Johnson Controls International plc

Welcome to Johnson Control's second quarter 2020 earnings call. Your lines have been placed on listen only until the question and answer session. To ask a question, please press star 1 on your touchtone phone. This conference is being recorded. If you have any objections, please disconnect at this time. I will turn over the call to Antonella Franzen, Vice President and Chief Investor Relations and Communications Officer.

Good morning, and thank you for joining our conference call to discuss Johnson Control's second quarter fiscal 2020 results. The press release and all related tables issued earlier this morning, as well as the conference call slide presentation, can be found on the investor relations portion of our website at johnsoncontrols.com. Joining me on the call today are Johnson Control's Chairman and Chief Executive Officer, George Oliver, and our Vice Chairman and Chief Financial Officer, Brian Steeves. Before we begin, I'd like to remind you that during the course of today's call, we will be providing certain forward-looking information. We ask that you review today's press release and read through the forward-looking cautionary informational statements that we've included there. In addition, we will use certain non-GAAP measures in our discussions, and we ask that you read through the sections of our press release that address the use of these items. In discussing our results during the call, references to adjusted EBIT A and adjusted EBIT margins exclude restructuring and integration costs as well as other special items. These metrics are non-GAAP measures and are reconciled in the schedules attached to our press release and in the appendix to the presentation posted on our website. Additionally, all comparisons to the prior year are on a continuing operations basis, excluding the results of Power Solutions. GAAP earnings per share from continuing operations attributable to Johnson Control's ordinary shareholders was 28 cents for the quarter, and included a net charge of 14 cents related to special items, primarily related to an asset impairment charge and integration costs. Excluding these special items, non-GAAP adjusted diluted earnings per share from continuing operations was 42 cents, compared to 32 cents in the prior year quarter. Now, let me turn the call over to George.

Thanks, Antonella, and good morning, everyone. Thank you for joining us on today's call. I hope you and your families are staying safe and healthy during these extraordinary times. You may have noticed from our slide presentation, we are taking a very different approach compared to our traditional quarterly earnings call format. In order to focus our discussion on addressing the impacts from the COVID-19 pandemic, as well as the steps we have taken as a company to partially mitigate the financial impacts and position the company to capitalize on the eventual recovery. Although we have withdrawn our guidance for the year, I will provide some color commentary on how we are thinking about the second half later in the call. We'll allow plenty of time for your questions. Let's get started on slide three. Clearly, we are navigating through unprecedented times. The ongoing COVID-19 pandemic has had profound impacts on the way we live our daily lives and the way companies run their businesses. We believe most of these impacts are largely transitory, but the dramatic slowdown in global economic conditions presents very real challenges. However, I can assure you that Johnson Controls has stepped up to the challenge, taking decisive actions to manage through this crisis day by day. We also have many opportunities to assist our communities and customers, which we will discuss. Protecting the health and well-being of our employees, customers, and communities in which we live and work has always been a top priority at Johnson Controls. That is never more apparent than in times of crises like the one we are facing today. In anticipation of a deepening pandemic, we activated our business continuity plan, including a crisis command team led by our employee health and safety division and comprised of regional leaders and members of my executive committee. This team has been working day and night to ensure the safety of our employees and quickly implemented policies and procedures, ensuring our factories, facilities, and offices could operate safely and effectively. Although we are still managing through various disruptions to our normal workflow as the virus rapidly spread, we have remained fiercely committed to supporting our customers, partners, and other stakeholders, including ensuring the uninterrupted operations of essential and critical infrastructure vital to combating this pandemic. I'd be remiss if I did not start by saying I couldn't be more proud of the way our employees around the globe have responded to this crisis since day one. Our teams have been fixtures on the front lines, helping to design and build temporary hospitals in Wuhan in the earliest days, maintaining the essential and critical infrastructure of our customers everywhere in supporting government leaders around the world. We have provided filtration materials used in the development of replaceable respirators, and our dedicated employees have volunteered their time and skills serving their communities. Johnson Controls has been at the heart of response efforts from the beginning, and from my perspective, the level of cross-function collaboration, compassion, and partnership has been truly extraordinary. That said, we've also had to make some difficult but necessary decisions and took decisive actions in order to mitigate the pressure that built over the course of the quarter as a result of COVID-19. Over the last few weeks, we have initiated significant actions to permanently lower our cost structure and strengthen our competitive position, which are based on the various scenario analyses we have conducted. From a balance sheet and liquidity standpoint, we entered the crisis on strong footing. Over the course of the last 12 months, using a portion of the power solutions proceeds, we took significant steps to strengthen our balance sheet, paying down over $5 billion in gross debt and maintaining higher levels of cash on hand with virtually no reliance on commercial paper. With respect to liquidity, we are in very good shape. sufficient cash on the balance sheet, and access to additional credit should we need it. Brian will provide more details on some of the actions we have taken to further enhance our already strong liquidity to ensure we maintain plenty of financial flexibility as we move forward. From a capital deployment standpoint, we are committed to maintaining our dividends given our strong balance sheet and liquidity positions. Turning to slide four. Our actions today will ensure we redefine the new norm to capitalize on the recovery. Aside from protecting our employees, one of the most pressing focus areas for us in terms of our emergency response during the current pandemic has been supporting our healthcare customers. Healthcare is about a $4 billion end market for Johnson Controls globally, offering end-to-end capabilities with a substantial global footprint. in a history of deep industry expertise and digital innovation. It is more important than ever that we have healthy buildings, and Johnson Controls is a leader in this area. We have been working with our customers in all regions of the world to rapidly increase patient capacity, whether by converting existing patient rooms to negative pressure isolation units or converting unused infrastructure to isolation units. to enhance communications by deploying temporary wireless nurse call systems, as well as real-time equipment tracking solutions. Maximizing safety for staff and patients, including cloud-based visitor management systems, touchless credentials, and thermal imaging cameras to assess occupant temperatures, as well as prioritizing service and maintenance of essential infrastructure. We have been responding in record time In Wuhan, for example, our teams in China were able to install and integrate critical systems for an additional 860-bed expansion facility within eight days. And we did the same in New York City, where our team worked hand-in-hand with the U.S. Army Corps of Engineers to build a 1,000-plus-bed emergency healthcare center in 21 days. Next, on slide five. As we begin supporting our customers' recovery plans, the feedback we have received over the last several weeks indicate how COVID-19 has the potential to have lasting impacts to our cities, buildings, and infrastructure. More resilient or flexible building space will be required to adapt to changing capacity or utilization needs. Safer environments will be created through seamless combinations of occupant screening, tracing, and credential management in more sophisticated ventilation systems. Touchless or frictionless access, lighting and temperature controls will be implemented to minimize cross-contamination and enhance the user experience. Remote monitoring and service delivery, including condition-based maintenance, will significantly increase. These types of solutions are being deployed in some of our marquee projects today, and the list of ideas and offerings continues to expand. I won't spend the time to go through each of these, but these are several examples of the rapid solution innovation that has taken place over the last couple of months. By closely engaging with our customers, we were able to create unique solutions to meet their immediate needs by leveraging the strength and breadth of our existing product portfolio. I view this past 10 plus weeks as a testament to the strength of our business model in further validation of our strategies around digital transformation in building partner ecosystems. Let's move to slide six. As the pressure from COVID-19 began to mount, we quickly instituted a set of immediate cost control actions across the enterprise to help mitigate the near-term financial impacts, eliminating all discretionary spend, suspending nonessential business travel, and decreasing contract labor in contingent workforces. As that pressure continued to spread, we moved into the next phase of our playbook by implementing mandatory unpaid time off and furloughs for all salaried employees and flexing our hourly workforce while executing permanent cost structure changes. Turning to slide seven, this is a quick look at the status of our major manufacturing regions. As you can see, it is a fairly mixed picture. Though there are a couple of isolated plant shutdowns, North America and EMEA remain in relatively good shape, running near normal capacity. China continues to ramp back up. Our two primary facilities are now fully operational, and we continue to monitor the progress there and in other parts of Asia. We do have a couple of issues with plant shutdowns in Mexico and India within the last couple of weeks. Along with some of our peers, we are leading an effort working closely with local authorities and would expect those to be back up and running over the next week or so. Japan is in good shape now, but there is another country we continue to monitor closely as we are not completely out of the woods yet. That said, we are using this downturn as an opportunity to take more aggressive actions to reduce our cost structure long term, including consolidating portions of our manufacturing network. The same can be said with respect to our supply chain management. Efforts to establish redundant capacity in multiple low-cost regions, dual qualified suppliers, reduction of skew complexity, and influencing our major suppliers to diversify their footprint have been underway. These efforts were expanded with the announcements of tariffs in 2018 and are accelerating further now. In the initial stages of this pandemic, Our existing continuity plans allowed us to mitigate a significant amount of supply chain risk. We were able to apply the lessons learned in China to drive preemptive actions to reduce the impact to other affected regions. And we are now working with our suppliers to plan for the recovery. Turning to slide eight. In the spirit of full transparency, we wanted to provide you with an estimate of the net impact of COVID-19 in the quarter. I won't spend time going through each line in detail, but clearly you can see we had a fairly material top-line headwind of around $375 million. That includes the impacts to our Asia-Pac and global products businesses as a result of the shutdown in China, as well as the spread to parts of Europe and the U.S., which began to ramp in March as regional lockdowns went into place across the various countries. As a result of some of the quick cost actions we implemented in anticipation of steep declines in demand in both the businesses and corporate, we were able to hold the net impact of COVID-19 to about a 25% incremental. At the EPS level, we offset the 10 cent gross impact with 4 cents of cost and other actions for a net impact of 5 to 7 cents, which is basically in line with what we shared with you during a conference presentation in mid-March. Turning now to Slide 9 for a quick recap of the financial results in the quarter. Sales of $5.4 billion declined 5% on an organic basis. Within the field businesses, total service revenues grew 1% in the quarter as strength in North America and Amela was offset by a decline in Asia-Pac. Adjusted EBIT margin held flat with last year on an organic basis. at 8.1% despite the volume decline as a result of both ongoing productivity and synergies in COVID-related cost actions taken in the quarter. Adjusted EBIT of $440 million declined 4% on an organic basis. Adjusted EPS of 42 cents increased 31% over the prior year as a benefit of synergies and productivity savings lower net financing charges, and aggressive share repurchase year-to-date more than offset the headwinds from COVID-19. Adjusted free cash was just over $150 million in the quarter, in line with our normal seasonal patent, bringing the year-to-date total to approximately $100 million. With that, I will turn it over to Brian to discuss our performance in a little more detail.