Johnson Controls International plc

Welcome to Johnson Control's third quarter 2022 earnings call. Your lines have been placed on listen only until the question and 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 turn the call over to Michael Gates, Senior Director, Investor Relations.

Good morning, and thank you for joining our conference call to discuss Johnson Control's third quarter fiscal 2022 results. 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 Controls Chairman and Chief Executive Officer, George Oliver, and our Chief Financial Officer, Olivier Leonetti. As a reminder, before we begin, during the course of today's call, we'll 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'll 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 are made to adjusted earnings per share, EBIT A and EBIT, excluding restructuring, 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. With that, I'll turn the call over to George.

Thanks, Mike, and good morning, everyone. Thank you for joining us on the call today. Let's begin with slide three. As we closed out the third quarter, we continued our pace of delivering solid top-line growth supported by a resilient backlog and strong order pipeline. Reported sales for the quarter increased 4 percent to $6.6 billion compared to the prior year and grew 8 percent organically in line with our expectations for the quarter. The overall demand backdrop remains robust with total field orders up 11 percent organically year-over-year and 29 percent on a two-year stack. as our record backlog continues to grow, increasing 13 percent organically year over year. The third quarter was an inflection point, and our teams have done an excellent job of executing, both from a sales perspective and operationally, despite the challenging macro environment we have faced throughout the fiscal year. While supply chain disruptions have reduced the speed at which we can convert our substantial backlog, primarily in our longer cycle North America solutions business, our enhanced focus on supply chain management is beginning to produce results. Our teams have done a great job working with suppliers to mitigate the impact of supply chain headwinds by securing critical materials and managing sites to improve production and facility utilization. I remain confident in the fundamentals we are building for fiscal 23 and beyond. Given our prudent approach to managing operations and advancements across key growth factors, I believe we are positioned to withstand these fluctuating headwinds and simultaneously deliver on our long-term targets. Our focus on strong business fundamentals and meeting customer demand for smart, healthy, and connected buildings across the most mission-critical vertical markets remain our top priorities. We have also taken great strides to deliver on our strategic initiatives over the quarter and remain on track to achieve our goal of reaching $230 million in productivity savings, realizing $170 million in cost savings year-to-date. We are also utilizing additional levers through functionalization, simplification, and our ERP rollout to further drive our productivity efforts. In addition to the margin benefits from our cost optimization efforts, we are seeing improvements in price cost, which inflected positive for the first time this year. We expect additional cost absorption to be realized in our field project backlog, which consists of higher book margin to be converted in the quarters to come. As we accelerate our growth strategy, we are confident in our ability to achieve our strategic vision of becoming the smart building solutions leader. Through our digital transformation efforts, we reached significant milestones during the quarter and year-to-date, further advancing our OpenBlue platform, executing on our commitment of investing in best-in-class technologies and fostering technology partnerships. Our efforts further strengthen our ability to capitalize on the vast and emerging secular trends across our installed base as we look to lead the way in fostering clean energy usage and healthy indoor air environments for our customers and transform our service value proposition. M&A remains another key strategic priority to further our growth objectives with several actionable opportunities in the pipeline that will allow us to support technological advancements and synergies across our portfolio. From a capital allocation standpoint, we have deployed over $2 billion in capital year-to-date, including over $1.4 billion in share repurchases and nearly $700 million in cash dividends. Our execution this quarter defines our meaningful approach to reaching our strategic objectives of commercial excellence through enhanced digital capabilities and supply chain management, all while continuously improving the diversity of our organization. We are committed to strengthening our leadership across our organization with recent appointments of Rodney Clark as VP and Chief Commercial Officer, Anu Rathnindi as VP and President of Asia Pacific, and Susan Hubberts, who assumed the role of Chief Supply Chain Officer. We pride ourselves on fostering a high-performance culture and having the teams in place to drive continued innovation to address today's challenges while leading the way for the future of our industry. While there is still a long way to go until supply chain disruptions normalize, we have seen encouraging signs of operational improvement helping to stabilize supply chain related challenges as we realize the benefits of our management and contingency programs implemented throughout the year. Now turning to slide four, we continue to lead the industry in connectivity with OpenBlue and have built upon significant milestones to solve the dynamic needs of our customers. Through our fully integrated digital platform, providing the latest cybersecurity, AI enablement, and digital twin capabilities, OpenBlue remains a step ahead of the competition. Last quarter, we launched the OpenBlue Gateway, which was a critical step in accelerating the connectivity of our equipment and a key enabler of our ability to deliver enhanced digital service offerings. To date, we have over 8,400 connected chillers through OpenBlue, representing an 86% increase year over year. The launch of our connected control platform, which represents the first integration of OpenBlue with our legacy Metasys platform, is also off to a great start. As mentioned last quarter, we view this as a significantly disruptive solution that will allow us to intelligently automate buildings to get to the next level of optimization for our customers' indoor air quality, energy efficiency, and carbon reduction needs, as well as transform our service value proposition. In addition, we look forward to providing customers with added flexibility of data integration with OpenBlue multi-cloud capabilities. This technology gives customers the ability to seamlessly integrate hosted data from various outlets while ensuring a high availability of data and insights for our customers. Lastly, on the M&A front, we announced another exciting technology acquisition with Tempered Network. Similar to the Foghorn acquisition announced in Q1, this transaction leverages best-in-class technology to further enhance the OpenBlue technology stack. Tempered's industry-leading edge security focus in proprietary airwall technology will be seamlessly embedded into OpenBlue Bridge to create a zero-trust security pipeline that enhances the trust and connectivity of our growing network. This purpose-built system greatly simplifies the implementation of zero-trust cybersecurity networks, including connected equipment, which are already resonating strongly with our customers. This is critical as we think about our strategy for AI-enabled edge devices and the importance of data security for our customers, and we are excited to welcome the Tempered team to Johnson Controls. Next, moving to slide five, our differentiated best-in-class digital services, while still in the early stages, are maturing and delivering results as we start to capitalize on the flexibility and solutions offered to our direct channel customers. Core services benefited during the quarter, with orders and revenues up over 7 percent and 8 percent year-over-year, and 20 percent and 19 percent, respectively, on a two-year stack. Our overall service attach rate increased another 70 basis points in the quarter, bringing us closer to our target on a run rate basis. Moving along to slide six, turning to our growth vectors, with climate change continuing to pose an imminent risk, decarbonization is an increasingly significant goal nationally and globally, both in the public and private sectors. At Johnson Controls, we drive our business forward by recognizing there is a role for us to play in global decarbonization and have taken great strides in growing our best-in-class partnership ecosystem to address our customers' commitment towards net zero. Through our collaboration with Forrester, we have commissioned our proprietary sustainability maturity assessment tool, helping customers deliver on their net zero goals. We have strengthened our partnership with Accenture, which together will deliver two new Johnson Controls OpenBlue Innovation Centers, helping further the development of AI-enabled building control system products and services to accelerate our development and deployment of a full portfolio of digital solutions. Year to date, our sustainability infrastructure business has booked over $595 million in orders, and we remain on track to deliver over $1 billion of orders for fiscal year 22, representing a 15% increase year over year. In addition, our $7.2 billion pipeline remains healthy, with over 200 active opportunities consisting of large multinational customers spanning across numerous end markets from hospitality, healthcare, beverage, and industrial. Turning to slide seven, shifting to healthy buildings, the market opportunity remains strong with global government support for indoor air quality investments on the rise. We remain uniquely positioned to capture this trend and help customers manage challenges through our open blue indoor air quality as a service. This turnkey offering has continued to gain traction, providing customers with a long-term proactive approach to meet the ever-changing health and safety compliance standards while leveraging our advanced OpenBlue technology stack to optimize costs and increase productivity. Notably, during the quarter, we delivered strong results. Year-to-date, Healthy Buildings orders have increased 27 percent year-over-year. Our Healthy Buildings pipeline represents over $1.3 billion and has grown 33 percent year-over-year. And finally, on slide eight, We continue to demonstrate our leadership in sustainability, data privacy, and diversity, and we are honored to be recognized for our efforts. Most notably, we would like to recognize our own Chief Human Resources Officer, Marlon Sullivan, who was recently named as one of 2022's most influential black executives in the corporate world. To close out my prepared remarks, I am confident about what the future holds and how our team is positioned to lead the way towards a more sustainable future for our customers and communities. We have made great progress across our key growth sectors and have managed to navigate a difficult macro environment while executing our strategic initiatives. Despite the temporary headwinds, our path forward remains bright, and we are in a perfect position to execute on our resilient backlog demand through 2023 and beyond. With that, I'm going to turn the call over to Olivier to walk you through the financial details in the quarter and update you on our outlook. Olivier?