Earnings Call Transcript - CARR Q2 2020

Operator, Operator

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.

Sam Pearlstein, Vice President of Investor Relations

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’ll review our financial results for the second quarter of 2020, discuss the full year 2020 outlook and we’ll leave time for questions at the end. Once the call is opened up for questions, we ask that you limit yourself to one question and one follow-up to give everyone the opportunity to participate. With that, I’d like to turn the call over to our President and CEO, Dave Gitlin.

David Gitlin, President and Chief Executive Officer

Thank you, Sam and good morning, everyone. Here’s a quick summary: the second quarter was better than we expected driven by our continued cost reduction actions, progress on our 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 four priorities 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 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 at more than 95% of our production capacity availability. Our third priority is effectively managing cost and cash. Carrier 600, our program targeting $600 million of run rate savings within three years, had initially targeted $175 million of savings in 2020. After Q1, we increased that to $225 million of savings this year and we’re now tracking to $250 million of recurring annual savings. We also announced one-time cost actions of $300 million. We remained 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’re now comfortable projecting at least $1.1 billion of free cash flow, up from our prior estimate of at least $1 billion. We also declared our first dividend in Q2 demonstrating our confidence in the business. And fourth, we remain laser-focused on ensuring that we position Carrier to emerge stronger from this pandemic. We are accelerating the implementation of our strategic initiatives and investing in two 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 move 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 standalone company, we launched the Carrier operating system and the Carrier Way and both are yielding early results. Our operating system includes a disciplined global deployment of lean in our factories. I was recently in our Charlotte factory and it was night and day compared to a year ago. In just one year, our efficiency in that factory has improved by almost 15%. Our quality has improved by over 25% and our on-time delivery has 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. It always has been and we take pride in being leaders in this effort. We’ve also been consistent in focusing on our three strategic pillars to drive sustained growth. In order to strengthen and grow our core business, which is our first pillar, we continue to invest in R&D, salespeople, and digital. We originally planned to spend an incremental $150 million in these three 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 achieved more traction during the year. So with our improved outlook, we’re 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. In our fire and 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’re 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 GSP fire business had an important win with a 1.3 million square foot commercial complex. And then the third pillar driving aftermarket and digital. We introduced the BlueEdge Service Platform providing customized tier solutions across the business. We remain on track to achieve 30% attachment rates in our commercial HVAC business this year helped by the launch of our assurance program and digitally enabled lifecycle offerings are a clear focus for us and we’re seeing traction. Our new digital platform for our residential and commercial national accounts achieved $100 million in e-commerce revenues in June. Our Super business signed a contract with six 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’re 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 portfolio to include touchless and traceability offerings. And our LenelS2 business announced 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’re integrating these multiple healthy and safe building offerings to provide our seven targeted verticals with a one-stop shop solution. Society needs confidence in the safety and health of indoor 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’re working with a university to upgrade 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 remained 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’re assessing our overall back-office footprint for reduction and consolidation by moving to a back office shared service center of excellence model. So there’s 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 showed 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, to surprise with the strength of U.S. orders in June up 40% from last year. U.S. strength was led by residential where we saw orders up 100% in June helped by an increase in cooling degree days and pent-up demand suppressing 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 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.

Tim McLevish, Chief Financial Officer

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 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%. In the absence of 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 is 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’ll 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 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 strength to continue in the third quarter. The commercial HVAC business was down 17% with declines in most of the businesses. We saw a decline of around 20% in light commercial, although there was a 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 activity suggests that 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’re encouraged to see order and 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 and May tempered somewhat in June. The point of sale data for 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 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 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 the overall full-year targets. Our intense focus on managing through the crisis in Q2 resulted in lower investment spending 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, salesforce, and digital. These are expected to support growth in 2021 and to enable us to capitalize on some of the market trends emerging from the crisis. Continue 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 and 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 a 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’re 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. As mentioned earlier, we’ve 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’re now comfortable projecting at least $1.1 billion of free cash flow this year up from at least $1 billion identified in our previous outlook. This comes even after restoring some of the capital spending reductions we made earlier in the year. Capital spending is now expected to be in the $250 million to $275 million range compared to the prior $200 million to $225 million as we invest for future growth. We continue to reiterate that our outlook expects the current momentum in order and sales to continue. One additional note is that a number of the items you may need to bridge the adjusted operating profit EPS such as interest expense, tax rate, and share count are in the appendix of this presentation. With that, let me turn it back over to Dave to say a few words before we open it up for your questions.

David Gitlin, President and Chief Executive Officer

Thanks Tim. We remain on track to navigate through this uncertain environment. We continue to focus on aggressive cost actions while driving key strategic initiatives. The quarter was better than we expected, enabling 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 building 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.

Operator, Operator

Our first question comes from Nigel Coe from Wolfe Research. Your line is now open.

Nigel Coe, Analyst

I just wanted to kick off on the residential debt point. I think you said down 13% or 14% some in the quarter. You’re obviously all pretty much independent distribution so you’ve got the economic so, getting that Wasco had significant inventory draw down. I’m just wondering if you got any intel on how the sell-through looks so we can sort of judge how market share trended versus some of the comps, that would be my first question.

David Gitlin, President and Chief Executive Officer

Yes, we look at residential and like you said, Nigel. We sell through distribution. So when you look at the shared number AHRI, you’re really comparing the sales from our distributors direct to the dealer network compared to some of our competitors that shipped 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 residential 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 the very strong demand that we saw coming into July that’s continued into June and that’s continued into July. So we feel pretty well set up for Q3. The biggest we have right now is supporting that demand operationally with our logistics team.

Nigel Coe, Analyst

It's a good problem to have, isn't it? Regarding your framework, there’s been a slight adjustment to the midpoint. In the previous framework, we anticipated mid-teens declines with HVAC down 10% and refrigeration down 20%. I apologize if I missed this, but what does it look like currently? Perhaps we could get better data points for the second half of the year? How has that changed compared to what you observed back in early May?

Tim McLevish, Chief Financial Officer

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 is 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 but will go into HVAC.

Nigel Coe, Analyst

But to be clear, the performance that translates in Q2 doesn’t change your view, that’s going to be bit more of a good guide relative to the other segments?

Tim McLevish, Chief Financial Officer

No, I’d say they’re going to be pretty proportional.

Operator, Operator

Thank you. Our next question comes from the line of Julian Mitchell from Barclays. Your line is now open.

Julian Mitchell, Analyst

Maybe just first question around your overall perspectives on the non-residential markets across, I suppose, fire, security, and HVAC in particular. But 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 non-residential activities are tied to greenfield investments as opposed to replacements or aftermarket?

David Gitlin, President and Chief Executive Officer

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 at Q2 and then we’ll kind of look forward with you. We feel on the applied side that we had strengthened 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 one within five years which really looks at about 50 basis points 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 the 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 and 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 scenario 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 40, so positive trend there and we’ll see if that bodes well as we look out six months. Light commercial was pretty rugged in April and May. It started to show better signs of progress as we’ve gotten 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 Mitchell, Analyst

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 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 a sort of narrower sales decline, but perhaps some of those more steps up investments as you look ahead?

Tim McLevish, Chief Financial Officer

Yes, I think you're on the right track, Julian. If we calculate, we expect about a 34% decremental margin in Q2, with 1% of that due to public company costs compared to last year and another 3% from an accounting adjustment to our long-term liabilities. This brings us back to the typical 30% we usually anticipate. Looking at the second half, while we prefer not to assume we'll be at the midpoint for each of the sales and operating income, calculations might suggest a 45% decremental margin, with around 10 percentage points attributed to investments. As I noted earlier, our first quarter activities were minimal as part of UTC, and in the second quarter, we were heavily focused on responding to the COVID crisis, which limited our investment spending. Initially, we indicated $75 million for investments, which has now increased to $100 million in the second half, accounting for those 10 percentage points. The remaining 5% bringing us to the 30% range will come from the public company costs that will increase in the second half as we wrap up several transitional support agreements from United Technologies and our digital spending.

Julian Mitchell, Analyst

Great, thank you.

Operator, Operator

Thank you. Our next question comes from the line of Steve Tusa from JP Morgan. Your line is now open.

Steve Tusa, Analyst

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 - different types of behavior in different parts of the country as the heat came on here, or obviously 100% everything was up a lot? Just kind of curious as to what you saw on the ground regionally, if there were any major differences?

David Gitlin, President and Chief Executive Officer

Steve, in the Northeast as the heat hit there, we did see a nice pick up there and including in the West and into the Midwest. The South and Southwest were 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 was some pent-up demand. So we did see a nice snap back in some of those regions that hadn’t been as strong as they had been in other parts. Mix, also although you didn’t ask, I’ll just mention that on the product mix side, in 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. So that was encouraging as well.

Steve Tusa, Analyst

And then price for that business in the quarter.

David Gitlin, President and Chief Executive Officer

Yes, look we had thought there’ll 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 to help delivery. But the key right now is for our residential operations and our logistics to just keep supporting our customers.

Steve Tusa, Analyst

And are suppliers like Copeland kind of keeping up with you guys?

David Gitlin, President and Chief Executive Officer

Yes, it’s not an operational issue. I mean we’re having issues 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 logistic 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.

Steve Tusa, Analyst

And then one last one, are you re-evaluating it all in your portfolio analysis? The value of the more security type assets on the commercial side with this pandemic I know that you know some have gone after integrated buildings as a strategy. I think you guys were still making that decision around what you wanted to do with portfolio. Does this change at all that portfolio analysis when it comes to keeping that kind of content and that channel outside of HVAC with the security stuff?

David Gitlin, President and Chief Executive Officer

Steve, we 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 that 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’re finding is there’s tremendous synergy on a 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 into the BlueDiamond 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. 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.

Steve Tusa, Analyst

Got it. Thanks a lot.

Operator, Operator

Thank you. Our next question comes from the line of Jeff Sprague from Vertical Research. Your line is now open.

Jeff Sprague, Analyst

Maybe just a pickup on Chubb there for a second. Fully understand what you said about kind of 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 wish you had more distribution on the HVAC side and alike. Is there something more creative to do with that field force than what’s been done historically?

David Gitlin, President and Chief Executive Officer

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 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 are sort of two aspects to the assessment: does it strategically fit and if it does not, when is the right time that you would look at divesting it? We’re in the first phase of really assessing that right now and Chubb was hit very hard because it’s very European centric. So if you look at Q2, 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.

Jeff Sprague, Analyst

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 if I’m pronouncing that correctly and other things. What is your thought on monetizing some of the stuff and how it actually fits in your portfolio going forward?

David Gitlin, President and Chief Executive Officer

Yes, we’ve said that not only for every part of our product and service portfolio but including our JVs you mentioned where we do have a stake in a European distributor of refrigeration equipment and it’s a 37% stake. We’ve 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, Operator

Thank you. Our next question comes from the line of Gautam Khanna from Cowen. Your line is now open.

Gautam Khanna, Analyst

Thanks for the great detail. So I had two questions. First just on the residential 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 we’re just seeing the opposite right now?

David Gitlin, President and Chief Executive Officer

Yes, Gautam we’re not seeing any mix down and we’re not seeing customers favoring parts over full replacement. So we had been concerned about that. We’ve been watching it closely and we haven’t seen that materialize. I think that we’re seeing a very positive combination of a lot of forces that is driving a lot of near-term activity. People are spending more time at home. They’re not eating out. They’re not 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 drive some very strong order demand. But we’re not seeing a pickup in parts or mixing down.

Gautam Khanna, Analyst

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 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 Gitlin, President and Chief Executive Officer

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 Q2 on some of our—we introduced it as OptiClean, HEPA filter, 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 even thought 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’s society 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 stop shop approach. Phase two, what 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, Operator

Thank you. Our next question comes from the line of Deane Dray from RBC Capital Markets. Your line is now open.

Deane Dray, Analyst

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 is 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 Gitlin, President and Chief Executive Officer

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 university 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 Dray, Analyst

That’s great to hear. Can you spend a moment talking about how you’re differentiating 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 talk about the monitoring capability beyond just CO2?

David Gitlin, President and Chief Executive Officer

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 multi-prong 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 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. Whereas 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 controlled system or an overlay-controlled system. We have the ability to connect the dots. I think in a fairly unique way for our customers.

Deane Dray, Analyst

That’s real helpful color. Thank you.

Sam Pearlstein, Vice President of Investor Relations

Can we just go to one last question, Gigi?

Operator, Operator

Of course. Thank you. Our next question comes from the line of Vlad from Citigroup. Your line is now open.

Unidentified Participant, Analyst

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 begin to roll this out in your facilities what you 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 have come out?

David Gitlin, President and Chief Executive Officer

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 uptick 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 the morning. They can see it through their app interfaces. So it’s really having a direct correlation to employees coming back in the investments that we’re making.

Unidentified Participant, Analyst

That’s great to hear and then maybe just a last follow-up from 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 all under what you’ve anticipated under the Carrier 600 umbrella or is that sort of new initiative that can be incremental savings over time?

Tim McLevish, Chief Financial Officer

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 million of the Carrier 600, that what we call the G&A savings. And we’re setting up what we call - 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 it in the reporting of accounting and we’re setting up facilities and probably three or four places around the world. We have one in Prague today. We’re going to set 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 of the cost structure, but it’s also an efficiency. We’ll employee state-of-the-art tools to reduce cost and yes, that is part of the Carrier 600 and is 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.

Unidentified Participant, Analyst

Great. Thank you.

Operator, Operator

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 Gitlin, President and Chief Executive Officer

Okay, thank you. And thanks everyone for joining us always. Sam is available for follow-up questions. We look forward to speaking with many of you in the coming months and thank you for your time today.

Operator, Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.