U.S. Markets closed

Edited Transcript of JCI earnings conference call or presentation 1-May-20 11:30am GMT

Q2 2020 Johnson Controls International PLC Earnings Call

Cork May 9, 2020 (Thomson StreetEvents) -- Edited Transcript of Johnson Controls International PLC earnings conference call or presentation Friday, May 1, 2020 at 11:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Antonella Franzen

Johnson Controls International plc - VP and Chief IR & Communications Officer

* Brian J. Stief

Johnson Controls International plc - Vice Chairman, Executive VP & CFO

* George R. Oliver

Johnson Controls International plc - Chairman & CEO

================================================================================

Conference Call Participants

================================================================================

* Andrew Alec Kaplowitz

Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head

* Charles Stephen Tusa

JP Morgan Chase & Co, Research Division - MD

* Jeffrey Todd Sprague

Vertical Research Partners, LLC - Founder & Managing Partner

* John Fred Walsh

Crédit Suisse AG, Research Division - Director

* Joseph Alfred Ritchie

Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst

* Julian C.H. Mitchell

Barclays Bank PLC, Research Division - Research Analyst

* Nigel Edward Coe

Wolfe Research, LLC - MD & Senior Research Analyst

* Scott Reed Davis

Melius Research LLC - Founding Partner, Chairman, CEO & Research Analyst of Multi-Industry Research

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Welcome to Johnson Controls Second Quarter 2020 Earnings Call. (Operator Instructions)

This conference is being recorded. If you have any objections, please disconnect at this time.

I will turn over the call to Antonella Franzen, Vice President and Chief Investor Relations and Communications Officer.

--------------------------------------------------------------------------------

Antonella Franzen, Johnson Controls International plc - VP and Chief IR & Communications Officer [2]

--------------------------------------------------------------------------------

Good morning, and thank you for joining our conference call to discuss Johnson Controls' second quarter fiscal 2020 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 Controls' Chairman and Chief Executive Officer, George Oliver; and our Vice Chairman and Chief Financial Officer, Brian Stief.

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 discussion, 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 EBITA and adjusted EBIT margins exclude restructuring and integration costs as well as other special items. These metrics 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 operations basis, excluding the results of Power Solutions.

GAAP earnings per share from continuing operations attributable to Johnson Controls' ordinary shareholders was $0.28 for the quarter and included a net charge of $0.14 related to special items primarily related to an asset impairment charge and integration costs. Excluding these special items, non-GAAP adjusted diluted earnings per share from continuing operations was $0.42 compared to $0.32 in the prior year quarter.

Now let me turn the call over to George.

--------------------------------------------------------------------------------

George R. Oliver, Johnson Controls International plc - Chairman & CEO [3]

--------------------------------------------------------------------------------

Thanks, Antonella, and good morning, everyone. Thank you for joining us on today's call. I hope you and your families are staying safe and healthy during these extraordinary times.

You may have noticed from our slide presentation we are taking a very different approach compared to our traditional quarterly earnings call format in order to focus our discussion on addressing the impacts from the COVID-19 pandemic as well as the steps we have taken as a company to partially mitigate the financial impacts and position the company to capitalize on the eventual recovery.

Although we have withdrawn our guidance for the year, I will provide some color commentary on how we are thinking about the second half later in the call. And we'll allow plenty of time for your questions. Let's get started on Slide 3.

Clearly, we are navigating through unprecedented times. The ongoing COVID-19 pandemic has had profound impacts on the way we live our daily lives and the way companies run their businesses. We believe most of these impacts are largely transitory, but the dramatic slowdown in global economic conditions presents very real challenges. However, I can assure you that Johnson Controls has stepped up to the challenge, taking decisive actions to manage through this crisis day by day. We also have many opportunities to assist our communities and customers, which we will discuss.

Protecting the health and well-being of our employees, customers and communities in which we live and work has always been a top priority at Johnson Controls. That is never more apparent than in times of crises like the one we are facing today.

In anticipation of a deepening pandemic, we activated our business continuity plan, including a crisis command team, led by our Employee Health and Safety division and comprised of regional leaders and members of my Executive Committee. This team has been working day and night to ensure the safety of our employees and quickly implemented policies and procedures, ensuring our factories, facilities and offices could operate safely and effectively. Although we are still managing through various disruptions to our normal workflow as the virus rapidly spread, we have remained fiercely committed to supporting our customers, partners and other stakeholders, including ensuring the uninterrupted operations of essential and critical infrastructure vital to combating this pandemic. I'd be remiss if I did not start by saying I couldn't be more proud of the way our employees around the globe have responded to this crisis since day 1.

Our teams have been fixtures on the front lines, helping to design and build temporary hospitals in Wuhan in the earliest days, maintaining the essential and critical infrastructure of our customers everywhere in supporting government leaders around the world. We have provided filtration materials using the development of replaceable respirators. And our dedicated employees have volunteered their time and skills serving their communities.

Johnson Controls has been at the heart of response efforts from the beginning. And from my perspective, the level of cross-function collaboration, compassion and partnership has been truly extraordinary. That said, we have also had to make some difficult but necessary decisions and took decisive actions in order to mitigate the pressure that built over the course of a quarter as a result of COVID-19.

Over the last few weeks, we have initiated significant actions to permanently lower our cost structure and strengthen our competitive position, which are based on the various scenario analyses we have conducted.

From a balance sheet and liquidity standpoint, we entered the crisis on strong footing. Over the course of the last 12 months, using a portion of the Power Solutions proceeds, we took significant steps to strengthen our balance sheet, paying down over $5 billion in gross debt and maintaining higher levels of cash on hand with virtually no reliance on commercial paper.

With respect to liquidity, we are in very good shape: sufficient cash on the balance sheet and access to additional credit should we need it. Brian will provide more details on some of the actions we have taken to further enhance our already strong liquidity to ensure we maintain plenty of financial flexibility as we move forward. From a capital deployment standpoint, we are committed to maintaining our dividend given our strong balance sheet and liquidity positions.

Turning to Slide 4. Our action today will ensure we redefine the new norm to capitalize on the recovery. Aside from protecting our employees, one of the most pressing focus areas for us in terms of our emergency response during the current pandemic has been supporting our health care customers. Health care is about a $4 billion end market for Johnson Controls globally, offering end-to-end capabilities with a substantial global footprint and a history of deep industry expertise and digital innovation. It is more important than ever that we have healthy buildings, and Johnson Controls is a leader in this area.

We have been working with our customers in all regions of the world to rapidly increase patient capacity, whether by converting existing patient rooms to negative-pressure isolation units or converting unused infrastructure to isolation units; to enhanced communications by deploying temporary wireless nurse call systems as well as real-time equipment tracking solutions; maximizing safety for staff and patients, including cloud-based visitor management systems, touchless credentials and thermal imaging cameras to assess occupants' temperatures; as well as prioritizing service and maintenance of essential infrastructure.

We have been responding in record time. In Wuhan, for example, our teams in China were able to install and integrate critical systems for an additional 860-bed expansion facility within 8 days. And we did the same in New York City, where our team worked hand-in-hand with the U.S. Army Corp of Engineers to build a 1,000-plus-bed emergency health care center in 21 days.

Next, on Slide 5. As we begin supporting our customers' recovery plans, the feedback we have received over the last several weeks indicate how COVID-19 has the potential to have lasting impacts to our cities, buildings and infrastructure. More resilient or flexible building space will be required to adapt to changing capacity or utilization needs. Safer environments will be created through seamless combinations of occupant screening, tracing and credential management and more sophisticated ventilation systems. Touchless or frictionless access, lighting and temperature controls will be implemented to minimize cross-contamination and enhance the user experience.

Remote monitoring and service delivery, including condition-based maintenance, will significantly increase. These types of solutions are being deployed in some of our marquee projects today, and the list of ideas and offerings continues to expand.

I won't spend the time to go through each of these, but these are several examples of the rapid solution innovation that have taken place over the last couple of months. By closely engaging with our customers, we were able to create unique solutions to meet their immediate needs by leveraging the strength and breadth of our existing product portfolio.

I view these past 10-plus weeks as a testament to the strength of our business model and further validation of our strategies around digital transformation and building partner ecosystems.

Let's move to Slide 6. As the pressure from COVID-19 began to mount, we quickly instituted a set of immediate cost control actions across the enterprise to help mitigate the near-term financial impacts, eliminating all discretionary spend, suspending nonessential business travel and decreasing contract labor and contingent workforces.

As that pressure continued to spread, we moved into the next phase of our playbook by implementing mandatory unpaid time-off and furloughs for all salaried employees and flexing our hourly workforce while executing permanent cost structure changes.

Turning to Slide 7. This is a quick look at the status of our major manufacturing regions. As you can see, it is a fairly mixed picture. Though there are a couple of isolated plant shutdowns, North America and EMEA remain in relatively good shape, running near-normal capacity. China continues to ramp back up. Our 2 primary facilities are now fully operational, and we continue to monitor the progress there and in other parts of Asia.

We do have a couple of issues with plant shutdowns in Mexico and India within the last couple of weeks. Along with some of our peers, we are leading an effort, working closely with local authorities, and would expect those to be back up and running over the next week or so.

Japan is in good shape now, but there's another -- that's another country we continue to monitor closely as we are not completely out of the woods yet.

That said, we are using this downturn as an opportunity to take more aggressive actions to reduce our cost structure long term, including consolidating portions of our manufacturing network. The same can be said with respect to our supply chain management. Efforts to establish redundant capacity in multiple low-cost regions, dual-qualified suppliers, reduction of SKU complexity and influencing our major suppliers to diversify their footprint have been underway.

These efforts were expanded with the announcements of tariffs in 2018 and are accelerating further now.

In the initial stages of this pandemic, our existing continuity plans allowed us to mitigate a significant amount of supply chain risk, and we were able to apply the lessons learned in China to drive preemptive actions to reduce the impact to other affected regions. And we are now working with our suppliers to plan for the recovery.

Turning to Slide 8. In the spirit of full transparency, we wanted to provide you with an estimate of the net impact of COVID-19 in the quarter. I won't spend time going through each line in detail, but clearly, you can see we had a fairly material top line headwind of around $375 million. That includes the impacts to our Asia Pac and Global Products businesses as a result of the shutdown in China as well as the spread to parts of Europe and the U.S., which began to ramp in March as regional lockdowns went into place across the various countries.

As a result of some of the quick cost actions we implemented in anticipation of steep declines in demand in both the businesses and Corporate, we were able to hold the net impact of COVID-19 to about a 25% decremental. At the EPS level, we offset the $0.10 gross impact with $0.04 of cost and other actions for a net impact of $0.05 to $0.07, which is basically in line with what we shared with you during our conference presentation in mid-March.

Turning now to Slide 9 for a quick recap of the financial results in the quarter. Sales of $5.4 billion declined 5% on an organic basis. Within the field businesses, total service revenues grew 1% in the quarter as strength in North America and EMEALA was offset by a decline in Asia Pac.

Adjusted EBIT margin held flat with last year on an organic basis at 8.1% despite the volume decline as a result of both ongoing productivity and synergies and COVID-related cost actions taken in the quarter. Adjusted EBIT of $440 million declined 4% on an organic basis. Adjusted EPS of $0.42 increased 31% over the prior year as the benefit of synergies and productivity savings, lower net financing charges and aggressive share repurchase year-to-date more than offset the headwinds from COVID-19. Adjusted free cash was just over $150 million in the quarter, in line with our normal seasonal pattern, bringing the year-to-date total to approximately $100 million.

With that, I will turn it over to Brian to discuss our performance in a little more detail.

--------------------------------------------------------------------------------

Brian J. Stief, Johnson Controls International plc - Vice Chairman, Executive VP & CFO [4]

--------------------------------------------------------------------------------

Thanks, George, and good morning, everyone. So let's start with a quick look at our year-over-year EPS bridge on Slide 10. Volume and mix, including the estimated sales impact from COVID-19 of $350 million to $390 million, was a $0.10 headwind, and this was offset by $0.04 of mitigating actions and a $0.02 tailwind in noncontrolling interest as a result of the lower earnings in our consolidated Hitachi JV. The net $0.05 to $0.07 estimated EPS COVID impact we discussed on Slide 8 is included in these 3 columns.

As expected, synergies and productivity save, net financing charges and share count were tailwinds in the quarter.

So moving to Slide 11 for a quick look at our balance sheet position. As a result of planned capital deployment actions in the quarter, net debt was up roughly $900 million sequentially due primarily to share repurchases in the quarter. We remain in a very strong position with net debt-to-EBITDA leverage less than 2x, still below our target range of 2 to 2.5x, and we ended the quarter with over $1 billion in cash.

Turning to Slide 12. Let's take a look at some of the proactive steps we've taken to further bolster our balance sheet position and enhance liquidity. I would point out that in the quarter, we repaid a $500 million bond, which matured in March, with existing cash. In April, we opportunistically raised a total of $1.25 billion in shorter-term debt through $650 million in European financing arrangements and $575 million from our current bank group, and I will just point out these were pretty attractive rates in this environment.

From a strategic standpoint, these arrangements allow us to maintain a flexible capital structure and also provides an additional cash buffer as we work through what we expect to be a challenging period over the next few quarters. Additionally, as a reminder, we have 2 undrawn revolving credit facilities, which together amount to another $3 billion in available credit.

As you know, substantially all of our free cash flow generation occurs over the next 2 quarters, and this provides additional support to our strong liquidity position as we navigate through this difficult period.

Further, I would point out that in mid-March, we suspended our planned share repurchase program with approximately $700 million remaining on our original $2.2 billion target for fiscal '20. And additionally, we'll continue to be very aggressive in managing our CapEx spend through the remainder of this year.

So in summary, given all of these actions, we are well positioned to refinance our upcoming debt maturities, including the potential use of our active shelf registration statement.

So let's turn to Slide 13. Q2 was another solid quarter with adjusted free cash flow of roughly $150 million, bringing our year-to-date free cash flow to approximately $100 million, which is in line with our normal seasonal pattern. For the full year, given the decline in net income from COVID, accompanying with other cash accelerations we're taking in response to COVID, we now expect to achieve greater than 100% free cash flow conversion for the year. In addition, I would just note that given our planned Q3 restructuring actions in response to COVID-19, the onetime cash outflows of $300 million will be adjusted as appropriate on our Q3 call.

So let's move to Slide 14 for a look at our consolidated segment results. Sales were down 5% organically, again primarily due to the impact of COVID-19, which had the most significant impact in the quarter on our businesses in APAC and Global Products. Segment EBITDA of $619 million declined 7% organically. Synergies and productivity save as well as the immediate cost actions we took in the quarter were more than offset by the volume declines we saw related to COVID-19. And then lastly, Q1 segment EBITDA margin contracted by 20 basis points to 11.4%. And if you take a look at the margin waterfall, you can see that volume and mix declined 120 basis points versus the prior year, which was due primarily to COVID-19. However, this was offset by 60 basis points of COVID mitigation actions in the quarter.

I would highlight that our gross margin in the quarter expanded 120 basis points year-over-year to 33.1%, and this was driven primarily by productivity and synergy save and pricing. We continue to realize our planned synergy and productivity save, which is in addition to the COVID actions in the quarter, and this contributed another 50 basis points.

So moving to Slide 15. Given the COVID-19 impacts, we have consolidated our key segment results onto one page. And in the interest of time and to get to your questions, I won't go through this information in as much detail as I normally do. However, we have included all of the details we would typically provide related to subsegment organic growth in the appendix.

I would like to highlight a few items for each segment. North America was flat from a top line perspective as low growth in HVAC & Controls and high single-digit growth in Performance Solutions was offset by declines in retail and Fire & Security. EMEALA revenues declined 1% organically with continued strength in Industrial Refrigeration, more than offset by declines in HVAC & controls and, to a lesser extent, Fire & Security. Asia Pac, which was hit the hardest, was down 14%, led by systems insulations down 20% primarily as a result of the widespread shutdowns across China in the quarter.

Finally, Global Products revenue declined 8% organically primarily due to low double-digit decline in our HVAC and refrigeration portfolio. The largest decline was seen in residential HVAC and was driven by a significant decline in our Hitachi business as a result of shutdowns in countries like Japan.

Overall, orders for our field businesses declined 7% organically year-over-year. Through February, order trends have been tracking to the mid-single-digit growth, which was more than offset by the sharp declines we saw in March across all regions. Our backlog of $9 billion at March 31 increased 4% organically year-over-year.

And then finally on Page 16, Corporate expense declined 21% year-over-year in the quarter.

With that, I'll turn the call back over to George to discuss the framework for the second half of our fiscal year.

--------------------------------------------------------------------------------

George R. Oliver, Johnson Controls International plc - Chairman & CEO [5]

--------------------------------------------------------------------------------

Thanks, Brian. Let me spend a few minutes on our thoughts for the second half of our fiscal year on Slide 17.

We are planning for an organic revenue decline in a range of 15% to 20% with the most significant impact expected in Q3. As I mentioned, we have taken numerous actions, both temporary and permanent in nature, to help mitigate the financial impact. The benefit of these actions will keep the net decrementals on the revenue decline in the low 20s, which speaks to the value of the mitigating actions we are taking. It is important to keep in mind that the $400 million to $450 million of mitigating actions are in addition to the $150 million of synergies and productivity we have committed for the year, of which $80 million is expected to be delivered in the second half.

Our focus is on controlling what we can control, and that is ensuring we are financially and strategically well positioned when we exit this crisis. The permanent actions we have taken will ensure we have a lean cost structure while protecting our product and channel investments to lead the new norm as we go forward.

As the largest pure-play buildings provider, we are leading the change to provide more resilient and flexible building spaces, safer environments, touchless or frictionless access and remote monitoring service delivery. This, combined with our position as a leader in intelligent and sustainable building solutions, enables us to deliver the outcomes that matter most to our customers.

The depth and breadth of our product portfolio, combined with proven expertise and an expansive global footprint, provides us with a unique advantage as the evolution of the built environment accelerates.

With that, operator, please open up the lines for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

We will now begin our question-and-answer session. (Operator Instructions) Our first question comes from Jeff Sprague with Vertical Research.

--------------------------------------------------------------------------------

Jeffrey Todd Sprague, Vertical Research Partners, LLC - Founder & Managing Partner [2]

--------------------------------------------------------------------------------

Good morning, everyone. Hope you're all well. Just, like, 2 from me real quickly. George, we did see a pretty abrupt impact on your orders. And obviously, this is an unprecedented-type situation. But I wonder if you could spend a little time on what the forward order kind of horizon looks like. Is there wavering in the pipeline? How are people feeling about kind of new construction projects? Obviously, the backlog is nice and gives you some support for a while. But just wondering what's kind of on the new horizon to kind of backfill on the backlog.

--------------------------------------------------------------------------------

George R. Oliver, Johnson Controls International plc - Chairman & CEO [3]

--------------------------------------------------------------------------------

Yes. Let me start, Jeff, by just giving my thoughts on the non-resi construction, and then I'll give you kind of a sense on where we are here in April.

We are tracking the macro trends in third-party data closely. I would say that we had incredible discussions with our customers in understanding what their plans are. I would say that through -- as we look at our order pipeline, although it's still up, it has moved to the right, purely timing, what I would say about a quarter. Certainly, because of that, it is what drove us to take the actions that we're taking now, both temporary as well as the permanent cost -- the cost structure changes. And I do believe that there will be some continued disruptions here, which we have limited visibility today. But I think it's kind of tough to look beyond the next 6 to 9 months.

I believe short term, our backlog position, as Brian discussed, positions us here to bridge the gap. And if I were to play out what's happened here, when I look at Q2, we did have a demand air pocket. It started certainly in China, Hong Kong, Japan, some of our larger markets in Asia Pac. And then with the shutdowns that occurred in North America and EMEALA, that continued, and we see that continuing here in third quarter.

We did see an impact on service a bit, but that was mainly because of sites being shut down. We do expect that to come back pretty well here as we get through the quarter.

So as we laid out our plan, based on what we learned in the second half of March, obviously we looked at April and we said orders would potentially be down somewhere kind of high teens, 20%. Based on the daily activity that I've seen, and we're watching this every day, it's coming in at about that level. What I would say within that, Asia Pac is better. And so what you can see in the pipeline and the orders suggest that, that will get back to a more normal by the fourth quarter. And so that is encouraging based on what we're seeing happening in APAC. But certainly, as you would expect, with all of the shutdowns that occurred in EMEALA as well as in North America, until our customers come back to work and we're actively engaging with them, it's hard to put a clearer picture together. But based on the interactions I've seen, I am fairly confident that over the next 3 months, we'll see continued improvement. So although it's kind of high teens orders in April, that'll continue to prove as -- improve as we go through the second half.

--------------------------------------------------------------------------------

Jeffrey Todd Sprague, Vertical Research Partners, LLC - Founder & Managing Partner [4]

--------------------------------------------------------------------------------

And maybe a follow-up. Maybe it's for Brian. But on the $400 million to $450 million of cost reductions, how much of that is kind of structural in nature that we could kind of think about carrying over into next fiscal year?

--------------------------------------------------------------------------------

George R. Oliver, Johnson Controls International plc - Chairman & CEO [5]

--------------------------------------------------------------------------------

Yes. So as you would expect, we started early. What we saw happening in China, obviously, we have a big footprint there, and so we began immediate actions. Now some of the actions are temporary such as unpaid time off, furloughs, other employee compensation, reduced travel. You can imagine all of those actions. And then the other is looking at this from a structural standpoint that we've been able to now proceed with and will have a much bigger impact as we move forward.

As we look at the world today and what has happened, what I would tell you, it has really changed the way we're working virtually. And very quickly, we had all of our salaried teams working remotely with full security as well as access to Microsoft Teams and the like so we could stay engaged. And so with all of that happening, as we look going forward, it gives us opportunities to think differently and think about our cost structure and ultimately enhance our productivity.

And so as you look at the actions we took of the $400 million to $450 million of the mitigating actions expected to come through in the second half, about 80% are temporary. And then the other impact in the quarter are the structural actions that we're taking, recognizing that though that's only one -- it's only really the benefit of about 1 quarter. Then as you project that in 2021, we actually have a margin structure that with the volumes that we're anticipating, that we'll actually have a better margin structure.

And when you look at the buckets of cost, you'll see about 60% is comp and ben, and that's the result of the furloughs and other employee comp and some of the restructuring. You've got 30% that's in indirect spend and about 10% in facilities, Jeff.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Our next question comes from Steve Tusa with JPMorgan.

--------------------------------------------------------------------------------

Charles Stephen Tusa, JP Morgan Chase & Co, Research Division - MD [7]

--------------------------------------------------------------------------------

Thanks for all the detail on the breakout and all these costs. Lots of big numbers being thrown out there, temporary. You guys seem to be doing some structural stuff as well. So that seems to be a positive.

Any color at all on kind of how this 15% to 20% breaks down kind of quarter-to-quarter? Or should we just assume that it's within a band kind of stable for third and fourth quarter?

--------------------------------------------------------------------------------

George R. Oliver, Johnson Controls International plc - Chairman & CEO [8]

--------------------------------------------------------------------------------

Yes. So Steve, as we looked at the third and fourth quarter and tried to model this on how it's going to play out based on what we learned in March. Certainly, the larger impact will be in Q3, and that's -- we're tracking -- Asia Pac will be better because they're now in the recovery mode. But as you look at EMEALA and North America, April will be the toughest month, and then it'll continue to get better through the quarter. But if you look at the 2 quarters, the larger impact is going to be in Q3. And so that's why we -- as we saw this happening, we took the actions that we took very proactively with the temporary actions and then really then went into the next phase of our permanent cost reductions, which is going to play out well not only in the second half, but it'll set us up well for 2021. And that's what gets us to the net decrementals to be in the low 20s in the second half. And then when you look at that, combined with the -- that combines with the addition of the $150 million of the planned synergies and productivity that we'll achieve for the year, and about $80 million of that is actually in the second half of the year.

--------------------------------------------------------------------------------

Brian J. Stief, Johnson Controls International plc - Vice Chairman, Executive VP & CFO [9]

--------------------------------------------------------------------------------

Yes. Steve, just to help you with the models as well then below the decrementals, I mean, we continue to take a hard look at our corporate cost structure and have taken additional actions really as a result of the COVID situation. So our corporate expense now, which original guidance was $330 million to $340 million, we would now be in that $265 million to $275 million range. And then for net financing costs, even though we've taken on some more debt since we suspended our share repurchase program, those 2 pretty much offset. So net financing costs, we're going to retain at that $245 million to $255 million level.

And then when you look at minority interest or noncontrolling interest, as a result of some of the pressures that we're seeing in our Hitachi JV, our original guide for noncontrolling interest was $210 million to $220 million, and we're moving that down now to $150 million to $170 million given the pressure we're seeing in Hitachi. So those are kind of 3 below-the-line items that will be helpful to you as you update your models.

--------------------------------------------------------------------------------

Charles Stephen Tusa, JP Morgan Chase & Co, Research Division - MD [10]

--------------------------------------------------------------------------------

Great. Very helpful. Just one last one for me. So if you're down at kind of the lower end of the range of that in 3Q, kind of the 15% to 20%, I mean, does that mean like install-related stuff? Because I would think services would maybe hold up a little better or maybe there are some shutdown impacts. Maybe that's the difference. But does that mean install is down like in the 30s?

--------------------------------------------------------------------------------

George R. Oliver, Johnson Controls International plc - Chairman & CEO [11]

--------------------------------------------------------------------------------

No. No. When you look at our -- the way this plays out is the install -- the pressure on install is actually access to sites and all the shutdowns that have occurred in EMEALA. It started in China. So when you look at what happened in China in the second quarter, our install was down about 30%, I believe, or thereabouts. And so that will be coming back in third quarter and fourth quarter.

When you look at service in Asia Pac, it was down about 7%. Now that was -- a lot of that is purely because of access to facilities in the sites that we provide service to.

When you look at EMEALA and North America, certainly that started at the end of March, and that's continuing through April. So we do see an impact, like I said, starting out. And when I gave those previous numbers, those were orders. As far as revenue, we'll be similarly at the higher end of the decline here in April, but we believe that, that will sequentially get better as the quarter plays out.

And so install is mainly access to sites, and then service was purely temporary because of the shutdowns. But we believe that, that will -- April will be the toughest and will get better monthly on a go-forward basis.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

Our next question comes from Scott Davis with Melius Research.

--------------------------------------------------------------------------------

Scott Reed Davis, Melius Research LLC - Founding Partner, Chairman, CEO & Research Analyst of Multi-Industry Research [13]

--------------------------------------------------------------------------------

Just kind of curious, George, a couple of your comments about just what perhaps the building customer may do going forward from a -- whether it's UV light or filtration or some sort of retrofit to perhaps just improve the air quality of the building. Is that -- is it too early to have those conversations with your customers? Is it just everybody just scrambling to stay alive right now? Or -- and is that a real theme, do you think, that there'll be a fair amount of spend that needs to occur to clean the air?

--------------------------------------------------------------------------------

George R. Oliver, Johnson Controls International plc - Chairman & CEO [14]

--------------------------------------------------------------------------------

Yes, Scott. What I would say is we're in very active engagements with our customers in defining what the new norm is going to be and what technology can do to ultimately address some of the new challenges. Some of what you discussed is absolutely front and center. Initially, it's as simple as adding IR scanners so that we can do temperature checks and the like. It's sanitation, it's enhanced filtration and other technologies that can ultimately drive purification of the air.

What I talked about in my prepared remarks, I would categorize it in 4 key buckets. What we learned in this hospital response and this health care response is I think there's a view that space is going to be much more flexible, and that's across verticals. And what can be done to create flexible space, it's going to be safer environment, as you say, not only the air purification but then touchless and frictionless, everything within buildings and infrastructure. What I would say is it's going to be more automation. That ties to more automation, which ultimately plays to our strength. So those are the trends.

And I would tell you, Scott, that very actively engaged with other CEOs and a bunch of our customers in really defining what the new norm will be. And then from an innovation standpoint, we're already deploying resources, very actively working in partnership with our customers to be able to deliver on these type of solutions.

--------------------------------------------------------------------------------

Scott Reed Davis, Melius Research LLC - Founding Partner, Chairman, CEO & Research Analyst of Multi-Industry Research [15]

--------------------------------------------------------------------------------

Okay. That sounds interesting. So just a somewhat separate, less positive topic. Just when you think about your backlog, is there a certain percentage of it you'd consider kind of high risk like hotels, things like that, that just -- the projects just may not get off the ground in the next few years?

--------------------------------------------------------------------------------

George R. Oliver, Johnson Controls International plc - Chairman & CEO [16]

--------------------------------------------------------------------------------

So right out of the gate, we have really gone through all of the backlog, recognizing that there's going to be some industries that are going to be extremely challenged given what the impact that this has had. And I would tell you that most of what we've seen from that has been where projects have been pushed to the right. And so although -- we've seen short term the inability to convert, although I would tell you the activity is still very high. We've had thousands of customer engagements via video meetings on continuing to stay engaged and ultimately executing on their demand and being able to support them. And so when I look at the backlog where it was actually up 4%, and that's purely because of the way how things played out from a revenue turn standpoint, I believe that -- and the pipeline is actually up, that although there'll be some that are going to be delayed and potentially canceled because of the state of the industry, I think that there's new demand that's backfilling that that's coming into the pipeline as fast given what we see today.

--------------------------------------------------------------------------------

Brian J. Stief, Johnson Controls International plc - Vice Chairman, Executive VP & CFO [17]

--------------------------------------------------------------------------------

I would just add to that. We have done a backlog review of the $9 billion or so. And as George said, sitting here today, we have not seen a significant number of cancellations. We've seen more delays versus cancellations. So it's something we monitor every month in the ops meetings that we have with our business units, and we'll keep a close eye on it.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

Our next question comes from Nigel Coe with Wolfe Research.

--------------------------------------------------------------------------------

Nigel Edward Coe, Wolfe Research, LLC - MD & Senior Research Analyst [19]

--------------------------------------------------------------------------------

Hope everyone is well. Just -- so I want to go back to the second half outlook. Recognizing that the 15% to 20% is a planning range, could you maybe just -- I mean, I think Steve might have tried -- kind of dug into this a little bit, but what -- how do you see service within that 15% to 20%? And if you could break out how you view your fire versus security versus HVAC service within that kind of range you put out there.

--------------------------------------------------------------------------------

George R. Oliver, Johnson Controls International plc - Chairman & CEO [20]

--------------------------------------------------------------------------------

Yes. So we look at -- well, I'll give you a sense on Q2 and then how that continues to play out here over the third and fourth quarter. When you look at products, let's start with products, down 8% in Q2, we'll continue at a -- that'll be a little bit worse and worse in Q3 mainly because of the residential HVAC, which we talked about in the prepared remarks. And then when you look at the mix of that, it'll be pretty much across all of the domains, although BMS is actually holding up pretty well. Our digital businesses are holding up well. So most of the decline is being driven by HVAC as well as Fire & Security.

When you look at the field, the field was down 3%. Service was up 1%, but that was with North America and EMEALA up, offset with the decline in Asia Pac, down 7%.

And so as I said earlier, I believe that service -- we will see some short-term impacts in service even in EMEALA and North America here over the next 1 to 2 months. But I believe that the service, based on our backlog and the demand from L&M, that'll continue to come back over time.

On the install side, as I said, we have a good backlog and purely -- right now, it's purely because of the shutdowns that's impacting our ability to be able to convert the installed revenue.

And so as we saw, as I said, it's going to start off at the higher end of that impact. In some cases, maybe a little bit worse because even in China, we saw our install get impacted by 30% with the complete shutdown. But as that goes forward, with more access to customer sites and to projects, we see that continuing to improve through the quarter with service coming back sooner than the total install.

--------------------------------------------------------------------------------

Nigel Edward Coe, Wolfe Research, LLC - MD & Senior Research Analyst [21]

--------------------------------------------------------------------------------

So would you expect to -- so to be within that range or at the low end? Or would it be below the low end of that 15%?

--------------------------------------------------------------------------------

George R. Oliver, Johnson Controls International plc - Chairman & CEO [22]

--------------------------------------------------------------------------------

Yes. So Nigel, as everyone, we're trying to project what we see happening. This is really based on what we've seen in the last few weeks. I am encouraged that because we've been deemed essential, everywhere we work across the globe, recognize that we've stayed pretty much in operations. Although we've had some disruptions, we've maintained our operations because of the criticality of what we do supporting our customers. And so most of the impact is purely because we haven't had the access to be able to perform what we do at customer sites. And so a lot of it's dependent on that and how countries open up and how businesses open up and sites open up. So it's really dependent on that, Nigel. But based on what we see here in April, I'm encouraged, based on what we've provided for a framework, that we're in line with that.

--------------------------------------------------------------------------------

Brian J. Stief, Johnson Controls International plc - Vice Chairman, Executive VP & CFO [23]

--------------------------------------------------------------------------------

And another...

--------------------------------------------------------------------------------

Nigel Edward Coe, Wolfe Research, LLC - MD & Senior Research Analyst [24]

--------------------------------------------------------------------------------

Okay. Now I recognize...

--------------------------------------------------------------------------------

Brian J. Stief, Johnson Controls International plc - Vice Chairman, Executive VP & CFO [25]

--------------------------------------------------------------------------------

I think another way to think about that, Nigel, is our service business is roughly what, 25%, 30% of the consolidated. We're giving a range here of 15% to 20% enterprise-wide. And then -- so if you look at that and say our products business is about $8 billion, our service business is $6 billion and the remaining is the install piece, I think the service decline is going to be lower than the 15% to 20% range we're giving and then install will be higher, a bit higher on the high end. And then products is just somewhat dependent upon how we ramp up in some of our manufacturing facilities. George mentioned in his comments that right now, we're in pretty good shape. We're monitoring some things in Mexico and India, but some of it is dependent upon how quickly we can ramp back up from a manufacturing standpoint. So the 15% to 20% is intended to be kind of a broad guidepost here. But service would be lower on the low end or lower certainly than the 15% to 20% range.

--------------------------------------------------------------------------------

Nigel Edward Coe, Wolfe Research, LLC - MD & Senior Research Analyst [26]

--------------------------------------------------------------------------------

Okay. Yes, that's what I was trying to get to. So obviously recognizing that there's not a lot of definite points here on the numbers. But George, can you quickly just address in China and Asia Pacific in April which businesses you've seen spring back quickly and which businesses have still somewhat depressed?

--------------------------------------------------------------------------------

George R. Oliver, Johnson Controls International plc - Chairman & CEO [27]

--------------------------------------------------------------------------------

So when you look at Asia Pac in total, it's pretty mixed. Starting with China, most companies are back to work. I wouldn't say things are back to total normal, but I'd say probably in the 80% to 90% area, and we're coming back nicely. We've seen some nice pickup in orders and activity there. Obviously, there are still travel restrictions within the country.

We are watching -- what I would say, we're watching a couple of other areas closely, Singapore and India, because of the current lockdowns, and there are some pressures there. So -- and when you look at our headquarters, we're back full operations at our headquarters in Shanghai.

So overall, I think it's -- we're using that as a model and understanding how that plays out across these other countries. We do expect to see continued challenges in the region in the second half of the year with the larger impact in Q3.

If you look at specifically your question on China, I would say that the biggest impact -- as I said earlier, overall, it's about 6% of our consolidated revenue. The revenues were down about 35% organically in the field, in the field-based businesses, and a lot of this was driven by our install business in China. But even with that, the good news there is with the work we've done around gross margins, with pricing and productivity. Our margins are up nicely. And so on a go-forward basis, we feel good with the recovery that's going to play out there. And that seems to be happening as we sit here today through April. And so we're somewhat encouraged by that trend.

Now on products, we also have had the impact in products. It's about 5% of the total segment. As Brian talked about, we do have our facilities back and running. The customers are coming back up, but it's not a -- I wouldn't say it's at 100%, but it's encouraging that the activity has picked up pretty significantly here over the last few weeks.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

Our next question comes from Julian Mitchell with Barclays.

--------------------------------------------------------------------------------

Julian C.H. Mitchell, Barclays Bank PLC, Research Division - Research Analyst [29]

--------------------------------------------------------------------------------

Maybe just following up on that mix aspect. So is it fair to assume that your decremental margin outlook for the second half, that should be embedding or could be embedding a fairly handsome margin mix tailwind just because service is down a lot less than installed? And maybe just clarify that. And also, how are you seeing the discipline on pricing across service, install and products in terms of maybe the marketplace as well as your own discipline in pricing practices?

--------------------------------------------------------------------------------

George R. Oliver, Johnson Controls International plc - Chairman & CEO [30]

--------------------------------------------------------------------------------

So let me start with the first question there, Julian. The -- when we talked about in the quarter and second quarter install was down greater than service in Asia Pac, and that was true as well as in North America and EMEALA, so that -- where we had a little bit of mix here in the quarter come through because service was down less than install. When you look at on a go-forward basis, that will probably still be true as it plays out, right, so that the install will be -- there'll be pressure there. With the install coming back, service, we believe, will come back quicker, but we've seen pressure in both.

When you talk about pricing, we have been very successful in continuing to execute on price. For the year, we're still expecting about 1 point on the top line coming through our price realization, and that has continued even through this period of time with the pandemic.

--------------------------------------------------------------------------------

Julian C.H. Mitchell, Barclays Bank PLC, Research Division - Research Analyst [31]

--------------------------------------------------------------------------------

That's helpful. And then my second question, really just around the free cash flow conversion. So you've raised that guidance for the year. Maybe I missed it, but if you could clarify perhaps what's changed on the capital spending front for fiscal '20 and how confident you are that you'll be able to get those sizable working capital cash tailwinds in the second half. Are you seeing payment terms proving fairly regular? And is it easy to manage that balance of receivables and payables?

--------------------------------------------------------------------------------

Brian J. Stief, Johnson Controls International plc - Vice Chairman, Executive VP & CFO [32]

--------------------------------------------------------------------------------

So the free cash flow conversion going now from 95% to greater than 100% is really a function of the net income pressure we're going to see in the second half. As it relates to the metrics, I would tell you at the end of the second quarter, trade working capital as a percentage of sales, we saw a 10 basis point improvement year-over-year. So not as much as we saw in the first quarter but still we continue to make progress. It is an area we're watching very closely in today's environment. I think DSO was flat in the quarter, and it's an area that we're watching very close as we move forward. But I think with the policies and practices that we've got in place now through our cash management office, it's going to be a challenging environment from a cash flow standpoint. We'll manage our trade working capital appropriately, and we feel pretty good about landing someplace north of 100% right now.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

Our next question comes from Joe Ritchie with Goldman Sachs.

--------------------------------------------------------------------------------

Joseph Alfred Ritchie, Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst [34]

--------------------------------------------------------------------------------

Hope you're all well. George, maybe my first question. I know that a couple of people have touched on this service-versus-install piece. But clearly, like, the services business has held up better in China during the COVID-19 shutdowns. And clearly, from an install perspective, you need to be on premise.

I guess the question that I think we're trying to understand is, from a service perspective, how much of the business is -- does not need to be on premise? How much of it is kind of subscription based and can be more resilient in this downturn?

--------------------------------------------------------------------------------

George R. Oliver, Johnson Controls International plc - Chairman & CEO [35]

--------------------------------------------------------------------------------

Yes. So getting back to the service, service held up in Asia Pac better than the overall install. And in China, it was down almost in line with the install but coming back faster, if I misled you there. And so when we look at now -- and it's mainly because of access to facilities and sites that we provide service to. The rest of it -- overall Asia, that only impacted overall Asia being down 7% with our install in Asia down even greater than that in total. So just to clarify on the first question.

And then the second part, what -- could you repeat that?

--------------------------------------------------------------------------------

Joseph Alfred Ritchie, Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst [36]

--------------------------------------------------------------------------------

Yes. Yes. I guess the second part really was how much of the business was -- how much do you have to be on-premise for service for you to generate service revenue versus how much of it is potentially subscription based, more resilient and you don't necessarily need to be on-premise? And just is there a portion of it that is a little bit more resilient that is not location?

--------------------------------------------------------------------------------

Antonella Franzen, Johnson Controls International plc - VP and Chief IR & Communications Officer [37]

--------------------------------------------------------------------------------

Hey, George, why don't you let me jump in on this one a little bit?

--------------------------------------------------------------------------------

George R. Oliver, Johnson Controls International plc - Chairman & CEO [38]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Antonella Franzen, Johnson Controls International plc - VP and Chief IR & Communications Officer [39]

--------------------------------------------------------------------------------

So Joe, I think one way to think about it is when you look at our total service revenue, about half of it is performance service agreements and the other half would be more nonrecurring time and material and things of that nature.

Now clearly, when you look at that part that's performance service arrangements, some of that is going to still require to be on premise, but some of it will be remote like monitoring and such. So I mean, don't have it all to that level of detail, but that's one split you can think of as you're trying to think about the piece that's more resilient.

And to the point you made earlier, I mean, if you take the performance in APAC during the quarter, clearly you can see that service held in better than the install side of the business. Even if you take a look at the global financial recession in the '08, '09 period, you would see something very similar to that as well. Service went down but clearly not to the extent that install did. So your point well taken, service is much more defensive, particularly in this type of environment and will definitely hold up better.

--------------------------------------------------------------------------------

Joseph Alfred Ritchie, Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst [40]

--------------------------------------------------------------------------------

Helpful. And if I could maybe just follow up with Brian. Just from a balance sheet perspective, obviously, suspending -- you're suspending the buyback at this point. I guess just from a timing standpoint, how would you guys think about reinstituting a buyback and being a little bit more aggressive with capital deployment from here?

--------------------------------------------------------------------------------

Brian J. Stief, Johnson Controls International plc - Vice Chairman, Executive VP & CFO [41]

--------------------------------------------------------------------------------

Yes. I think the current plan is we'll continue to hold off on the buyback through the end of this year, and we think that's a prudent thing to do, and we'll reevaluate it as we think about 2021.

But at this point in time, I would tell you that as far as your models and so forth, I wouldn't assume any buyback for the remainder of fiscal '20.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

Our next question comes from Andrew Kaplowitz with Citi.

--------------------------------------------------------------------------------

Andrew Alec Kaplowitz, Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head [43]

--------------------------------------------------------------------------------

I hope you're well. George, how are you thinking about your Fire & Security businesses in general moving forward? When you look at APAC field, it was down 14%. But when you see Fire & Security in the field, down only low single digits. So how are you thinking about these businesses, which should be less cyclical than the rest of your portfolio versus that second half guide of down 15% to 20%?

--------------------------------------------------------------------------------

George R. Oliver, Johnson Controls International plc - Chairman & CEO [44]

--------------------------------------------------------------------------------

Yes. The field -- when you look at Fire & Security for the quarter, the Fire & Security products were only down low single digits, and it was a mix. What really drove that was fire suppression, and a lot of that was just timing of projects. And on the field, we're down about 2%, and that was low single digits, and it was spread across the regions.

Now when you play that out, we're going to see similar-type impacts in the third quarter -- third and fourth quarter relative to the shutdowns and how that plays out. But it is a higher mix of service. So you see less of an impact in total because of that, and that's what we've got modeled. We've got -- the businesses have been performing well in spite of the challenges that we faced, and we're prepared to continue to execute.

--------------------------------------------------------------------------------

Andrew Alec Kaplowitz, Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head [45]

--------------------------------------------------------------------------------

That's helpful. And maybe the opposite of that is if I just look at applied and HVAC, in products, it was down mid-teens in Q2. I guess most of that was APAC-related weakness. But does that suggest applied to be down more than 15%, 20%? Maybe you can give us your outlook and sort of what you're seeing there sort of larger projects? Are they just sort of getting deferred right now?

--------------------------------------------------------------------------------

George R. Oliver, Johnson Controls International plc - Chairman & CEO [46]

--------------------------------------------------------------------------------

Yes. If you look at commercial applied HVAC, revenue was down mid-single digits, and it's mainly driven by the Asia Pac decline being down high teens. And that was the bulk of it. When you look at orders. About the same. It was down low single digits, and it's mainly driven by APAC and the full impact that we saw in the quarter because of the virus.

And so as we look at our pipeline, we really -- as Brian said, we were trending pretty well on our secured orders right through February in EMEALA and in North America, and that was true with applied. And so with the impact here, we think it's temporary. The pipeline is still there. Some of the pipeline is being pushed to the right because of the timing of projects. But we still feel very good about our position, what we see in the pipeline and our ability to be able to convert now obviously pushed to the right.

--------------------------------------------------------------------------------

Antonella Franzen, Johnson Controls International plc - VP and Chief IR & Communications Officer [47]

--------------------------------------------------------------------------------

And Andy, just one thing to jump in here. If you think about the criticality of the things we do, both within Fire & Security and HVAC, clearly both very important, especially in the environment we're currently in. I think the important point is what George said, is there is a higher mix in service in the Fire & Security business versus HVAC. So to that point, as service will hold up better, that kind of gives you an indication of the 2 different platforms.

--------------------------------------------------------------------------------

Operator [48]

--------------------------------------------------------------------------------

Our last question comes from John Walsh with Crédit Suisse.

--------------------------------------------------------------------------------

John Fred Walsh, Crédit Suisse AG, Research Division - Director [49]

--------------------------------------------------------------------------------

Maybe just as a follow-up to that question. Just wanted to know what you were -- I think you talked about the health care vertical earlier. I wanted to know what you were hearing on kind of more of the public side, whether that's municipality, federal and maybe also education, if you're -- if that's part of where that pushing to the right is, if decisions are being slower coming out of those verticals, how you're thinking about that.

--------------------------------------------------------------------------------

George R. Oliver, Johnson Controls International plc - Chairman & CEO [50]

--------------------------------------------------------------------------------

Yes. What we've seen there -- short term, we've seen a push to the right within those projects also. We do believe we have a pipeline now of new projects that are coming in based on the way that we have responded to the crisis and creating new capacity and new capabilities. And so there is a lot of new projects that have been identified. But when you look at the overall project base, it's been pushed to the right, similar to what we've said with some of our other backlog. I do believe that there's going to be some stimulus here in the institutional verticals relative to what's going to happen with the new norm, as we discussed earlier, what's going to be required to get these facilities back and operating.

So we see an opportunity there, although we're in the early stages of that. And so that's something we're going to watch closely because I think based on what we do in the buildings that we support, I think there's going to be a lot more opportunities. That all being said, I think there's going to be some financial constraints. And so we're going to have to watch that closely as this plays out.

--------------------------------------------------------------------------------

Antonella Franzen, Johnson Controls International plc - VP and Chief IR & Communications Officer [51]

--------------------------------------------------------------------------------

George, do you want to make a couple of closing comments?

--------------------------------------------------------------------------------

George R. Oliver, Johnson Controls International plc - Chairman & CEO [52]

--------------------------------------------------------------------------------

Yes. Just to wrap up the call, I want to thank everyone again for joining our call this morning. We are -- as you know, we're navigating through these challenging times very well. We're well positioned, both financially and strategically, to capitalize on the recovery as it plays out. And again, I hope that you and your families remain safe, and I look forward to speaking with many of you soon. So operator, that concludes our call.

--------------------------------------------------------------------------------

Operator [53]

--------------------------------------------------------------------------------

Thank you for your participation in today's conference. Please disconnect at this time.