江森自控 (JCI) 2019 Q1 法說會逐字稿

Welcome to Johnson Controls First Quarter 2019 Earnings Call.

(Operator Instructions) This conference is being recorded.

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

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

Good morning, and thank you for joining our conference call to discuss Johnson Controls First Quarter Fiscal 2019 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'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 discussions, 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.

Given the announced sale of our Power Solutions business, the results of Power are reported as discontinued operations.

The focus of this call will be on continuing operations.

GAAP earnings per share from continuing operations attributable to Johnson Controls ordinary shareholders was $0.12 for the quarter and included a net charge of $0.14 related to special items.

These special items primarily relate to integration costs and discrete tax items in the quarter.

Adjusting for these special items, non-GAAP adjusted diluted earnings per share from continuing operations was $0.26 per share compared to $0.21 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 our call today.

What I thought I'd do is start with a brief strategic overview, then turn it over to Brian to review the financial results and end with an update on 2019 guidance.

As we discussed with you on last quarter's call, 2018 was a year of significant progress for Johnson Controls, having set and achieved several ambitious goals to improve operational performance with a bottoms-up and top-down approach.

This included harmonizing our various legacy policies, establishing better processes around cash generation, better aligning our top executives to driving the fundamentals of our businesses and concluding the strategic review of Power Solutions.

Although I said it last quarter, I really can't thank our employees around the globe enough for all their hard work, extra hours and in many cases, assuming new responsibilities.

As we've entered into 2019, our goals are the same: continue to build upon the success in 2018 to further improve the operating fundamentals of our businesses and across all of our key initiatives.

We have dedicated teams in place working on the Power separation.

And I can tell you, at this point, everything is progressing well and we are on track to close no later than June 30.

We continue to see the return on investment from several years of elevated R&D spend and engineering spend as a percent of sales aimed at refreshing our product portfolio.

For those of you who joined us at this year's AHR Expo in Atlanta, I am sure you walked away with a good sense for some of the new products we are bringing to the HVAC and building controls markets.

New product introductions are continuing to ramp in 2019, and we are well positioned to continue gaining share across our product categories.

We've built a complete global portfolio of proven solutions to help our customers design, build, retrofit and manage the next generation of safe, smart and connected buildings.

As a global leader in sustainability and energy efficiency, our approach to innovation focuses on enabling our customers and communities to reduce energy consumption, lower operating cost and minimize the environmental footprint of their facilities.

We achieve these with tools and technology that make those facilities smarter by using sensor-based automated monitoring of environments and security systems as well as data mining and artificial intelligence.

Whether that be the latest release of our Metasys software platform, our smart connected chillers or our cloud-based digital solutions offerings, we are able to offer compelling value propositions across all of our key verticals.

As we continue to drive top line growth, we will remain focused on improving returns and increasing our operating leverage.

We continue to strengthen our processes around large project approvals to ensure we are achieving appropriate margin rates.

We have enhanced pricing desks and have set consistent productivity metrics across sales, service and installation to drive improved performance.

Turning to Slide 4. Orders in our field businesses increased 7% organically.

And as you can see on the slide, although we are beginning to lap more difficult prior year comparisons, our momentum increased sequentially.

The increase in orders was driven by mid-teens growth in global commercial HVAC and mid-single-digit growth in Fire & Security, partially offset by a significant decline in our North America solutions business.

Brian will provide you with some order details in his segment review, but we continue to see broad-based strength in our order book across all 3 regions and across most of our core product platforms.

Our backlog ended the quarter at $8.5 billion, up 7% organically versus the prior year, which puts us in a much better position in 2019 with strong visibility to execute on our revenue expectations.

Our project pipeline remains robust and we continue to see -- expect continued order momentum across our end markets over the course of the year.

Taking into consideration the increasingly difficult comps as we move throughout the year, we expect continued strong order growth in the mid to high single-digit range.

Before I move to the summary of our first quarter results, just a quick comment on the macro environment.

As evidenced by the continued strength in our orders in revenue, our end markets remain healthy.

Generally speaking, we are not seeing a notable slowdown in any of our internal leading indicators as our short-cycle book-to-bill trends, service growth and both small and large project bookings remain robust.

We continue to monitor global economic conditions.

And although it seems clear that GDP growth rates in some key regions are beginning to moderate to some degree, we feel good about our position.

We have made the right technology investments and have expanded our sales force as well as distribution footprint.

We have been expanding capabilities in our service business, which is over $6 billion in annual revenue with roughly 2/3 recurring in nature.

In addition to leveraging our industry-leading installed base, we have been developing new technologies, enabling us to create new value propositions for our customers.

We are focused on execution and are continuing to take out costs and drive productivity.

Turning now to Slide 5. Let me recap the financial results for the quarter.

Sales of $5.5 billion increased 6% on an organic basis, led by 7% growth in products and 5% growth in the field businesses.

Adjusted EBIT of $400 million grew 10% on a reported basis and 15% on an organic basis despite the anticipated pressure in our Asia Pac business and the carryover impact of sales capacity investments, driven by solid growth in segment profit as well as lower corporate expense.

Overall, underlying EBIT margins expanded 60 basis points year-over-year, excluding the impact of FX and M&A.

Adjusted EPS of $0.26 increased 24% over the prior year, driven by solid top line performance and a modest benefit from below the line items.

Adjusted free cash was an outflow in the quarter of approximately $200 million, better than the historical use of cash in Q1.

The Cash Management Office continued to execute well, driving improvements across our cash fundamentals.

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

Thanks, George, and good morning, everyone.

So let's start on Slide 6 and take a quick look at the year-over-year EPS bridge.

As you can see, segment operating performance added $0.08 versus the prior year quarter, and this was partially offset by $0.02 of continued product and channel investments and the carryover run rate impact of our fiscal '18 sales force investment.

I would also note that net financing charges provided a $0.02 benefit, primarily driven by favorable interest rates and some FX gains, and this was more than offset by a slightly higher year-over-year tax rate and some pension amortization and FX headwinds.

So let's move to Slide 7. Buildings on a consolidated basis had total sales of $5.5 billion, which was up 6% organically.

This was led by strength in products, up 7%, and our field businesses, which were up 5%, driven by continued strength in both service and project installation activity, which grew 6% and 4%, respectively.

Segment EBITA of $590 million grew 9% organically, driven by strong growth in both our field and shorter-cycle products businesses despite some continued high investment levels.

I would note that fiscal Q1 is typically our lowest quarter from a volume leverage standpoint given the seasonally lower revenues in our Buildings business.

Our segment EBITA margin expanded 30 basis points on a reported basis to 10.8%.

And as you can see in the waterfall chart, this includes 90 basis points of underlying operational improvement, partially offset by continued product investment as well as the run rate sales force investments and indirect channel cost -- expansion cost.

Now let's review each segment within Buildings.

Starting with North America on Slide 8, you can see that sales grew 6% organically to $2.1 billion with install activity up 6% and service up 5%.

We saw another quarter of strong performance in our applied HVAC & Controls platforms, which grew in aggregate mid-single digits organically, led by 5% growth in core applied HVAC equipment installation service.

We also saw Fire & Security grow mid-single digits, led by high single-digit growth in Fire and our solutions business, which was up 30% in the quarter.

And I'd just point out, as you know, that the solutions business can be quite choppy on both an order intake and revenue standpoint quarter-to-quarter.

Adjusted EBITA of $253 million grew 8% on an organic basis.

The North America EBIT margin expanded 30 basis points to 12% as we saw the benefits of volume leverage and synergy and productivity save, partially offset by the year-over-year impact of our run rate sales force investments and unfavorable mix as install revenue growth outpaced service growth in the quarter.

Margin was also impacted by mix within the individual platforms.

Orders in North America increased 5% organically, driven by applied HVAC orders up mid-teens, and we do think this benefited partly from some equipment pull-forward ahead of prices.

And Fire & Security was up mid-single digits, including strength in project installation and service.

This growth was partially offset by a significant decline in large orders in solutions, which, as I mentioned earlier, can be quite choppy.

Backlog of $5.4 billion increased 4% year-over-year.

Now let's move to EMEA/LA on Slide 9. There, we saw sales of $907 million, which grew 4% organically with continued strength in service, partially offset by a modest decline in project installations.

Growth was positive in most regions and across most lines of business.

Europe grew mid-single digits, led by continued recovery in IR and HVAC, which combined are roughly 1/3 of the revenues for this segment.

Orders in Europe increased 10% organically, led by strong demand in IR, security and HVAC.

In the Middle East, we saw revenue decline low double digits as continued growth in service activity was more than offset by softness we're seeing in HVAC project installations, but this was also driven by a tough compare with the prior year, which was up strong double digits.

Latin America revenues increased mid-single digits, led by strength in our security monitoring business and solid growth in IR and fire suppression.

Adjusted EBITA of $77 million increased a strong 17% organically, and our EBIT margins expanded 70 basis points to 8.5%, and this includes 30 basis point headwind from FX.

The underlying margin increased 100 basis points as favorable volume and mix and productivity and synergy save more than offset the run rate impact of sales force investments in '18.

Orders in EMEA/LA increased 9%, led by solid growth in Europe and Latin America across both service and installation.

In the Middle East, orders declined low double digits, again driven by a tough compare with the prior year.

Overall backlog ended at $1.6 billion, up 15% organically.

So let's move to APAC on Slide 10.

Sales of $613 million grew 6% organically, driven by an acceleration in project installations, which grew 8% in the quarter.

Growth in install was led by HVAC and IR.

Adjusted EBITA of $66 million declined 9% on an organic basis.

And as expected, EBITA margin declined 160 basis points to 10.8% as the benefit of the favorable volume was more than offset by the higher install mix, run rate sales force investments and the as-expected competitive pressures in China.

Asia Pac orders increased a strong 9% in the quarter, driven primarily by service, and we are beginning to see some improvement in year-over-year secured margins, particularly in service, which should benefit the latter half of this year.

Overall backlog increased 12% to $1.5 billion.

Turning to global products on Slide 11.

Sales increased 7% organically, and this was on top of the mid-single-digit growth last year.

Sales totaled $1.8 billion in the quarter.

Buildings Management Systems grew low double digits with strength across all 3 of our platforms: controls, security and fire detection.

Sales across our HVAC and IR equipment businesses grew high single digits collectively.

In global residential HVAC, which, as you know, includes sales to our consolidated Hitachi JVs in Japan and Taiwan, grew mid-single digits in the quarter.

North America resi HVAC grew high single digits, benefiting from favorable weather trends and strong price realization.

And our global light commercial HVAC grew mid-teens in the quarter with North America up low teens.

IR equipment revenues declined low double digits in the quarter due to a very difficult prior year compare, which was up a strong double digits.

Our applied HVAC equipment base grew high teens, reflecting strength in our indirect channels in both North America and Asia.

We saw Specialty Products grow mid-single digits on strong demand for our fire suppression products, and this was broad based across all regions, particularly in APAC.

Segment EBITA of $194 million was up 15% organically.

And the margin expanded 60 basis points, driven by higher volume leverage and mix, positive price/cost in the quarter and the benefit of cost synergies and productivity save, partially offset by our continued product and channel investments.

So let's move to corporate on Slide 12.

Corporate expense was down 11% to $93 million as we continue to see the benefits of our cost reduction initiatives.

For the full year on a continuing ops basis, we expect corporate expense in the range of $380 million to $395 million.

This does not include any takeout related to the Power Solutions divestiture, which will begin post transaction close.

As a reminder, over time, we expect to reduce corporate expense by about $50 million.

Moving to cash flow on Slide 13.

As George mentioned, reported cash flow was an outflow in the quarter of slightly above $200 million.

If you exclude a little less than $100 million of integration and transaction costs, adjusted free cash flow in the quarter was an outflow of a couple of hundred million dollars.

And as you know, our first fiscal quarter is typically a cash outflow, but we were pleased with the continued year-over-year improvement we're seeing in the cadence of our cash generation.

For fiscal '19, we expect adjusted free cash flow conversion of approximately 95%.

And as I mentioned on the Q4 call, this excludes special cash outflows of $300 million to $400 million related to some special integration costs and a $600 million tax refund that we expect either in Q4 or in early fiscal '20.

Moving to the balance sheet on Slide 14, you can see that our gross and net debt increased $1 billion sequentially as planned, which reflects a higher CP balance to support our Q1 trade working capital needs as well as a more aggressive share buyback program that we've implemented.

Assuming a June 30 close for Power Solutions, we expect to pay between $3 billion and $3.5 billion of outstanding debt in Q4 with a portion of the net proceeds.

This will result in a reduction of financing costs of about $25 million or $0.02 in the fourth quarter, which is included in the full year guidance that George will provide.

Our net debt to cap increased to 36.6% from 33.7% in Q4 related primarily to these share repurchases as well as a reduction in equity related to a Q1 adoption of a new income tax accounting standard.

Given our current stock price, we'll be very aggressive with our buyback program.

We've made significant progress toward our full year share repurchase target of $1 billion, which will be completed before the closing of the Power Solutions transaction.

In Q1, we repurchased just over 14 million shares for approximately $465 million.

I would also note that we expect to utilize a portion of the Power sale proceeds later in the year to repurchase additional shares, which is expected to contribute about $0.03 in incremental earnings for the year.

Given our planned share repo strategy for fiscal '19, we now expect our diluted weighted average shares to be approximately 905 million for the year.

Finally, let me touch on a couple other items on Slide 15 before I turn it back over to George for fiscal '19 guidance.

First, based upon some additional tax planning that's been done, in part related to the pending sale of Power Solutions, we now expect our effective tax rate from continuing ops in fiscal '19 to be approximately 13.5%.

As Antonella mentioned, the results of Power Solutions are now reported as discontinued operations, and all historical financial information is presented on a comparable basis.

We are well underway with the separation activities and expect the sale to close no later than June 30.

And I'd also mention that Power Solutions had adjusted free cash flow in the quarter of about $100 million which was right in line with expectations.

And lastly, all the guidance that we provide will be on a continuing ops basis, and we have provided normalized financials in the appendix for comparative purposes so you can update your models.

And with that, I'll turn it back over to George.

Thanks, Brian.

Before we open up the line for questions, I want to provide you with our outlook for 2019 continuing operations.

Let's start by walking through the year-over-year impact of the significant items embedded in our 2019 guidance on Slide 16.

As I mentioned on the fourth quarter call, we expect mid-single-digit organic growth in Buildings, which will drive approximately $0.20 of earnings.

We expect this growth to be primarily driven by improved volumes and price.

We will also have the continued benefits of synergies and productivity savings in Buildings and corporate which we will realize over the course of the year that will contribute an additional $0.19 of earnings.

Additionally, as Brian discussed, the benefit in fiscal 2019 related to the deployment of a portion of the Power Solutions sale proceeds is expected to add about $0.05 of earnings.

The carryover impact of the sales force investments as well as a few cents of incremental investments in our product businesses are expected to total about $0.07.

As you are all aware, the U.S. dollar has continued to strengthen.

Based on quarter end rates, we expect this to result in a $0.06 foreign currency headwind year-over-year.

Lastly, as you can see, there are various other items, which net to a $0.10 headwind, with the most notable being a $0.03 headwind from tax and a $0.02 headwind from both pensions and amortization.

All of these factors contribute to our fiscal 2019 EPS guidance range before special items of $1.75 to $1.85.

This represents growth in the range of 10% to 16%.

The full details of our guidance is included on Slide 17.

Lastly, as a significant portion of the benefit related to the deployment of the Power Solutions sale proceeds will benefit fiscal 2020, I wanted to provide a framework for how our earnings are expected to progress as we move forward.

As you can see on Slide 18, the incremental benefit of proceeds deployed in 2019, additional share repurchase in 2020 and a reduction in corporate cost is expected to contribute an incremental $0.50 to $0.60 of earnings, which takes our fiscal 2020 EPS to a range of $2.25 to $2.45.

This would be prior to any operational growth or benefits from additional capital deployment.

Recognizing that we will not receive the full benefit of our reduced share count in fiscal 2020, there will be an incremental benefit of $0.10 to $0.20 in fiscal 2021.

Over the last 2 years, we have been merging 2 businesses into one and have made a significant amount of progress.

During that time, we have reinvested heavily back into the businesses.

Now it's about capitalizing on those investments with how we are going to market.

We have been building backlog, which provides us visibility in our field businesses.

We have been strengthening our service business, which tends to be more resilient, and our short-cycle products business is seeing good growth across all 3 platforms.

We are watching closely what is happening economically around the globe, and our focus is on execution and delivering for our customers.

We feel good about our position in a very attractive market, and we expect to grow our underlying operations at or above the market for industrial peers as we look ahead.

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

(Operator Instructions) The first question in the queue is from Gautam Khanna from Cowen and Company.

I appreciate the detail.

I was wondering if -- George, if you could just maybe directly address the capital allocation with the proceeds of the Power Solutions spin.

Just to be clear, we should expect or we should model in that it's -- besides the $3 million to $3.5 million of debt repayment, it's all going to be directed at share repurchase.

Is that a fair conclusion?

That is correct.

I mean, we're -- as I said, we're very much focused on executing on the strategy, delivering on the growth, delivering the operational performance and ultimately delivering results.

And our plan today is to take the proceeds from the Power Solutions sales and as we have said, deploy those as quickly and as efficiently as we can as we -- once we complete the transaction.

Got it.

That's very helpful.

And just in terms of M&A appetite, I mean, do you guys have really any interest in North American resi HVAC as an area of acquisition growth?

No, Gautam, as you know, we've been investing heavily back into our products over the last 3 or 4 years.

We feel very good about our portfolio and the progress we've made in -- with the new products we're bringing to market.

Although we are not a leader in that space today, we feel very good about the progress we're making with the share gains that we're making and how we're positioned for the future.

So at this stage, we're continuing to focusing on executing on the investments we've made and ultimately delivering the results.

Next question is from Nigel Coe with Wolfe Research.

The next question is from Jeffrey Sprague with Vertical Research Partners.

Just a couple of things for me.

First, Brian, as you may know, there's a lot of noise out there on kind of tax right now with this deductibility issue creating some uncertainty.

I assume your guide encapsulates all that.

But can you give us a little bit of an update on what changed to get you to this lower tax rate in '19 than you were previously thinking?

And is there any upward risk to that rate if some of these tax law changes take full effect?

Yes.

So I would say, the reduction in the rate, Jeff, to 13.5% was just a function of a lot of planning that was done in contemplation of the Power Solutions sale.

We had guided a year or so ago that with -- tax reform was going to impact us by about 2% to 4% prior to any tax planning.

And I think the -- our tax team has done a great job of minimizing the impact of tax reform on our rate.

And so that 13.5%, we're really comfortable with for fiscal '19.

As it relates to these proposed regs that are out that I think you're referring to, because we are a fiscal year company, Jeff, that doesn't impact us until 10/1/19, which is our fiscal '20.

And at this point in time, given the tax structure and footprint that we've got in place, we don't expect a significant impact in 2020 from those proposed regs.

Great.

And then George, maybe just on kind of the overall price execution.

Maybe a little bit of an update on what you're actually seeing on price realization and kind of how your price cost dynamics play out in 2019 and how that plays into your margin outlook.

Sure.

As you know, in 2018, we made a lot of progress.

We started off with a lot of headwinds and through the course of the year, executed extremely well, executing on price.

And as we planned for 2019, we not only took into account all of the inflationary pressures on the commodities but also the impact that we're going to see from tariffs.

And so we feel very good about the progress we've made and what we continue to make, that we've got not only the inflationary pressures but the tariffs fully covered in our plan.

I would suggest, at this stage we'll see, of the margin improvement there's probably 10 to 20 basis points of margin improvement that's attributed to price.

And I would tell you, across the board, across all of our products as well as across all of our regions, we're now seeing margin accretion as a result of the strategy -- the pricing strategy that we've deployed.

Next question is from Andrew Kaplowitz from Citi.

It's Vlad Bystricky on for Andy.

So your global products business has been quite strong, mid to high single digits for over a year now, I think, organic growth.

Can you talk about your confidence in sustaining that elevated growth?

And if there's any way to think about sort of how much of it is market-driven versus outcomes of everything you've been doing on new product investment?

Yes, as you know, we've been investing extremely heavily, reinvesting over the last 3 or 4 years across each one of the product platforms.

And what I would say is across the board, we are gaining share with the investments we've made, with the new products we're bringing to the market.

If you look at our -- if you -- Brian went through the details here, but if you look at our Building Management Solutions, all of our -- the combination of all of our digital businesses, we're growing low double digits.

And that's a result of the reinvestments we're not only making in our Metasys Building Controls, but also all of the other electronic platforms that now are going to be integrated with our Metasys platform.

And so we feel really good about the position that we have in that space.

If you look at the other segments in the HVAC space, residential, we're seeing a nice growth across the globe, and that's a combination of what we're doing in North America as well as within our Hitachi JV in North America.

We are seeing -- I think if you look at the last year, we've had very strong -- over the last year, strong double-digit growth.

And as we see ourselves going forward, we see that continuing.

So the investments we're making there have been very, very strong.

The other is in the light commercial.

We're seeing very nice growth in the quarter in our light commercial business globally.

That again is double digits.

And then when you look at our applied business with the investments we've made not only in our chillers but our air handling equipment and the deployment of that in new projects, we're seeing very nice pickup in share gain pretty much across the globe.

And so I think it's a factor of both the space, the HVAC space is continuing to expand, and with the investments that we have been making and executing on, it's given us an opportunity that within that expansion, we're enabling ourselves to be able to gain share.

That's really helpful.

And then just as a follow-up.

It seems like your applied business has continued to accelerate.

And I know you mentioned some potential equipment pull-forward here ahead of pricing.

But are you also seeing U.S. institutional markets accelerating?

And how much contribution are you getting from new products like your new chiller that you rolled out?

Yes.

So as we look at this space, we do see the institutional vertical is coming back pretty strong and as you know, that we have a very strong position in that.

If you look at our North America applied business, when you look at our orders, our orders are up mid-teens.

And as I said earlier, a very strong segment for us.

And I think that again is because of the verticals we support, the investments we're making in the new products and then our go-to-market and making sure that we're getting more than our fair share as we execute on the pipeline.

Our pipeline right now is up double digits across the globe.

And so as you look at our orders globally, we achieved 7% with the backlog up about the same.

And with the confidence that I have in the pipeline and the way that we've been converting on that pipeline over the last 3 or 4 quarters, it gives me confidence that we're going to be well positioned here to deliver on 2019 and beyond.

Next question is from Nigel Coe with Wolfe Research.

Just to be very clear, George, you're encouraging us to bake in all of the proceeds, the $8 million or whatever it is, from the disposal ex debt reduction into share repurchases as of 4Q, 1Q next year.

Is that the message?

That is correct.

Okay, that's pretty clear.

Can we just turn to -- I've got 2 quick questions.

One, do you have a handle on the free cash flow profile of the new JCI?

Obviously, the old JCI had very back-end loaded free cash generation.

How does the new JCI look?

You -- obviously you had a negative in 1Q, which I think was expected.

But how does that then progress through 2Q and into the second half of the year?

Yes.

I think it's going to be consistent, and we'll continue to be back-end loaded.

I mean, if you look at our Buildings profitability, it's in the back half of the year or so, I think you can look at this and assume it's going to be pretty consistent with what we've seen historically.

First quarter is a cash outflow.

We get most of that back plus or minus breakeven, maybe a little positive year-to-date in Q2, and then it will be the back half where we deliver the majority of the cash against the 95%.

But all things are tracking toward that right now, we're pretty pleased with how we came out first quarter.

Okay.

And then in terms of China and the competitive nature of that market, you called that out, where specifically are you seeing the competition?

Is it Fire & Security, is it HVAC, commercial versus residential?

It sounds like it's commercial.

And are you seeing it mainly from local players or MNCs?

Any color there would be helpful.

Yes.

So I mean, we're making good progress in China.

When you look at our revenue, we're up low double digits, pretty much led by HVAC and Refrigeration, so we're seeing good execution there.

Most of our footprint there is in the commercial space, very strong in the applied HVAC.

We've got a tremendous position as well as we're positioned locally with our supply chain with a very -- on one of our, let's say, highest performing plants.

And so we're positioned well within that market.

Our orders, when you look at our orders, it's up almost double digits.

And in addition, Nigel, to making sure that we're building the installed base, we've been accelerating our service growth.

And so we're seeing orders in our services now up kind of 20-plus percent in that space.

And so not only are we continuing to expand our install base, but on top of that, being able to execute now in the service opportunity.

So when we talk about margins as we did, as you look at the overall regions, mainly driven by the mix of install and then the mix of the China growth relative to the overall APAC region, we are beginning to execute and accelerate service growth, which will help mitigate some of that acceleration of install.

But I feel confident that with the fundamentals we're ultimately driving, how we're going to be positioned for the rest of the year, we'll see continued improvement there.

Next question is from Steve Tusa with JPMorgan.

The -- just kind of a -- I know you guys have a lot of different businesses in there.

But residential HVAC pricing has obviously been very strong.

Can you maybe dig into what you're seeing from a price perspective on the kind of core applied side and what you expect to kind of put through for 2019 calendar in the various regions?

Yes.

So across the board, we -- as we get into this, starting out last year with my transition, we got deep into each one of the segments not only the product segments but regionally, and went about making sure across the board we had good understanding of the cost structure and the inflationary pressures coming through as well as what we could expect from a tariff standpoint.

And so Steve across the board, we've been executing strong pricing in every one of our categories, every one of our regions.

Now what I would tell you is that when you look at our growth last year, I believe we suggested it was about 1% or 2% of our growth.

Given the progress we've made across the board, that's going to be elevated here in 2019, additional percentage of our growth.

And I think given the work we've done, you could see similar type improvements across the other product segments as you're seeing within our residential business.

Got it.

Okay.

And are you seeing any pockets of competitive behavior from your domestic competitors?

I know Carrier's trying to come out with a few new products.

And it doesn't seem like Trane is mucking it up.

So anything out of your kind of domestic kind of North American competitors, are you seeing anybody get aggressive to get new products into the channel?

I think across the board, there's some.

You could go through each one of our competitors and there's new products coming to market.

I think you would've seen it at AHR this year, they're pretty much across the board.

We've been focusing on how do we create value in each one of the segments for our customers.

What's -- from a technology standpoint, what is going to differentiate us from the competitors?

I think we're executing well.

And as a result of that, when we bring these new products to the market, there's a much higher value proposition that we make to our customers which allows us to able to get additional price.

And so I think you would have seen that there are some other new products coming in the market, I would tell you my assessment.

Given the investments we're making, I feel very confident with what we're doing and how it compares to our competitors and truly believe that as we continue to move forward with these product introductions, we're going to continue to gain share.

Yes.

Clearly, a great presence at AHR and a good, nice espresso bar upstairs as well, I appreciate that late in the afternoon.

One last question for you.

Just on kind of seasonality.

Anything unusual seasonally here as we move into the second quarter and how that should behave financially, anything moving around?

No.

I mean, what I would say, Steve, is when you look at the total year, I mean, when you separate Power Solutions, the remaining company, we're typically now historically have been 30% first half, 70% back half.

Obviously, we're off to a nice start here in 2019.

I see that continuing.

And so when you look at our performance, we're going to continue to drive strong order growth, we're going to continue to convert revenue kind of mid-single-digit based on the backlog we see and how that's going to flow.

And then we'll continue to deliver very strong cash flow as we continue to execute through the year.

So I don't see anything significantly different than what historically we've done.

Next question is from Tim Wojs with Baird.

Maybe just on the Buildings margins.

How much of kind of the sequential improvement that's implied for the rest of the year is really Asia kind of getting back to EBIT margin expansion versus -- ex your synergy realization or some of the investments?

Yes.

So when you look at the underlying margins that we're projecting for Buildings here in 2019, it's -- the overall is going to be 40 to 60 basis points.

And that's being driven by strong -- the pickup that we get on the volume and the mix, the strong productivity, synergies productivity that we're delivering.

And that's being then offset by -- there's a few headwinds which we talked about which was we still have the run rate of our sales investments from 2018 coming through the first half of this year, and that's roughly about 30 basis points.

And then the other is we do have, as Brian talked about, some pension headwind as well as equity income that year-on-year is a little bit of a pressure.

But operationally, with what's coming through not only in the growth, what's coming through on price, is ultimately is what's delivering on that 40 to 60 basis points.

That's pretty broad based across each of the businesses.

What I would say in APAC, we had said we were going to have pressure in APAC given what we had in backlog that was going to convert the first part of this year.

I would tell you that we are executing on the fundamentals.

We are improving those fundamentals.

We are growing the service business, which is higher margin and the combination of what's going to be able to flow through the year and be able to contribute to that 40 to 60 basis point of improvement.

Okay.

So it sounds like that 30 basis point headwind on investment, that should taper as you go through the year?

That is correct.

Okay, great.

And then just on free cash flow.

I know the gap is closer now, it's 95% plus ex Power.

What do you guys need to do internally to maybe get that in line to better than earnings?

Are there any big buckets that you can attack to improve that metric?

Yes.

I mean, we've made good progress.

I guess, just to comment on trade working capital, I mean, our DPO year-over-year has improved by 6 days.

Our DSO's improved by a couple of days.

We are flattish relative to inventory.

So if there was an area that I think we need to go to work on a bit more, inventory is probably an area that we're going to be spending some more time on in fiscal '19.

When you actually look at trade working capital as a percentage of sales, December 31 last year versus December 31 this year, we're actually improved by 130 basis points, which was giving some of the basis for why we're moving to a 95% plus free cash flow number here.

But I think we're making progress.

There are certainly areas that we continue to work at across the globe, I mean we looked at our larger markets first.

So I just expect gradual improvement as we move into 2020.

Next question in the queue is from Josh Pokrzywinski from Morgan Stanley.

George, just want to follow up on your comment on some of the unitary businesses and the share gains, the investment.

I guess, the piece that it's harder for us to see is on the distribution side and getting these products out to market.

I think historically, that's been one of the challenges for anyone trying to gain share.

With all the new products, are you finding the ability to kind of add storefronts or add distribution points within resi and commercial unitary?

Absolutely.

I mean, we've been, as you look at all of the regions, certainly, we tailor our strategy depending on the region and where we have a strong position, where we have weak positions.

We're not only putting our own distribution in place but also other distributors that we're working with to expand our presence within each of the key markets.

That is absolutely tied to the reinvestments that we're making within the new products to assure that as we're reinvesting, we are positioned from a go-to-market to be able to return, to get the returns on that investment.

So absolutely.

And I think when you look at our relative performance here over the last year, we've been able to do what we said relative to continuing to launch new products, expand distribution and grow at or above the market rate.

Got it.

That's helpful.

And then just taking a step back on margins and operating leverage at large.

We're kind of halfway through the synergy calendar at this point.

I guess, looking at incremental margins here, understanding you're going to get a little tailwind from price, that investment is a drag but obviously something that needs to be done, how should we think about structural incremental margins here?

Because it seems like some of the synergy upside you're deploying back into the business and there's only another year of it left after '19, is the underlying incremental margin in the business still around 20%?

Or how should we think about that shift over time?

Yes.

So I'd frame it up.

If you start 2018, our incremental margin's, as you suggested, in the low 20s.

When you look at -- and a lot of that was driven because we had reinvestment in sales, in the sales force ahead of our growth and we've had historically, over the last 3 or 4 years, the reinvestments in our product and technology was ahead of our growth.

What you see happening in 2019 now, that begins -- that reinvestment now begins to level out as a percent of revenue.

And so our field businesses should be, on a go-forward basis, should be in the high teens to low 20s, recognizing that, that businesses is very much driven by variable labor.

And then the product businesses now, with the investments that we've made and the growth that we're achieving, should now become more like mid to upper 20s.

And so I think as we get through the year, as we lap some of these headwinds that we had in the first half with the year-on-year compares, we're going to start to see some nice leverage going forward.

So I would target incrementals to be, over the next couple of years, kind of mid to -- kind of mid-20s plus over the next couple of years.

Inclusive of synergies?

That's correct.

Next question is from Noah Kaye with Oppenheimer.

Great to see the continued solid execution.

George, I think I'd like to return to the capital allocation question for a minute.

You were very clear this morning that the Power proceeds will go towards debt paydown and share repurchases.

And I guess, my question is given that the new JCI is really about smart, safe, efficient, sustainable buildings, how are you thinking about opportunities for additions or adjacencies whether it's HVAC, as someone mentioned earlier, or lighting?

And why wouldn't you be looking to augment the portfolio at this point?

Is it sort of where you think the cycle is, is it valuations?

Help us understand that.

Yes.

We're always looking at the portfolio to make sure that from an organic standpoint, we're making the right investments, we're getting the intended returns on those investments.

And what I would say is that we feel really good about the progress we've made with our organic investments.

And that being said, as we look at the trends, customer trends and industry trends, we're also making sure that as we look forward, we're making -- we're comparing our organic investments against what can be done from an acquisition or investment standpoint.

And so what I would tell you is that as we look at our position, we feel really good about our position with the work that we've done here over the last couple of years.

Now we're always looking at -- to make sure that as we look at the ability to be able to create value, I would tell you, we're always looking to make sure that we're staying on offense and understanding of the trends and what we're going to do to be positioned to be able to achieve those trends.

So at this stage, given where we are, given the progress we've made with the reinvestments, given the success we've had with our sales force, we're focused on executing and being able to deliver on the commitments we've made in delivering strong results.

Next question is from Deane Dray with RBC Capital Market.

Just want to go back to Slide 18 and just make sure I understand that footnote and maybe it's earnings fatigue and you already mentioned it.

But what's the -- when you say that the $0.10 to $0.20 benefit is excluded, that, that's coming in '20 -- fiscal '21, just could you remind us what that piece is?

Yes.

So if you look at the overall $0.75 that we've kind of talked about historically, there's $0.05 of that, that's in '19 that we talked about for '19 guidance.

And then we're saying there's midpoint about $0.55 in fiscal '20 and then there's midpoint $0.15 in 2021.

That's how you get to that full $0.75 we've talked about historically.

And the reason there is $0.15 still coming in 2021 is because no matter what share repurchase approach we use, there's not -- we aren't going to get the full benefit likely in fiscal '20.

And so there will be a carry-on effect in 2021 from an EPS standpoint that we'll get that's really a by-product of whatever repurchase program approach we use, whether it's open market purchases, whether it's ASR or whether it's some form of a tender or combination of those.

But the way we've modeled it now, there's $0.15 more that would come in 2021 to get us to full $0.75.

Right.

That was a great explanation.

And then for George, a couple of times, you've mentioned the service opportunity.

And I heard you say that today, service is 2/3 recurring.

And what's the right mix or what's the right ratio there in terms of optimizing the service offering from a margin standpoint?

Yes.

So Deane, we made strategic -- we made service growth one of our strategic imperatives when I took over, and it's an incredible business.

Like I said, it's over $6 billion globally.

And traditionally, it's been more of the maintenance and repair of the installed base, getting some recurring revenue through PSAs, doing some monitoring and the like within the Fire & Security businesses.

And what I would say is we've got an incredible opportunity to take what we've done today, and the 60% to 65% is mainly contracts that get renewed for that type of work.

And what we're doing today is above and beyond that.

We're deploying now new solutions, utilizing the data, using AI that now enables us to be able to optimize not only the maintenance of those -- of that equipment but also beyond what we historically have done to be able to create new value propositions through new business models, leveraging technology.

So I'm pretty excited about the progress we've made, recognize that we started at a standstill in 2017.

Our service growth was, I think, 1% in 2017.

Through the course of 2018, we ramped up from 3% to 4% to 5% to 6%.

And then again, in the first quarter here, we're out pretty strong with 6% growth.

And so it's a combination of not only getting a higher percentage of the traditional work that we get on the installed base we create, but it's also creating new business that we deploy on top of that installed base, which is more white space for us, which is a significant opportunity for us to be able to contribute to the growth.

Operator, I'd like to turn the call over to George for some closing comments.

All right.

Thanks again, everyone, for joining our call this morning.

As you've seen, we've made a tremendous amount of progress in 2018.

And I think most important now is that we're building on that momentum in 2019 and certainly look forward to engaging many of you here over the next few weeks.

Operator, that concludes our call.