Johnson Controls International plc (JCI) Earnings Call Transcript & Summary

Good afternoon. Welcome to the working and consuming outside the home track for the Morgan Stanley Life After COVID Conference. I'm Josh Pokrzywinski, the firm's U.S. electrical equipment and multi-industry analyst. With me this afternoon is Johnson Controls, and I'm pleased to be joined by George Oliver, Chairman and CEO; and Mike Ellis, EVP and Chief Customer and Digital Officer. Gentlemen, thanks for joining us. Before we get started here, I do need to read one quick disclaimer. Please note that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. This webcast is not for members of the press. If you are a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. With that, George, thanks for joining us. Good to see you, good to hear your voice in what has been a weird time to be alive. If you wouldn't mind, just take a few seconds here in what is an exciting time to be alive, I think, at Johnson Controls. Kind of talk through some of the big things you're focused on. And why now is kind of an interesting time to look at the story.

Sure. And thanks, Josh, for having us. It's great to be able to join you for this conference. I did think that it would be good to start off with a few comments here. I think as most of you know, we wrapped up fiscal 2020 with results out last week. I won't rehash everything we said on the call, but for those -- for the benefit of those who haven't had the chance to review our results or are unfamiliar with Johnson Controls. I'd start by saying we executed very well in what was extraordinarily challenging environment. We saw a sequential improvement across all of our businesses from both a sales and order perspective. Aggressive cost actions in response to volume declines, has resulted in best-in-class decrementals over the last 2 quarters. I'd say throughout this pandemic, we remain fully engaged with our employees, customers and partners around the world. We accomplished our strategic goals and initiatives for the year. We further strengthened our balance sheet and liquidity profile. While at the same time, we returned over $3 billion in capital to our shareholders through both dividend as well as share buybacks. I think most importantly, we stayed on offense. Maintaining a very high level of organic investment in our businesses with continued innovation while filling key leadership positions. And entered the next stage of evolution at Johnson Controls with the launch of OpenBlue, which is our very comprehensive new digital platform. And lastly, we provided some initial views on fiscal 2021 that demonstrate our commitment to: number one, accelerating growth, expanding operating margins and ultimately returning capital to shareholders. Just a quick note on our portfolio. I'd say we are very well aligned with strong secular trends, which include sustainability and energy efficiency, urbanization and now smarter and safer buildings and infrastructure. And I'd say we are uniquely positioned to serve these trends with a very holistic approach that leverages the most comprehensive product portfolio in the industry. That combines with the largest installed base and the broadest direct channel footprint to enable a very extensive go-to-market advantage. And just quickly on the business model and portfolio, we have positioned the company as a pure-play building solution provider with the broadest portfolio of intelligent building solutions in the market with annual revenues of $22 billion. We do hold leading positions in very attractive industries with favorable secular growth trends. As I mentioned, we have a $12 billion global HVAC and building controls platform, which is skewed heavily towards institutional and commercial infrastructure that we believe longer term, that's a great position to have. We have a $9 billion global Fire & Security platform with a large installed base and very high service attachment. And a lot of interactive qualities, particularly on the security side. And with our digital transformation platform, OpenBlue, which I'm sure we'll talk a little bit more about, I believe we are uniquely positioned to be able to service smart buildings of the future with a very comprehensive suite of solutions that connect both the IT and OT in and out of the building leveraging Data Analytics, Artificial Intelligence and Machine Learning, and ultimately deliver outcome-based solutions for our customers. And all of these attributes play very well in addressing not only the immediate needs around indoor air quality and healthy buildings. But I believe that there is no one better positioned to help customers operate healthy and safe buildings. And lastly, sustainability in ESG, in general. Both are core to the vision, mission and values of the company. And we are very well-positioned, both from a product portfolio standpoint to address our customers' goals to lower greenhouse gas emissions with nearly half of revenue coming from product design to exceed minimal efficiency requirements and significantly reduce greenhouse gas emissions. And we have made over a dozen global commitments to fight climate change and support sustainable development. And then last, I'd say, in addition to the depth and breadth of our product offering, we also have one of the largest direct channel footprints. And with that, an unmatched history and expertise in the buildings environment that enable us to bring best-in-class team of sales and service engineers, combined with our technology that give us a clear competitive advantage. So on that, Josh, I'm looking forward to our discussion around healthy buildings.

Great. Appreciate some of those -- those kind of or all of those comments, George, it's very helpful in kind of framing where JCI is. I guess to take that a step further, obviously, you mentioned the JCI's portfolio as it stands today, is kind of the culmination of years of work on pruning and focusing down in the building space. And now you're kind of left with the broadest portfolio of solutions. How should we think about the different areas of those in the broader context of this mega trend? Because you guys can come at this problem from multiple areas, maybe in a way that a more monolithic player can't. So maybe touch upon how those pieces come together. And how OpenBlue, which I think we can go into a bit more detail in a bit, all kind of converge for a customer?

Yes. I'd start, Josh, by saying, reshaping the portfolio over the last several years has been about the alignment with trends in connectivity, sustainability and energy efficiency. Urbanization in smarter and safer buildings with improved infrastructure. That has been fundamental to the merger and everything we've done over the last 3 years. Our customers tell us every day, they're looking at buildings holistically. They're looking for a leading-edge connected solution to solve for specific outcomes, especially now with the pandemic, there's lots of new challenges. And I believe we're uniquely positioned to be able to completely own that holistic view with all of the systems that we bring to the building. And now more important with OpenBlue, our ability to be able to leverage the most comprehensive product portfolio, the largest installed base, and in the broadest channel in buildings. And we can apply our go-to-market approach across a wide array of customer types, right from the simplest building or infrastructure all the way up to the most complex. And I would say that the strength that we have is that we're part of our customers' ecosystem, which allows us to learn constantly, especially now with data, extracting the data and analyzing it and therefore, we adjust constantly to be able to increase our customer value proposition. And then that, combined with the horizontal footprint, with the ability now to bring that all together and move up the technology stack is what ultimately now OpenBlue gives us an incredible advantage. And our direct channel to the customer is, I believe, is unique. It's broad and a true differentiator. So that was the vision when I look back to when we did the merger 5 years ago, and it is now the same, which we will now lead from managing -- what I would say, managing traditional buildings to becoming an outcome-based solutions provider that support more intelligent connected spaces and places. And the COVID-19 has only advanced that need.

So I guess within this OpenBlue is one of a very small number of offerings, but a unique offering that -- it's IoT for buildings. How has that customer reaction been? And how should we think about this as different from some of your current offerings? I think JCI has been very early and is a leader in building management systems. Control as you guys have been around forever. I think you invented the thermostat, if I remember right.

135 years ago, Josh.

Yes -- so clearly, a rich history to follow-on there. Does OpenBlue replace that? Does OpenBlue sit on top of that? Maybe spend some time talking about how that infrastructure fits together, given that there's a huge installed base. And now you have some pretty compelling data-driven technology that sits on top.

Yes. Let me try to simplify it. So OpenBlue, what I would say is a complete suite of connected solutions that enables delivery of a more impactful sustainability within the building, new occupant experiences. And then with all of that, enhanced safety and security that combines our long-standing expertise in buildings with new cutting-edge technology. So it enables us, along with our customers and partners to, what I would say, fundamentally transform how spaces and places are experienced, and that are safe and protected. And it does take everything we do in a building and now through leveraging all of the connectivity of those systems, and then the ability to be able to utilize the data, it now enables us to be able to create new outcomes. And where we believe we're truly differentiated, again, is the way that we go to market with a very strong direct channel footprint with a -- and then be able to capitalize on a very large installed base of equipment and service, which now we can take all that installed base with OpenBlue and significantly enhance our value proposition. And I would tell you that although it's still very early. We launched this just 90 days ago. We've seen significant success in creating momentum with customers and partners. Immediately, it was -- we're engaged with a wide variety of customers looking to connect, plan and manage space. A lot of that focus has been enhanced security, sustainability, occupant experiences, health and safety. The platform addresses a broad series of solutions targeting a variety of environments. And just a couple of examples. Worldwide, we've seen engagement with a wide range of our customers from the largest to most respected real estate developers in Asia to multiple sports venues, across the world and then probably everything in between. And just a couple of examples. One of the largest real estate developers in Asia, which is a leader in facility management, selected our OpenBlue enterprise manager solution, which is a software solution that helps customers manage large portfolios of properties. We now are deploying it across 42 of their buildings in Singapore. And then the other one I'd mention is universities is a big vertical for us. We began OpenBlue engagements at Stanford, Brown, Tulane, Kent State, University of Arkansas, many others. And then our work with the National University of Singapore also demonstrates that with the deep collaboration that we have with Microsoft, that we're actually creating a living laboratory for a new breed of customizable, contact-free applications built on our Johnson Controls unifying digital technology suite OpenBlue. So all of that has been creating this ecosystem with technology partners coming together. I did mention the partnership with Microsoft, but we also have begun work with other technology companies, including Accenture, Intel, Cisco and others. And so maybe, Mike, you can make a couple of comments where you've been right in the middle of this with all of these deployments?

Yes, absolutely, George, happy to. So you talked about a little bit around building management systems. And just to delineate what the difference is here, BMS, building management, is and has been for many, many years, the heartbeat of running a great building. It's a very important technology, especially around the core platforms that enforce and drive forward, all the core processes of running a building, HVAC, fire, security, et cetera. OpenBlue, we think of it is not only encompassing those traditional BMS capabilities but also complementing and extending it at a broad degree. So think of the connection or the convergence of IT or informational technology, along with OT, operational technology. So let's talk a little bit about the differences and why we're doing these partnerships like we have that have extended our footprint around technology. So firstly, think about OpenBlue as that connector, driving that technology connection with operational technologies, not only Johnson Controls, but any vendor that might be in that building. So creating truly that connected view of what's happening in that building across every technology, by the way, not just the heating and ventilation, HVAC, et cetera. Secondly, we are using a whole new series of next-gen technology. So I think not only AI, Artificial Intelligence and Machine Learning, but also technologies like digital twin. So the ability to actually create a virtual simulation and real-time monitoring of what's going on in the building, really empowers how you not only support that building, but also how we support our customers in driving their most valuable assets to people in those buildings to a good and safety -- safe and secure productive environment. And then lastly, connecting IT platforms. So again, this convergence of IT and OT is really important because if we can provide that singular view of that building, we can provide a really amazing dashboard to delivering great customer experiences and outcomes for those building owners. Think of 3 pillars of the way we look at it: Sustainability, so lowering their carbon footprint; safety and security, so healthy buildings; and lastly, but importantly, customer experience. So the folks that own these buildings and the people that manage them are very interested in how do we really capture that increase in value of building and do so in a responsible, trustful way with technology, both IT and OT. And as George said, between hospital campuses, universities, large commercial headquarters, campuses, everything. We are deeply involved in already doing this today with some of the largest institutions out there in the world.

That's really helpful, Mike. Would you mind just kind of delving in on the healthy building side some of the offerings and enabling outcomes that OpenBlue can provide, whether it's cleaner air or touchless activities. What are some of the things that come out of enabling OpenBlue?

Sure, sure. No, happy to. So as I mentioned, OpenBlue is an extension of already the BMS system, the building management platforms and controls, et cetera. But it also encompasses this whole concept of healthy buildings as you put it. So think about OpenBlue Workplace. It's a new solution that we launched this summer. It's all about providing real-time visibility into the people in the building and doing so with trust and with privacy built into it. The idea there is, not only can you provide a more safe experience, but you can also provide, because of that knowledge of the individual, preferences and personalization around their productivity and what they would like to accomplish. We also released just recently in the last couple of weeks, OpenBlue security applications that allow for the people running those buildings, facility managers to do so in a much more informed way around risk profiles that are happening around that building in the neighborhoods or locations of it, to also provide standard operating procedures in a more uniform way. All under the branding, if you will, of OpenBlue, connecting all of these technologies within the building. And as I mentioned earlier, some of the largest banks some of the largest credit card companies, universities, et cetera, worldwide are now deploying these technologies because of not only pandemic and COVID, of course, that is a catalyst to moving faster. But also because of what I described earlier of how do you affect the value of the building in the biggest and broadest way. So I think sustainability, healthy spaces and buildings and again, experiences. Core to us in terms of driving forward that healthy building experience.