Johnson Controls International plc

Welcome to the Johnson Controls first quarter 2021 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 telephone keypad. 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 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'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 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. I'm going to start off with a quick look back at 2021 and update you on a few of our long-term strategic priorities. Olivier will provide a detailed review of our fourth quarter results and provide you with our fiscal 2022 guidance. And as always, we will leave as much time as possible to take your questions. Let's get started on slide three. We rounded out fiscal 21 with another quarter of solid financial results, having met or exceeded all of our original commitments for the year in what turned out to be a much more difficult environment than originally planned. The ability to deliver these results while navigating through unprecedented levels of inflation and supply chain disruptions is a testament to the operational discipline and agility demonstrated throughout the organization. And for that, I am incredibly grateful for the efforts of the entire Johnson Controls team. Despite the challenging external environment, our end market demand remains strong. Robust retrofit activity, coupled with a pickup in new non-residential construction we are starting to see, creates a strong future demand trend. This is evidenced by the continued momentum we are seeing in our order books and the record backlog we have built. We also remain focused on the big picture, moving ahead with bold new commitments, doubling down with ambitious new ESG goals set earlier this year, embarking on a substantial new productivity program designed to drive a step function change in profitability. And just recently, at our investor day in September, we committed to a new set of three-year financial commitments. We made significant progress in advancing our growth strategy, scaling our OpenBlue digital platform, launching eight new major offerings and greatly expanding our partner ecosystem, investing in the refresh of our product portfolio, focusing on accelerating our service growth and improving our attachment rate. And we are capitalizing on strong secular trends for healthy buildings, decarbonization, and smart connected equipment in buildings. As end markets continue to recover and the adoption of these trends continue to expand globally, I am confident we are uniquely positioned from a competitive standpoint to continue to outperform. Please turn to slide four. In addition to the strong financial results and advancement on our strategic initiatives, we have also continued to lead in ESG, including continued progress toward both our 2025 sustainability goals and our new ESG commitments. This is not by any means an exhaustive list, but I am extremely pleased with what our teams have accomplished in the last year. We are committed to net zero. committed to reducing emissions within our own operations and that of our customers. Our science-based targets have been approved. Our leadership team is aligned from a governance perspective, and we are extending our leadership in sustainable financing as well. Tomorrow, I travel to COP26 in Glasgow. We've made great progress in driving home the understanding that buildings represent approximately 40% of global greenhouse gas emissions, And there is no tackling climate change without substantial investment in buildings. Governments are now acting on this and mobilizing billions to upgrade buildings. And Johnson Controls is perfectly positioned to deliver those solutions. At COP26, I will meet with government and business leaders to build momentum and ensure action. Turning to slide five, I wanted to take a few minutes to highlight several new strategic developments in the quarter. Most recently, we signed an MOU with two significant technology leaders, Accenture and Alibaba, to address sustainable infrastructure needs. This collaboration will focus on an estimated multibillion-dollar market for digital solutions serving data centers in China. We also signed a foundational technology agreement with Tempered Networks, building upon our recent cybersecurity partnerships with Pellion and DigiCirc, Each of these partnerships embeds a critical layer of trust, security, and operational capability into our OpenBlue platform and connected devices. These elements differentiate our products and services to help protect the integrity of our customers' operations and data. Tempered brings an industry-leading, zero-trust secure network capability that helps us drive customer confidence and, in turn, accelerate the adoption of OpenBlue services. Our partnerships with UL, Safe Traces, and with Phylogen are powerful examples of how we are innovating to extend our healthy buildings leadership, providing new indoor environmental quality solutions to address our customers' most pressing challenges. Our near-term focus is on the education vertical, as there is a clear and compelling need to help those customers optimize their investments. With an estimated $195 billion in government stimulus, earmarked for K through 12 spending, this provides a significant opportunity. Additionally, we entered into an exclusive joint development agreement and investment with Biologen, a leading biotech company working on the identification of indoor bacteria and viruses that are all around us in buildings. Our work with Biologen is a commitment to developing the cutting edge of capabilities to deliver and maintain healthy buildings. Please turn to slide six. At our investor day, we shared with you our three pillars for delivering above-market growth over the next three years and beyond. One of those pillars related to gaining share through innovative product development centered around digital and sustainability. As planned, we launched over 150 new products in fiscal 2021, spanning nearly all business units, resulting in continued share gains in both Q4 and the full year. In 2022, we are well positioned to gain share with another 175 new products across four main categories, sustainability, smart buildings, digital, and residential, with heat pumps central to our product development strategy. These are just a sample of what is expected to launch over the next 90 days, with a steady pipeline behind this. Turning to slide seven, service plays a central role in everything we do. Over the last 18 months, we have strengthened our market-leading capabilities to best position ourselves for the shifting industry demographics and evolving digital technologies that are enabling outcome-based solution models. At the start of last year, we began articulating our intentions to accelerate service growth to a couple of points above market levels, part of which would be the result of increasing our attachment rate by leveraging our large installed base and the digital transformation of our business. In fiscal 2021, we saw the early benefits of our efforts shine through. We exited the year with service revenues up 8% in the fourth quarter, with high single-digit growth in all three regions in nearly all business domains. For the full year, service revenue grew 4%, which is up two to three points over 2019 levels, despite a slow start to the year, as we manage through lingering site access restrictions and abnormal customer budget pressures. Looking ahead, we see service accelerating through fiscal 2022 in line with our goal to outpace the market. The order strength we've seen in the second half of the year bolsters that view. Service orders were up 7% in Q4, and importantly, up low single digits organically versus 2019 levels. Additionally, we improved our attach rate to approximately 40%. Turning to slide eight, the third pillar is our vectors of growth, which we believe on a combined basis represents an incremental market opportunity of $250 billion over the next decade. Our unique portfolio is a competitive advantage across all three areas. And from a financial performance perspective, we have significantly increased both revenue and orders in fiscal 2021. This positions us very well for continued strong performance as we move forward. Next, on slide nine, I wanted to highlight a key customer win related to one of our key vectors of growth. In Q4, we were awarded a Buildings as a Service project by one of our longstanding customers, the University of North Dakota. This is the second long-term performance infrastructure contract we have been awarded with this university in the last two years. It leverages not only our expertise in performance contracting, but also the OpenBlue Enterprise Manager software. The total contract value is nearly $220 million over the life of the project, with a smaller portion of that booked during the quarter. On a related note, our OpenBlue Healthy Buildings platform enabled nearly 900 colleges and universities to safely and efficiently welcome students, staff, and faculty back to their campuses this fall. Before I turn things over to Olivier, let me conclude with a few thoughts. I remain extremely encouraged by the demand patterns we are seeing across most of our end markets and the ability of our teams to capitalize on more than our fair share of that demand. We see this decade as being one of the most exciting for the smart building industry which Johnson Controls is positioned to lead. Underlying momentum in our short cycle businesses continues to improve, despite pressure from ongoing supply chain and component availability constraints. Our longer cycle install business, driven by the new buildings market, also continues to recover, although extended lead times and inflation are delaying some investment decisions, particularly on larger projects. Retrofit activity remains an important driver of our business, and we see plenty of opportunity to capitalize on this activity going forward. All of that said, we are very mindful of the macro backdrop, and our outlook does not assume any significant near-term improvement in supply chain conditions or inflation over the next couple of quarters. On price cost, given the progressive rise in inflation for almost all input costs throughout the year, We took decisive steps on pricing and cost to stay ahead of the curve, and I am confident we will continue to manage through these challenges. Looking ahead to fiscal 2022, our focus turns to accelerating and demonstrating our growth capabilities. Our proven product technology leadership, combined now with OpenBlue, truly differentiates the solutions we can bring to our customers. In fact, we believe we are best positioned to lead the revolution of smart buildings We are fully committed to creating healthier, safer, and more sustainable buildings. With that, let me turn it over to Olivier to go through the details of the quarter.