Johnson Controls International plc (JCI) on Q1 2021 Results - Earnings Call Transcript
Antonella Franzen: Good morning and thank you for joining our conference call to discuss Johnson Controls’ First Quarter of Fiscal 2021 Results. The press release and all related tables issued earlier this morning as well as the conference call slide presentations 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. George Oliver: Thanks, Antonella, and good morning everyone. Thank you for joining us on today’s call. Hopefully the New Year is treating you well so far. I will start with a brief strategic update in summary of our Q1 results. Olivier will provide a more detailed review of those results and update you on our forward outlook and we’ll have plenty of time to take your questions. Let’s get started on Slide 3. We are off to a strong start in the first quarter with solid financial performance and accelerating momentum on all of our strategic initiatives. As we will cover in a few minutes, top-line performance was at the high end of the expectations we communicated to you last quarter, which together with impressive operational execution across all segments enabled us to grow EBIT by 5% year-on-year, despite continued volume pressure related to the ongoing pandemic. Although the promise of a vaccine is sparking modest optimism in several of our end markets, many of which continued to show improving sequential demand, there is still many regions of the world facing second and third waves with varying degrees of lockdowns and restrictions. With that being the case, we have remained focused on the commitments we made to our employees, customers and suppliers. Our teams have come together to achieve truly extraordinary things, improving the fundamentals of our businesses and executing our overall strategy. During the quarter, we were honored to receive recognition from several organizations. Additionally, as you may have seen in a separate press release issued earlier this morning, we announced an ambitious set of new ESG commitments, reinforcing sustainability as a top priority in our leadership role in climate change. Lastly, we continued to gain traction on several of our core growth initiatives, which we have been discussing with you over the last couple of quarters, scaling OpenBlue, driving higher service attachment rates in sales growth and accelerating new product introductions. Olivier Leonetti: Thanks, George, and good morning everyone. Continuing on Slide 9. Q1 sales declined 5% organically, improving sequentially compared to the 6% decline last quarter. Relative to our expectations global products outperformed primarily the result of continued high levels of demand for residential HVAC equipment, both here in North America as well as our Hitachi business in Asia Pacific including China. Segment EBITA expended 80 basis points year-over-year to 12%, the highest margin rate in any first half since the merger, despite volume headwinds related to the pandemic. EPS of $0.43 increased 8% benefiting from the higher profitability I just discussed as well as lower share count as we have maintained a disciplined approach to capital allocation. Our free cash flow performance in the quarter was strong, up about 10% on a reported basis to over $400 million. I will provide the details on our cash performance later in the call, but the strong start in Q1 puts us on a path to achieve 100% conversion for the full year. Please turn to Slide 10. Orders of our field businesses continue to improve with the year-over-year decline moderating to just 3% despite our install business still experiencing pressure from slower non-resi new bill activity with retrofit activity showing signs of recovery. Service orders increased 2% overall driven by EMEALA and supported by the recovery of our core commercial fire and security businesses in Europe. Operator: Thank you. Our first question comes from Nigel Coe with Wolfe Research. Your line is open. Nigel Coe: Thanks. Good morning, everyone. George Oliver: Good morning, Nigel. Nigel Coe: So first of all, thanks for all the additional details on the slides, been very helpful. So looking at the margin guide for the full year, the implied back half is obviously much flatter. I realize we've got temporary costs come back into the equation here. But is there anything else that we should think about in terms of mix, raw materials? Anything else that would kind of cause that margin to flatten out in the second half? George Oliver: So, Nigel, good morning. Indeed, we are – the guide implies that the margin rate for the second half is going to be marginally up. We discussed that in prior calls. In the second half of the year, some of the costs we mitigated last year are going to come back. The net for the year we discussed is about $40 million, but the second half is going to be a headwind. As I indicated last quarter, we're working on mitigating those costs coming back. We have plans in place. It's too early for us to commit to an improvement in margin in the second half, and we'll come back when those plans are a bit more structured, Nigel. Nigel Coe: Great, now that's clear. And then the attachment rate initiatives, 35% of service attachment rates, looking to increase that by a few hundred basis points for the year. I'm just curious how you're looking to achieve that. What sort of incentives do you have in place to either sales or technicians? And what role is obtain in that? So any help there would be helpful. George Oliver: So, Nigel, when you look at our $6 billion Service business, of course, as we've laid out, it's a very attractive vector for growth, and that has been accelerated with the healthy buildings trends. So when you look at historically, we've been under-serving our installed base. And so we've been going back after that, and we believe that, that's a real material opportunity and a competitive advantage for us. We have been increasing our market coverage with people as well as enhancing the technology that we're deploying within our solutions with OpenBlue. When you look at the margin profile, it's 2x the overall company EBITDA margin. And as we now look at our new capabilities, differentiating our services with connectivity and utilization of data that really gives us an opportunity to be able to get longer term contracts, being able to solve bigger problems, be able to attach contracts and ultimately drive that attachment rate. We've seen great progress here in Q1. We're up about 90 basis points sequentially in Q1. We expect for the whole year that our attach rate will move up 300 or 400 basis points and we will actually accelerate as we enter 2022. And so it's a combination of all of that, that truly positions us to be able to take what we've done historically and truly now move the needle with how we can attach a lot more to what we do to serve that installed base. Nigel Coe: Okay, thanks, George. Operator: Thank you, Mr. Coe. Our next question is from Deane Dray with RBC Capital Markets. Your line is open sir. Deane Dray: Thank you. Good morning everyone. George Oliver: Good morning, Deane. Deane Dray: Hi. I really like seeing the slide right upfront profiling the opportunity in Healthy Buildings, this whole indoor air quality theme that we think is really meaningful post COVID. And George, I was hoping you can give us a little bit more of granularity in how you arrived at that $10 billion to $15 billion. Maybe a sense of how much is equipment, services, digital. And how much of this benefit are you seeing today? George Oliver: Yes, so, when you look at what we launched here, Deane, the OpenBlue Healthy Buildings, it does represent our new comprehensive strategy to be able to address both the clean air, which we said was a few billion dollars previously, and then all of what else we do within a building around Healthy Buildings. And holistically, it's about $10 million or $15 million of new addressable market when you look at it holistically. Now when you look at across industries, more than half of businesses not only have implemented some type of Healthy Building initiative, OpenBlue Healthy Building now addresses this next phase, where not only are we driving efficiency, but we're driving health and safety and we're positioned to be able to then drive sustainability and reduce energy to be able to achieve those outcomes. When you look at what we do, it combines all of our core, it tailors what we do to each individual customer. And now we have about 25 unique solutions or services that, to your point, it takes our products, it takes our service technology, it now takes our data services that we're developing, truly now to be able to create these new outcomes. So it's aimed not only at helping customers return to work, but also optimizing their performance of their infrastructure longer term, not only through efficiency and energy reduction, all of which contributes to their sustainability goals. So it's really a combination of all of that that allows us to really differentiate what we can do to deliver these type of solutions. Deane Dray: Great. And just as a follow-up there. If you had to split the opportunity between, let's say, a onetime windfall of new equipment, higher filtration and so forth versus an ongoing service opportunity, the monitoring, the digital side of this, what's the split? How much is pure equipment upgrade versus the ongoing recurring connected building opportunity? George Oliver: Well, to give you an idea, and this will be within our global products, we've seen huge increases with filtration. Orders up strong 20%, 30%. We've got our ISO clean, our potable air purification units. We see growth of well over 100% year-on-year. We're seeing our pleated filters up 500%. We're seeing filtration products up kind of 50%. So we are seeing benefit in the products that ultimately go into our solutions in what we can do to look at every aspect, filtration, disinfection, the recirculation as well as isolation that ultimately we provide with our solutions. And so it really – it's a combination of all of that, Deane. And then as we're now upgrading these systems, the more connectivity that we can gain with how we utilize our – when we use our Medicines platform to collect data and then being able to optimize the outcome that we can produce is the advantage that we have with the 16,000 people that we have deployed across the globe that are intimately working with customers in delivering these solutions. Deane Dray: That’s great. And just congratulations on all of your ESG commitments. That really does put you guys best in class here. Thank you. George Oliver: Thanks, Deane. Operator: Thank you for your question Mr. Dray. Our next question comes from Scott Davis with Melius Research. Your line is open sir. Scott Davis: Hi, good morning everybody. George Oliver: Good morning, Scott. Scott Davis: George, is there a preference between M&A and buybacks in 2021? Or any kind of opening of M&A markets that get you more interested? George Oliver: Yes, so we – as we've been improving our fundamentals here, Scott, and getting a lot of confidence here with the continued improvement that we're going to deliver on, that we think that M&A is a space that, as we're building our pipeline, that is attractive in being able to take what we're doing with our organic investments and be able to contribute more in how we ultimately deliver growth. So as we look at our priorities for the year, we are not only supporting strong dividend, but also optimistically doing the buybacks. And we committed the $1 billion that's still remaining from the Power Solutions sale. But on a go-forward basis, see M&A as being an area that we can contribute 1% or 2% growth on a go-forward basis on an annual basis because of the pipeline that we see, the ability to be able to enhance our technologies, our go-to market, our services, and then accelerate the work we're doing with OpenBlue. Scott Davis: Make sense. And then just switching gears to service. You've, on Slide 17, referenced a mid-single-digit growth rate and attachments of 35%. What – I mean, you say the entitlement is double the current rate, but what can get you there? I mean, we're not there yet. So, what needs to happen either within the sales force or within perhaps customer education or something else that kind of gets you driving to a higher growth rate in Service? George Oliver: So, if you look before the pandemic, Scott, we had got our growth rate to 4%, 5% and it was pretty much at the market rate and that was a lot of blocking and tackling. Now strategically, we've been investing in new services. We've been enhancing those services with OpenBlue. We've been targeting our installed base in a much more aggressive manner, because we have an opportunity to be able to bring that forward with new technologies and to be able to address some of the new challenges that our customers are facing. So when you put all of that together and you look at our performance here, in Q1, we've been sequentially improving. We're only down, when you look at our – service was down 1%, it was down 3% in Q4. We're projecting here on a go-forward – and our orders were actually up 2% in the quarter. On a go-forward basis, we see our orders continuing to improve. We're getting a higher mix of longer-term contracts within those orders. And that we believe that from a revenue standpoint, we turned positive here in Q2 and it will continue to ramp Q3 and Q4. So, it's really a combination of not only mining the installed base, adding additional capabilities within the field and being able to do that, be able to enhance the offerings, be able to get it connected, utilizing data, creating new outcomes and then ultimately being positioned here to attach. Our attach rate in the first quarter was up 90 basis points sequentially and we see that improving 400 or 500 basis points over the year and then accelerating beyond that. So, that gives us confidence here Scott that through the year, we'll get to mid-single digit growth in 2021, and that we believe that we can accelerate from there with very attractive margins going forward. Scott Davis: Sounds encouraging. Good luck, George. Thanks, guys. George Oliver: Thanks, Scott. Operator: Thank you for your question, Mr. Davis. Our next question is from Steve Tusa with JPMorgan. Your line is open, sir. Steve Tusa: Hi, guys. Good morning. George Oliver: Hi, Steve. Steve Tusa: Can you just fill us in on kind of what you're seeing in your core, like the commercial HVAC equipment market in the U.S.? Just kind of hard to tell like what the real trend is? I mean, non-res construction, obviously remains kind of weak, but you've got all these opportunities on ESG and IAQ et cetera. But just curious as to how this cycle is shaping up versus prior may be on that front, equipment? George Oliver: Sure. So, when you look at our commercial HVAC market, let me start with applied. So, applied HVAC orders were down low-single digits, this is globally, now about 3%. We did see continued sequential improvement in the market through the quarter. We did see some pressure in North America, where it's purely due to timing of orders as well as some federal business, they got pressured and again timing. And then Asia-Pac continues to accelerate. China was up over 20%. When you look at the sales now following the orders the sales were down low to mid-single-digits globally about 4%. We did see sequential improvement in North America as well as APAC. APAC actually came back to being flat, and a lot of that's being driven by our service growth and the traction we're getting there. The North America install is better and we're seeing the – as Olivier said, we're seeing more retrofit quarter-on-quarter. And then when you look at unitary markets, they generally remain under pressure. They were down low-single digits in Q1. The mix of that is light commercial, smaller tonnage units was down slightly in the quarter. Larger tonnage units are actually weaker because of larger projects being delayed or deferred. We continue to gain share as a result of the investment that we've made in both new products as well as channel. So, when you look at the whole space, we're still pretty bullish that these are very attractive end markets with long-term secular trends that align very well with our core. And a lot of focus now on energy and sustainability, which is going to drive – I think is going to drive the industry. And we've been leading with the investments we've made in our YZ chillers and the increased tonnage that we're launching there, our rooftops, our premier choice in select rooftops. And ultimately, now we're investing more heavily in next-gen air cool technologies, electrification with heat pumps and heat transfer units and advanced VRF technology. So, when you think of the space, there is some changes happening in this space, but we're invested to really capitalize on that going forward. And now with our larger installed base and now with the connectivity with our digital offering does give us an opportunity to really leverage that and build the service business that we've been building. And so, I think the trends are sequentially positive, some pressure on the larger non-residential construction that we see being pushed to the right a bit, but we are seeing sequential improvement, Steve. Steve Tusa: And just a simple one, do you think the applied markets in the U.S. will be on a calendar basis down in 2021, the biggest ticket stuff in the market? George Oliver: So, when you look at the overall market driven by non-resi construction, the overall market will be slightly down. Steve Tusa: Okay, got it. George Oliver: Now, when you look at our mix, we have been remixing towards the higher growth end markets and we've been focused on obviously with the new demand around healthy buildings and the like we've been doing more shorter cycle projects and putting that into the backlog that we are projecting our North America business will be positive for the year. And now, that's gaining share. That's above the industry metrics that you follow, whether it would be ABI or construction starts. But with the work that we've been doing with remixing our capacity, focusing on high-growth end markets and then with the acceleration that we see with some of these upgrades and retrofits is what's going to drive our business for the year. Steve Tusa: Great. Thanks. Appreciate it. Operator: Thank you for your question, Mr. Tusa. Our next question is from Jeff Sprague with Vertical Research. Your line is open, sir. Jeff Sprague: Thanks. Good morning, everyone. George Oliver: Good morning, Jeff. Jeff Sprague: Good morning. Just two unrelated questions. First on, back on service attachment, I think you're actually probably being conservative saying 35%, right, because you're saying like a full service contract, so – but I wonder if you could give us a sense of your aggregate service reach? And it does seem like you believe you can score some early points on this. And so, I'm wondering if this is a function of really ramping up the service activity at customers you are engaged with, and you're taking it to kind of a different level or the service attachment is being driven primarily by kind of attachment on new installations? George Oliver: No, it's all of the above, Jeff. So, what we're doing is, as we've really brought our strategy around service to a whole new level here, we brought on new leadership, we've got it structured such that we've got all of the key metrics that we're driving. It starts with understanding the installed base, where we are today with the services that we provide. We have significant opportunity to go back into that installed base and bring that forward. And that includes bringing holistic solutions, being able to get longer-term contracts with how we deploy those solutions, and then ultimately getting a recurring revenue that comes out of that work. And so, it's been both. We're not only getting a higher attach with the new projects that we're engineering and deploying and getting a higher attach rate because of the value proposition that we can bring with our OpenBlue capabilities combined with our service capabilities in the field, but at the same time being able to get additional volume by leveraging the installed base and bringing that forward with some of the newer technologies and capabilities. And that all is supported with what we're doing in the field and being able to expand our technicians and the capabilities and capacity that we have in the field to be able to actually deliver the new solutions that we're providing. And so, as we look at going forward, we believe that not only do you get a higher attach rate, you get higher revenue per customer because of the connectivity and the data and the solutions that are being provided, which ultimately are going to both contribute to our ability to be able to get our growth rate, get that continuing to increase through the course of the year and then setting up 2022 very well. Jeff Sprague: And then second unrelated question, probably for Olivier, but I wonder if we could just dig a little bit further on what you're doing on cash flow? It's really encouraging to see the 100% kind of benchmark here now in the target zone. In particular to me, it seems like there is some huge opportunities in DSOs. I'm sure that's not the only thing we're working on, but can you elaborate on what you are driving to make this cash flow number work here? Olivier Leonetti: Yes, good morning, Jeff. So, we are very pleased with the performance we have had in cash flow in the quarter. By the way, last year was pretty good too. And if you remember Jeff during the prior call, we said that we believe, we are 100 plus free cash flow compression company. The debate was when. And we were concerned this year with some of the tax cash tax benefit we took in 2020 are headwind this year, but despite that we believe we’re going to be at 100% this year. So what is happening? Few things first, the level of profit is strong and we believe, we have the ability to make that stronger. And to your point on working capital, we have a strong discipline happening to your point, DSO has been trending well. We believe we have to opportunities to improve DSO. And we have today at the top of the house weekly reviews to make sure we keep the momentum on cash flow generation. It’s also part of our incentive plan at the level of the enterprise. So, all the lines are aligned today, Jeff, to keep performing on cash, we believe. Jeff Sprague: Great. Thank you. I’ll pass it on. Operator: Thank you for your question, Mr. Sprague. Our next question is from Andy Kaplowitz with Citi Group. Your line is open, sir. Andy Kaplowitz: Hey, good morning guys. George Oliver: Good morning. Andy Kaplowitz: George, last quarter, you mentioned you might see a pullback in product related revenue in Q1, given somewhat of a pent up snap back that you saw in Q4, but products actually improved in terms of the revenue decline. So, obviously some of that improvement looks like it was North American residential, but it seems like Fire & Security products continue to improve. So, can you just more color and what you’re seeing in that category in particular moving forward? George Oliver: Yes, let me start by, again I was very pleased with the performance in global products in the quarter with the underlying trends in the overall output we saw. It really is built on the depth and breadth of our product portfolio, which, as we have been reinvesting, is industry leading. We’ve been gaining share. We’ve had various new product introductions related to both the core HVAC and Fire & Security products as well now, products that are enabling the COVID response and healthy building opportunities. Just quickly, HVAC, we’ve had the continued tonnage expansion of the YZ chiller platform. We’ve had the Premier Choice Select rooftops. We’ve had the York Affinity series in residential and as well as additional heat pumps. In controls, we continue to advance our Amedisys 11, with continuous upgrades to enhance the capabilities and the better user interfaces. Security with our Qualys business, we’re now in a leadership position and we’re leader now in providing smart home solutions. Electronic Fire, and that’s been very strong. Electronic Fire has been more around connectivity, notification, enhanced interfaces. And in fire suppression, although we’re pressured over the last year or so in the high hazard business, we have continued to advance our sprinkler heads, and we’re getting good traction there. So overall, the business recovers nicely. There was some pressure in the non-resi space remaining. But when you look at Q1, we definitely saw better than expected performance in. It would really be broken down into rest of world residential, which is our JCH business with better performance and a better recovery there and gaining share. And then we saw a stronger sequential improvement pretty much across each one of our product businesses within the quarter. Olivier Leonetti: And Andy, we mentioned that in our prepared remarks, we are going to accelerate the number of new product launches in the rest of the year. So we have launched already some new exciting products in Q1, but that will accelerate. So we are optimistic about what this business can keep doing for us. George Oliver: And your second question, Andy, was around Fire & Security? Andy Kaplowitz: Yes, in particular. George Oliver: So, in total, I’d start by saying Fire & Security remains very attractive to us. 40% of our revenues are in the space. It’s core to building systems. Very attractive margin profile due to the Service mix. We’ve got an incredible installed base, which creates significant recurring revenue in Service. And then when you look at these attributes, they’re critical to what we’re doing with OpenBlue and being able to really drive a comprehensive solution within the building, deploying technology in our go-to-market. And Security now is coming to the forefront because it takes all of what is done in a building, and it brings it together interactively and then being able to then manage the data that gets collected throughout the building. So that’s been very important. When you look at the performance, we did moderate. The Service moderated in Q1. We’re only down roughly about 1% – 1% or 2%, We saw North America recurring Service revenue turned positive, and a lot of that was our ability to be able to drive long-term contracts in the fire business. EMEALA, the overall Service turned positive, and Asia Pac is slightly down. When you look at where the pressure is right now, it’s an install. And it’s mainly due to project delays and general prioritization of HVAC around indoor air quality that’s driving some of the resource allocation of our customers. But I believe that that’s only a timing issue. These projects will be released, and we’ll be able to be positioned and capitalize on those going forward. And the only other one to note, Andy, is the retail. Retail continues to be under pressure. It’s down about the same that it was down in Q4. So we are – it’s a great business. It’s a high-value proposition within the business. But given what’s been happening in retail, we’ve been working to reposition ourselves to be critical to the essential retailers at the same time, while we’re helping the less essential of the apparel retailers to expand their omnichannels in addition to their brick and mortar infrastructure. So that’s where we are in Fire & Security, but still a very attractive business for us. Andy Kaplowitz: Very helpful. And just a quick clarification on price versus cost. I mean, I assume it’s in your forecast, Olivier, for 2021, but you’ve been able to cover rising inflation in the past. Just any thoughts on price versus costs in 2021. Olivier Leonetti: It’s still positive. It was in the quarter, Andy. And we believe the discipline in the organization is strong and price/cost will remain positive for the back of the year. George Oliver: And to reinforce that, Andy. We’ve put in place, very strategic pricing over the last couple of years. And we’ve demonstrated strong performance, being able to net 100 basis points to the top line every year. Yes, we are seeing the commodity costs increase. But I can tell you, with the work we’ve done, there’s more than enough mitigating actions across – with the other levers that we’re deploying around BAV, direct material productivity, around supply chain, leveraging our buy. So, we’re very well positioned to be able to have positive price cost and the margin guidance that Olivier provided incorporates the updated price cost headwind that we see. Andy Kaplowitz: Very helpful, guys. Thanks. Operator: Thank you for your question, Mr. Kaplowitz. Our next one is from Julian Mitchell with Barclays. Your line is open, sir. Julian Mitchell: Hi, good morning. May be just the first question around the installed outlook. So, the orders were down 7% in the quarter. Understood why there is some weakness in Fire & Security and so forth in different regions. But maybe help us understand globally, when you think that figure may return to growth? And also, what we should expect for installed revenues for fiscal 2021? George Oliver: Julian, let me start. When you look at the market indicators coming out of 2020, they were pointing to a weaker new construction. That was ABI and construction starts and the like and when you look at the verticals, certainly mixed. There’s some verticals that still have strong growth and there’s others that are being more challenged. So, when you look at new construction starts, it is still under pressure. We are seeing retrofit activity related to healthy buildings and service beginning to pick up – pick back up. We do see our installed business growing low single-digits this year in spite of those metrics, because we’ve been reallocating our resources to the higher growth verticals and then being able to now capitalize on the retrofit opportunity that we see both short and long-term. When you look at the verticals, there are certain verticals that are under more pressure than others. When you think about the growth, there is better than 25% of our sales go into institutional markets in both healthcare and education. They’re definitely receiving a lot of attention right now with respect to building health. And then when you look at commercial office, it is more mixed with lower utilization rates near term. But we do believe that there’s going to be a demand, because there is a lot of interest in solutions now for what the new normal will be within these buildings. And so, when you look at the overall impact of COVID, we believe that it has delayed the investment decisions, which is creating some uncertainty and limited visibility beyond the six months. But we believe that what we see with our pipeline, our pipeline is actually been growing. And we see now in North America, for instance, with the access restrictions, continuing to be eased, we’ll see some headwinds here in Europe and LatAm with some of the shutdowns and the like. But as we get into the second half of the year, we believe we start to recover on orders. I mean, orders are actually going to be recovering here in the second quarter. That will continue to improve through the course of the year and set us up well for 2022. We do have a $9 billion backlog and that is up year-on-year. We believe the mix within that backlog is shorter cycle. So, that is helping us book in turn through the course of the year, which is helping us be able to outperform the market within the non-resi market. And then, with service recovered now with PSAs, that is beginning to offset the pressure that we’ve had with some of these site restrictions. So, I believe you’ll see that we’re going to outperform through the course of the year. The market will continue to recover and you’ll start to see positive expansion within the industry metrics in 2022. Julian Mitchell: Thanks. That’s helpful. And then just a quick follow-up on the margin outlook across the four segments. So, you got that plus 50 bps figure firm-wide for operating margin for the year. Anything you’d call out on segments that should lead or lag that? And perhaps, in particular, what kind of operating leverage do we expect in Global Products? Olivier Leonetti: So actually, the margin profile of the business is going to be equally up in the year. If you look at the various regions, the various installed services or products, we see margin going up. And we have said before and let me repeat this – we believe we can increase the margin of the enterprise, EBITDA margin by about 50 basis points to 60 basis points. We have the ability to be at this level this year despite the negative impact obviously of the pandemic. But we feel good today about our ability to keep improving the profitability of this business and we are lining up several activities to deliver on this promise. Julian Mitchell: Great. Thank you. George Oliver: Thanks, Julian. Operator: Thank you for your question, Mr. Mitchell. Our last question will come from Joe Ritchie with Goldman Sachs. Your line is open, sir. Joe Ritchie: Thanks. Good morning, everybody, and thanks for putting me in. George Oliver: Good morning. Joe Ritchie: So, I’m just going to ask one question, and I want to go back to the attachment rates that you were discussing. I guess my question is, when you think about the investments that’s needed in order to expand those attachment rates, maybe talk about what’s your quantification of those investments over the next couple of years? And then specifically around like where you’re actually taking share? Any discussion around like the types of competitors that you expect to start to take some share from as you increase your attachment rates? George Oliver: Yes, so the investments that we’re making is really what’s enabling our ability to be able to get a higher attach rate. It’s not only making sure we have the right capacity deployed across the regions and being able to go after. So, historically going after the installed base that’s out there today that we’ve underserved and then being able to bring those forward by upgrading and getting new technology deployed and getting a recurring revenue contract. But then on new, new solutions and how we now bring our technology investments and embed those into the overall solution and then being able to then tie that to a long-term contract, that enables us to be able to get that attach. That is the underlying strategy. So, the investments that are being made are built into our products within – at the product stage. They’re built into our digital capabilities were building with OpenBlue. And then it’s ultimately making sure that we’ve got the infrastructure deployed within our regions to be able to successfully deliver that to our customers. And we have all of those elements that have been built into the plan in our reinvestment. And this has been ongoing here for the last 18 to 24 months. And so, we’re starting to see the fruits of our labor with the work that we’re doing. We’re beginning to get the attachment rate on the new projects. We’re beginning to get a pickup in service on the installed base. And all of that is leading to not only the higher attach rate, but higher revenue per customer and ultimately accelerating the overall service growth rate. Olivier Leonetti: Joe, just to make it clear, we will deliver those investments while scaling SG&A as a proportion of revenue. So, we do not believe we need to add OpEx as a proportion of revenue to deliver on this service strategic initiative. Joe Ritchie: Yes – no, that’s helpful. But – and then I guess maybe just that second part question about where you’re going to be able to take share; is there any color that you can provide at this point? George Oliver: Well, I’d say, when you look at our – it’s in line with our installed base. We are strong in each of the verticals. I think you’ve got a breakdown of the key verticals. It’s broad based. The strategy is such that that historically it’s been more of a – just more of a mechanical service that we provided to maintain break and fix, and some of that was done through long-term contracts. The difference now, Joe, is that with the connectivity, with the use of the data, not only can we improve the value proposition or solve problems that customers haven’t historically been able to solve, but then being able to do that on a longer-term basis with the connectivity and the use of the data. So, it’s really across the board on all of our new product installations, whether it’d be healthcare, education or industrial or government, any one of the spaces. I think we are uniquely positioned with our business model, with our performance contracting and some of the business model that historically we’ve had that has successfully delivered an outcome. We are now embedding our service technologies and capabilities, so that we then with that installed base, we can generate a lot more service with the use of the data that we collect and ultimately deploy. Joe Ritchie: That makes sense, George. Thank you, both. George Oliver: Thanks, Joe. And I think we’re at the hour here, so let me close. I want to thank, everyone, again for joining our call this morning. I’m incredibly proud of how our teams continue to execute in what remains a challenging environment. I can tell you I’m extremely pleased with our continued strong performance and the resiliency of our global teams that have just continued to execute across the globe in spite of the pandemic. I hope that you and your families remain safe and certainly look forward to engaging and speaking with you – many of you soon. So, operator, that concludes our call today. Operator: Thank you so much sir. Thank you all for participating in today’s conference call. You may now disconnect. And have a great rest of your day.JCI Ratings Summary
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Johnson Controls Beats Earnings Expectations in Q2 2024 Amid Revenue Challenges
Johnson Controls Faces Fiscal Challenges Yet Surpasses Earnings Expectations
On Wednesday, May 1, 2024, before the market opened, JCI:NYSE reported revenue of approximately $2.18 billion, which fell short of the estimated $6.72 billion. This announcement came as a surprise to many, considering the expectations set by analysts and the company's historical performance. Johnson Controls International plc (JCI), a leading name in the building solutions and technologies sector, faced a challenging fiscal second quarter, as highlighted by its financial results for the period ending March 31, 2024. Despite the revenue shortfall, the company managed to surpass earnings expectations, reporting adjusted earnings of 78 cents per share against the Zacks Consensus Estimate of 75 cents, marking a 4% increase year over year.
The revenue miss can be attributed to various factors, including market conditions and operational challenges. However, it's important to note that Johnson Controls' revenue of $6.7 billion, slightly below the consensus estimate of $6.75 billion, still represents a stable top-line performance compared to the previous year. This stability is further underscored by a modest 1% growth in organic revenues. The Building Solutions North America segment, in particular, showcased remarkable performance with revenues climbing to $2.74 billion, a 9% increase from the previous year. This growth was primarily driven by the robust performance of the applied heating, ventilation, and air conditioning (HVAC) & controls business, contributing significantly to the company's overall financial health.
Despite the revenue shortfall, Johnson Controls demonstrated strength in its core HVAC and controls businesses, as evidenced by the performance of its Building Solutions North America segment. This segment not only exceeded expectations with an 8% rise in organic sales but also saw its EBITA increase by 18% year-over-year to $373 million. Such results highlight the company's ability to navigate market challenges and capitalize on growth opportunities within its key business areas.
The financial landscape for Johnson Controls, as reported by The Motley Fool, reflects a mixed bag of outcomes. While the company's stock price experienced a significant drop of 7.6% in morning trading following the announcement, the underlying financial metrics tell a story of resilience and strategic maneuvering. The company's slight revenue increase to $6.7 billion and an improvement in EPS to $0.78 from the previous year's $0.75 demonstrate a steady performance amidst challenging market conditions. Furthermore, Johnson Controls' anticipation of weakness in its fiscal third quarter, yet maintaining its full-year forecast, suggests a strategic approach to overcoming current hurdles and aiming for a year-end rally.
In conclusion, Johnson Controls' fiscal second-quarter performance, characterized by a slight revenue shortfall but a surpassing of earnings expectations, underscores the company's resilience and strategic focus. The strength in its HVAC and controls businesses, particularly within the North American market, positions JCI to navigate through market volatilities and capitalize on growth opportunities. Despite facing challenges, such as revenue declines in the Asia/Pacific region, Johnson Controls' steady financial metrics and strategic outlook indicate its potential to maintain a stable performance and achieve its full-year objectives.
Johnson Controls International Reported Q4 EPS Beat, Better-than-Expected 2022 Growth
Johnson Controls International plc (NYSE:JCI) reported its Q3 results, with EPS coming in at $0.88, beating the consensus estimates, but quarterly revenue of $6,395 million (up 7% year over year) was below the Street estimate of $6,419 million.
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