Johnson Controls International plc

Welcome to the Johnson Controls third quarter 2021 earnings call. Your lines have been placed on a listen only mode until the question answer session. To ask a question, please press star one on your telephone keypad. This conference is being recorded. If you have any objections, please disconnect at this time. I will now go ahead and 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 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 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 the call today. Let me kick things off with a brief update, spotlighting a few specific areas related to our strategic initiatives, and Olivier will provide a detailed review of Q3 results and update you on our forward outlook. We will leave as much time as possible to take your questions. Let's get started on slide three. Another quarter of solid results with demand accelerating across most of our end markets as a robust recovery continues to expand. Q3 represents our easiest comparison of the year, but I am encouraged to see the underlying sequential improvement experienced in the first half continue to accelerate in the third quarter, with many of our businesses back to operating at pre-pandemic volume levels. Non-residential construction markets continue to recover, led by the ongoing strength in retrofit activity tied to demand for healthy building solutions. New construction is also beginning to show signs of stabilization, and the inflection in order trends for our longer cycle of project businesses sets us up well as we look to next year and beyond. Our service business has recovered, and we continue to transform this business through our digital service strategy to drive higher levels of recurring revenue and an improved growth profile. This recovery has not been without its challenges. We have managed through significant headwinds related to persistent supply chain disruptions, component shortages, labor constraints, and continued inflation. While these dynamics have created some revenue pressure which will continue near term, the pace and composition of order growth in the quarter provides confidence that we will remain on track over the medium and long term. Our teams have done an excellent job navigating these challenges, and I'd like to acknowledge and thank them for the tremendous amount of time and effort dedicated to meeting our customer needs, particularly over these last several quarters. As you may recall, in an effort to mitigate the severe impact of the volume declines during the height of the pandemic, we implemented significant cost actions last year. These actions provided a material boost to profitability in the prior year period and led to best-in-class decrementals. Lapping that difficult comparison and managing the return of some of those variable costs, coupled with navigating current capacity constraints and supply disruptions, has resulted in significant margin pressure. That said, we were able to deliver better than expected margin expansion in the quarter and remain on track to meet our targets for the full year, which is a remarkable accomplishment in the current environment. At the same time, we remain laser-focused on executing our strategy. which is driving continued share gains. As we will discuss over the next few slides, we continue to advance our efforts to deliver innovative solutions to help customers enhance building performance and reduce costs while achieving their net zero carbon and renewable energy goals. This will be accomplished through our ongoing digital transformation enabled by OpenBlue and accelerating our offerings to deliver the outcomes our customers need. Please turn to slide four. Continuing our trend to highlight a few notable achievements over the past quarter, recently we launched the latest offering under our OpenBlue platform, Net Zero Buildings as a Service. I will spend more time on this announcement in a few minutes, as this represents an important step forward in enabling our customers' achievement of decarbonization and sustainability commitments. We have now filed our 200th U.S. patent application and received 90 U.S. patents for OpenBlue energy optimization innovations. We announced another strategic partnership with DigiCert, which will allow us to leverage their IoT device manager in an industry-leading automated digital certificate platform to encrypt data and authenticate the identity of users, devices, or services within a building. This will further expand Johnson Control's already robust capabilities around cybersecurity risk management, providing our customers peace of mind and resilient solutions that ensure hardware, software, and communications remain trusted throughout the building lifecycle. Together with the announcement of our partnership with Pellion last quarter, OpenBlue Solutions users will have confidence that their devices are safely and securely connected to the networks. About two weeks ago, we launched the Community College Partnership Program aimed at expanding and advancing associate degree and certificate programs in HVAC, fire and security, and digital building automation systems across the U.S. Over the next five years, Johnson Controls will grant $15 million to nonprofit community colleges in support of academic programs that train and develop the next generation of skilled trades technicians. In addition to the funding, Johnson Controls employees will be increasing their support through volunteer and mentorship programs and also provide a pathway for student internships and entry-level employment opportunities. Lastly, we are proud to have received additional recognition for our efforts to ensure we create a diverse and inclusive work environment. Recently being named as one of the best companies for multicultural women by Sarah Mount. We are also proud to be a part of the Forbes 2021 list of best employees for diversity, as well as the Financial Times European climate leaders list, further demonstrating our commitment to sustainability. Before I move to the next slide, I wanted to welcome Vijay Sankaran, our chief technology officer, to the team. Vijay is transforming our software organization strengthening our engineering development processes, and expanding the solution set of our OpenBlue platform. We are excited to have Vijay on board. He is already having an incredible impact internally, and you will hear more from him at our upcoming investor day. Let's move to slide five for a brief update on trends in our service business. As we have shared with you over the past couple of quarters, accelerating growth in service has been a strategic initiative underway since well before the pandemic. Ultimately, the actions we are taking are designed to drive 200 or 300 basis points of above-market growth, which should place us firmly in the mid-single-digit annual growth range for the entire $6-plus billion in revenues. Our approach is multifaceted, simultaneously focusing on increasing our contractual service attach rate, reducing attrition, and driving higher revenue per user. while transforming our offerings through digital. Enabling higher digital content and connecting our installed base compounds our ability to create higher levels of recurring revenue over time. In the quarter, service revenue increased 11%, in line with the rebound we expected with double-digit growth across all three regions. Order growth also accelerated, as expected, up 13%. And our attachment rate year-to-date has now improved close to 400 basis points, already achieving our guidance range for the full year. We expect to continue this pace going forward, again aided by our digital service and solutions, which were up mid-teens in the quarter. Please go to slide six. I referenced our new OpenBLUE offering net zero buildings as a service back on slide four, and I thought I would spend a few minutes highlighting the importance of this launch. Not only does this offering fulfill an immediate need as expressed by our customers, it also represents the next phase in the evolution of our digital smart buildings offerings, which will drive our shift towards increased deployment of higher recurring as-a-service revenue models. Our broad building systems portfolio and market-leading capabilities and expertise in ESCO projects combined with the OpenBlue software platform uniquely positions Johnson Controls to provide customers with guaranteed outcomes and risk management models to achieve their emission reduction commitments. Based on our high level of customer engagement and the extensive market-backed research conducted leading up to the development of this solution, the need for a trusted partner to deliver a one-source, seamless roadmap to net zero and the urgency to reduce carbon emissions is clear. What is also clear is that digitally-enabled solutions that tie together the IT and OT in the built environment are the only ways to provide these roadmaps. At nearly $250 billion, sustainability and decarbonization is a once-in-a-generation opportunity, and we are excited about our role in leading these critical trends. Net Zero Buildings as a Service includes a full portfolio of sustainability offerings tailored to schools, campuses, data centers, healthcare facilities, as well as commercial and industrial verticals. It leverages a game-changing new solution, Net Zero Advisor, which delivers turnkey, AI-driven tracking and reporting of sustainability metrics and helps building operators ensure improved carbon reduction and renewable energy impacts of their buildings. We also leverage the full open blue suite of connected solutions and services offered through flexible risk sharing models that enable tailored deal structures where end users pay for outcomes rather than assets. Turning quickly to slide seven, just a few examples of customer wins tied to the theme of decarbonization and net zero. I won't go through each of these, But in every example, Johnson Controls is providing unique solutions to solve the outcomes our customers are looking for. Some of these new relationships are born out of our digital partner ecosystem, while some are longstanding relationships where we are converting existing building automation systems to open blue or advancing customers' ongoing sustainability initiatives. In all of these, we are driving energy efficiency, reducing energy consumption, driving cost savings and emission reductions. Before I turn things over to Olivier to review our financial performance in more detail, let me conclude my opening remarks by saying I remain extremely encouraged by the demand patterns playing out across our portfolio. Our teams remain dedicated to achieving top-tier performance, despite some of the short-term challenges we are facing. We are watching closely the resurgence of COVID cases in the potential impacts renewed lockdowns and supply chain constraints may or may not have on project activity. And from a supply chain perspective, we are confident in our ability to manage access to critical materials and components. Although lead times and conversion cycles are stretching, we believe conditions will begin to improve over the next couple of quarters. We are successfully leveraging our pricing capabilities to offset inflation, and we still expect to remain price-cost positive for the year. At the same time, we are making tremendous progress on our strategic initiatives to accelerate top-line growth and improve profitability, including indoor air quality, decarbonization, smart buildings, digital services, and our productivity programs. and we continue to reinvest in our portfolio both organically and inorganically. We believe we are extremely well positioned to outperform throughout the next cycle. With that, let me turn it over to Olivier to go through the details of the quarter.