Johnson Controls International plc

Johnson's Control Second Quarter 2021 Earnings Call. Your lines have been placed on a 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, and if you have any objections, you may disconnect at this time. I will now turn the call over to to Antoinella Franzen, Vice President, Chief Investor Relations and Communications Officer.

Good morning, and thank you for joining our conference call to discuss Johnson Control's second 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 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 and EBIT, exclude restructuring and integration costs, as well as other special items. These metrics, together with organic sales and free cash flow, are non-GAAP measures and are reconciled in the schedules attached to our press release. and in the accompanying index 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. I will start with a brief strategic update, spotlighting a few specific areas related to our growth initiatives. Olivier will provide a detailed review of Q2 results and update you on our forward outlook. and we will leave as much time as possible to take your questions. Let's get started on slide three. We delivered another quarter of solid financial performance. Organic sales and order growth reflected positive as anticipated, which when combined with our ongoing commitment to operational excellence, enabled us to grow EBIT by more than 20% year over year. Despite some challenges in the macro environment, inflationary pressures, supply chain disruptions, and the lingering impacts of COVID-19, trends across most of our end markets continue to improve, and we continue to gain share. We have maintained an incredible level of engagement with our teams globally, as well as with our customers and partners. And we continue to execute on all of our strategic initiatives, expanding our service attachment rate and driving higher recurring revenue, enhancing and connecting our install base with our digital OpenBlue platform, in advancing our role in addressing the environmental needs of our customers. Lastly, as promised, we are announcing our constant goods reduction program on today's call, which targets $250 million in run rate savings by fiscal 2023. In combination with the SG&A actions we announced earlier this quarter, we expect to deliver $550 million in net savings, which provides significant margin expansion over the next several years. These actions are a testament to our commitment of continuous improvement and will enable us to close our margin gap versus peers. Let's turn to slide four. As was the case last quarter, we have had a number of strategic announcements. A few of the more notable examples are listed on the slide. Each of these is significant in its own right, but I do want to take a minute to touch on two in particular, and that's the announced acquisition of Silent Air and the partnership with Pellion. We are extremely excited to welcome the Silent Air team into the Johnson Controls family. Their best-in-class portfolio of innovative cooling equipment and modular data center technologies is tailored to hyperscalers. These specialized data center providers are building and operating the critical infrastructure that the world needs in the rapid global transition to consuming cloud-based software as a service. There is a well-established entrepreneurial spirit throughout Silent Air, combined with a customer-centric culture, deep subject matter expertise, and a long history of seamless execution. Expanding our exposure to the data center vertical, and specifically the high-growth, hyperscale market, has been a high priority over the last several years. Silent Air accelerates these efforts considerably, and together we have an opportunity to leverage a best-of-both approach to fuel growth in this end market globally with a high return profile and immediate earnings accretion. We also announced a transformational partnership with the leading technology player in connected IoT device management, Pellion, a division of ARM Technologies. Put simply, this partnership allows us to bring connected intelligence to all of the operational technology, be it heat pumps, security sensors, or air handling systems in buildings. This partnership will help remove the complexities associated with pushing that intelligence to the edge by leveraging Pellion's connected device platform for secure, simple integrations across a diverse installed base of hardware. Pellion's open, flexible device management capabilities will allow OpenBlue to run on any device in any hardware configuration at cloud scale and address the challenges with monitoring and maintaining performance at the edge. Moving to slide five. Turning to the theme of sustainability, we wanted to spend a few minutes highlighting one of the more important secular trends that we expect will benefit our industry for the next decade plus, and that is decarbonization. With buildings representing approximately 40% of global greenhouse gas emissions, large-scale investment in decarbonization is at an inflection point. We have seen corporate commitments to meeting science-based targets from over 1,000 companies and countless commitments to net zero operations from the private sector. Federal policies and stimulus to incentivize investment in the renovation of existing infrastructure is growing, and regulations designed to reduce emissions are increasing. We see the investment required for commercial buildings to achieve net zero extending into the hundreds of billions of dollars. We believe we are uniquely positioned to capitalize on this once-in-a-generation opportunity with a combination of efficient building systems and smart technologies that are connected via our digital infrastructure, OpenBlue, as well as our global presence, enabling us to convert on a local scale. Turning quickly to slide six, we are enabling net-zero buildings today with a value proposition that is centered around transferring the risk of delivering building decarbonization from the building owner to JCI, leveraging flexible, customizable, turnkey solutions in our proven capability of delivering energy savings and emission reductions. One such solution is OpenBlue Enterprise Manager, a comprehensive suite of applications to monitor and improve energy efficiency, tenant satisfaction, asset performance, maintenance operations, space performance, and ultimately the comfort of all occupants. Using a single pane of glass approach, Enterprise Manager delivers the next generation of smart building capabilities with portfolios ranging from commercial offices, healthcare, mixed-use high-end, transportation, retail, and K-12 school systems. Turning to slide seven, another increasing area of focus when it comes to addressing decarbonization is the electrification of heat. This is a market that is growing at a high single-digit CAGR overall, with a lot of that growth being driven by demand in Europe and Asia as a result of the increased level of environmental regulations in these regions that minimize the use of fossil fuels and mandate low GWP refrigerants. Many of you have asked recently about our offerings in this space, and from my perspective, I would tell you we have one of the broadest portfolios of heat pump technologies in the industry. As you can see, our portfolio spans all major building segments, residential, commercial, and industrial, covering a wide range of capacities and equipment configurations. We are the leader in the complex segment, which serves applications like district heating and industrial process manufacturing, with the most complete offering stretching between our applied and industrial refrigeration portfolios and utilizing natural and HFO refrigerants. District heating is an exciting subsegment of growth in this category, particularly across Europe and China. In fact, we have had several major district heating project wins in these two regions recently, supplying customers with customizable solutions to help achieve their environmental goals and lower energy costs substantially. We also have a strong market position across commercial and residential markets in China with leading technologies in applied and ductless. Turning to slide eight and staying on the theme of sustainability, our customers are challenged with balancing costs and achieving their sustainability goals. Our solutions are positioned to address those challenges and be more agile in providing outcome-based solutions and services centered around integrated data that reduce energy and cost while providing an attractive return on investment. As you can see on slide nine, the enhanced capabilities enabled by OpenBlue combined with our performance infrastructure business are proving to be a powerful combination in the current environment. Our energy savings performance contracts offer customers a budget-neutral way to fund the improvements necessary to reduce energy intensity and the environmental footprint of a building through guaranteed operational savings. This is a business we have been in for two decades, having implemented well over 3,000 performance contracts in North America alone, with a portfolio of over $6 billion in guaranteed savings. Utilizing OpenBlue as a service, we help our customers make and implement decisions that improve a building's total cost of occupancy, energy and carbon profile, as well as the well-being of their occupants, without customers having to manage the process. We ensure our consistent availability to buildings and a predictable cost of operations. As a result, building owners are able to focus on their mission and their business. We are proud to be partnering with our customers on several new projects. We have listed five recent wins that showcase our ability to power sustainability for our customers. Before I turn things over to Olivier to review the financial performance for the quarter, let me wrap up my opening remarks by saying, We had a very strong first half of the year, and I am extremely encouraged by the momentum we are seeing across Johnson Controls. Our teams remain focused on execution and are committed to achieving top-tier performance. We have a number of initiatives in flight designed to accelerate top-line growth and improve profitability and ensure we expand our competitive advantages. We continue to reinvest in our portfolio, both organically and inorganically,