Johnson Controls International plc

Welcome to Johnson Control's fourth 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 now turn the call over 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 fourth 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, our Vice Chairman and Chief Financial Officer, Brian Steeve, and our Chief Financial Officer-elect, Olivier Leonetti. 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 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 $0.60 for the quarter and included a net charge of $0.17 related to special items, including year-end pension mark-to-market adjustments. Excluding these special items, non-GAAP adjusted diluted earnings per share from continuing operations was $0.76 compared to $0.78 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 calls. As the effects and impacts of COVID are still fresh in our minds, I hope you and your families are continuing to stay healthy and safe. Before we get started with the prepared remarks, I wanted to take the time to officially welcome Olivier to the team. Olivier is on the call today and will be actively participating in our guidance discussion and in Q&A. Many of you have already had the opportunity to speak with him briefly at a few of our investment conferences in early September. And if not, we look forward to speaking with many of you over the next several weeks. From my perspective, the transition couldn't be going any better, and it's clear to me that Olivier is already having a positive impact on the organization in his first 10 weeks. As we said at the time of his announcement, Olivier will formally assume the role of CFO immediately following the release of our 10-K in just a few days. I'd also like to take this opportunity to thank Brian for all of his contributions over the past several years. Brian has been an incredible partner and ally for me and, of course, played a vital role in the success of the merger integration over these last four plus years. I can't thank you enough for all that you've done. I think I speak for the whole team, Brian, in wishing you a long and happy retirement. With that, let's get started with a look back at our fiscal year on slide three. It likely goes without saying that 2020 is a year of unprecedented challenges. The experiences of this past year have tested the resilience, agility, and resolve of the entire organization and all of us as individuals. I'm incredibly proud of the way we came together as one team with an unwavering reliance on our core values and culture, which have underpinned every decision we made along the way. As we have said since the onset of the crisis, our goal as a company has been twofold. First and foremost, to protect the health and safety of our employees and their families, and second, to fulfill our customer promise by proactively developing and delivering solutions to ensure the continuous functionality of their critical infrastructure and essential facilities. Those two goals remain in place today. Improving the fundamentals of our business has been the foundation of our integration and transformation over these last few years, and the significant progress we have made was critical to our ability to navigate through the pandemic. From my perspective, we have continued to demonstrate strong execution and established a consistent pattern of achieving our commitments. In spite of the enormous amount of volatility in our markets this year, we continue to execute on our strategy. Although we had to pivot early in the year to mitigate the impact from COVID-19, we further strengthened our operating systems, continued to invest in our businesses, filled key leadership roles, and returned nearly $3 billion in capital to shareholders through share buybacks and dividends. We ended 2020 with arguably the healthiest balance sheet and strongest liquidity profile we've had since the merger. We opportunistically refinanced a significant portion of our debt at very attractive rates. It issued our first green bond, further underscoring our leadership in and commitment to sustainability. We have remained on offense throughout the course of this downturn, competitively positioning the company for the recovery as market conditions normalized. For example, we launched an impressive number of new products this year, including our expanded fleet of light commercial unitary HVAC systems. In addition, we completed a number of bolt-on acquisitions over the course of the year, including the remaining minority stake in Qualtis, a proven technology disruptor in the security products market, delivering cloud-based intrusion and smart building solutions, which further enhances our digital innovation capabilities. We also doubled down on service and on digitally connected systems and, of course, announced the launch of OpenBlue, all of which will form the axis of our growth strategy going forward. And finally, as we enter the next stage of the evolution of Johnson Controls, I couldn't be more excited about the opportunities in front of us as we turn our attention to accelerating growth and gaining share. I will come back later in the call to discuss this in more detail. Turning to slide four, I'll provide a quick summary of the financials for the quarter. We ended the year with positive momentum as general business activity and demand trends continue to improve sequentially across many parts of our portfolio. That said, while we are encouraged by the progress of the recovery to date, almost all of our businesses continue to experience material impacts from the pandemic. Overall, sales in the fourth quarter declined 6% organically, better than the 10% decline we were projecting coming into the quarter as our sales teams executed very well in the current environment. Global products showed the strongest sequential improvement, declining 3%, with sharp rebounds in many of our product lines, including our residential HVAC portfolio. Our field revenues declined 7% in aggregate as site access continued to improve, although discretionary spending remained somewhat more restrained. Service continued to outperform, showing more normal resiliency with sales down 3% in the quarter, led by the relative strength of our contractual service base. Install revenues declined 10%, but again, significantly improved compared to last quarter's 18% decline. We remained vigilant on our planned cost mitigation efforts in the quarter, holding our EBIT margin flat year-over-year at 12.9%, despite continued volume pressure, a direct result of strong execution, delivering best-in-class incrementals at 13%. Adjusted EPS came in at 76 cents, down 3% year-over-year, and we delivered on our cash commitment for the quarter, with strong free cash flow of $1 billion, bringing the full year to $1.9 billion, 115% conversion on adjusted net income. Turning to slide five. Let's look at our order trends for the quarter. Similar to last quarter, this chart highlights our monthly field orders on a trailing three-month basis through the end of September and excludes orders related to our global products business, as they tend to be book and ship. For the quarter overall, orders declined 7%, continuing to recover off the May lows, substantially better than the 16% decline we reported last quarter, and in line with our expectation for a mid- to high-single-digit decline. All three segments rebounded on a quarter-sequential basis. By platform, orders for our global applied HVAC install and service businesses improved to down a little less than 1%, led by positive growth in North America and APEC. Orders for our fire and security business remain challenged, including weakness in our retail business, However, these businesses have improved on a quarter-sequential basis. We continue to see uneven order patterns across many of our regions, and many countries across Europe are seeing renewed lockdowns and restrictions, and case rates in the U.S. are picking back up. So we continue to plan conservatively. With that, I will turn it over to Brian to discuss our performance in a little more detail.