Q4 2019 Earnings Call

Welcome to the Johnson controls fourth quarter 2019 earnings call. Your lines have been placed I don't listen only mode until the question and answer session.

Ask your question. Please press star one on your Touchtone phone. This conference is being recorded if you had any objections you may disconnect. At this time I would now I'll turn the call over to develop Franzen, Vice President and Chief Investor Relations <unk> Communications Officer, you may begin.

Good morning, and thank you for joining your conference call to discuss Johnson controls fourth quarter fiscal 2019 results.

The press release that 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 agile to control dotcom.

With me today, our Johnson controls Chairman and Chief Executive Officer, George Oliver and our Executive Vice President and Chief Financial Officer, Brian Steve.

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 reach or 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 cold references to adjusted EBIT aimed at adjusted EBIT margins exclude restructuring and integration costs as well as other special items.

These metrics are non-GAAP measures and are reconciled in the schedules attached to our press release and in the appendix to the presentation posted on our website.

Additionally, all comparisons to the prior year or on a continuing ops basis, excluding the result of power solution.

GAAP earnings per share from continuing operations attributable to Johnson controls ordinary shareholders was 77 cents for the quarter and included a net charge of once that related to special items, which Brian will address in his comments adjusting for these special items non-GAAP adjusted diluted earnings per share from continuing operations.

Was 78 cents per share compared to 57 cents in the prior year quarter now, let me turn the call over to George.

That's an hour and good morning, everyone. Thank you for joining us on todays call.

Going into the details of the quarter I thought I would kick things off with a quick look back at our year to recap some of our strategic initiatives and financial commitments.

Starting with slide three.

The most significant strategic achievements in 2019. Once this is successful divestiture of power solutions and the subsequent capital deployment actions.

I'm extremely pleased with our execution from start to finish.

Large transactions like like this never go completely as planned usually take longer than expected to execute.

Our teams effectively navigated the transaction process monetizing the business with lower than expected tax leakage, resulting in net cash proceeds of $11.6 billion.

As we discussed last quarter, we quickly began we redeploying the proceeds within weeks following the close of the transaction.

Including the use of those proceeds we were able to meet an aggressive capital allocation commitment.

Deleveraging, our balance sheet and returning a significant amount of capital to our shareholders.

In 2019, we were able to pay down nearly $4 billion in debt and completed $6 billion and share repurchases buying back over 150 million shares just over 17% of our shares outstanding.

Perhaps even more important to the long term strategy as a company the sale of power solutions completed our transformation to a pure play buildings company.

As we move forward, we will continue to strengthen our core increased profitability and accelerate growth in digital solutions across all aspects of the company.

Our broad portfolio of smart edge devices connected equipment in systems in cloud based applications and data analytics capabilities provide Johnson controls a unique competitive advantage in market, leading position as customers increasingly seek outcome based solutions.

The strength of our capabilities combined with our large installed base and trusted customer relationships provides us with unparalleled industry expertise and thought leadership with the most advanced digital innovation.

That innovation captures untapped value for our customers and positions Johnson controls as the preferred partner for their digital transformation.

From delivering better patient outcomes in hospitals to creating better learning environments in schools or defining new exciting ban experiences in the world's most advanced stadiums.

We had the unique position to power the golden missions of our customers.

As we move further into the next phase of our strategy I.

I was pleased to announce the addition of Mike Ellis to our team in a newly created role as chief customer and digital officer.

Mike brings an incredible amount of industry knowledge and leadership with a deep expertise in software and connected solutions.

My primary responsibility will be to accelerate our digital strategy and execution across all business units regions and functions within JCR.

Ultimately to expand our service offerings.

In addition to Mike's announcement, we also made to other significant changes to our executive leadership team during the quarter.

In late July we announced that Jeff Williams would transition from his role leading or umbrella.

Segment to lead global products.

Just proven leader leadership abilities, and operational expertise will drive improved underlying fundamentals as well as innovation new product growth.

At the end of September we announced Jeffs successor in a may alone with the appointment of Tomas animal who joins us from xylem, where he led global operations and oversaw a key functions across their European businesses.

Tomas brings a diverse background in project and service businesses as well as strategy will play a critical role in driving growth and increased profitability as we go forward.

Also as you may have seen this morning as Brian answers is last year as Chief financial Officer of JCR right, we've appointed him as Vice Chairman.

The board will begin a process to identify Brian successor, including an external search to allow for an orderly and smooth transition.

Lastly, I am very proud of what the teams around the globe have accomplished over the course of fiscal 2019 to improve the underlying fundamentals drive innovation and new product development.

Strengthen talent management and further enhance commercial excellence across the organization, all while optimizing our cost structure.

Now lets turn quickly to our financial commitment as scorecard for the year on slide four.

I will spend a lot of timing on each of these but in addition to some of this strategic priorities. We just discussed we met or exceeded each of the financial targets. We set at the beginning of the year.

Strong growth in orders and top line revenue solid margin expansion in free cash flow conversion ahead of our guidance.

Turning to some of the highlights for the quarter, starting with orders on slide five.

We had another quarter of solid mid single digit order growth. Despite our most difficult quarterly comp of the year plus 9%.

Our order pipeline remains robust with an attractive mix of service and a balanced ports profile of small and large projects.

Backlog ended the quarter at $8.9 billion up 8% organically versus the prior year.

Which provides high visibility into 2020.

Turning now to slide six for a quick recap of the financial results.

Sales of $6.3 billion increased 3% on an organic basis with solid growth across the field businesses led by high single digit growth in commercial H. back.

Adjusted EBIT of $812 million grew 8% on a reported basis, including a 10 million dollar headwind from FX in the quarter.

On an organic basis adjusted EBIT grew 10% is driven by solid 7% growth in segment profit as well as lower corporate and amortization expense.

Overall underlying EBIT margins expanded 80 basis points year over year on both a reported and organic basis.

Adjusted EPS of 78 cents increased 37% over the prior year with solid operational performance and a significant contribution from the capital deployment actions related to the utilization of the power solutions sale proceeds.

Adjusted free cash flow increased 25% over the prior year to just over $1 billion in the quarter.

Full year adjusted free cash flow was $1.7 billion, representing 99% conversion.

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 get started with the year over year Brits Vps on slide seven as you can see our operational performance, including synergies and productivity save contributed nine cents.

This was partially offset by a penny of investments. We also benefited in the quarter from the redeployment of the power solutions proceeds from both the share count.

And that financing charge perspective, which added 12 and five cents respectively.

Below the line items not to do a four cents headwind, which resulted in fourth quarter EPS of 78 cents, which was up 37% year on year.

So let's move to slide eight and take a look at segment results on a consolidated basis.

See sales of 6.3 billion increase 3% on an organic basis and this was led by 4% in our field businesses.

This is partially offset by some softness in our product businesses, which was flat quarter I.

I would point out that in Q4, we were facing our most difficult comp from prior year up 8% in aggregate with every segment facing its toughest comp.

Within the field businesses total service revenues grew 4% on the quarter, which was consistent growth across all three regions.

As you know growing and expanding our service offerings as bad area of significant internal focus and we've now established a consistent cadence of mid single digit growth for the past two years.

Going forward, we look to augment our service gross enabled by digital solutions to continue driving a similar growth level in service.

As you know our service business represents just over $6 billion in revenues, which was about 40% of our field revenue base.

And this provides us with a very profitable resilient revenue stream as we move forward.

We continue to convert our project backlog in Q4, as well driving install revenue up 4%.

And this was solid growth across all regions.

Segment EBITDA of 990 million grew 7% organically and this was driven by the volume leverage from the field.

Strong price cost realization and products and our ongoing productivity.

Energy sales.

Lastly, Q4 segment EBITDA margin expanded 60 basis points to 15.8% and as you can see in our margin waterfall underlying operational improvement contributed 100 basis points and this was partially offset by some products and run rate Salesforce inbox.

As well as a minor headwinds with pension and other items. So let's review each segment in more detail.

Turning to slide nine in North America, North America sales grew 3% organically against an 8% prior year compare.

This was driven by continued growth in both install and service activity.

The growth was led by strength in our applied H., Fac and controls businesses, which increased high single digits again Q4.

Fire and security grew low single digits with balanced growth in both install and service I.

I would note to performance solutions declined mid teens in the quarter. This was due primarily to a high teens comp in the prior year.

North America, adjusted EBITDA increased 6%, an EBITDA margin expanded 40 basis points to 14.9%.

And this was driven by favorable volume leverage as well as synergy and productivity say.

As expected the mix headwinds we faced in Q3 this year is substantially.

Although age Frac again outgrew the fire and security businesses, putting pressure on mix in Q4, this was offset by higher growth in service.

Orders in North America were very strong up 7% led by fire and security up strong double digits.

Hi, H. back up mid single digits.

Orders in performance solutions declined 3% due primarily to the timing of some large project awards.

Backlog of 5.8 billion increased 8% year over year.

So let's move to a meal on slide 10 sales in EMEA grew 4% organically with service up 4% and install up 5%.

Growth was positive across most regions, except for the Middle East, where we continue to see pressure.

Europe grew mid single digits in the quarter led by low double digit growth in our industrial refrigeration business and both fire and security and I tracking controls grew low single digits.

In the Middle East revenues declined mid single digit a solid growth in our service activity was more than offset by continued softness in H. Sachs project installs on fire and security.

And in Latin America revenues increased mid teens with gross growth across most lines of business led primarily by strength in science here.

A meal as adjusted EBITDA increased 17% and EBITDA margin expanded 80 basis points to 11.7% and this includes a 40 basis point headwind from FX.

Underlying margins increased a strong 120 basis points in the quarter as favorable volume and productivity and synergy saved more than offsets the run rate impact of our previous salesforce additions.

Orders in a meal increased 3%, which was led by continued strength in Latin America across both install in service.

Orders in Europe grew low single digits in the quarter.

Backlog ended up 1.6, <unk> backlog ended at 1.6 billion up 10% organically.

So let's move to a pack on slide 11, a pack sales grew 7% organically led by higher demand for project installs, which grew 9% in the quarter.

Install activity was led by continued strength in our core H. Frac and BMS platforms with sales in China up low double digits.

Sales for our core service offerings grew 4% in the quarter, including low double digit growth in China.

Hey pack adjusted EBITDA margins declined 1%.

With margins down 100 basis points to 14.2%.

Favorable volume leverage was more than offset by higher install mix as well as expected margin pressure.

Hey, packed orders were flat in the quarter as our strong service order growth of 13% was offset by high single digit decline and install orders and I would just note. This was due primarily to order delays as a result of the unrest in Hong Kong and ongoing China trade dispute.

Backlog in Asia Pac increased 4% year over year to 1.5 billion.

Overall, it's clear that the environment APAC is very competitive and economic conditions in some areas remain uncertain.

Nonetheless, given the actions we've taken in fiscal 19 to drive growth in our service space and also improve the quality of intra installed jobs in our project execution.

We are confident our ability to grow the topline and improved profitability in fiscal twice.

So let's move to global products on slide 12.

Global products growth in the quarter was flat organically versus a strong 9% compare last year.

As we discussed on our Q3 call. We did expect to decline in North American resi H. back due to a 20% plus prior year compare.

As well as our strong Q2 in Q3 performance this year and resulting.

Q3 quarter end channel inventory levels.

Having said that the unexpected softness for us was and APAC residential which as a reminder relates to our tachy joint venture.

This softness resulted in three percentage points headwind, an overall global products organic revenue growth for the quarter.

The decline in our Tachy business was due primarily to market conditions in Japan, and Taiwan and just as a reminder, we have market leading positions in both these countries, which together make up over two thirds of Hitachi is revenue base.

So, let's turn to the individual platforms within global products.

We saw BMS grow low single digits with double digit growth and fire detection.

Single digit growth and controls security products was relatively flat year on year.

Overall sales and HVAC and refrigeration equipment businesses declined less than 1%.

Global residential age H. fact, deploying low double digits in the quarter driven by the expected weakness in North America, and the previously mentioned softness and APAC.

Light commercial unitary grew high single digits in the quarter with North America.

Mid single digits.

I, our equipment declined mid single digits in the quarter against tough prior year compare which was in the hub upper high teens.

Vrs had a nice quarter with low double digit growth on our applied H. fact parts and equipment business grew high single digits, reflecting continued strength in our chillers business and the indirect channels for both North America in Asia.

And finally specialty products grew mid single digits, some strong demand for our fire suppression products, particularly in North America.

Product segment, EBITDA increased 7%, an EBITDA margin expanded 130 basis points as the under absorption on lower volumes was more than offset by positive price cost in the benefit of cost synergy and productivity save.

Incremental product and sales force investments were also a slight headwind.

Looking to fiscal quantity, we expect sales for global products to be in the low single digit range in Q1.

And then the low to mid single digit range for the full year.

So let's move to corporate on slide 13, I continue to be very pleased with the progress we made an.

And overall corporate cost reductions as you can see corporate expense was down 6% year over year to 89 million and this was driven primarily from the benefits of synergy and productivity save as well as the ongoing actions, we're taking to reduce costs as a result of the power solutions divestiture.

On slide 14 free cash flow, we reported Q4 cash flow from continuing ops of 800 million. If you exclude the 200 million and onetime cash outflows in the quarter adjusted free cash flow was up 22% to slightly above $1 billion for Q.

Before.

For the full year, we delivered adjusted free cash flow conversion of 99%.

This reflects solid performance on trade working capital improvement.

Can you discipline around Capex management actions.

As we look to fiscal 20, we see adjusted free cash flow conversion of approximately 95%.

This excludes 300 million of remaining onetime cash outflows and the 600 million dollar tax refund we've talked to you about in previous quarters, which we expect in the first half of fiscal 20.

As a result, our GAAP free cash flow will exceed our adjusted free cash flow in fiscal two warning.

So, let's turn to the balance sheet quickly on slide 15, net debt was up slightly in Q4 as we redeployed some of the power solutions cash back into share repurchase, which as you can see was nearly $900 million in the quarter.

Before turning it back to George for a look at our fiscal 2000 guidance I do want to provide some commentary on the two significant special items that are outlined on slide 16.

We recorded a noncash pretax loss of 626 million related to our year end mark to market adjustments and this results primarily from lower discount rates associated with our year end pension and OPEB calculations.

Additionally, we recorded a non cash $586 million.

Tax benefit related to the favorable tax audit adjustments, we saw in the quarter.

So with that let me 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 2020.

Let's start by walking through the waterfall chart on slide 17.

Overall, we expect low to mid single digit organic revenue growth, which will drive approximately 15 cents of earnings.

Additionally, we will have the continued benefit of synergies and productivity savings, which we will realize over the course of the year and will contribute an additional 15 cents of earnings.

As Brian mentioned last quarter, we are moving forward with a plan to continue repurchasing our shares.

We expect to deploy approximately $2.2 billion of power solution sale proceeds during the course of fiscal 2020.

Which is expected to result in an incremental benefit to earnings of about 33 cents.

This assumes we continue to hold the remaining $1 billion a power solution sale proceeds on hand.

Service, although small items result in a four cents headwind.

These items net to our fiscal 2020, EPS guidance range before special items of $2.50 to $2.60.

This represents earnings growth in the range of 28% to 33%.

And the full details of our guidance is included on slide 18.

Our guidance is based on strong underlying EBIT growth of 8% to 12%.

Driven by solid topline performance in synergy and productivity benefits.

Lastly, as a portion of the benefit related to the deployment of the power solution sale proceeds will benefit fiscal 2021.

I wanted to provide an up updated framework for how our earnings are expected to progress as we move forward.

As you can see on slide 19 incremental run rate benefit of proceeds deployed in 2020.

In a reduction in corporate costs is expected to contribute an incremental six cents of earnings.

This takes our fiscal 2020 as to a range of $2.56 to $2.66 on a run rate basis.

This would be prior to the deployment of the remaining $1 billion a power solution sale proceeds as well as any operational growth or benefits from additional capital deployment in 2021.

Over the last two years, we've made significant progress and aligning our portfolio, improving our underlying fundamentals and reinvesting back into the businesses.

As we move forward. It is all about execution and controlling what is in our control.

Although we are watching the macroeconomic environment closely.

We feel good about our position entering fiscal 2020, as our backlog provides us visibility in our field businesses.

Our service business tends to be more resilient and we continue to benefit from self help and our capital deployment.

We remain focused on driving execution and delivering for our customers and shareholders.

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

We will now begin our formal question and answer session. In respect of time, we ask that you limit yourself to one question and one follow up in order to ask your question. Please press star one on your Touchtone phone.

First question is coming from Goldman Kona Cowen <unk> Company. Your line is open.

Thanks, Good morning, guys.

Good morning, good morning.

So George I was wondering if you could just talk about the applied a track.

Pipeline what are you seeing in terms of front log if you will projects RSP is what have you any slowdown yet.

To speak of.

Domain.

No I mean as you've seen we continue to execute very well in the commercial HVAC space. When you look at our revenues in the quarter were up 8% with strong growth for both applied equipment and service and and that was spread across our North American APEC, We've had a light commercial unitary up mid high single digits.

And a lot of that has been a result of the new products, we've been launching with our rooftop products. If you look at orders the order show, 3% in the quarter, but thats off a strong plus 9% last year. So that's important to note and when you look at where that's that's occurring it's pretty broad base.

So then if you go and look at our pipeline on projects. We continue to have a very strong pipeline that were working pretty much across the globe and and converting.

And that has given us confidence with the backlog, we have going into 2020 and the continued progress we see continuing maybe a little bit lower on our growth rate mid to single digit here through the course at 2020, but I believe that that gives us confidence that we're going to be position here to deliver on the commitments. We made here in 2020.

Okay, and just a quick.

Follow up on consolidation you guys as kind of earmarked a billion dollars for M&A I just wondered if you could update us on your pipeline there and do you think theres going to be any broader consolidation any bigger.

Moves in the space.

Just your thoughts on.

How things might shake out with Ingersoll, becoming of independent climate company and Ccs spin.

Any any thoughts on that thank you.

Yes got some let me just give you my perspective, I think in any industry, there's always opportunity for consolidation.

I think it's been clear based on what we've been doing with the the Reinvestments, we've been making in products with the work that we're doing a build out our channels globally that we're focused on continuing to execute execute for our customers being able to build strong pipelines of of potential orders converting and ultimately executing and I think.

As we look at the future and a lot of this is tied to what we talked about with the the chief customer Digital officer that we've added we see an incredible opportunity to take a very strong portfolio and position positioned ourselves to be able to outperform on a go forward basis and so that's our focus when we looked at M&A we serve.

Only working pipelines as we look at our each of our product businesses and in our regional footprints and we're opportunistic looking at opportunities that would strengthen our organic investments, but the focus for US has continued to execute delivering strong performance and then.

Continuing to do bolt ons as needed.

Thank you.

Your next question is coming from Nigel Coe Wolfe Research your line is open.

Good morning.

Morning.

George It sounds like in spite of of ours. They use your voice sounds that creaky, so hopefully the classics in here.

So maybe just talk about pricing globally speaking, obviously Asia Pac is.

Challenging, but how are you seeing pricing across the the board, especially with will materials them too.

Let's move to face in rate and then maybe just comment on price cost and how that shaped up this quarter versus expectations.

Nigel I'd go back if you look at the last two years, we had done a headwind in 2018, and though we began to overcome that headwind at the late next year and that positions us well for 2019, we got we looked at our topline who is roughly two or three points of the of the top.

Line growth in 2019.

And that contributed to positive price cost in 2019.

Now that being said as we as we've set up for 2020, we've continued to make sure that we're staying disciplined from a pricing standpoint, and that we're projecting that on the topline.

Will contribute about 1% to the overall top line and so that combined with our productivity and and the like we'll continue to offset inflation and will continue to be price cost positive as we go through 2020.

It is important to note that would that would that price the impact to the margin rate is relatively neutral.

In 2020, thanks, Yeah, great. Thanks, George and then Brian I wanted to dig into some of the cash flow items for next year. So yes, I can point $3 billion of onetime outflows just maybe just talk about that.

Then the tax refunds, obviously as expected the is that does that came up that that the item and then on the conversion question.

To what extent as pension income.

Pressure on that conversion next year and then.

And I know that's four points here, there's a large outflow this quota in disc ops, just wonder if you could adjust as well. Thank you.

So the large outflow in disc ops. This year relates to the tax payment that was made associated with the gain on the power sale.

As it relates to the 600 million dollar.

Tax refund, we've kind of been flagging that for several quarters now we do expect that.

In the first half for 2020 were helpful. It's a December January timeframe, but I mean, that's that because of the size of it as we've talked about previously had to go through.

Committee review, but we do expect that to come in and the first half of 2020, and then the $300 million of outflow.

That will flagging really relates to.

Prior cash costs are current cash cost of prior restructuring charges as well as the ongoing activities that we have.

To support the $150 million of synergies that we're going to generate related to the 900 million target. We've got through fiscal 20 that we've talked about previously so.

Was it was around another question there.

Oh, sorry, yes, the pension income to what extent that putting some pressure on a condition.

Yeah, I mean pension income provides some pressure for us as does the joint venture dividends being less than our equity income, but we also get some benefit from our amortization as well, but but net net I think when we look at our free cash flow conversion target.

Next year at 95% as I think about how that improves on a go forward basis to get closer to 100% I would say, there's two areas one would be to close the gap between equity income in our joint venture dividends that we get on annual basis, and secondly, I still think theres some improvement in trade working capital.

So that will come through.

Continued efforts of our cash management office team.

Around the globe.

Okay. Thank you very much.

The next question is coming from Jeff Sprague vertical research your line is open.

Thank you good morning, everyone.

Hi, Jeff Good morning.

Could we dig in a little bit more george into synergy and productivity and.

I'm kind of sure at this point of the game, it's getting a little blurry on what synergy and whats productivity, but a little more explicit on what it is you still have yet to capture.

What is kind of embedded in that number and.

I'm sure you're never going to stop seeking productivity, but with this bring that programs, we will close in 2020.

Yes, so as Brian laid out we are still position head to deliver very strong synergy in addition to productivity here in 2020.

On a go forward basis, when you look at our cost base and our ability to be able to get continuous productivity on that caused base.

Normal productivity would generate about 30 basis points of net margin expansion.

It's our goal is to continue to keep strong pipelines of of opportunities to reduce the.

The structural cost and then from a process standpoint, with everything that we do whether it be at our manufacturing product businesses or within our field installation and service business really driving strong operational improvements on a continuous basis going forward.

And so our window when we project beyond 2020, we're still going to have a very strong pipeline for productivity to continue to expand margins.

And George then just looking at backlog I think it goes a little bit.

One of the earlier questions right some of the the macro indicators for whatever they're worth right Dodge starts.

The guy.

Placed at all as kind of wobbling here.

And it really hasnt shown up in your orders or really any of your peers orders yet.

I just wonder if theres any additional insight you can share on maybe what you think the disconnect is there and.

Your visibility to convert backlog.

As you look into 2000.

So let's start by the macro indicators that we look at you look at a b or Dodge forecast. They do suggest a they are a little bit lower but they have stabilized.

And when you look at some of the areas, where we have strength.

We see institutional we still believe that that has yet to peak in some of the end market. So we support there and I think thats driving a lot of the though the order pipeline in the conversion.

Conversion of that pipeline.

So what I would tell you is that when we projected the year in 2020 were starting with a nice backlog. We have suggested that the order rate will slow a bit to kind of low mid single digits based on what we see in the pipeline today in the two combined is what gives us confidence. So we are positioned to be able to deliver kind of low to mid single digit growth.

Throughout the year.

Certainly we are watching this closely and making sure that from a cost standpoint that we're going to do what's necessary to adjust as needed.

What I would say is that for us.

Service business is a boat little better than $6 billion globally, and if you've seen our progress in last two years, we've been able to sustain our our growth rate up over 4%. So were showed a 4% two years ago and then this past year were north of 4% and our goal is that we believe with the installed base.

So we have that we've built that there is still tremendous opportunity to build our service business. So at the same time that we're watching.

The big projects and that pipeline and making sure that we're going to be able to adjust appropriately as plays out. We will also working hard to be able to execute on our service strategy that we believe that if it does soften.

Much that we're going to be positioned well with our service franchise to be able to try to make up for some of that softness.

Right. Thank you.

The next question is coming from Steve Tusa Jpmorgan. Your line is open.

Hi, guys good morning.

And Steve.

Can you just talk about what you're seeing specifically in China on kind of the larger equipment and services side things there for everybody seems to be holding up pretty well you guys are obviously continuing to lead attack there to the degree.

On your growth so any color on you know is there any timing here in the next 18 months, where this is going to slow down is it some project phasing concerns or things I think things are pretty robust here for the next step for the foreseeable future.

Yeah, let me frame up China for US Steve China overall is about 6% of our total total company by 900 million of that as in the field and 400 million is in global products. When you look at the field business, China is an important market for us in Asia Pac, It's about 30, 540% of the Asia Pac.

Region, and we are seeing as you said, we're seeing good revenue growth, we had low double digit organic growth year, driven by HVAC equipment as well as our ability to be able to expand or service here in the quarter and I believe that we are no lapping the tough backlog that we had in in margins.

On a go forward basis.

Now that being said, we as I was just so I just spent over a week there unmet knows in Shanghai and chunking. It was in Qingdao and and working with the teams and meeting with customers and meeting with the local governments and I have to admit I left.

Feeling really good that the work that we're doing we're continuing to make progress we're positioning our capabilities appropriately to to capitalize on the the infrastructure expansion and the like and so I.

I don't I see it's going to continue to grow it might it might temper a bit based on what's happening here with some of the trade was in the like but overall I have to say I feel good about the growth in the China market.

We're also going to make sure that we stay competitive not only from a cost standpoint, but in how we create value with the type of projects. We go after but.

That's my current view Steve.

Great. Thanks, a lot for all detailed the comprehensive answer.

Thanks.

Your next question is coming from Julian Mitchell Barclays. Your line is open.

Hi, good morning.

Graduations, Brian on the Vice Chairman ship.

Thank you thanks.

In terms of I guess my first question I'm, just looking at the EBIT margin guide for fiscal 20. So it's up 60 to 80 bips with some corporate cost reduction within that I'm, just wondered when you're thinking across the four segments.

Do we think about that expansion being sort of a pack margins flattish and the other three in 2020 being up say 50, Bips is that the right way just to think about the segments in 2020 .

Yes, so when we look at.

Let me give you a high level that obviously, we're positioned hit a to expand margins as we've guided 40 to 60 basis points.

And for the for the total year and Thats going to be.

Pretty much we'll see expansion across the board. It's the we're going to get better leverage out of our global products and so as we look at our global products, where we're going to be closer to.

70, plus type basis points, and then our field based businesses kind of the where we're seeing good good leverage here is the the work we've done in the mail of being a little bit better.

The one that's going to be.

The lower margin is going to be North America, roughly about 30, or 40 basis points and thats purely when you look at the total when you look at how we achieved the margin expansion, we get about 20 basis points on volume mix you picked up about 50 basis points on synergies in productivity and then we.

We are pressured a bit on the on the total year with a pack as well as some other pressure we have.

Within the overall portfolio. So that's what gets us in total now when you break that out into as I said North America, we're a little bit more pressured there because of the mix of age of H. back versus fire and security as well as the headwind that we've had in the retail business continuing.

Because of the pressure that we see there in the in the end market that we're serving.

And so overall, it's we're going to see improvement across the board.

But the strength will be driven by global products as well as the the a may look continue to perform as an umbrella and then beginning to recover here in APAC.

Thank you very much in and my second question I'm, just around that global products residential.

Revenue aspect. So you had as you said down low double digits revenue in global Reggie H. back in Q4.

I'm just wondering if you gave a bit more color around the Asian piece, you talked about Japan in Taiwan being culprits is there something going on market share wise.

Dike ins numbers in Japan has been okay.

Just wanted what your outlook was on that Asian piece within global residential HVAC.

Sure. So let me frame it up here Julian when you look at global products organic revenue growth being flat in Q4, let's start that it was off of a plus nine last year and now we did expect a decline in North America rosy given that a year ago, we had 20 plus percent growth.

When we when we won coming into the quarter. We knew that there was going to be distributor inventory levels that we're going to have to be burnt off.

What was softer as Brian talked about was the APAC residential business and just to frame that up it's about $1.8 billion in annual revenue is primarily the Hitachi JV and that with the strength in the position that we have in Japan and Taiwan the.

The overall decline it was low teen decline that impacted as Brian said three points of our global products growth.

Now if you break out break it out into Taiwan, and Japan. The decline in Taiwan was was partly due to mild summer we had.

Distributors had to burn through their inventory as a cooling season was coming to an end.

Our fourth quarter and then as we look at it today, we see the inventory levels to be back to normal at the end of September recognize that we have about Oh, we do have a very strong share position in that market and so we do believe on a go forward basis, we're going to be positioned well and continuing to me maintain share into.

And we had a very strong first three quarters ourselves in Japan, and then the market decline began to occur in Q4.

So with that we saw distributors burning off inventory.

And I think right now I just came back from there and spent a few days with our team there what I would say is that the inventory levels of back to where they need to be we are a little bit concerned about continued softness here in Q1. So we're going to watch that closely I would tell you from.

My visit and the deep dive that I've done in all of our investments I feel really good about the business with the investments, we're making and being able to maintain a very strong position in these markets.

And so that's that's kind of the way I assume you today, but we are going to see a little bit of pressure here in Q1, because of the jet Japan market.

That's great. Thank you.

The next question is coming from Andrew Kaplowitz of Citi. Your line is open.

Hey, good morning, guys.

Morning, Andrew.

George in cooking solutions like in that the you mentioned a mix issue did ease in Q4 versus Q3 service is better but.

Good day to really large you'd be day improvement 40 basis points versus last quarter was shut down 90. Despite for in security, that's still being lower than H. back. So can you give color into the improvement I know you just said that we feel pressured didnt go away, but you could be it at all or was it really just better service next week.

He better Salesforce productivity.

Yes, there's a lot of.

Let me try to frame. This up so you can kind of put the pieces together overall as you said, we had a lot of pressure in the previous quarter with mix and the like and and now in the fourth quarter were 40 basis points year on year improvement.

You look at the breakdown of that volume and mix.

Was about 20 basis points, we're seeing good good volume come through continued volume we're seeing.

Very strong productivity savings in cost synergies, which was up 40 basis points. There was a little bit a headwind on pension and then there is that.

Almost done with the headwind that we've seen in sales investments.

So when you walk that through.

That's where.

Which ultimately achieve the net 40 basis points year on year.

And so it's we're.

Obviously watching this closely as we get into Q1, we are looking and making sure that on a year on year basis, where continued position to continue to expand I believe that right now it's going to be somewhat flat because of the way the mix is going to come through and in some of the pressure that we're seeing in retail.

We're going to continue to focus on driving strong productivity and cost savings, while we're executing on the growth.

Andy the only thing I would add as a reminder is just keep in mind that in Q3 for North America part of that decline really had to do with a really strong performance. We had in the North America retail business in Q3 of 18, and we didn't have that same dynamic here in our fourth quarter.

That's helpful guys and then George can you talk about the fire and security markets in particular, I think you'd mentioned that thanks security products growth was good.

The orders have hung in there reasonably well, but how much of it is sort of the markets being Sean I know for detection generally has been pretty strong how much of that is sort of self help over the last few years for you guys in markets like security in digital improving business versus the markets are outperforming the market.

So let me start Andy by breaking that out into products and field and so if you look at our fire and security products, we were up although it prince 2%, but that was on a low double digit prior year compare so on a two year stack was still doing extremely well with our with our product businesses.

Now if you break if you dig into that fire detection was up 7%.

And that's a result of both.

Reinvestment in new products, continuing to expand our channel and Salesforce, and then ultimately being able to convert backlog.

Security was flat now that's on a very tough comp also year on year I believe it was it was high teens and we are continuing to invest in positioned ourselves with the right products and mix in how we want to compete and security as it relates to our overall, we look at our digital solutions the importance of having that.

Product mix within the portfolio.

And then the last is our fire suppression business continues to perform very well I believe that we continue to gain share were up mid single digits.

Pretty much and that's.

Pretty broad based across the globe when you look at our the field businesses were up.

4% and that's that's both install as well as service and his broad base, it's across all three regions.

In a big like.

I spoke earlier about our focus on building services, we continue to focus on how we build out our service capabilities, but.

Overall, I would say that we're performing we are performing at above the market.

With both our product and technology businesses as well as how we're executing projects in service.

Thanks, guys.

The next question is coming from depot Reichlen Wells Fargo. Your line is open.

Good morning, good money off.

Would you say at this time Youre field backlog, just given your field backlog and give us facilities.

2020 now you'll get the both these at least three quarters out or you think thats no where perhaps you this time and any color on how that visibility split across regions.

Yes, it's pretty but I would say is the if you look at our order rate in 2019, right. We had a good pace of order growth throughout the year. It was driven by pretty healthy end market demand.

The much across the board some softness in the middle East and a few soft spots, but overall pretty pretty broad based across all three of our regions.

The work that we've been doing an expanding our salesforce as well as our service technicians.

Thank you at the end of the day, we're positioned well known to be able to convert that and if you look at the mix of projects. It's a balanced mix of small mid and large sized projects.

So what we do as we take that backlog and we look at how it's going to convert over the next year.

Much of which is in backlog and with the continued as I said earlier would be the idea that that might be some little bit of pressure here to maintain our our mid to upper single digit order growth that we've seen last two years, we're suggesting that might be more of the low to mid quarter growth that we're putting into the backlog.

Doug.

That's what then.

Pretty much ties to our organic revenue growth of low to mid single digit for the year.

So again, that's something we'll watch closely but we are starting the year with a with a healthy backlog.

Got it my follow up let's see on.

Cadence of month can you.

Can you talk about how the quarter progress I mean did good momentum since then or weekend in any of the job received or any of your products our field businesses. Thank you.

The just a clarification on that so how the quarter <unk> the quarters for growth 20 Twond.

No the month in the quarter, how did you are.

As Q4 fiscal Q4 progress by month was did you see increasing momentum as then our momentum decreasing and setting the verticals are setting geographies.

Yeah, I mean, when we look at our our businesses.

And it differs a bit but typically the third month of the quarter.

As we are a lot of projects close and a lot of the shipments get made so there is a little bit of a an anomaly here on a quarterly basis, where the third month is always our strongest which ultimately was the case in the fourth quarter. So I don't believe that there was any any change in the profile of how the quarter played out with what.

We expected.

I think we did see.

As we knew as a quota played out that from a residential standpoint that was a little bit of where we saw our additional softness from what we were expecting when we started the quarter.

But that was probably that was probably the only spot that as of quarter played out it didnt play out as we would have normally expected I think the cadence in Q4 fiscal 19 was very similar to the cadence of the monthly in Q4 and 18. So I don't think there was I can recall at all.

Got it thank you for the call.

The next question is coming from Josh Pokrzywinski Morgan Stanley . Your line is open.

Hi, good morning.

Good morning.

Just wanted to follow up on I think something so I'm a bit more topical recently, maybe more on the applied space than anything else. This whole concept of.

Kind of refrigerant upgrades more energy efficiency. It seems like something that the whole industry has been talking about four for decades on and that's really starting to come into its own George could you can you size for us how much of the business is really around.

Some of these kind of energy efficiency upgrades versus something that's more break fix or.

Maybe kind of new new install focused and how that's been doing.

Yes so.

Well you visit this couple of different questions I guess embedded in that question. When you look at what we do today.

Certainly as we're bringing new products to the market. They are more efficient there and higher demand and and ultimately there's a payback from an energy standpoint, so I think on consumers and even from a beat it these standpoint when Europe . When we do have performance solutions, we bring our new equipment it delivers energy efficiency.

We deliver value and ultimately we get paid for that value.

Thank you know for all of US we are anticipating theres a lot of pending legislation around.

HFC refrigerants and ultimately what's that going to mean and we're taking a very active role.

And we support bipartisan federal legislation being introduced that gives EPA authority to phase down to the high global warming potential H HFC refrigerants in a manner, that's consistent with the can Golly amendment in Montreal protocol.

That said is we want to work with the industry as a whole and with a consistent approach to the HFC transition rather than a patchwork of individual state laws targeting different sectors or or having different transition date. So all of the investments that we've made.

Is in our R&D is to develop new low GWP product platforms. A good example is our Y Z chillers.

In anticipation of these regulations and so we're very active in the industry, making sure that as we project, what's going to happen here.

From an efficiency standpoint, making sure that with delivering the highest efficiency as well as being able to to drive the regulation appropriately that's what our commitment as we believe that that would benefit our customers shareholders as well as the environment.

And then just a follow up if I remember back to the Tyco days and I think early in the integration there or there are parts of the products business I think around oil and gas that showed a little bit Isle surprising cyclicality in that were a drag on the business I think today those are probably some markets that are a little choppy themselves is is that something that's still in the portfolio.

And at some of that leave with with Scott.

Maybe just kind of update us on on how that's performing relative to the all.

Yes, so the what what remains is our fire suppression business has a strong position in the oil and gas space with the high hazard.

Technologies that they bring in so and as we said earlier that business is actually continuing to perform very well.

And when we looked at.

Our field based businesses, obviously, we restructured a lot of those businesses in the downturn.

And we've been very careful in how we grow those businesses on a go forward basis capitalizing on where we believe.

The opportunities are and ultimately where we don't want to play so our footprint is much smaller than it was back then without the Scott safety business as well as the way that weve restructured our field businesses over that time period.

Got it that's helpful. Thanks to color.

With that operator, I'd like to turn the call back over to George for some closing comments just to wrap up here today I want to thank everyone for joining our call. This morning.

We have made a tremendous amount of progress this year it will build upon that momentum in 2020, as we laid out our guidance.

I am looking forward to see many of you soon so operator that concludes our call.

So we can see today's conference all parties may disconnect at this time.