江森自控 (JCI) 2018 Q1 法說會逐字稿

Welcome to Johnson Controls First Quarter 2018 Earnings Call.

(Operator Instructions) This conference is being recorded.

If you have any objections, please disconnect at this time.

I will turn the call over to Antonella Franzen, Vice President of Investor Relations.

Please go ahead.

Good morning, and thank you for joining our conference call to discuss Johnson Controls' first quarter fiscal 2018 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.

With me today are Johnson Controls' Chairman and Chief Executive Officer, George Oliver; and our Executive Vice President and Chief Financial Officer, Brian Stief.

Before we begin, I would 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 schedule attached to our press release.

GAAP earnings per share from continuing operations attributable to Johnson Controls' ordinary shareholders was $0.25 for the quarter and included a net charge of $0.29 related to special items.

These special items primarily relate to restructuring and impairment cost as well as the net impacts from U.S. Tax Reform, partially offset by the gain on sale from the Scott Safety divestiture, which closed early in the quarter.

Adjusting for these special items, non-GAAP adjusted diluted earnings per share from continuing operations was $0.54 compared to $0.53 in the prior year quarter.

Now let me turn the call over to George.

Thanks, Antonella, and good morning, everyone.

Thank you for joining us on today's call.

I thought I'd start today by providing you with an update on the progress we have made with respect to some of the strategic priorities I laid out for you last quarter.

Beginning on Slide 3. First, we made some additional changes to our board in the quarter.

At our most recent board meeting in December, we formally welcomed our newest director, John Young, who currently serves as Group President of Pfizer Innovative Health.

Additionally, we announced the retirement of 2 longstanding board members effective as of the upcoming Annual Shareholders Meeting in early March.

On behalf of my fellow board members and the executive management team, I would like to personally thank Natalie Black and David Abney for their many years of dedicated service to Johnson Controls and wish them all the best.

We also nominated 2 new board members: Gretchen Haggerty, who served as CFO of U.S. Steel before retiring in 2013; and Simone Menne, who served most recently as CFO at Boehringer Ingelheim and as CFO of Lufthansa, prior to that.

Both nominees bring decades of senior leadership experience and a deep financial acumen.

I look forward to their joining the board and to leveraging their expertise in the coming years.

As we mentioned last quarter, we expected the Compensation Committee to make a number of changes to executive incentive plans in an effort to more closely align with shareholder expectations.

Those changes have been made, and beginning in fiscal year 2018, executives' annual incentive compensation plans are tied to 3 key performance metrics: organic revenue growth, EBIT growth and free cash flow conversion.

We're off to a strong start on our initiative to increase sales capacity.

Net of attrition, we added 180 new sales team members during the quarter, and we are well on our way to reaching our target for the year of 400 net adds.

Although we are still in the early stages as it relates to the changes we are making across the sales organization within buildings, I am very encouraged by the results we are seeing so far.

We're also beginning to see the initial benefits of driving improved gross margins in backlog.

Our field teams are more disciplined on pricing new projects and more focused on driving stronger service growth.

As a result, we are improving our booked margin rate on new orders as well as accelerating service growth, which will help alleviate some of the margin pressure in the field organization as the year progresses.

We saw solid organic top line growth across the buildings platform, which grew 4% organically in the quarter, admittedly, on our easiest comparison of the year.

But the underlying trends across each of our businesses are promising and should provide us some momentum as we go forward.

I am very encouraged on the progress we have made in expanding our services.

We've been adding both sales and technician capacity, and it is beginning to pay off with service growth accelerating to 3%.

Next, we have implemented our internal cash management office, and the team is actively engaged with the business units as well as external advisers in an effort to improve cash generation and management.

I have made this our top priority for the company in fiscal 2018, and we have the right team in place to deliver.

As I mentioned last quarter, we will continue to look at the portfolio, ensuring we are allocating resources in areas where we can generate the highest returns and divesting businesses that are noncore.

Lastly, I wanted to highlight a number of truly innovative new products recently launched.

As I have been communicating with many of you over the last 6-plus months, Johnson Controls entered into a significant product development phase roughly 3 years ago, and we are beginning to see some of the fruits of our labor here on Slide 4.

I won't spend time on each one of these, but I do want to call your attention to the breadth of product categories across Building Technologies launched within the quarter and over the last few weeks.

We have a steady pace of product launches planned for 2018 across the buildings portfolio with expanded AGM battery offerings within Power Solutions.

Turning to Slide 5, I do want to spend a minute highlighting our new York YZ centrifugal chiller, which was launched in early January.

The YZ represents a significant milestone in our product development journey and will become the new flagship in our chiller portfolio.

Our engineers have spent the past 3 years analyzing, designing and optimizing each component centered around the next-gen low-GWP refrigerant to create the highest efficiency centrifugal chiller on the market today.

With its mag bearing driveline, variable speed drive and our OptiView control panel, we have created what will be the new industry standard when it comes to reliability, energy savings and service capabilities.

I had the opportunity to spend some time with key customers and distributors at the AHR Expo in Chicago last week, and I can tell you the feedback was overwhelmingly positive, not just about the YZ but for the entire HVAC and controls products suite.

I'm extremely proud of the work our engineering and R&D teams are doing around the globe, and I am confident we are investing in the technologies and channels necessary to accelerate top line growth over time.

Let's turn to Slide 6. The macroeconomic environment remains generally favorable across most of our key geographic regions, supported by rising global GPs.

North American nonresidential construction markets are growing steadily, led by the institutional vertical.

Global demand for our commercial HVAC and controls products is strong, highlighted by recent strength in Asia, the Middle East and North America.

The sustained rebound in oil prices is helping to ease budget constraints.

It even released some large infrastructure projects.

Especially in the Middle East, it is also driving demand for our fire protection and suppression products that serve the harsh and hazardous end markets.

China remains one of the fastest growth regions, although pricing remains competitive, particularly in HVAC.

We remain focused on developing innovative new products and expanding our channel presence, and we are gaining share as a result.

In power, we continue to see increased adoption of our Start-Stop technologies globally and are well positioned to address the increased electrification in vehicles.

OE production is a soft spot, particularly in the U.S. and Europe, and we would anticipate that to continue in the near term.

That said, we are fully committed to serving our customers and channel partners worldwide, and our technology capabilities enable us to consistently outperform the market.

Overall, I would say the economic landscape is supportive of continued order and revenue growth momentum throughout fiscal 2018.

Moving to Slide 7. Field orders accelerated in the quarter to 5% year-over-year organically compared to the low single-digit average we experienced in fiscal 2017.

Underlying order strength was broad based across the 3 regions as well as all domains, including insulation and service.

Brian will provide more color by segment in just a few minutes.

Turning now to Slide 8. Let me recap the results for the quarter.

Sales of $7.4 billion increased 5% on a reported basis in the quarter and 3% organically, led by strong performance across our buildings platform.

As expected, adjusted EBIT of $748 million declined 1% as the impact from the Scott Safety divestiture and anticipated headwinds from lower-growth margins and incremental investments more than offset cost synergy and productivity realization.

EBIT margins declined 60 basis points year-over-year on a reported basis or 30 basis points excluding the impact of the Scott Safety divestiture, FX and lead.

Despite anticipated margin pressure in the quarter, we were able to deliver modest earnings growth of 2% year-over-year to $0.54.

Adjusted free cash was an outflow of roughly $300 million, which is typical of our first quarter and in line with our expectations.

Turning to our EPS bridge on Slide 9. You can see synergy and productivity savings adding $0.05 to the prior year.

Volume and mix added an additional $0.05, driven by solid growth across buildings and a mixed benefit in Power Solutions.

The cumulative benefit of synergies and volume/mix was mostly offset by expected gross margin pressure and incremental investments we discussed on our last call.

Overall, this resulted in $0.54 in adjusted EPS for the quarter.

With that, I will turn it over to Brian to discuss the performance within the segments.

Thanks, George, and good morning, everyone.

Starting on Slide 10, we provided the breakdown of our buildings business, which is the same pie chart that we provided you last quarter.

And we thought this would be a useful reference point for you as we talk through our segment results.

So let's move to Slide 11 and get into the details with the look at the performance of buildings on a consolidated basis.

And I would just say, as you'll see -- as I go through the results here, the Q1 headwinds we talked about on our Q4 call came through pretty much as we expected, and we see good momentum building as we move into Q2.

Total building sales in the quarter of $5.3 billion increased 2% year-over-year and 4% organically with products growth in mid-single digits and field growth in the low single-digit range.

Buildings consolidated EBITA of $559 million declined 3%, but keep in mind, the prior year included the results of Scott Safety.

Buildings EBITA margin decreased 60 basis points versus the prior year to 10.5%, but again, this includes a 40 basis point headwind from the Scott Safety divestiture.

So on normalized basis, EBITA margin declined 20 basis points as we expected.

You can see in the margin waterfall that the combined benefit of 130 basis points from cost synergy and productivity save as well as volume leverage was more than offset by 150 basis points of headwind from conversion of lower-margin backlog, price/cost pressure and the incremental investments in product and sales capacity, all generally in line with the Q1 expectations we set for you last quarter.

Looking to Q2, we do anticipate these headwinds will continue.

However, these pressures should begin to abate sequentially as we move throughout the year.

As George mentioned, total field orders increased by a very strong 5%, including improved margins with backlog up 4% year-over-year to $8.1 billion.

Now in order to provide more transparency on each of our reportable segments within buildings, let's review each segment's individual results.

So moving to Slide 12, Building Solutions North America.

Their sales grew 3% organically to $2 billion, led by high single-digit growth in our commercial HVAC and controls businesses and mid-single-digit growth in our solutions businesses.

Fire and security field revenues declined modestly in the quarter.

North America adjusted EBITA of $236 million was flat on a year-over-year basis, and EBITA margin declined 50 basis points to 11.7% as an 80 basis point headwind from lower-margin backlog conversion and a headwind from sales force additions more than offset the benefits of synergies and productivity and volume leverage.

Orders in North America increased a solid 4%.

During the quarter, we saw strong order intake led by our conventional HVAC business, integrated security and retail, primarily driven by higher installation activity.

Our solutions business, which as you know is primarily performance contracting, also had strong order growth, but this was against an easy prior year compare.

Given the underlying trends in North America and our opportunity pipeline, we expect to see continued solid order growth in Q2.

Backlog at the end of Q1 was $5.3 billion, which was up 4%.

So let's move to Slide 13 and EMEA/LA.

Sales of $915 million increased 4% organically with solid performance in install and service across our 3 primary regions.

Europe grew modestly in the quarter across fire and security and controls, and in the Middle East, we saw solid demand for commercial HVAC projects.

Latin America experienced broad-based strength across fire and security, HVAC and controls.

Adjusted EBITA of $71 million grew 9%, and EBITA margin expanded 40 basis points to 7.8%, primarily driven by cost synergies and productivity as well as modest volume leverage.

Orders in EMEA/LA increased a strong 6%, led by growth in Continental Europe and the Middle East with backlog increasing 1% to $1.4 billion.

Moving to APAC on Slide 14.

Sales of $597 million in the quarter increased 2% organically primarily due to higher service activity versus the prior year.

Adjusted EBITA of $74 million increased 3%, and adjusted EBIT margin declined 10 basis points, but this includes a 30 basis point headwind related to foreign currency.

The underlying margin increase to 20 basis points reflects savings from cost synergies and productivity as well as some modest volume leverage.

One item that I'd like to point out is that pricing does remain very competitive in China and did negatively impact margins in the quarter.

We do expect continued pricing pressure in our China field businesses as we look into Q2, but we're going to work to offset that headwind with cost actions.

Asia Pacific orders increased 9%, driven by strong growth in China, Northeast Asia and India, including a solid increase in service bookings with our backlog increasing 11% to $1.4 billion.

Now let's turn to global products on Slide 15, and again, sales increased a strong 6% organically to $1.8 billion with mid-single-digit growth across HVAC and Refrigeration Equipment, Building Management, and Specialty Products.

In HVAC and Refrigeration Equipment, our applied HVAC business grew in the mid-single-digit range with strong shipment growth across all geographies for both large and small tonnage chillers.

Another bright spot that I'd like to point out is our VRF business in Asia where we saw mid-single-digit organic growth in the quarter.

And the other thing I would also point out would be that our unconsolidated Hitachi joint ventures in China also saw strong double-digit growth in the quarter.

Moving to resi and light commercial HVAC equipment, we saw low single-digit growth versus the tough compare in the prior year.

Mid-single-digit growth in Building Management and Specialty Products was driven primarily by growth in buildings, controls, and fire and security products, led by increased demand for special hazards and fire detection equipment.

Segment EBITA of $178 million declined 13%, but remember, this reflects the impact of the Scott Safety divestiture.

The reported segment EBITA margin declined 140 basis points, but again, 110 basis points of that decline was attributable to Scott Safety.

So the underlying segment margin in products declined 30 basis points to 10% as the benefit of cost synergies in productivity and volume leverage was offset by about 100 basis points related to incremental product investments and 160 basis points related to price/cost pressure.

So let's turn to Power Solutions on Slide 16.

Power Solutions sales of $2.1 billion grew 1% organically as favorable price/mix was offset by a decline in unit volumes.

Global battery shipments declined roughly 2% with declines in both OE and aftermarket.

The 1% decline in OE was actually slightly less than declines in the overall audit production.

Shipments to the aftermarket channel declined 2% on a tough prior year compare, the warmer weather we experienced during the quarter and a bit of pull forward of demand that we saw in the fourth quarter of last year.

Once again, the China market was a highlight with units up 20% with strong growth in both OE and aftermarket channels.

Global shipments of Start-Stop batteries increased 20% with another quarter of strong growth in the Americas and China, and we saw EMEA Start-Stop up 3%.

Segment EBITA of $384 million declined 2% with margins declining 250 basis points to 18%, but this includes 150 basis point impact of FX and the higher lead prices.

Power's underlying margin declined 100 basis points as favorable mix and productivity savings were more than offset by planned product investments and start-up and launch costs, and increased transportation cost and logistic costs were a bit higher than we expected in Q1.

We're definitely seeing higher freight costs, particularly in the U.S. and Mexico, as well as higher fuel costs and unfavorable [Lane] mix, due in part to the ongoing impact of the hurricanes.

Turning to Slide 17 quickly, corporate expense.

We moved down 6% year-over-year to $101 million, and we continue to target a range of $425 million to $440 million for the entire year.

So let's move to Slide 18 and free cash flow.

Reported free cash was an outflow of just under $400 million in the quarter, which is in line with normal seasonal patterns and consistent with our plan and expectations.

Excluding about $100 million of integration cost, adjusted free cash was an outflow of $300 million.

As expected, we received a $200 million tax refund in the quarter, and this was offset by the $200 million in tax planning payments that we talked about in our fourth quarter call.

As George mentioned, the focus on improving cash flow is our company's top priority, and I am working closely with the newly established cash management office as well as our external advisers.

In Q1, we've created a free cash flow road map and identified specific actions with clear accountability that will improve trade working capital and drive higher free cash flow conversion as we move through the year.

For 2018, we're on track to deliver our 80%-plus adjusted free cash flow conversion, excluding the net onetime items that we communicated to you last quarter.

Turning to balance sheet on Slide 19.

Net debt of $11.9 billion is down $1.3 billion sequentially versus the end of fiscal '17.

Of course, the biggest driver of this decline was the $1.9 billion paydown of a TSARL debt using the net cash proceeds from the Scott transaction.

In addition, we repaid nearly $500 million of debt in Q1.

In early December, given the positive rate environment, we issued $750 million -- EUR 750 million in debt with an effective interest rate of essentially 0% for a term of 3 years.

We used these proceeds to fund recent maturities as well as the term-outs in commercial paper.

In the quarter, we also purchased 3.6 million shares for a total of $150 million, and our outlook for the remainder of fiscal '18 still assumes buybacks to offset dilution.

Finally, I wanted to spend a few minutes on U.S. tax reform on Slide 20, which I know is of interest to everyone.

During the quarter, we took a provisional net charge of $200 million, which reflects our initial estimate of the impact of tax reform in fiscal '18.

This includes a onetime noncash tax benefit of $100 million related to the remeasurement of our net U.S. deferred tax liabilities, and we also took a onetime $300 million tax charge for a preliminary estimate of taxes on unremitted foreign earnings.

As you all know, the cash taxes on the foreign earnings component is very manageable for us and will be funded over an 8-year period.

Given the significance and complexity of U.S. tax reform, we continue to analyze all aspects of the new legislation and may adjust this onetime charge as necessary over the course of the year.

With respect to our effective tax rate, there will be no change to our 14% rate this year.

We do anticipate our fiscal '19 tax rate to increase to a range of 16% to 18% based upon the effective dates of certain provisions of the new legislation.

As always, we will continue to evaluate tax planning opportunities as we move forward.

With that, let me turn it over to George.

Thanks, Brian.

Before we open up the lines for questions, I wanted to reiterate that fiscal 2018 will be a year of change.

We are intensely focused on driving execution to deliver adjusted EPS in the range of $2.75 to $2.85, which represents a 6% to 10% increase in the earnings per share versus fiscal year 2017.

As I mentioned on our last call, consistent with prior years, we expect our earnings per share to be stronger in the second half of the year due to the normal seasonality of our businesses, the pace and timing of investment, as well as price cost and gross margin headwinds, all of which are heavier in the first half.

Based on our current outlook, we would expect EPS to be weighted roughly 38% in the first half and 62% in the second half compared to our normal 40-60 split.

As I think about the second half ramp, we're going to focus on controlling what we can control.

Although I feel good about the underlying momentum we're seeing in the top line, if organic growth begins to decelerate, you should expect that we will dial back the pace of investments.

Cost synergies are on track, and it will give us about $0.03 more earnings in the back half than in the first half.

Price/cost headwinds should begin to flatten out as some of our more recent price increases begin to take effect.

We feel good about our price realization so far, but obviously, Asia, and China specifically, are still tough.

And we are taking additional productivity actions to help offset some of the areas we are seeing pressure.

Our guide assumes price gets better, so that is one area we will have to watch.

I am encouraged by the margin improvement we are seeing in backlog, the traction we are seeing on sales capacity and by the acceleration we are seeing in higher-margin service and product sales.

Ultimately, we are committed to delivering on profitability as we continue to manage our way through the integration and focus on reinvesting for growth.

We've made the structural changes necessary to help ensure that the focus on execution is felt deep into the organization.

With that, let me turn it over to our operator to open the line for questions.

(Operator Instructions) Our first question comes from Deane Dray from RBC Capital Markets.

Speaking of the Europe change, I like the revamped slide deck.

Lots of good color, and I especially like the bridges that are included, so I appreciate that.

Thanks, Deane.

So first question, George, I was hoping you could expand on the strategic focus to improve the serve margins -- secured margins in buildings.

And I can't help but think that this sounds a bit like project selectivity, and maybe there's some parallels there.

But what are the initiatives?

And then for the 5% increase in orders this quarter, what's that margin improvement or the implied margin?

Sure.

Let me start, Deane, by saying that when I took over, I set up a sales leadership team that I ultimately chair, and we've been meeting monthly, making sure that we're executing on the commitments we've made to not only put the capacity in place from a sales force standpoint, but to be able to execute on and improve margins and, ultimately, deliver on the organic growth.

We're making a tremendous amount of progress with this team.

And so not only have we been able to add 180 heads in the quarter, that was in addition to the 50 that we added in the fourth quarter.

But strategically now, as we're now segmenting our markets, understanding how we're deploying that capacity to be able to go after where growth is occurring and making sure that, from a pricing standpoint, we're staying disciplined with the projects that we're taking on.

And so that said, we have seen significant improvement not only in the pipeline generation but how that's converting to orders and then how that's going to now set us up to accelerate organic growth through the remainder of the year.

When you look at the booked margins in the quarter, we book margins so that the margin and backlog now is up 30 basis points.

And so you can imagine, we booked margin much better than that in the quarter that brought the average up about 30 basis points.

So I'm feeling really good working with the sales team and how we're going about deploying the resources we're putting into place, the productivity we're getting from those resources, the booked margins that we're securing, the service growth that we're accelerating, and that all will then translate into not only improved growth in the second half, but also, from a margin perspective, much higher margins.

So is there a bit of this project selectivity playbook that you're running?

So Deane, the project selectivity is making sure that, from a resource standpoint, as we're understanding the markets and the opportunities that we have in the markets, that we're deploying our resources where we can accelerate and we can ultimately get the returns for the resource that we're putting into these projects and that we're beginning to execute.

So certainly, from a discipline standpoint, we've implemented the discipline to make sure that, as we're planning these projects, we're planning them in a way that positions us to be able to get the appropriate returns.

And so whether it be project selectivity or just pure discipline in how we deploy our resources and setting expectations for the type of margins that we expect by executing on these projects, that's ultimately what we're doing.

Got it.

And then just as a follow-up question, and this may just be competitive sniping with the second coming of ADT, but there's been some claims about taking share in light commercial.

And you can correct me if I'm wrong, but the noncompetes all came off in 2014, and it really shouldn't be anything new going on here but would be interested in your perspective.

I would reinforce what you said, Deane.

Our security business is executing extremely well in North America.

We're continuing to grow.

We're continuing to execute on the margins and, ultimately, delivering on performance.

And so as you said, the noncompete went away back in 2014.

Certainly, we respect our competitors.

But what we're seeing now, we're continuing to execute on our business, continuing to grow, and continuing to maintain and grow the margins.

Our next question comes from Jeff Sprague from Vertical Research.

George, just back to thinking about how all this kind of plays out in margins.

When we -- when you say margin is up in backlog up 30 basis points, that's up relative to what it, I guess, was last quarter.

Is it tracking up relative to what you're reporting here today?

And can you give us some context on that?

Yes.

Absolutely, Jeff.

In the first quarter, when we look at -- let me just go back and reframe what the problem was when we gave guidance back in November.

We had -- when we looked at our North America backlog, we had 75 basis points of pressure in about a $5 billion business.

And so we had projected that there was going to be roughly about $40 million of pressure that was going to play out through the course of the year, and we're going to have to offset that with productivity and other initiatives so that we'd be positioned to deliver on the commitments we made.

So we've seen about $16 million of that pressure in the first quarter, and so the remainder of that will play out a little bit less in the second quarter and then less in the third and fourth quarter.

And I would tell you, with what we've been booking, we had an improvement of about 70 basis points, maybe a little bit better, in the quarter.

And so the work -- the projects that are going into backlog, as we project how they will play out remainder of the year and beyond, we'll start to see improved gross margins.

And so I'm projecting here in the second quarter, our margins will be relatively flat in buildings with the work that we've done, realizing that, in addition to the backlog that's converting with the pressure, we also have price/cost that we've experienced here in the first quarter, a little bit more in the second quarter -- a little bit less in the second quarter, and then we start to see it turn positive in the second half.

So the combined -- those combined topics, as we're now executing, we're now seeing the margins flat, and then you'll start to see them improve in the second half.

And then thinking about the sales force growth and initiative, how long does that remain a headwind?

How long does it take, for lack of a better term, for a new salesman to carry his weight, so to speak, and be accretive to the equation?

What I'd say, Jeff, it varies depending on what business you're in and whether it be large install project-type business or whether it be service -- transactional service business.

But you could say that when we estimated the year, we said we're going to have about $15 million to $20 million of potential pressure for what I would say while we're adding the sales capacity, we would have less productivity per head with that new capacity.

What I would tell you is that the way we're bringing them onboard, we've been very process-driven in training, getting them educated and trained so that they can hit the ground running.

So there's still going to be that pressure, but I have confidence with the folks that we've brought on here, not only in the fourth quarter, first quarter, we're making really good progress in how we're deploying that capacity and making them productive through the course of a year.

So you can average it.

It probably takes around 6 months -- 3 to 6 months depending on the type of business, but I'm encouraged.

I'm extremely encouraged by the progress we're making and what we can expect here going forward.

And then just one last one from me.

So you did do some share repo in the quarter.

Should we assume you're chipping away at repo?

Or kind of given your leverage, you're kind of on hold until the cash flow comes in later the year-end or there's some asset sales or something else going on?

Yes, Jeff.

I think we -- it's $150 million in the first quarter, $100 million that we did in the month of October.

And the thought is roughly $50 million a quarter for the remainder of the year, which is essentially offsetting option dilution.

So I don't think, at this point in time, we're looking at any incremental share repurchase above and beyond that.

Our next question comes from Steven Winoker from UBS.

Just wonder on the cash side, I know you did reference it in your prepared remarks, but a couple things.

One, when did the conversion addition to comp start to really hit the ground for management, sales force, et cetera?

And then secondly -- or not sales force, sorry, but the broader teams.

And then secondly, maybe just talk about that cash management office.

And I noticed today seasonally normal cash outflow, but maybe get into sort of the biggest drivers of that and -- that we might expect to see the improvement in over the next year.

Steve, I'll take the first part of the question, then I'll turn it over to Brian on the cash management office.

Relative to the incentives, as we went through the succession with myself becoming Chairman and CEO, certainly, there was a lot of focus on incentive compensation here or executive compensation within the company.

And as we're putting the plan together for 2018, that was certainly something that was front and center with our board.

And so we worked through that very, very quickly so that when we launched our incentives with our executive team and then had similar components that are embedded in the executive leadership incentive that now were pushed down into sales incentives and operational incentives, that all was done at the beginning of the year.

So we wanted to be positioned so we could hit the ground running, the right metrics were in place, the right incentives were in place so that we could make sure that we execute on the commitments we made for the year.

Now Brian, you might want to talk a little bit more about the cash management office.

Yes.

We set up during the quarter the cash management office, which is really a combination of roughly 8 to 10 people internally, and then we've got an outside adviser that's working with us on this effort.

I will just comment that we took one of our top finance people, the CFO of our buildings business, and have put him in charge of the cash management office, which is I think reflective of the importance that we're placing on making sure that we deliver on the free cash flow conversion commitments we've got.

As far as Q1 and why Q1 tends to be a bit of a cash outflow quarter for us, I think I'd focus on a couple things.

First of all, as it relates to the fourth quarter, there is a huge push in Q4, and that tends to be our best cash flow quarter.

And so there is a little bit of, I would say, pull-forward maybe in Q4 from Q1.

Secondly, I would say our lowest income quarter tends to generally be the first or second quarter as well.

And then there's some timing of working capital that I put in the equation as well, and then we do pay our bonuses out in the first quarter of each year as well.

So those are probably some of the items that really drive some of the timing, Steve.

But I think it tends to be an outflow in Q1, an inflow in Q2.

And then Q3 and Q4 tend to be our strongest quarters.

And then George, I see all the Start-Stop growth that you're mentioning in power.

Can you maybe comment on the progress of those factor investments in AGM, how we're -- where we are in the ramp on those?

And then I guess, just one last one, maybe Brian also.

I understand that you're going through a portfolio review together, but any of the tax legislation changes with regard to asset sales?

338(h)(10) elections changed the view of tax leakage across the portfolio.

Does it give you more options?

Yes.

So let me -- starting with the AGM, like we said, we're up about 20% year-on-year, and that's really a function of very strong penetration in Europe, and that continues.

And we've -- we're kind of in line with the market.

We are picking up a little bit of share.

And then if you look at where the investments are being made, it's mainly in China as well as North America.

So we're executing well on putting that investment in place, and that's what's contributing to the very strong growth that we're getting in China, being up -- I think it's up over about 50 -- China was up almost 50% or thereabouts and continue to see good progress in North America.

And so that is going to be -- when you look at the mix, that's going to be extremely important for us to continue to execute on those investments and the volumes from those investments.

Yes.

And as far as the tax rate impact, I mean, clearly, to the extent that any business that we would decide to divest of from a noncore standpoint to the extent it had U.S. operations of significance, this tax rate reduction certainly would play into that.

Our next question comes from Steve Tusa from JPMC.

So just wanted to be clear.

What is the target for your incentives for this year in cash?

I think the guide is 80%-plus, and then $1.3 billion of -- or up to $1.3 billion of CapEx.

I didn't see kind of an explicit reaff of that.

Just wanted to make sure that we're accounting for any kind of tweaks there.

And is it based on conversion or absolute free cash flow?

The adjusted free cash flow conversion is at 80%-plus.

As we've talked about previously, there's no adjustments above and beyond that we've communicated already that are necessary really for us to talk about here.

So the 80%-plus is our target.

Okay.

And the CapEx guide?

CapEx, $1.3 billion for the year.

There's a little timing in the quarter, but it's still $1.3 billion for the year, Steve.

Okay.

And then just following up on, I think it was Deane's question, on the security side.

I mean, you said your security business is holding up.

In North America, I think the field business, fire and security field with a modest decline.

Did that mean kind of fire was down and security is growing?

Maybe you could just kind of give us some idea of how kind of that core business did, the security business did in the quarter from a revenue perspective.

Yes.

So in North America, where we've had a gap with our capacity has been in fire.

And so as we talked about last year, having some shortfall of putting the sales capacity in place, a lot of that was in the fire space.

That has kind of rolled forward and why we're seeing -- it's really just a temporary decline within that business.

We've been adding capacity, both in sales as well as technicians, because the market is very attractive.

And we're making progress.

And so it's more -- I would say it's more of a temporary situation because of the way that we're short on how we're staffing the fire business, but that's going to -- that will continue to improve now with the work that we've done and the capacity that we're putting in place.

The fire and the security business I think overall was modest.

I mean, year-on-year, they had a good year.

First quarter last year, I think they were up low single digits.

This year, the security business...

Correct.

Correct.

And then one last question on commercial HVAC pricing, asking all these guys -- all the guys this question.

What are your assumptions embedded in -- for price this year for the business where it's relevant?

I think it's probably mostly in the products business.

You had a tough price/cost spread this quarter.

What's your pricing assumption embedded for commercial HVAC?

Yes.

So if you look at our price/cost pressure, we're -- in the first quarter, it was about $34 million, and a lot of that certainly in HVAC.

I mean, as we price -- we put our price increases.

It's our -- beginning of our second quarter, so the beginning of the calendar year.

And I know they range from 5% to 7% type price increases that are being put into place.

I think that compares similarly with our competitors.

Certainly, we're going to be very disciplined with how we execute on these price increases, given the pressure that we've had here in the first quarter.

Some of the actions have already taken place, and so the price pressure, price cost will be better in the second quarter.

And then as we get into the third and fourth, we believe that then we have a positive price/cost.

And so right now, it's really all about executing and staying disciplined.

Those price increases that go into place because we are seeing -- on the opposite side, we are seeing a commodity headwind, and it's coming through.

I guess, I've seen a lot of letters around residential price, and I -- sorry to prolong this, but I'm just trying to get an idea of the magnitude.

In commercial markets, it's a lot more opaque for everybody.

And Ingersoll made some positive comments on ability to get price, so has Carrier, but there's no numbers that have been put around those.

I guess, are the magnitude of commercial HVAC price increases, I mean, is it low single digits?

Is it mid-singles?

Hoping to capture low singles?

Is it TBD?

Like, just trying to get an idea of the magnitude that you guys are all kind of trying to put out there.

Nobody seems to be giving like a really good answer.

So Steve, I've been spending a lot of time in the field here over the last couple months, and this has been front and center with many of our discussions.

And I would tell you, it's probably in a range -- it varies depending on market.

Brian talked about China being a little bit more difficult right now with some of the pricing.

But on average, what I would say it's kind of low to mid- -- probably low to mid-single digits that we're getting traction, which is certainly part of our ability to be able to now not only improve the projects that we're putting in place, and then, ultimately, how we're executing on margin improvement with those projects.

Our next question comes from Andrew Kaplowitz from Citigroup.

Going back to global products, the 6% organic revenue growth looks like the strongest it's been in a while.

While you mentioned fire security, VRF being highlights of the quarter, the former Tyco high-asset business has been a drag on the business for a while.

Is that really the biggest change in the growth profile of the products business as we sit here today?

What I would say is we've had strength that's very broad based.

And so as Brian mentioned in his prepared remarks, we're seeing it across all of the platforms.

So we break it down into HVAC equipment.

We break it into Building Management, which is all of our electronic equipment.

And we break it into specialty, which is the fire suppression business.

And when you look at across the board, it's broad based.

Anywhere -- it's all kind of around 6 -- about 5% to 6%, 7% across the board.

And so what's happening here is you have 2 -- there's 2 key elements, where we've been investing heavily over the last 3 years.

We've actually increased our technology new product developments.

If you look at our run rate of investment, they're up about $165 million on a run rate over the last 3 years.

We're now seeing the products from those investments come into the market.

And so we are positioned to be able to gain share and continue to accelerate our positioning and, in that, in addition to some of the market recovery.

And so as we see the Middle East now with oil and gas beginning to recover, we see industrial refrigeration.

We're up very strong double digits, 20-plus percent in our industrial refrigeration business with orders and backlog extremely strong.

And so what we've seen here is not only a significant recovery of fire and security products but very broad-based execution across every one of our platforms.

That's helpful, George.

And I want to ask you about the power margin in the quarter.

You identified transportation cost as a drag, which I'm guessing really wasn't as much in your initial guidance.

So maybe you could give us a little more color on what you expect going forward there, and if that cost is higher, what you can do to sort of get closer to the flat margin guidance that you'd given for the year.

Yes.

So overall, when you look at the total company, we're down about 60 basis points in the first quarter, and about 30 of that was the divestiture of Scott Safety.

Now if you break it down into the 2 segments, buildings, it was right in line with the lower margin on backlog conversion.

Again, we're down about 60 -- it was about 60 basis points, 40 of which was driven by the Scott Safety divestiture.

And then with the additional price/cost that we talked about in the quarter and then the acceleration of our sales force, the investments in sales force, and the continued product investments is what ultimately contributed to that.

So we got strong productivity and integration savings, plus the volume was a little bit more than offset from the price/cost and the additional sales investments and continued product investments.

So that's the building side.

On power, the power margins, right off the top, you got 150 basis points from the impact of FX and lead.

And so then when you look at the remaining 100 basis points, we got the volume leverage and mix productivity was more than offset with the product investments -- continued product investments as well as the increased transportation cost that Brian talked about.

That posthurricane as well as with the overall pickup in the economy, you can imagine transporting lead-acid batteries, there is a cost to that.

And as we were going into our ramp-up in the first quarter getting ready for the selling season, certainly had higher demand.

And so with that capacity is what created some of the increased costs that we saw in the quarter.

So I think when you look at the power margins, as George said, it's 100 basis points in the first quarter, that transportation and logistics will probably continue with us into the second quarter, and I would think in terms of half what we saw in the first quarter.

And then I think as we move throughout the year through either cost actions we're going to take or pricing actions we're going to take in the back half of the year, we'll make effort to cover that, but there still will be some going into Q2.

Our next question comes from Tim Wojs from Baird.

I just had 2 quick follow-ups, if you could.

I guess, first, on the order growth in products, I'm not sure if I saw that.

I might've missed it somewhere, but if you let me know what the order growth in the products business was in the quarter.

And then secondly, just on the cost side of price/cost, what are you expecting or what are you kind of putting into the back half of the year in terms of input costs around things like metals and refrigerants?

Yes.

So on the first one...

So let me take that one.

In terms of the orders, one of the things that we decided to do, just to make sure that everybody is clear, is when you're looking at forecasting our revenue going forward, the orders are now focused on the field side of the business because keep in mind that on the product side, it tends to be more of a book-and-ship type business.

There's maybe a little bit of variability from quarter-to-quarter.

And you may recall last quarter, actually, orders were a little higher than the revenue growth, and this quarter, I would say that the orders were a little lower than the revenue growth.

But think of products as more of a book-and-ship-type business.

And the second part as far as price/cost, we're monitoring all of our commodities and projecting what that -- what each one of them will do.

And as we look at the mix of our commodities with the overall cost of goods that we have, we're making sure that our pricing actions are not only in line but ahead of that to make sure that if there are any additional pressures going forward, we're going to be able to abate the overall margin pressure from that.

And the only thing I would add to that in terms of price/cost, because I know there's a lot of focus on that, we had about $0.03 in the first quarter.

That's expected to moderate to maybe $0.02 in the second quarter.

And keep in mind, as we get into the second half of the year, it'll actually be a benefit for us.

So particularly as you think about first half, second half, that is another thing that flows into the second half of the year as a benefit.

Our next question comes from Noah Kaye from Oppenheimer.

Question for Brian...

We're getting a lot of feedback on the line.

[Technical Difficulty]

Joe Ritchie from Goldman Sachs.

Maybe just circling back to this price/cost question for a second.

I just want to make sure that -- I may have not heard the answer, but we talked about $34 million headwind in the first quarter.

It seems like your guide is assuming that it gets better as the year progresses.

What's the -- or explicit assumption on price/cost for the outlook?

Yes.

So as we laid out the year, and certainly, this has been one of the headwinds we've been extremely focused on.

We started off knowing that the first quarter was going to be the most difficult, which it was, $34 million, mainly in global products and as well as some of the pricing in China that we talked about.

But most of the price increases going to effect this quarter, and as we've started the second half, we believe that we're going to mitigate a lot of the pressure that we had in the first quarter and the second.

Not fully.

So it will improve first quarter to second quarter.

With the idea with all of the actions in place, we then, in the second half, return positive in price/cost with the actions that are being taken.

And so that's -- we're watching this very closely.

We're making sure that we're staying disciplined in the market and that we're ultimately yielding what we need to yield to be positioned to be able to deliver on the commitments we made here through the year.

Got it.

That's helpful, George.

I guess, my follow-on question.

In thinking about the like lower-margin projects, I mean, you talked about it a little bit last quarter.

That it had been -- basically, it's been building for about the last 18 months.

Fully recognize that your backlog typically isn't that long cycle.

I'm just trying to understand like when do we start getting through these lower-margin projects?

Will we be done by the second quarter?

Or could they possibly bleed into the second half of your fiscal year as well?

Yes.

So our projects -- you can look at projects we turn.

Some of the quick-turn projects can be a few months, and then some large projects can go multiyears, the average being somewhere 6 to 9 -- probably 6 to 12 months, depending on whether it's fire, security or HVAC.

And so we knew the turn that we saw coming through in the first quarter that, that was going to be the toughest.

And as we said, the -- in North America, at the start of the year, we had 75 basis points of pressure.

On a $5-plus billion backlog, that was roughly about $40 million.

About 40% of that turn's in the first quarter.

So about -- it was about $16 million.

And so as we now project what's in backlog and how it's going to turn, that will be reduced in the second quarter and then minimal impact in the third and fourth quarter based on what's being put into the backlog.

And just another note on that would just be to say that in line with the compensation discussion, a big change has been making sure that not only from a sales standpoint but from an overall comp standpoint, margin is part of the compensation now for our sales team and for our operating teams in the field.

And I'd like to turn the call over to George now for some closing comments.

All right.

Thanks, again, for joining our call this morning.

And so I hope you took away from our call today we are building momentum and expect a very strong second half.

So I look forward to seeing many of you soon.

Operator, that concludes our call.

And that concludes today's conference.

Thank you for your participation.

You may now all disconnect.