Johnson Controls International plc

Good morning, and welcome to the Johnson Control's second quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, today's event is being recorded. I would now like to turn the conference over to Jim Lucas, Vice President, Investor Relations. Please go ahead.

Good morning, and thank you for joining our conference call to discuss Johnson Control's second quarter fiscal 2023 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 Chief Financial Officer, Olivier Leonetti. Before we begin, let me remind you that during our presentation today, we will make forward-looking statements. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Johnson Controls. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risk factors and cautionary statements in our most recent Form 10-Q, Form 10-K, and today's release. We will also reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are contained in the schedules attached to our press release and in the appendix to this presentation, both of which can be found on the investor relations section of Johnson Control's website. I will now turn the call over to George.

Thanks, Jim, and good morning, everyone. Thank you for joining us on the call today. Let's begin with slide three. We are proud of our second quarter performance, which saw sales, segment EBITDA, and adjusted EPS all exceeding the high end of our guidance. During the quarter, sales grew 13% organically as we realized strong pricing and improved volumes across both our shorter cycle global products and longer cycle business solutions. The overall demand backdrop remains robust, with orders growing 8% for business solutions and continued momentum with service orders growing 14% in the quarter as the adoption of our digitally enhanced solutions continues to materialize and provide value for our customers. Our resilient backlog grew 9% to a record $11.7 billion, and our service backlog increased by 15%. We made great progress executing on our higher margin backlog build and continue to convert at a faster pace, resulting in improved gross margin performance and strong incrementals. In addition, we realized $75 million in productivity savings and are on track to meet our targets of delivering $340 million in savings for the full year. As a result, adjusted segment EBIT margins expanded 120 basis points. As we move into the second half of the fiscal year, our strategy remains sound as we continue to execute our resilient backlog, deliver on our productivity initiatives, and advance our digital transformation. Our pipeline remains healthy, and we expect momentum to stay positive. While global macro conditions remain uncertain, we are confident in the fundamentals we have built across our business. Our visibility into the second half of the year provides confidence in raising the lower end of our full year adjusted EPS guide, which Olivier will provide more details on later in the call. We continue to anticipate strong top line growth and backlog conversion in the second half, which should lead to continued margin expansion. Now turning to slide four. We continue to demonstrate our unique value proposition and accelerated our leading position through our pillars of growth. we have a significant market opportunity ahead of us connecting smart, healthy, and sustainable buildings. As the call for climate action intensifies, we are seeing strong tailwinds for our sustainability infrastructure and decarbonization offerings. As we have stated in the past, nearly 40% of global energy emissions come from buildings. At Johnson Controls, we play a vital role in helping our customers bridge the gap towards a net zero future. Our systematic approach to digitization is creating a new class of smart buildings, helping reduce energy emissions, improve efficiency, and optimize costs. We are well positioned to capture secular trends to help build towards a more sustainable future. OpenBlue is a key differentiator as we advance our leadership position across our vectors of growth. Last quarter, we highlighted the significant progress through our digital transformation journey, and today we continue to see increased adoption of our OpenBlue platform across multiple use cases. By combining our dynamic product portfolio and services, we are making significant progress in expanding our global footprint of smart building solutions, helping better serve our direct channels through real-time monitoring of connected devices. Our integrated domain expertise and unique capabilities set us apart, and we look to continue this momentum as we help our customers deliver their objectives. While we continue to scale and capitalize on these emerging opportunities, we remain committed to building on our strong operational foundation and further expanding our margin profile. We have made great strides in successfully navigating inflationary headwinds and supply chain constraints over the year. As these have eased, our ability to execute is important. We see the results through our progress with our suppliers, disciplined pricing approach, and delivering on our productivity savings plan. Lastly, we look to maintain our prudent approach to capital allocation and drive long-term shareholder value through our attractive dividend, growing in line with net income, as well as consistent share repurchases. Year to date, we have returned over $700 million in capital, including roughly $250 million in share repurchases and nearly $500 million in cash dividends. Moving on to slide five. There has been a lot of focus the past couple of months around commercial construction, particularly with regards to the commercial office sector. While Johnson Controls does have exposure to this sector, it represents a small portion of our overall business. In addition, we have a large installed base and there continues to be demand for retrofit projects. This slide highlights the overall diversity of the Johnson Controls portfolio. Within commercial, we are diversified with exposure from retail, lodging, and hospitality, sports and entertainment, to warehouses. Beyond commercial, we have a broader exposure to institutional, industrial data centers and government sectors. Funding both for new construction and especially retrofit comes from many different avenues. There remains a lot of pent-up stimulus funds in both the U.S. and Europe that have not yet been released. We have a strong backlog today, and we continue to see a long runway for growth as we leverage our broad portfolio of products and solutions. In addition to our diversification of the verticals we serve, a key differentiator of our portfolio is the ability to leverage our large global installed base of equipment. As we further digitize our offerings to create smart connections, we can create more predictive outcomes for our customers as we help them use the power of data to make net zero a reality. Onto slide six. Service is a key area of focus for us as we leverage our large installed base. We once again saw a strong double-digit growth in sales and orders. We are making tremendous progress in taking what has historically been a mechanical break and fix business and building a solutions-based business that creates a higher margin recurring revenue stream from our large installed base. As we create more predictive outcomes, it not only helps our customers achieve better results, but it also allows us to better leverage our global field operations more effectively. We are creating more standardization across our field operations and capturing better data from our connected solutions. As a result, our higher margin parts business grew over 20% in the quarter, and we see this as a growing contributor to our overall service strategy. Decarbonization is an area of focus across the entire Johnson Controls portfolio, which includes our sustainable infrastructure or SI business that the KPIs on this slide represent. In addition to SI, decarbonization touches many products and solutions. Nearly 55% of our products and solutions drive sustainability. This includes heat pumps, energy efficient refrigerants, and digital solutions to name just a few. As an example, when we upgrade an asset or solution in the field, it drives efficiency at the building level, such as software for controls or upgrading a chiller. Within SI specifically, we continue to see strong orders, revenue growth, and a very healthy pipeline. The healthy buildings market opportunity remains strong, as evident by our almost $2 billion pipelines. We are seeing increased traction among both federal and international regulators as productivity benefits associated with well-managed indoor environments come to the forefront. Recently, the European Parliament voted to include a promising enhancement to the Energy Performance of Buildings Directive, which would require indoor environmental quality monitoring of buildings. John's Controls is encouraged by the latest developments, as the IEQ language has the potential to drive increased adoption of digital building systems and deliver improved health and wellness, all while accelerating the decarbonization of buildings. Turning to slide seven, we are honored to be continually recognized for our dedicated sustainability efforts. During the quarter, we received several recognitions, including being named one of the world's most ethical companies for the 16th time by Ethisphere. We were especially honored to be named to the Clean 200 for the eighth consecutive year. Every year, 200 out of more than 6,000 companies are selected for the high proportion of their revenue earned through sustainable business. We are proud of the recognition and will continue to further our strategy to help tackle building emissions globally. I will now turn the call over to Olivier to go through the financial details of the quarter.