Johnson Controls International plc

Good morning, and thank you for joining our conference call to discuss Johnson Control's first quarter fiscal 2021 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 Chief Financial Officer, Olivier Leonetti. Before we begin, I would like to remind you that during the course of today's call, we will be providing 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 and EBIT, exclude restructuring and integration costs, as well as other special items. These metrics, together with free cash flow, 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. Now let me turn the call over to George.

Thanks, Antonella, and good morning, everyone. Thank you for joining us on today's call. Hopefully the new year is treating you well so far. I will start with a brief strategic update and summary of our Q1 results. Olivier will provide a more detailed review of those results and update you on our forward outlook, and we'll have plenty of time to take your questions. Let's get started on slide three. We are off to a strong start in the first quarter with solid financial performance and accelerating momentum on all of our strategic initiatives. As we will cover in a few minutes, top-line performance was at the high end of the expectations we communicated to you last quarter, which together with impressive operational execution across all segments, enabled us to grow EBIT by 5% year-on-year, despite continued volume pressure related to the ongoing pandemic. Although the promise of a vaccine is sparking modest optimism in several of our end markets, many of which continue to show improving sequential demand, there are still many regions of the world facing second and third waves with varying degrees of lockdowns and restrictions. With that being the case, we have remained focused on the commitments we made to our employees, customers, and suppliers. Our teams have come together to achieve truly extraordinary things, improving the fundamentals of our businesses, and executing our overall strategy. During the quarter, we were honored to receive recognition from several organizations. Additionally, as you may have seen in a separate press release issued earlier this morning, we announced an ambitious set of new ESG commitments, reinforcing sustainability as a top priority in our leadership role in climate change. Lastly, we continued to gain traction on several of our core growth initiatives, which we have been discussing with you over the last couple of quarters. Scaling OpenBlue, driving higher service attachment rates and sales growth, and accelerating new product introductions. Please turn to slide four. There has been a tremendous amount of engagement at Johnson Controls over the last several months, both with our teams internally, as well as with our customers and partners. In early December, we announced an exciting partnership agreement with Microsoft as part of our global collaboration to build a comprehensive digital twin platform that supports the entire ecosystem of a building. OpenBlue Digital Twin Technology is transforming how buildings are conceived, built, and operated, enabling the creation of digital replicas of physical spaces, systems, processes, and people. The next four on the page reflect the incredible efforts and leadership by countless individuals across various businesses and functions throughout the organization. I want to congratulate our colleagues across the company as it underscores the commitment to excellence we have been driving towards over the last few years. Additionally, I am honored to have been selected to serve as the chair of the Energy and Environment Committee on the Business Roundtable. I look forward to working with my colleagues into having an opportunity to influence the nation's policies toward addressing climate change the most significant challenge facing the planet today. On slide five, I would like to highlight the ambitious set of new ESG commitments we announced this morning. Sustainability is at the center of our vision for a healthy world and is integrated into our culture and values. Now with our OpenBlue platform, the value creation we provide to our customers is directly linked to ESG. In terms of our new environmental commitments, we are setting a goal through our science-based targets, which enable us to achieve net zero carbon emissions before 2040, which is 10 years earlier than required by the UN Framework Convention on Climate Change's goal to cap global warming by 1.5 degrees Celsius by 2050. Additionally, we will direct 75% of our R&D investment on new product development to products and solutions that address climate need. On the social and governance side, we intend to double the representation of women and minorities in management roles by 2025. And finally, in terms of new commitments beginning in fiscal 2021, we are including sustainability and diversity goals in senior leaders' performance assessments and linking those directly to executive compensation to ensure accountability. Turning to slide six for an update on OpenBlue. The rollout of OpenBlue is going very well, and we remain encouraged by the high level of engagement we are seeing with customers and partners. We launched seven new offerings this quarter, the most significant of which is OpenBlue Healthy Buildings, the industry's most comprehensive suite of connected solutions. This particular launch leverages the strength of our core capabilities, which together with data-driven AI technologies enables our customers to transform how people interact with their buildings, create intelligent, safe, dynamic environments, achieve their own green building goals and maximize return on investment with shorter paybacks. By combining these solutions, we create a holistic menu of offerings that prevent customers from having to choose between efficiency and sustainability. We now have 27 offerings available that solve for unique customer problems and serve a new market opportunity which resized at $10 to $15 billion and is growing at a double-digit CAGR over at least the next five years. We are ideally positioned with technologies and solutions that accelerate the transformation and reinvention of healthy buildings, which is directly aligned with the priorities of the incoming U.S. administration. Our pipeline continues to build, and momentum with key partners like Microsoft, Accenture, and Salesforce is gaining steam. Turning to service on slide seven, service is an incredibly attractive business that is showing momentum with profitability that is two times the company average. We are fully deploying resources to enhance our service offerings and leveraging the power of OpenBlue to drive mid-single digit plus organic growth on an annual basis, improve attachment rates and revenue per user, as well as reduce attrition. Turning to new products on slide eight, As most of you know, we have been engaged in a significant amount of reinvestment in new product development over the last several years. Our engineering and R&D efforts have been aimed at reinvigorating our core product portfolio, ensuring new technologies are connected and future ready, while designing cost out of equipment and helping our customers reach their sustainability goals. We think about product investment as having four primary themes or drivers, regulatory and environmental, electrification, digital connectivity, and more recently, healthy occupants. We launched several new products in the quarter that address all of these themes. We continue to expand our chiller portfolio with equipment that uses low or ultra-low GWP refrigerants, and in Q1, we did that with one of our water-cooled screw chiller platforms. We also launched our Mercury II smaller tonnage package split system that is already compliant with the 2023 emission standards change two years ahead of time. York is the first in the industry with resi and light commercial product that is ready for the 2023 changeover. In Asia, we launched an exciting new side flow VRF system, which is the first of its kind. It opens a new market opportunity by enabling installation and building configurations that previously wouldn't accommodate top-flow systems. And the module design meets the needs of our customers who want to expand or retrofit existing spaces more easily and in a cost-effective way. Electrification is another big theme, particularly in Europe and Asia, which is driving significant demand for more energy-efficient heat pump technology across both HVAC and industrial refrigeration markets. This trend towards electrification is geared to lowering energy use, carbon emissions, and the reliance on fossil fuels. In addition to making sure that every piece of equipment that leaves our factory is enabled for connectivity, we are also investing significantly in cybersecurity technology, which has become increasingly important in a more digital world. Lastly, new demand for clean air technologies has resulted in some of the most rapid innovation sessions we have had. For example, our new premium Hitachi ductless system applies proprietary frost wash technology as well as more hygienic coils to increase the level of air quality in residential and small commercial applications. Over the last 12 months, we've been increasing the cadence of new product introductions, generating a higher level of product vitality than we've had in years past, with over 150 new products planned in fiscal 21. We are also investing in our channel to expand our points of distribution and leverage strategic partnerships with large dealers and other channel players. We are seeing tremendous validation of our investment in the marketplace and would expect that to continue over the next several years. Before Olivier reviews slide 9 in detail, I just wanted to reiterate our solid start to the year with improved performance in revenue, orders, profitability, and overall earnings per share. Additionally, free cash flow was exceptionally strong. Now let me turn it over to Olivier to go through the details.

Thanks, George, and good morning, everyone. Continuing on slide 9. Q1 sales declined 5% organically, improving sequentially compared to the 6% decline last quarter. Relative to our expectations, global products outperformed, primarily the result of continued high levels of demand for residential HVAC equipment, both here in North America as well as our Hitachi business in Asia Pacific, including China. EBITDA expanded 80 basis points year-over-year to 12%, the highest margin rate in any first half since the merger, despite volume headwinds related to the pandemic. EPS of 43 cents increased 8%, benefiting from the higher profitability I just discussed, as well as lower share count, as we have maintained a disciplined approach to capital allocations. Our free cash flow performance in the quarter was strong, up about 10% on a reported basis to over $400 million. I will provide the details on our cash performance later in the call, but the strong start in Q1 puts us on a path to achieve 100% conversion for the full year. Please turn to slide 10. Orders of our field businesses continue to improve. with the year-over-year decline moderating to just 3% despite our installed business still experiencing pressure from slower non-residue new build activity with retrofit activity showing signs of recovery. Service orders increased 2% overall, driven by MILA and supported by the recovery of our core commercial fire and security businesses in Europe. Our global products book-to-bill was up slightly year-over-year with extremely strong growth in our North American HVAC business, up over 170% year-on-year. Backlog accelerated up 3% over the prior year to $9.5 billion. We serviced backlog up 8% to $2.5 billion and installed backlog up 2% to just over $7 billion. We are beginning to see conversion rates in our service backlog accelerate, which gives us more confidence in our mid single digit growth outlook for that business. Our installed backlog flow rate is improving, but still below historical levels. Where site access has been allowed, we have continued to execute larger projects that were funded prior to the pandemic. As those projects reach completion, incoming backlog is remixing towards shorter cycle projects, which is positive for near-term margin outlook. Turning to our EPS bridge on slide 11, operations net of mitigating actions netted to a two-cent tailwind versus the prior year. Similar to the past several quarters, we experienced broad-based volume pressure, and unfavorable mix. We remained in a positive price-cost position, and we continue to keep tight control on SG&A costs, including ongoing efforts to mitigate COVID-related volume declines. Net financing costs and controlling interest were each one cent headwind, with lower share count benefited us by three cents. Let us turn to slide 12 to discuss our segment results in more detail. My commentary will also refer to the segment and market performance included on slide 13. North America revenues declined 6% organically, with install down 9%. Sales in the new construction channel remain depressed as customers continue to delay large projects. And although retrofit activity was still down year over year in Q1 due to the drop in orders we experienced last year, we would expect this part of our install business to reflect over the next two quarters. Services declined 2% with our recurring contractual service business up low single digits across all domain offset by weakness in transactional service linked to customers lower discretionary spend in the current environment. Segment margin increased 50 basis points year-over-year to 12.5%, primarily reflecting strong gross margin performance up 90 basis points. Continued cost mitigation efforts and favorable mix also benefited us in Q1. Orders in North America declined 7%, improving slightly on a sequential basis, but impacted by significant declines in our federal government business. Persistent softness related to managing the pandemic was exacerbated by the disruption due to change in the administration. Backlog of $5.9 billion increased 1% year over year. In Milan, revenues declined 5% with install down 11% and services flat. By geography, we saw continued challenges across our major regions with most geographies back under significant restrictions or full lockdown due to the spike in COVID cases in the second half of the quarter. Europe declined low single digits while the Middle East saw significant pressure down high teens against this quarter with continued weakness in HVAC business. Latin America was down low double digits. EBITDA margins rebounded, expanding 80 basis points from the prior year as favorable mix, cost mitigation efforts, and better fixed cost absorption more than upset the volume deleverage. Orders in IEMILA grew 2% in the quarter and backlog of $1.8 billion was up 5% year-over-year. AIPAC revenue went down 6%, with install down 11%, and service up 1%. Sales in China turned positive, growing 2%, while other geographies throughout the AIPAC region have deteriorated modestly since last quarter due to renewed lockdowns and restrictions related to COVID-19 in areas like India, Southeast Asia, and parts of the Pacific. That said, continued strength in China, an healthy backlog, stronger service activity, and easy comps should allow us to post solid revenue growth over the next couple of quarters with more modest growth in orders. EBITDA margins improved 140 basis points year-over-year to 12.8% as favorable mix and the benefit of mitigation actions more than offset the volume decline. Orders declined 1% in Q1 despite China orders growing 60% as renewed lockdowns and restrictions in several other key geographies offset. Backlog of $1.8 billion grew 12% year-over-year. Moving to global products, revenue declined 2% on an organic basis in the quarter, better sequentially with continued outperformance from our residential HVAC and security businesses. North America HVAC grew 46% in the quarter as the market continues its sharp recovery and we continue to gain share as a result of expanding our points of distribution and new product launches. We would expect these trends to begin decelerating over the next several months, but sales growth should still be relatively strong. In Asia Pacific, our RISI HVAC business grew 2%, with growth in Taiwan and India more than upsetting a low single-digit decline in Japan. Although not reflected in our revenue growth, our incense JV in China grew 30% year-over-year in Q1. On the commercial HVAC side, sales declined at a high single-digit rate as the commercial market remains under pressure, particularly in light commercial unitary. Fire and security products declined low single-digits overall, with strong growth in our security business more than upset by continued weakness in commercial fire detection and suppression markets. EBITDA margin expanded 90 basis points year-over-year to 11.9% as positive price cost and the benefit of mitigating cost actions more than upset the volume decline and related absorptions as well as negative mix. Turning to slide 14, corporate expense was down significantly year-over-year to $67 million benefiting from cost mitigation actions and continuous structural cost reductions. we do expect corporate expense to step up next quarter and three out the course of the second half as temporary cost reductions begin to reinstate. Given the favorable performance in Q1, we now expect corporate expense to be in the range of $300 to $320 million for the year. Turning to our balance sheet and cash flow on slide 15, starting with the balance sheet at the top of the page, no significant changes, versus the prior period. In the quarter, we repurchased approximately 8 million shares for roughly $350 million. As we have said, the balance sheet remains in very good shape. On cash, we generated $424 million of free cash flow in the quarter, which is truly remarkable performance for a quarter which typically experiences a cash outflow. As a reminder, beginning this year, we moved away from the adjusted free cash flow construct, so this represents true available free cash. Our cash from operations and reported free cash flow last year included a $600 million tax refund, as well as $100 million cash outflow related to integration costs. While there were clearly some timing benefits driving some the substantial year-over-year increase with CAPEX still in process and ramping back up, underlying operational performance was the primary driver. Now let's turn to slide 16 for our outlook. Although the market remains uncertain, given the solid start to the year and slightly more visibility, our confidence in the outlook for fiscal 21 has increased. In addition to initiating fiscal Q2 guidance, we are also providing formal guidance for the full year. Starting with our full year guidance, we still expect organic revenue growth in the low to mid-single-digit range, turning slightly positive in Q2 and then ramping significantly in the second half. As I mentioned last quarter, we will continue to manage costs over the course of the year, including the return of costs that were subject to temporary mitigation actions last year, and we look for additional opportunities to streamline some of these costs out on a permanent basis. We have many levers to continue to improve overall profitability through actions focused on gross margin as well as SG&A. This, along with our continued strong execution is expected to result in solid EBITDA margin expansion of 40 to 60 basis points for fiscal 21. Q2 margins are expected to expand by 80 to 100 basis points with continued benefits from cost actions. EPS for the full year will be in the range of $2.45 to $2.55 up 9% to 14% over 2020, which, as you will recall, was up 14%. Q2 EPS will be in the range of 47% to 49%. Given our strong cash performance in Q1, we are raising our outlook for free cash flow conversion on the reported basis to approximately 100% for the full year. Overall, continued strong performance in what remains a challenging environment. With that operator, we can open the line for questions.