Earnings Call Transcript
CARRIER GLOBAL Corp (CARR)
Earnings Call Transcript - CARR Q1 2020
Operator, Operator
Good morning and welcome to Carrier's First 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 call, Sam Pearlstein, Vice President of Investor Relations. Please go ahead, sir.
Sam Pearlstein, Vice President of Investor Relations
Thank you, operator. Good morning and welcome to Carrier's first quarter 2020 earnings conference call. With me here today are Dave Gitlin, President and Chief Executive Officer; and Tim McLevish, Executive Vice President and 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 in the call are subject to risks and uncertainties. Carrier's SEC filings, including Carrier's registration statement on Form-10 and our 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 first quarter of 2020, share what the remainder of 2020 could look like under a few scenarios, 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 per caller to give everyone the opportunity to participate. You may ask further questions by reinserting yourself into the queue if time permits. With that, I'd like to turn the call over to our President and CEO, Dave Gitlin.
Dave Gitlin, President and CEO
Okay. Thank you, Sam, and good morning, everyone. I hope that you and your families are all healthy and safe. Our thoughts go out to everyone affected by this crisis and our thanks go to the frontline workers who are fighting this pandemic. I would also like to recognize the incredible efforts of our entire team at Carrier, which has continued to deliver essential products and services to our customers during these challenging times. I have been so impressed with our 53,000 employees; they have stepped up in a truly profound way, and I couldn't be more proud of this phenomenal team. Clearly, a lot has changed since we last spoke to you in February. Therefore, we are going to structure our comments as follows. First, I'll take you through the impact that COVID-19 is having on our business and how we are addressing these dynamics head-on. Tim will then run you through our first quarter financials, as well as provide more detail on our approach to managing our liquidity, cash, and balance sheet. And then I’ll provide more color on the remainder of 2020. Starting with Slide 2, in response to COVID-19, we jumped into gear early and aggressively. We started daily leadership team meetings that continue today, and we established four priorities that have guided our decision-making. Our first priority is the safety of our employees. Our office employees are generally working remotely while our factory personnel have largely continued in the workplace to support our customers, given the critical nature of our products and services. In our factories, we have gone to tremendous lengths to keep our people safe by implementing an extensive range of safety protocols, and we are now applying those best practices to our offices as we begin to transition office employees back to the workplace. Our second priority has been to maintain business continuity to deliver essential products and services to our customers. Like other manufacturers, we did experience temporary closures in some of our 49 factories. In China, where we have nine factories and about 1,300 suppliers, all of our sites were operational within a couple of weeks after February 10, reopening after the Lunar New Year. And our output from our sites and from our local suppliers has been close to 100% for the past month. We have had short-term factory closures in India, Malaysia, Mexico, the EU, and the U.S., but our team has done a superb job of minimizing the length of the occasional site closures and supporting our customers. While we continue to experience episodic supplier challenges, our supply chain team has been managing these issues as they arise. Our third priority is to effectively manage our costs and preserve cash. Tim will cover this topic in more detail, but I'm pleased with our proactive approach and early results. We accelerated and increased savings through Carrier 600, which is our plan to eliminate $600 million in costs over three years. Between our overdrive expectations on Carrier 600 for this year, together with other one-time cost actions, we will be driving $425 million in cost actions this year. For example, we have implemented a 15% pay cut for our senior leadership team, including myself, reduced Board of Director pay, instituted a 15-day furlough, and suspended merit increases. We're driving down expected incremental public company costs by about $25 million for the year, and we are aggressively managing our discretionary spend. We will also be reducing our CapEx from our initial plan of $350 million to $400 million to $200 million to $225 million. Though we are aggressively containing spend, we continue to invest in areas that are critical to our growth agenda, including R&D, sales, and digital, all critical to our core strategy to achieve sustained mid-single digit growth levels. On the cash side, we are comfortable with our liquidity position. We started with $1.3 billion in cash on April 3, and we are confident in our ability to generate more than $1 billion in free cash flow this year. We have access to a $2 billion revolver if needed, so we have a strong cash position and are carefully managing it. Finally, our fourth priority has been to ensure that we emerge from this pandemic stronger, by accelerating the implementation of our strategic imperatives. I’ll give you more color on that on the next slide. So turning to Slide 3, it highlights how we're positioning Carrier for long-term success. Starting with our organizational culture, focus, and values, this truly is a new Carrier with a very different feel to it both internally and externally. We’ve recently launched the Carrier Way, which lays out our vision, values, and behaviors. Our culture is focused on customers, winning, growth, agility, innovation, and empowerment. We are breaking down barriers to enable our people to be more externally focused, and empowering them to drive our long-term growth agenda. Regarding our people, we have made great progress in assembling a world-class leadership team with both external hires and promotions of internal talent. We launched the new Carrier operating system, which is both nimble and disciplined. And we are doubling down on our ESG commitments with a laser focus on our commitment to the environment through not only our own factories but also more innovative energy-efficient products. We’ve supplemented our focus on the environment with initiatives that support the needs of our communities by playing our part in the fight against this pandemic. For example, we designed and produced our new optically negative air machine in just a few weeks, and early feedback from the hospitals on our prototype units is very positive. Turning to our strategy and growth pillars, these remain unchanged. We continue to deliver against our three strategic top-line priorities funded by Carrier 600. In the first pillar, growing our core, we remain well-positioned within each of our segments building off our number one or two market positions. We are also adding 500 net sales employees while we continue to make key strategic R&D and digital investments. We've had significant wins across the portfolio, including our largest order ever of 19DV chillers for data centers in Indonesia, an exclusive long-term residential deal with Fischer Homes in the U.S., and significant wins across our refrigeration and F&S portfolios. In our second pillar, extending our products and geographic coverage, as a vote of confidence in our CO2 technology that we're using to enter warehouse refrigeration, we were selected to provide the cooling for the Beijing Olympics ice rink. And we secured a VRF win for the Sanyo Olympic Village Apartments in China, for 3,500 heat pumps and 1,000 condensing units. In the third pillar, driving aftermarket and digital, we have a dedicated aftermarket team in place. We indicated that we'd get to a 30% conversion rate in commercial HVAC by the end of next year, and we are on track to do so this year. We're rolling out structured tiered offerings customized to customers' needs, and we have leaned forward on digital as a differentiator through remote monitoring, diagnostics, and prognostics. We've had some key aftermarket wins, including a four-year chiller service agreement with the Hong Kong International Airport for 52 chillers across 17 buildings and support for Tim Hortons China operations that is projected to scale to 1,500 stores over the next 10 years. On the right side of this slide, we're very proud of our essential and vital role in society. We support air conditioning systems in hospitals and nursing homes, and the delivery of food and pharmaceuticals safely around the world. Looking ahead, as countries and regions around the world prepare to reopen economies and society, we intend to play a critical role in anticipating and creating the new normal. For example, indoor air quality will be critical. We're putting our VVAC and HVAC in our unique electrostatic systems to filter microscopic size contaminants. Carrier will be a leader in transitioning buildings around the world from sick to healthy buildings. Addressing food safety and the new normal will be paramount, and we have been making tremendous progress on holistic whole chain solutions. Then our fire and security business, touchless and traceability will be very thematic in the future. With our touchless Blue Diamond solution, we can eliminate 80% of typical contact points in an office building by enabling employees to use their cell phones instead. So with that, let me turn it over to Tim to discuss Q1, cost, and cash, and I'll come back to discuss our best sense of 2020. Tim?
Tim McLevish, Executive Vice President and Chief Financial Officer
Thank you, Dave. Good morning. Please turn to Slide 4, where I will walk you through our Q1 results. But before I start, I want to point out that as we move from being a division of United Technologies to becoming a fully independent public company, some of the numbers we report may not have a perfect comparison with last year’s. The Form-10 carve-out statements adjusted for that in some circumstances but not all. We will try to help you understand those non-comparables with explanations, but it may be a bit messy and will continue to be so for the remainder of the year. With that caveat, let me jump into the results for our first quarter. Despite significant macroeconomic headwinds in the back-half of the quarter, it started out about how we had expected and reflected a solid start to the year. Sales of $3.9 billion were down 10% from last year, down 9% organically, which adjusts for a 1% FX headwind. We reported at Investor Day that we face difficult year-on-year comparisons in each of our three segments. In HVAC, our residential results last year reflected a strong furnace season due to abnormally high shipments ahead of a new FER regulation. In refrigeration, our North America truck and trailer business came off a cyclical peak in Q1 last year. In F&S, we wound down our residential intrusion business, creating a year-on-year decline in 2020. Additional pressure came from the warm winter this year and resulting softness in residential furnace sales. These items accounted for about half of our Q1 decline. The remainder resulted from the impact of COVID-19 on our business in the latter part of the quarter. It first hit China, where about 8% or $1.5 billion of our revenues are derived. This had a material detrimental effect with domestic China's sales down approximately 40%. In addition, a good part of our global factory production and supply chain sources come from China. We did, however, manage through that disruption without a material impact on our rest of the world business. But then, later in the quarter, the virus moved west into Europe and then on to the Americas. This pandemic accounted for about $230 million of our revenue decline in the quarter. Our teams have worked tirelessly to keep factories operational and productive to serve our customers around the world, and they continue to do so. Moving down the P&L, GAAP operating profit was $315 million. Adjusted operating profit of $436 million was down 16% from last year. But this adjusted number is still not comparable. Our Q1 included about $24 million of public company costs that were not included in the same quarter of 2019. Absent the impact of that, the comparable year-on-year decline was 12%. Of course, it was heavily impacted by COVID-19. While we're not happy about the negative signs here, a 12% decline for comparable adjusted operating profits versus a 9% decline in organic revenues shows we were able to offset a lot of the typical detrimentals, largely preserving our operating margin. Our Q1 GAAP EPS was $0.11, and adjusted EPS was $0.35. Since we were not a public company last year, the year-over-year comparisons of EPS are not meaningful. I'm pleased to report that our free cash flow was favorable to last year by over $200 million. Q1 is typically a seasonal user of cash, so bringing it in almost flat reflects a solid start to the year. The decline in net income was more than offset by favorable working capital results and aided by some deferred tax payments. All things considered, our performance in the first quarter was solid with good mitigation of a very difficult environment. Let's now look at how the segments performed. Please turn to Slide five. HVAC was down 9% organically. Within it, North America residential was down 11% organically, with roughly half the decline due to last year's FER-driven accelerated gas furnace shipments, and the other half to slow shipments this year due to the unseasonably warm winter. Overall furnace sales were down 30% year-over-year. The commercial business was down 8% organically, as a 5% decline in light commercial and a 20% decline in applied, driven by weakness in China and Europe that was only partially offset by a flattish services business and strengthened ALC and NORESCO. Refrigeration sales were down 14% organically, with North America truck trailer down close to 30%, Europe truck trailer down around 15%, and container down around 7%. A difficult truck trailer comparison for the quarter was expected, as I mentioned earlier, but the results did deteriorate as the quarter progressed. Commercial refrigeration was down 13% organically, with weakness in both Europe and Asia. The fire and security segment was down 5% organically, with the products business down 4% organically. This was attributable to COVID-related project delays and shutdowns in Asia and Europe but was partially offset by growth in our longer cycle businesses, water mist and gas suppression, and also growth in global access solutions. The field business was down 5% organically due to market lockdowns across regions, with particular weakness in Hong-Kong, Australasia, and France. In this world of uncertainty, we're focused on controlling the controllables, and that includes aggressive cost containment actions. Slide 6 provides a breakdown of our cost programs. In February, we told you that we expected to achieve $175 million of savings from our Carrier 600 this year, and that we would invest $150 million of that back into the business to support our growth strategies. The current environment shift is one of our priorities to aggressively reduce costs yet to preserve critical investment initiatives. The actions that we're taking are expected to generate $425 million of cost improvement this year, including accelerating Carrier 600, reducing our planned investments, and implementing an aggressive cost containment program. First, we will accelerate Carrier 600 and expect to deliver an additional $50 million in 2020, for a total of $225 million. Second, we have scaled back our investments in the year by $75 million in a very surgical manner. We are preserving the investments and initiatives that are most critical to our growth strategy to ensure we are well-positioned as we exit this crisis. We have also initiated a $300 million cost containment program for 2020. Lastly, while COVID-19 affected volume and the drop-through of margins, it also disrupts our factories and other areas of our cost base. We're anticipating a $200 million nonrecurring headwind this year on things like factory absorption, supply chain disruption, expediting costs, and inefficiencies caused by precautions for the safety of our employees. The $425 million of cost actions more than offsets this impact, and our net savings are $250 million, up from the $25 million we laid out at Investor Day in February. As Dave mentioned, our top priorities for 2020, one of which is to maintain ample liquidity. Please turn to Slide 7 and I'll walk you through that. I mentioned earlier that we've performed well from a cash flow standpoint in a quarter that is typically a big user of cash. Our working capital usually seasonally spikes in Q1, as we start building for the spring-summer selling season. We managed it tightly this year and delivered better cash than planned by over $200 million. We started the quarter with a cash position of $952 million and ended it with a balance of $768 million. This resulted from neutral free cash flow and the use of $184 million from other investing and financing activities, including a small debt repayment and effective foreign exchange. At spin, UTC returned us approximately $560 million of cash. So our opening balance sheet started with just over $1.3 billion on April 3. From this base, we will continue our efforts to preserve and enhance our liquidity. We'll intensify our focus on all the components and levers available to us. This will include tightly managing working capital, expanding and driving the program we began in Q1. We've also done a deep scrub of our CapEx budget for the year and cut it by 40% to 50%. It is now $200 million to $225 million, down from the $350 million to $400 million we had originally planned. In paring it back, we have prioritized those projects targeted at our strategic priorities for growth and those projects which have high-returns and a quick payback. We will also assess the timing and amount of a dividend. Our Form-10 identified a possible dividend scenario that was appropriate at the time, but the environment we face today is much different from what it was then. With this foundation and these actions, we expect good free cash flow for the year, and it will add to our available cash. In addition to our cash position, we have a $2 billion revolving credit agreement with a strong Bank Group. That revolver remains undrawn and fully available to us. And finally, I will remind you that we have no debt maturities until 2023. So 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. With that, let me turn it back over to Dave to discuss how we're thinking about the balance of the year.
Dave Gitlin, President and CEO
Thanks, Tim. So what does this mean for our expectations for the full year? For our scenario planning in this uncertain global economy, we looked at three key indicators to frame our thinking. First, macroeconomic projections like GDP. Second, indicators more directly tied to our business like new housing starts. And third, order trends. At a macro level, starting with GDP, our current guidepost for 2020 assumes U.S. GDP declines about 25% in the second quarter, and 5% to 10% for the full year. Expectations for Europe are similar. We assume China shows growth in Q2 and accelerates from there. When we look at macro indicators specific to our segments, we assume headwinds from lower replacement volumes as unemployment rates impact homeowner purchases. U.S. Housing starts being down 10% to 20% this year and continued softness in non-residential construction starts in North America and Europe, as we see from leading indicators like the architectural billing index. In our refrigeration business, the forecast declines in North America and Europe truck trailer will be even steeper than we had originally forecasted. ACT forecast North American truck trailer production to be down 45% this year, and European truck trailers are likely to be down 20% to 30%. Container drops are likely to be far more muted. So then on Page 8, let me share some color with you on orders. We start with our China experience. Q1 orders were down 40% year-on-year, with February being the lowest month down 50%. In the category of good news, the China recovery has been very positive. Our daily order rates returned to pre-crisis levels in mid-April, and our April orders in China were flat overall. The recovery has been a bit spotty and one month doesn't make a trend, but for us, China's decline and then its recovery were both quite steep. Our current thinking about the U.S. and EU is that the decline will be a bit shallower, but the recovery will be longer. For us, orders declined earlier in the EU than in the U.S. but we also expect an early recovery. Orders in Q1 were down 10% in Europe, but were down 5% in the U.S., which accelerated into April with Europe down 30% and the U.S. down 25%. Based on a slower recovery in the EU and U.S. versus China, our internal planning assumes recovery of orders to more typical levels as we get into later Q3 and early Q4. So what does this all mean as we frame 2020, turning to Slide 9. You could think of the numbers that you see here as guideposts, as we look at various scenarios playing out globally. We see sales between $15 billion to $17 billion, adjusted profit between $1.7 billion and $2 billion, and free cash flow over $1 billion. Also, with respect to the scenarios behind the sales decline for the whole company, you should think about the HVAC segment declining fairly aligned with the percentage range that you see here, with refrigeration facing a bit more headwind and F&S expected to be at the better end of the range. Given that 80% of our sales are in the U.S. and Europe, we expect the steepest declines to occur in Q2 with improvements from there. So, we’ve done our best to analyze the rest of the year for ourselves and for you, and we will continue to update you as this very fluid situation evolves. And though the coming months are inherently uncertain, what I do know with great confidence is that we'll get through this crisis. And over the long-term mega trends such as climate change, global urbanization, and the shift towards digitalization and operating in the new normal will remain tailwinds for our business. And this takes me to our last page, on Page 10. We remain confident that the game plan that we laid out for you on February 10 will drive the results that you see here. We are getting real traction on the three pillars of our topline strategy which will propel sustained mid-single digit topline growth. We are tenaciously driving Carrier 600 to invest in growth and to help drive margin expansion to enable high-single-digit EPS growth on a steady-state basis. And we are laser-focused on driving working capital improvements needed to support free cash flow equal to net income. We have a clear roadmap to success. We remain committed to executing on our plan with urgency, conviction, and effectiveness. And with that, we'll open this up for questions.
Operator, Operator
Our first question or comment comes from Steve Tusa from JP Morgan. Your line is open.
Steve Tusa, Analyst
Hey, good morning.
Dave Gitlin, President and CEO
Good morning, Steve.
Steve Tusa, Analyst
Just on kind of the bridge a bit, thanks for the color on kind of the guideposts. Any color on price cost and what you expect to run through what you're seeing out there for the year?
Dave Gitlin, President and CEO
Yes. On the price side, Steve, we're still looking at overall price tailwind, but it's going to be minor. It's going to be in the range of $4 million. We actually saw $4 million in the first quarter; it's probably $20 million for the full year. Keep in mind, we're coming off a couple of years with a lot of price tailwind. It was north of $200 million in 2018. It was closer to $175 million last year. But we do think there's going to be a little bit more price challenges in the overall system, but we're still looking at some net tailwind from price. And then Tim took you through the cost side. We're going to be very aggressive. You saw that we upped our Carrier 600 for this year from $175 million to $225 million. We're being very aggressive, especially on the supply chain side where we got some tailwind from commodity pricing, but a lot of aggressiveness on the negotiations and sourcing activity. And we're also certainly seeing a lot of headwind in factory productivity. But we are really going after G&A in this climate.
Steve Tusa, Analyst
Right. And then just lastly on the balance sheet, a little bit better cash. I think that's an incremental positive. But you're still going to end with some pretty high leverage. And I think there's a covenant out there that you guys have. Can you just talk about what that covenant is? And how much of a hard line it may be? Like, how concerned should we be about that? And any actions you're willing to take in the intermediate-term other than just generating cash to shore up the balance sheet?
Tim McLevish, Executive Vice President and Chief Financial Officer
Yes. This is Tim, Steve. So, yes. We do have a covenant that covers both our revolving credit agreement and our term loan. It’s attached to the Form-10. You can see that it says that it's first measured in our third quarter, at the end of our third quarter. The covenant is four times debt to EBITDA. According to the projections that you see in our scenario planning, we do anticipate that we will be in compliance with a covenant at that point. And we're expecting that it only gets better from there. We have some cushions, so we're not unduly concerned about that. But obviously, we want to ensure that we have liquidity. And you can assume that we're taking actions to ensure that we have access to that.
Steve Tusa, Analyst
Okay. And what if you do breach it ultimately, in the next several quarters? You're wrong in your projections?
Tim McLevish, Executive Vice President and Chief Financial Officer
No. Let's just say we're going to make sure that we don't. I mean, obviously it would preclude us from access to revolving credit agreements. And it would put our term loan in default. But we will assure that we're not going to run into that problem. We've already in this transaction. You can be sure that we've already taken precautions. We're not going to put ourselves in jeopardy.
Dave Gitlin, President and CEO
Yes. Steve, it'd Dave. First of all, it's net debt that 4x multiple. And also like Tim said, behind the scenes, we are working it. So I think we're in pretty good shape; we're managing it quite well.
Tim McLevish, Executive Vice President and Chief Financial Officer
Yes. I would point out further to what Dave just said. It's net debt and as adjusted EBITDA, there are some carve-outs and exceptions to it. So again, we're comfortably in compliance with it. But again, we want to make sure.
Steve Tusa, Analyst
Okay, great. Thanks.
Dave Gitlin, President and CEO
Thank you.
Operator, Operator
Thank you. Our next question or comment comes from the line of Nigel Coe from Wolfe Research. Your line is open.
Nigel Coe, Analyst
Thanks. Good morning, guys.
Dave Gitlin, President and CEO
Good morning, Nigel.
Nigel Coe, Analyst
Yes. So, nothing surprise that we're seeing CapEx getting cut in this environment and some of the investment spending is pushing to the right. Can you maybe just talk about where you are down back a little bit on the investment spending and the CapEx? And whether we should think of this as more of a push as opposed to a shove?
Dave Gitlin, President and CEO
Yes. I would say Nigel, it's probably more of a push. We did scale back on investments like automation. We're really focused on keeping the shops running. So to have industrial engineers in the shop, figuring out how to implement automation is not the ideal timing, so we did push some of our automation spend. We are doing ERP consolidation. We pushed that to the right. So a lot of the discretionary actions that don't necessarily affect growth, we have pushed out. We've been pretty tenacious at preserving investments that affect our growth agenda. So our view is that, like an outfielder, it's easier to run forward than backward. We came out, we were aggressive, we saw what was happening; we've made the right cuts to the budget. We'll see how the year progresses. If things open up a little bit, we'll pull some of the investments we pushed out into next year, we'll pull back into this year. But we've really gone to great lengths to preserve investments that have the highest payback that are going to protect our growth agenda.
Nigel Coe, Analyst
Right. Thanks, David. And then you gave a number for housing stuff in the U.S. down 10% to 20%. And then you've talked about replacement demands being down. I struggled to think about how to think about replacements in this environment given where unemployment is? What's your view right now on residential replacement?
Dave Gitlin, President and CEO
Yes. Look, it's probably down in the 15% range or so, as we look at it. There were 3.8 million Americans last month that did not pay their mortgages. So, it's going to be a tough climate for at least a while. But where there's demand, there's demand. And there may be a little bit of movement to a little bit more parts by for the next few months for replacement. We haven't actually seen that just yet. But we do think there's going to be a little bit of headwind on the replacement cycle. But, we'll see as we get into the summer months, if employment, of course, the numbers remain extremely challenging right now. But as folks come back to work and society starts to reopen, we'll hopefully start to see a little bit more traction there.
Nigel Coe, Analyst
And then just a quick one on free cash flow. Is that all in free cash? Or is it some kind of concept of adjusted free cash flow? Is that including one-timers?
Tim McLevish, Executive Vice President and Chief Financial Officer
No, the free cash flow is essentially operating cash flow combined with capital expenditures or adjusted for capital expenditures.
Nigel Coe, Analyst
So, it's real cash. Great. Thanks, guys.
Dave Gitlin, President and CEO
Thank you.
Operator, Operator
Thank you. Our next question or comment comes from the line of Jeff Sprague from Vertical Research. Your line is open.
Jeff Sprague, Analyst
Thanks. Good morning. I hope everyone's well. Just a couple of quick questions, first, just on the CapEx push, Dave. So, it does sound like you're not doing any good damage to the growth plans. But I would think this also then pushes out some of your underlying productivity plans, right? So, you're taking temporary actions to contain costs, but automation and ERP was a big part of future productivity. Can you just elaborate kind of on the interplay between those factors?
Dave Gitlin, President and CEO
Yes. Jeff, when you look at productivity, it was a key element and it is a key element of Carrier 600. But I will tell you that only a piece of that is automation. There's another piece that just comes from really application, the carrier operating system. So, it will have a short-term impact. I actually think what you're going to see with the new normal is you're going to see people leaning more forward on automation as you get out into the end of this year and into future years. So look, we're going to free up the investments on automation as we get towards the end of this year into next year, because I think it's going to be really critical to our overall story. We hadn't really baked ERP consolidations into our overall cost savings numbers. So, I don't see that impacting Carrier 600. It impacts overall productivity and some of the manual nature of what we do. But we'll have to catch up to those investments next year.
Jeff Sprague, Analyst
And perhaps it's early to talk about a different number. But with this kind of acceleration, is Carrier 600 on the path to be in $700 million and $750 million, something like that?
Dave Gitlin, President and CEO
Well, it is early. A couple of months doesn't make a trend. But look, I'm confident, I've always been confident in the Carrier 600 number, and I think there's room to overdrive it. But we'll see how the rest of the year plays out, and we'll update that as we get out to the end of this year.
Jeff Sprague, Analyst
And then just finally. So then on the dividend, we should expect that's kind of on hold until you get past this Q3 covenant, make sure you're kind of clear the decks there?
Tim McLevish, Executive Vice President and Chief Financial Officer
I think that would be directionally fair, Jeff. You recall that back in our Investor Day, we said that we would expect the $550 million dividend, and we thought that was a competitive dividend in a normal circumstance. Obviously, we're not under normal circumstances. And preservation of cash and addressing our high leverage is the high priority right now. And so we're deferring a little bit the decision and the level. I mean, in this environment, we perhaps will or we likely will consider reducing that amount and still be competitive from a yield standpoint, from a payout standpoint. But yes, you should anticipate to hear something in the near future. But again, it's not likely to be at the same level that we talked about Investor Day.
Jeff Sprague, Analyst
Thanks. It makes sense. Good luck.
Dave Gitlin, President and CEO
Thank you.
Operator, Operator
Thank you. Our next question or comment comes from the line of Julian Mitchell from Barclays. Your line is open.
Julian Mitchell, Analyst
Hi, good morning. Maybe I'm just trying to stick to the one question rule, perhaps focusing on margins for a second. So, I think at the midpoint of the scenario plan you've got about maybe about 25%, 30% decremental margin dialed-in for the year. Maybe just help us understand, how you see the relative mix within that as transport refrigeration is probably one of the businesses that falls the fastest this year in sales terms? And then also related to that, should we expect the decremental margins to be widest in the second quarter? Or are you assuming that decrementals are pretty level over Q2 to Q4? Thank you.
Tim McLevish, Executive Vice President and Chief Financial Officer
Yes. Julian, it's Tim. As you know, we usually think of what we call a drop-through rate decremental. Usually, I like to think of it as incremental, but unfortunately in this environment, we talked about decrementals. That’s about a 28%. What you saw in the first quarter actually was much favorable to that. But that was largely because we had the better part of 10 percentage points worth of benefit from cost reduction in the quarter, about $40 million lower costs. And that contributed to a much lower drop-through. And interestingly, our sales in China were hit during the quarter, the hardest of ours, and China tends to carry lower general margins through, and we benefited by about 4%. So, that's why you see the 14%. You may not see the 14%, you may see a 19%. But remember, we talked about a $24 million standalone cost; that's the first quarter component of the $107 million that you ultimately see for the full year. I will also point out that I think you may have seen from UTC's release yesterday, numbers that are a little bit different. About $20 million difference in profits. So if you adjust for that, there's some unusual things where it was different from most of them. You may have construed at a 24% from them. As we think about the rest of the year, again, going back to the 28%, yes, I would say the second quarter is likely to be the hardest hit quarter. And the deeper the drop in revenues, it makes it difficult. We aren't just scaling back production; we're shutting the lines down. We're closing shifts; we're in some cases, closing factories. And you go deeper into the cost pool there and I would expect that to be in the second quarter. We will experience some mix degradation, the reverse of what you saw; I mean, some of our higher margin businesses, the residential, HVAC, and others will be hit. How I simply think about the rest of the year; decrementals though is that we’ll be hit by two or three points with JV income because there's no offsetting revenue component to the drop in earnings that we're anticipating. And then all other of the costs, the factory disruption, et cetera, is largely covered, and the margin mix is covered by our cost reduction. So we anticipate, if you look at the projections we’ll probably be about 30%, a couple points worse than the normal 28%.
Julian Mitchell, Analyst
Very helpful. Thank you.
Operator, Operator
Thank you. Our next question or comment comes from the line of Deane Dray from RBC Capital Markets. Your line is open.
Deane Dray, Analyst
Thank you. Good morning, everyone. And let me also say congrats on the debut. I'm not sure anyone was expecting quite as a tough environment as you've had to face in your debut here. But appreciate all the color and all the actions that you're taking.
Dave Gitlin, President and CEO
Thanks, Deane.
Deane Dray, Analyst
If we can start, just we've heard the expression this too will pass. Looking ahead, could you expand on the comments or the examples you were giving on how the buildings of the future are going to change? We've heard some similar comments from your competitors, this earnings season about air purification, touchless credentials, and so forth. But are these just thoughts? Or are these actually starting discussions with customers? How close are you to marketing and actually getting orders for this type of the new normal buildings?
Dave Gitlin, President and CEO
Well, thanks, Deane, for the question. Actually, it's absolutely underway. We've been in discussions, and we've actually seen real progress with customers, whether it's the State of Florida or with hospitals where we've distributed our new OptiClean negative air machines. We're coming out of the gates fast on this one, because we believe it's critical, not only for our business but it's critical for society. There are a shockingly high number of sick buildings out there. And one of the characteristics of a sick building is the ventilation system. You look at the room I'm in right now; you would expect a certain number of air changes per hour, say in the 10 to 15 range. Many buildings around the world have staggered in there, and they don't have the number of changes per hour. You look at the filtration system in many buildings, as you have the return air going through a filtration system; you'd expect it to be able to filter out contaminants at a 0.1 to 0.3 micron level, and many filtration systems don't have that. We have that with our electrostatic filters for homes, UAV or HEPA filters in commercial buildings. Many buildings don't have that. You want your ducts cleaned every three to five years and that doesn't happen. So as we look at the transition to healthy buildings, I think you should expect that Carrier's going to be front and center on that. It's very real; it's the same in our other two segments. You mentioned touchless; in our fire and security business, we already have a Blue Diamond app that can eliminate a lot of the touch points. Let’s say you go from your car to your office building; there's usually eight to 10 touch points. And like I said in the earlier remarks, we can eliminate 80% of that as you go to open the turnstile or press the elevator button or adjust the HVAC controls in your office or on your floor. There's a number of touch points that we can eliminate that are going to be critical. And it also is combined with the traceability elements. So as employers want to be able to track folks in the workplace, we have an app that can co-mingle with the other parts of the app to be able to track people in the workplace. In our refrigeration business, the entire cold chain is going to be just foundationally and fundamentally different. So you look at how people get their food today in a place like China. There are a significant number of wet markets, and we have farmer's markets here in the U.S. and in Europe. But you're going to see a lot more home delivery of goods. The cold chain is going to be critical for that and pharmaceuticals. And we're working on some telematics and other innovative solutions to really connect the entire cold chain. So, we think we can play a real pivotal role in the new normal.
Deane Dray, Analyst
I appreciate all that color. And just a quick clarification from Tim if I could, just with regard to capital allocation and cash preservation. The expectation was that Carrier was going to have an investment-grade rating with your expectation you'd be paying down debt. So what's the outlook in your discussions with the rating agencies? Are they giving you some leeway here in terms of the path of the deleveraging? Thanks.
Tim McLevish, Executive Vice President and Chief Financial Officer
Well, it's still intention to maintain investment-grade. We’ve been in conversations with the agencies. As I said, they’ve recognized that short-term liquidity is critically important in this crisis situation with the uncertainty about the economy. We've been in regular discussions with them and I think they are supportive of our game plan. And I think we'll be just fine.
Deane Dray, Analyst
Great to hear. Thank you.
Operator, Operator
Thank you. Our next question or comment comes from the line of Carter Copeland from Melius Research. Your line is open.
Carter Copeland, Analyst
Hey, good morning, Dave, Tim. I hope you're well.
Dave Gitlin, President and CEO
Thanks, Carter.
Carter Copeland, Analyst
Dave, I wondered if you could talk a little bit about the portfolio. I mean, these sorts of discontinuities and changes have a tendency to make you think about the business in different ways. And I know that sort of optionality around the long-term appearance of the businesses is something you thought about; you mentioned tangentially at the Investor Day. I wondered how this whole crisis may be changing that thinking, if at all.
David Gitlin, President and CEO
Yes. Carter, what I’d tell you is that what we said at an Investor Day remains consistent today, that our number one priority is on execution. We really feel very strongly that we can unleash tremendous value just by doing what we said we were going to do. As we get sales consistently in mid-single-digit range, and we get EPS at the high-single-digit rate and we get cash flow about equal to net income, we know that consistent track record or performance will have a significant impact on the overall valuation of Carrier. And then we're playing from a position of strength. So, our number one priority is focus on execution. Our number two priority is to really take a very dispassionate look at our current portfolio. And of course, we've been doing that for quite some time. And we said that we would put our current portfolio through a very specific set of criteria. Are we the rightful owner? Does it strategically fit? Does it meet the financial criteria that we've set out for ourselves? And if it doesn't, we'll be dispassionate and do the right thing about divesting those parts of the portfolio. I think once you make that decision, you will of course have to look at the current environment and decide if you're going to do something like that, when would be the right time, and this is not the ideal time to do something like that. But we'll look at the right time if there are parts of the portfolio that we decide don't meet the criteria that we've set. And then in terms of that third category, overall, more strategic types of transactions, that is not our priority right now. We know that our peers have made themselves more pure plays SFV. But our focus right now is on that first category of execution and on the second category of the real portfolio analysis that we've been going through, and we'll deal with that second.
Carter Copeland, Analyst
Okay, great. And, Tim, I wondered just a quick clarification. Thanks for the color on truck trailer. Can you tell us what the container orders look like both at maybe end of the quarter and April trends?
Dave Gitlin, President and CEO
Yes, Carter, it's Dave. Container orders have actually been pretty steady. So, we're going to see how things play out. But when we look at overall container orders, and there's been a couple of months where it's been positive, a couple of months where it's been negative. Overall, Q1 was down 7%, I believe. When we got into April, it was positive. So on balance, it's probably flat to down just low single digits right now.
Carter Copeland, Analyst
Great. Thanks, Dave.
Dave Gitlin, President and CEO
Yes. Thank you, Carter.
Operator, Operator
Thank you. Our next question or comment comes from the line of Josh Pokrzywinski from Morgan Stanley. Your line is open.
Josh Pokrzywinski, Analyst
Hi, good morning, guys.
Dave Gitlin, President and CEO
Good morning.
Josh Pokrzywinski, Analyst
So I understand we've covered a lot of ground here already and I appreciate the color. I guess, in regards to some of the cost actions in Carrier 600, how do we think about operating leverage on the way out? Tim, you talked about the 28% target number. Obviously, a lot of things moving around, some temporary, some pull forward of the total. How should we think about exit rate incrementals being above or below that target number just as some of these temporary costs come back?
Tim McLevish, Executive Vice President and Chief Financial Officer
Yes. I would generally – again, a lot of the recovery from a higher decremental came from the cost actions that we identified as a kind of this year's impact. Again, Carrier 600 is kind of separate from that. We took these to offset the higher decrementals with the disruption and so forth. So I would expect that we should be coming out of this at a similar rate 28% give or take 1% or 2%.
Josh Pokrzywinski, Analyst
Got it. That's helpful. And then just related to that, I guess, supply chain was a part of Carrier 600. Obviously, everyone's taking a harder look at their supply chain today with some of the interruptions. Anything that changes with respect to that are needs to be reshuffled?
Tim McLevish, Executive Vice President and Chief Financial Officer
No. When you think about supply chain, we've talked about 55% of these savings will come from supply chain. And we're still on that level. It's going well. Remember, David said there's probably 6,000 suppliers, and we're going to consolidate, probably cut it in half. As we become more meaningful, we're able to partner better; we get some better pricing, we get some better terms. That's a big component of it, and that's tracking very well.
Josh Pokrzywinski, Analyst
Great. I appreciate the detail. Best of luck, guys.
Dave Gitlin, President and CEO
Thank you. Thanks, Josh.
Operator, Operator
Thank you. Our next question or comment comes from the line of Gautam Khanna from Cowen. Your line is open.
Gautam Khanna, Analyst
Yes. Thanks for the detail guys, and congrats on the first quarter. I'm curious, when you look at the commercial HVAC and fire and security backlogs, what do you perceive to be kind of at risk, perhaps serving industries that are going to be very hard hit by the recession? So, whether it's hospitality or what have you. Could you give us some framework on parts of the backlog that might stretch for an extended period, even when you have site access against? Any sort of framework for that?
Dave Gitlin, President and CEO
Thanks, Gautam. This is Dave. One positive update is that our backlog increased sequentially in the first quarter. It grew by approximately 6% in HVAC, with a third of that growth in residential and two-thirds in commercial HVAC. So, the backlog situation improved in the first quarter. In terms of any shift in timing, we believe it will be quite minor, likely just a month here or there. We anticipate that once some construction sites resume operations, there will be significant pent-up demand. Our experience in China illustrates this; after the Lunar New Year, most of our factories were operational by around February 20. We had the backlog and began shipping it. Following that, many construction sites employing migrant workers in China were quarantined for a bit longer. Eventually, they began to receive backlog shipments, and new orders increased in April. We expect a similar scenario when U.S. and European construction sites come back online; they will start receiving backlog deliveries. While there may be slight delays of a month here or there, some sectors, like education, are seizing this opportunity to speed up construction. So, while some projects are being expedited, others may be delayed, but the delays are typically only a few weeks to a couple of months at most and shouldn’t be significant.
Gautam Khanna, Analyst
Okay. And just a follow-up for Tim. Could you actually disaggregate the $425 million of costs into structural versus variable? I don't know if you said that in the opening remarks.
Tim McLevish, Executive Vice President and Chief Financial Officer
I would like to address the $425 million figure. The Carrier 600 and the $50 million incremental costs will be structural and enduring. Initially, we planned to invest $150 million this year, scaling back to an incremental $100 million next year, followed by $50 million before returning to normal. The $75 million we removed will be reintegrated and likely invested next year, slightly adjusting that timeline. The $300 million is a one-time measure stemming from furloughing most salaried employees, deferring merit increases, and cutting back on expenses. It was relatively easy to reduce travel expenses as there was little travel occurring, and we also decreased services and supplies. While this won’t be completely resolved, it is not a permanent change and will eventually rebound.
Gautam Khanna, Analyst
Thank you very much, guys.
Operator, Operator
Thank you. We have time for one final question. Our last question will be from the line of someone from Citi Group. Your line is open.
[Indiscernible], Analyst
Good morning, guys. Thanks for taking my question.
Dave Gitlin, President and CEO
Thanks, Lad.
[Indiscernible], Analyst
Can you talk about within the fire and security business, just how much of the overall business is driven by regulatory or statutory requirements? And should therefore be more resilient? And can you also talk about in that business what restrictions on building access and social distancing measures could potentially mean for productivity in the field business?
Dave Gitlin, President and CEO
Thank you for the question. We consider the fire portfolio as a larger component compared to the security side. Within the fire segment, there are regulatory elements. We analyze the fire and security portfolio in two parts: products, which make up about 60%, and Chubb, which accounts for about 40%. The Chubb segment includes monitoring, installation, and services, with the services part showing some regulatory influence. This segment has generally performed better during the downturn compared to installation, which experienced significant challenges in March and April, particularly in Europe. On the product side, some businesses, like Edwards, have fared well due to their regulatory aspects and have even seen growth in certain areas, including parts of our Edwards business and GST in China. Although some of the security portfolio is less connected to regulatory requirements, we are noticing increasing demand for products that will be essential in the evolving landscape. As hotels prepare for the new normal, we are engaging in discussions regarding our Entity system, which allows guests to bypass the front desk and access their rooms using touchless applications. This trend is also apparent with real estate brokers in our super business. So, while not all of the security aspects are regulatory, certain areas could be quite significant as we navigate this new normal, and we are involved in promising talks with our key customers as they plan for these changes.
[Indiscernible], Analyst
Okay. That's very helpful. And then just maybe one last one from me. I know the order information you gave was very helpful. I guess just going forward, the U.S. and the EMEA were actually pretty similar in April. So as we go through the year, do you expect the U.S. and EMEA to continue sort of trending in similar directions? Are there differences in the COVID-19 responses and protocols that could push for more divergence amongst those two regions?
Dave Gitlin, President and CEO
You know, quite honestly, it's hard to say, because it's even hard to generalize the U.S. and it's hard to generalize Europe. When we look at Europe, Germany has been coming on back online quite well. Recently, we see the automotive manufacturers coming back. We feel good about Germany. Spain and Italy have been coming back online over the last two to three weeks in a fairly positive way. France is more delayed. Eighty percent of the construction sites in France are still not operational. So I think France will be lagging and probably the UK lagging behind Germany and some of the others. And you're probably going to see a bit of a mixed bag in the United States, as different states come online at different times. I think if you were to compare the two, our experience so far over the last few months is that the U.S. has generally been three to four weeks behind Europe, in terms of on the way down and on the way back up.
Operator, Operator
Thank you. I'm showing no additional questions in the queue. At this time, I'd like to turn the call back over to management for any closing remarks.
Dave Gitlin, President and CEO
Well, I'd like to thank everyone for taking the time to join us today. Please know that Sam is also ready for your questions. And we appreciate your time and attention this morning. So thank you very much.
Operator, Operator
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.