Johnson Controls International plc

Welcome to Charms and Controls' third 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 any time. I will now 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 third 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 Steele. Before we begin, I would 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 earnings per share, EBIT A, EBIT and free cash flow 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 ops basis. GAAP earnings per share from continuing operations attributable to Johnson Control's ordinary shareholders was a loss of 24 cents for the quarter and included a net charge of $0.92 related to special items, primarily driven by a goodwill impairment, restructuring, and mark-to-market adjustments. Excluding these special items, non-GAAP adjusted diluted earnings per share from continuing operations was $0.67 compared to $0.65 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 continuing to stay healthy and safe. Before we get into the detailed review of our third quarter results, I'd like to start by providing you with several highlights and key messages coming out of the quarter on slide three. I am extremely pleased with how we executed in the quarter and have been encouraged by the monthly sequential improvement. Conditions are beginning to normalize. Our facilities are operating at near normal levels, and access to customer sites is improving four or more every day. And although global macro conditions remain challenging, and the political and social climate in many parts of the world remains extraordinarily dynamic, we are capitalizing on near-term opportunities to engage with our customers as they enhance the health and safety of their buildings and position ourselves long-term as a leader in intelligent building solutions. As I mentioned last quarter, protecting the health and well-being of our employees customers, and the communities in which we live and work has been and will always be a top priority at Johnson Controls. On that front, our crisis response team has been incredibly engaged with our teams across the globe to implement the appropriate policies and procedures to ensure safe workplaces while also encouraging our employees to follow similar protocols at home and in their communities to prevent transmissions. These policies and procedures have proven to be essential in our ability to ramp up and maintain operations throughout this crisis. I could not be more proud of the leadership and collaboration this team has demonstrated and the dedication all of our employees have shown to mitigating this risk. As our customers plan for the safe return of their occupants, we are committed to helping them prepare to reopen healthy buildings by delivering solutions and support that enhance the safety of their environment and increases the efficiency of their operations. We have one of the broadest portfolios of innovative products and solutions that promote building health and optimize customers' infrastructure to support flexible, resilient spaces. Over the course of the last few months, there has been active engagement with our customers related to these solutions, particularly indoor air quality, location-based services for contact tracing, thermal cameras, and touchless access control, which are beginning to convert to revenue. For most of the quarter, all of our field businesses experienced restricted access to customer sites, limiting our ability to perform service and install work, which was an abnormal phenomenon relative to a typical downturn. We will discuss orders in more detail in a few minutes, but based on the sequential improvement we saw in June, we believe orders have bottomed and our pipeline remains solid. We've also seen sequential improvement in our top line and expect that to continue in the fourth quarter. On the cost side, we were aggressive in right-sizing our cost structure for the current level of demand, including both temporary and permanent cost actions, and have increased the expected benefit of these actions. Free cash flow was another bright spot in the quarter as we generated approximately $800 million, and we are well on track to exceed 100% conversion for the full year. Additionally, we resumed our share repurchase program and began buying back stock in early July. In light of the recent events over the last several months, the significance of having an organizational culture that embeds and promotes a strong adherence to ESG principles has never been more essential. Sustainability is an integral part of our vision and values that Johnson controls, and that extends not just to our environmental practices, but to our social and governance practices as well. We have an ambitious strategy that incorporates sustainability into everything we do, from the highest levels of corporate governance down to our operations. We are honored to continually receive recognition for our dedication to ESG as a company, including being selected as one of the world's most ethical companies for the 13th consecutive year and ranking number 18 overall on the 100 best corporate citizens list, among others. Our employees, customers, and investors can expect that we will remain focused on advancing our leadership position on all environmental, social, and governance factors. We believe that a culture of inclusion drives the right mindsets and behaviors and fosters creativity and innovation, which leads to exceptional customer outcomes and long-term shareholder returns. Lastly, I am very excited about this morning's announcement as it relates to our leading position in smart, sustainable building solutions, the launch of OpenBlue, our digital platform. Johnson Controls has been making buildings safer and smarter for 135 years. OpenBlue reflects the next step in how we will interact with buildings, environments, and shared spaces, evolving from inflexible assets to dynamic resources in a digitally connected environment and leveraging our digital real-time service capabilities to deliver more value to customers. By combining traditionally separate building systems and enabling them to communicate, OpenBlue will create smarter and safer spaces that are also more efficient and sustainable for both new and existing buildings alike. Moving to slide five, I want to briefly touch on the technology that enables OpenBlue. Obviously, there is a lot of detail on this slide, so let me attempt to simplify the role of the platform itself. This has been years in the making, based on extensive feedback from our customers, our previous product innovation experiences, further research and development by our global team of engineers and data scientists. With OpenBlue, we are connecting various products across our domains with services that leverage our deep industry expertise and buildings to bring even more value to customers. When you think of OpenBlue, think about the combination of products, applications, technology, and services. OpenBlue brings together traditional IT with operational technology and cloud applications in a common platform that connects disparate systems and harmonizes data within a secure and reliable cloud-based system. The technology architecture is open, flexible, and easy to expand, and it features advanced technologies such as artificial intelligence and digital twins. Importantly, we are also creating an ecosystem of partnerships with world-class technology companies to help us bring more value to customers across all of our industry verticals. Now, let me touch on the power of OpenBlue on slide six. We have a $6.3 billion service business built upon a strong base of 2 million contract customers across all of our domains in HVAC, fire, and security. Our direct footprint of over 16,000 field technicians gives us an advantage in resolving customer needs for safety, security, comfort, and risk avoidance. Over the past two years, we have made significant strides in driving process efficiencies that have allowed us to leverage our large footprint more optimally for our customers. Our rapid service response capabilities were visible. Right at the beginning of the ongoing pandemic in Wuhan, China, when we were actively involved in quickly installing and servicing hospital infrastructure in heavily constrained environments. We are inventing serviceability as a key aspect within our product designs. We are also investing in proactive service technologies, including remote diagnostics, predictive maintenance, and advanced risk assessments. These technologies allow us to expand our range of outcome-based services, and enable our customers to extract higher levels of value from our products and solutions. With the ongoing pandemic, we are now augmenting our core domain expertise with location-based services, contact tracking and tracing, flexible infrastructure, and screening-based access. These technologies allow our customers to raise their requirements on safety and risk avoidance without adversely impacting their comfort or convenience. I also want to point out that we are raising our bars on sustainability and efficiency. For example, the OpenBlue platform can be used to generate almost all energy from onsite solar systems, achieve cost savings with energy efficiency, and improve water usage volumes. Working in living spaces in the post-pandemic future are going to be transformed forever. With all of the innovations that are currently available with OpenBlue, We are a leader in defining safety, security, sustainability, comfort, and efficiency in the building space, which are all critical to opening the workplace. In the coming weeks, you'll be hearing more about the various digital services and solutions being launched and the tremendous capabilities of OpenBlue. Back to the quarter, let's look at the order trend on slide seven, which plots our monthly orders on a trailing three-month basis. It highlights what we anticipate to be the trough for order intake, which, as the chart would suggest, occurred in May. For OQ3, we continued to see our order pipeline push to the right, in line with our expectations. Each of our segments followed a similar trend. Seed declines in April and May, and then material improvement in June, which exited the quarter down around 10%. I am optimistic that this trend line should continue to improve supported by our pipeline of opportunity. With that said, we are still planning conservatively. As a reminder, these orders do not include our global product segment as it is a book and build business. We did see a significant pickup in June driven by HVAC equipment. Let's turn to slide eight for an update of the significant mitigating actions that have been executed in response to COVID-19. As we mentioned last quarter, we had identified and began executing on various actions, both temporary and permanent, that were expected to benefit the second half of this fiscal year by $400 to $450 million. As a result of taking decisive action very early in the quarter, we were able to exceed our planned cost out and now expect these actions will result in approximately a $500 million benefit in fiscal 20. This is a testament to the team's commitment to execution and agility when faced with extraordinary challenges. Our permanent actions will provide a nice tailwind for us in fiscal 21 and more than mitigate the temporary actions related to compensation that are expected to return next year. As it relates to indirect spend and facility costs, we are in the process of streamlining some of those costs out on a permanent basis and are actively planning to govern the pace of those costs coming back to the P&L, with the gating factor being organic growth. If there is a silver lining to this crisis, it is that we are building new capabilities and optimizing the way we operate as a leaner, more efficient organization. Turning now to slide nine for a summary of our financial results in the quarter. Revenues declined 16% on an organic basis, with products down 20%, while our field businesses declined 13% in aggregate. As expected, service outperformed, declining 7% overall, as our shorter cycle labor and material activity was significantly impacted by access restrictions and more selective discretionary spending throughout most of the quarter. Install revenues declined 18%. Our adjusted EBIT margin increased 70 basis points in the quarter to 13.2%, aided primarily by the execution on COVID-19-related mitigating cost actions in the quarter. Despite a 16% organic revenue decline, adjusted EBIT of $707 million only declined 11% on an organic basis. Adjusted EPS of 67 cents increased 3% over the prior year. Brian will provide the details of the year-over-year bridge. Free cash was approximately $800 million in the quarter, up about 30% over the prior year, bringing the year-to-date total to approximately $900 million. With that, I will turn it over to Brian to discuss our performance in a little more detail.