positive trend there. We'll see if that bodes well as we look out 6 months.
Light commercial was pretty rugged in April May. It started to show a bit of signs of progress as we got into June July, but that for us is eightytwenty on replacement over OE. So we're starting to see more activity in the light commercial space, but some of those end markets remained challenged.
Thank you very much. And then maybe just a second question on the margin profile. I think, Tim, you talked about a one timer perhaps weighing on decrementals. Maybe if you could just clarify 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 a sort of narrower sales decline, but perhaps some of those more stepped up investments as you look ahead?
Yes. I think you've got it about right Julien. So the adjustments so I'll just say if you do the calculation and we come in about 34% decremental in Q2 and there's about a 1% of it is the impact of the public company costs relative to last year. And the second one is really an accounting adjustment to our long term liabilities 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'll be at the midpoint of each of the sales operating income, etcetera. But if you did take that, you would calculate probably a 45% decremental and about 10 percentage points of that is attributable to the investments. You recall, 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 Q1. 2nd quarter, we were quite distracted by responding to the COVID crisis and our customers and keeping our employees safe, etcetera, that Dave mentioned. So we spent very lightly on those investments.
So the majority of what we had said was $75,000,000 now incremented by $25,000,000 so $100,000,000 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, etcetera.
Great. Thank you.
Thank you. Our next question comes from the line of Steve Tusa from JPMorgan. Your line is now open.
Hey guys, good morning. Good morning, Steve. 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 percent 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?
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 had been pretty well shut down, there were some pent up demand. So we did see a nice snapback 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 Sears side. So that was encouraging as well.
And then price for that business
in the quarter?
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 pre provisioned 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 had pre provisioned to help delivery, but the key right now is for our resi operations and our logistics to just keep supporting our customers.
And are suppliers like Copeland kind of keeping up with you guys?
Yes, it's not an operational issue. I mean, we're having to brute force it right now. 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. And then one last one. Are you reevaluating at all pandemic? I know that some have gone after integrated buildings, 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 to keeping that kind of content in that channel, outside of HVAC with the security stuff?
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 and 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 a product side between that and our healthy building initiative. We're seeing it with some of our touch list 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 Blue Diamond app. So when you look at a holistic set of one stop shop ecosystem of healthy buildings, the fire and security product portfolio fits very, very well.
And we see that in terms of real application. Normally we would measure CO2 levels and then adjust the ventilation system, but you can use the fire and security contact tracing to anticipate CO2 level rises and get into artificial intelligence and then use that to pre ventilate. So there are some really interesting parts of that portfolio and some synergies that seem to fit quite well.
Got it. Thanks a lot.
Thank you.
Thank you. Our next question comes from the line of Jeff Sprague from Vertical Research. Your line is now open.
Thank you. Good day, everyone.
Hey, Jeff.
Hey, maybe just to pick up on Chubb there for a second. 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?
Yes. Look, Chubb is a very solid business. And the interesting thing about Chubb is there's tremendous room for improvement and growth. It's no secret that UTC had had it on the market and decided to take it off at the end of 2018. And that's been an obvious area that we'd assess.
There's 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 is, does it fit from a distribution and touch point with customers or is it worth more in the hands others? And our focus right now is just on improving the performance for our customers and for ourselves.
And maybe second sort of
related question, you also have other assets that maybe you could deem non core, not the size of Chubb, things like Bayer, if I'm pronouncing that correctly, and other things. What is your thought monetizing some of this stuff and how it actually fits in your portfolio going forward?
Yes. We've said that not only for every part of our product and service portfolio, but including our JVs. You mentioned Bayer, 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. Great.
Thanks for the color.
Question comes from the line of Gautam Khanna from Cowen. Your line is now open.
Yes, good morning. Thanks for the great detail. So I had two 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? No, we're not yes, Guad, 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 provisioned coming in, so we're catching up with that. So there's a lot of forces in play to
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?
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 the air scrubber machine and we've seen very solid order activity, whether it's a dentist office adding them or a K-twelve, 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 the 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 carriers 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 ecosystem. So Carrier does become the go to ecosystem. So Carrier does become the go to place for healthy and safe indoor environments.
Thank you.
Thank you. Our next question comes from the line of Deane Wray from RBC Capital Markets. Your line is now open.
Thank you. Good morning, everyone.
Good morning, Dean.
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?
I think the answer is yes.
I think it's going to
be a combination of co driven and customer by customer. I think what you're seeing is a lot of verticals looking to give their customers confidence in coming back into these public environments. So whether it's universities or K-twelve 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.
That's great to hear. Can you spend a moment talking about how you're differentiated competitively in terms
of your go to market?
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.
Yes. I think what really differentiates Carrier is the holistic capabilities that we have. So obviously we have all aspects of HVAC. Within HVAC and indoor air quality, we have a multipronged approach to filtration. So yes, for homes we use electric static 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 ALC business that has controls capability. And then when you integrate all of the HVAC and sensing and controls capability that we have there with our fire and security 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.
That's real helpful color. Thank you.
Thank you.
Gigi, can we just go to one last question, Gigi?
Of course. Thank you. Our next question comes from the line of Vlad Pyszczynski from Citigroup. Your line is now open.
Good morning, guys. Thanks for taking my call. Good morning, Brian.
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, what you've 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 their feedback or feeling of security in the facilities as these measures come out?
Yes. That's the beauty of, even the building that we're doing this call from today is our Center For Intelligent Buildings here in Palm Beach 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 environments. 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 Blue Diamond app that's part of our Lannell S2 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 app interfaces. So it's really having a direct correlation to employees coming back and the investments that we're making.
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 anticipated under the Carrier 600 umbrella? Or is that sort of a new initiative that could be incremental savings over time?
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 carved out about $100,000,000 of the Carrier 600 that what we call the G and 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 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 a labor arbitrage, it's a cost structure, but it's also an efficiency.
We'll employ 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.
Great. Thank you.
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.
Okay. Thank you, and thanks, everyone, for joining us. Always, Sam's available for follow-up questions. I look forward to speaking with many of you in the coming months, and thank you for your
time today. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.