Q4 2020 Johnson Controls International PLC Earnings Call
Morning.
Welcome to Johnson controls fourth quarter 2020 earnings call. Your lines have been placed on listen only until the question and answers answer session to ask a question. Please press star one on your Touchtone phone. This.
This conference is being recorded if you have any objections. Please disconnect at this time.
I will now turn the call over to Internet, Franzen, Vice President and Chief Investor Relations and Communications Officer.
Good morning, and thank you for joining our conference calls to the sub Johnson controls fourth quarter fiscal 2020 result.
Yes, releasing all related tables issued earlier this morning.
The conference call Slide presentation can be found on the Investor relations portion of our website at Johnson controls.
Joining me on the call today are Johnson controls, Chairman and Chief Executive Officer, George Oliver.
Chairman and Chief Financial Officer, Brian Steve.
And our Chief Financial Officer Olivier Leonetti.
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 todays press release and read through the forward looking cautionary informational statement that we've included there.
In addition, we will use certain non-GAAP measures in our discussion.
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 earnings per share even eat.
And free cash flow excludes 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 on a continuing ops.
GAAP earnings per share from continuing operations attributable to Johnson controls ordinary shareholders was 60 cents for the quarter and included a net charge of 17 cents related to special items.
Including year end pension mark to market adjustment.
Excluding these special items non-GAAP adjusted diluted earnings per share from continuing operations was 76 cents compared to 78 cents in the prior year quarter.
Now, let me turn the call over to George.
Thanks, Melanie and good morning, everyone. Thank you for joining us on today's call.
The effects and impacts of cold that are still fresh in our minds I hope you and your families are continuing to stay healthy in sales.
Before we get started with the prepared remarks I wanted to take the time to officially welcome Olivier to the team.
He is on the call today, we'll be actively participating in our guidance discussion I think today.
Many of you have already had the opportunity to speak with him briefly on a few of our investor conferences in early September.
We look forward to speaking with many of you over the next several weeks from.
From my perspective, the transition couldn't be going any better and it's clear to me that Olivier is already having a positive impact on the organization and his first 10 weeks.
As we said at the time of his announcement Olivier will formally assumed the role of CFO immediately following the release of our 10-K.
So a few days.
I'd also like to take this opportunity to thank Brian for all of his contributions over the past several years Brian.
Brian It's been an incredible partner and ally for me and of course played a vital role in the success of the merger integration over these last four plus years I can't Thank you enough for all that you've done I think I speak for the whole team, Brian wishing you a long and happy retirement.
With that let's get started with a look back at our fiscal year on slide three.
They likely goes without saying that 2020 is a year of unprecedented challenges.
Experience isn't this past year have tested the resilience agility and resolve of the entire organization and all of us as individuals I'm incredibly proud of the way we came together as one team with an unwavering reliance on our core values and culture, which have underpinned every decision we made along the way.
As we've said since the onset of the crisis our goal as a company has been twofold.
First and foremost to protect the health and safety of our employees and their families and second to fulfill our customer promise by proactively developing and delivering solutions to ensure the continuous functionality of their critical infrastructure and a central facilities.
These two goals remain in place today.
Improving the fundamentals of our business has been the foundation of our integration and transformation over these last few years and the significant progress. We have made was critical to our ability to navigate through the pandemic.
From my perspective, we have continued to demonstrate strong execution and established a consistent pattern of achieving our commitments.
In spite of the enormous amount of volatility in our markets. This year, we continue to execute on our strategy although.
Although we had to pivot early in the year to mitigate the impact from COVID-19, we further strengthened our operating systems continue to invest in our businesses filled key leadership roles and returned nearly $3 billion in capital to shareholders through share buybacks and dividends.
We ended 2020 with arguably the healthiest balance sheet and strongest liquidity profile, we've had since the merger.
We opportunistically repay debt finance, a significant portion of our debt.
Very attractive rates and issued our first green bond further underscoring our leadership in and commitment to sustainability.
We remain on off balance throughout the course of this downturn competitively positioning the company for the recovery as market conditions normalize.
For example, we launched an impressive number of new products this year, including our expanded fleet of light commercial unitary apex systems.
In addition, we completed a number of bolt on acquisitions over the course of the year include.
Including the remaining minority stake in calls is a proven technology disruptor in the security products market.
Levering cloud based intrusion and smart building solutions, which further enhances our digital innovation capabilities.
We also doubled down on service digitally connected systems and of course announced the launch of opened Blue all of which will form the exits of our growth strategy going forward.
And finally as we enter the next stage of the evolution of Johnson controls I couldn't be more excited about the opportunities in front of us as we turn our attention to accelerating growth gaining share I will come back later in the call to discuss this in more detail.
Turning to slide four I'll provide a quick summary of the financials for the quarter.
We ended the year with positive momentum as general business activity and demand trends continued to improve sequentially across many parts of our portfolio.
That said, while we are encouraged by the progress of the recovery to date almost all of our businesses continued to experience material impacts from a pandemic.
Overall sales in the fourth quarter declined 6% organically better than the 10% decline, we were projecting coming into the quarter as our sales teams executed very well in the current environment.
Global products showed the strongest sequential improvement declining 3% with sharp rebound in many of our product lines, including our residential HVAC portfolio.
Our field revenues declined 7% in aggregate as site access continued to improve although discretionary spending remains somewhat more restrained.
Service continued to outperform showing more normal resiliency with sales down 3% in the quarter led by the relative strength of our contractual service space.
Install revenue declined 10%, but again significantly improved compared to last quarter's 18% decline.
We remain vigilant on our planned cost mitigation efforts in the quarter holding our EBIT margin flat year over year at 12.9%. Despite continued volume pressure.
Direct result of strong execution delivering best in class Decrementals at 13%.
Adjusted EPS came in at 76 cents down 3% year over year, we delivered on our cash commitment for the quarter with strong free cash flow of $1 billion, bringing the full year to $1.9 billion, 115% conversion on adjusted net income.
Turning to slide five let's look at our order trends for the quarter.
Similar to last quarter. This chart highlights our monthly field orders on a trailing three month basis through the end of September and excludes orders related to our global products business, they tend to be book and ship.
For the quarter overall orders declined 7% continuing to recover off the may lows substantial substantially better than the 16% decline, we reported last quarter and in line with our expectation for a mid to high single digit decline.
All three segments rebounded on a quarter sequential basis.
Hi platform orders for our global applied APEC install and service businesses improved to down a little less than 1% led by positive growth in North America and APAC.
Orders for our buyers security business remain challenged including weakness in our retail business. However, these businesses have improved on a quarter sequential basis.
We continue to see uneven order patterns across many of our regions in many countries across Europe are seeing renewed lockdowns and restrictions in case rates in the us are picking back up so we continue to plan conservatively.
With that I will turn it over to Brian to discuss our performance in a little more detail.
Thanks, George and good morning, everyone. So, let's get started with our year over year EPS bridge on slide six.
You can see operations net of mitigating actions was an 11 cents headwind display.
Despite continued volume pressure and some unfavorable mix price cost was again positive and we achieved significant cost savings during the quarter.
In total Q4 benefited from approximately $200 million in mitigating cost actions in response to COVID-19.
Ongoing synergy and productivity savings of four cents tailwind as anticipated net financing costs were a two cents headwind.
Our lower share count given the significant share repurchase activity over the past 12 months benefited us five cents.
Moving to our segment margin bridge on slide seven as I mentioned, despite continued volume pressure across all four segments due to the pandemic.
We did remain very disciplined on price in an increasingly competitive environment.
As a result, we delivered another quarter of strong gross margin expansion of 70 basis points year over year, 34.3%.
With a full quarter of run rate permanent cost savings in Q4, and the incremental benefits from our cost mitigation efforts, we were able to hold decremental margins to 20% at the segment EBITDA level.
As planned 13% consolidated EBIT level.
Overall segment EBITDA margin declined 20 basis points on organic basis to 15.6%.
So, let's turn to slide eight for a look at our segment results in more detail in my comments will also focus on the segment end market performance. This included on slide nine.
For North America revenues declined 6% with installed down nine and service down three.
We saw strong retrofit activity, particularly from our enterprise customers requesting solutions to enhance the health and safety of their facilities. However demand in our conventional install business related to new construction remains under pressure.
Applied age fact declined mid single digits and fire security was down low double digits, while performance solutions grew low double digits in the quarter.
Segment margin increased 50 basis points year over year to 15.4% slightly ahead of our internal expectations given better than expected top line performance.
Cost mitigation efforts and restructuring benefits not of a mix mix headwind also benefited us in Q4.
Overall orders in North America declined, 9% with low single digit growth and applied H. bass offset by softer orders in fire and security.
Backlog of 5.9 billion was flat year over year.
Moving to EMEA, where revenues declined 7% with installed down 11 service down through.
By end market applied age factor fired secure both declined at high single digit rates versus the high teens rate last quarter.
Industrial refrigeration continues to outperform relative to the other end markets declining only mid single digits in the quarter.
By geography, we saw continued challenges across most of the major regions Europe declined mid single digits, while the middle East saw significant pressure down high teens in the quarter with continued weakness in our expect business Latin America was down high single digits.
As expected EBITDA margins improved sequentially, but declined 30 basis points year over year.
Favorable mix or cost mitigation efforts and better fixed cost absorption weren't enough to offset the volume de leverage.
Orders in EMEA declined 7% during the quarter, we strengthen our industrial refrigeration and security monitoring businesses.
But offset by continued pressure in our age fax business and to a lesser extent fire and security.
A meal this backlog of 1.6 billion was up 1% year over year.
So moving to a Pac revenues were down 10% with install down 14 service down four.
On a positive note China continued to improve not only 3% in Q4 with positive sequential revenue growth during the quarter.
Across the rest of the APAC region conditions do remain a bit fluid as it relates to COVID-19, and the steady pace of economic recovery that we've seen over the past several months may moderate from recent levels.
EBITDA margins in a Pac improved 50 basis points year over year or 14.7% as their favorable mix and the benefit of cost mitigation actions more than offset the volume decline.
APEC orders increased 2% in Q4 with China orders up a strong 7% back.
Backlog of 1.7 billion grew 10% year over year.
So let's move to global products were told revenue declined 3% on an organic basis in the quarter.
Residential was a clear standout with strong growth across to reach back and security product portfolios.
North America revenue grew 31% in the quarter driven by favorable weather.
Release of pent up demand and our strong dealer conversion.
We also continue to gain share primarily in the air conditioning heat pump categories. As a result of our new product launches earlier this year.
As we transition to getting heating season, we continue to see unprecedented order momentum with many of our channels restocking for upcoming service demand.
In Asia Pacific our Tachy residential revenues grew 5% driven by strong double digit growth in Taiwan, despite more challenging markets in Japan and India.
Commercial they track markets remain under pressure, particularly light commercial unitary.
These products typically support verticals that are still struggling due to the pandemic.
Sales in our North America light commercial business declined low double digits in the quarter.
That being said, we continue to gain share in this market both for the quarter on a trailing 12 month basis, and we're seeing good traction with our new choice and select rooftop platforms as well as our new channel program incentives aim directly at converting replacement demand.
The story for applied equipment in our indirect channel is very similar Q3 with revenues down 9% in the strong chiller and air handling unit replacements in North America being offset by declines in a past due to continued project delays and elevated channel inventories.
Fire and security products declined mid single digits security products benefiting from healthy Goldman trends and strong growth in our intrusion business globally as we integrate crosses.
EBIT margins declined 130 basis points year over year to 17.8%.
Positive price cost and the benefit of maybe getting cost actions was more than offset by the volume decline and related absorption as well as a negative mix.
So, let's turn to slide 10, corporate expense was down significantly year over year to 58 million as we continue to benefit.
In addition actions synergy and productivity sales.
The ongoing cost reductions related to the power solutions divestiture.
As a reminder, we expect that our corporate expense will increase to a range of 300 to 330 million in fiscal 2001.
Some of the benefits from this year's temporary cost reductions begin to reinstate over the course of fiscal 21.
Moving to our balance sheet on slide 11. During Q4, we made significant improvements to our balance sheet and liquidity profile.
We took advantage of the favorable interest rate environment to refinance approximately 1.8 billion of our short term debt some of which was raised in April 20, twond into longer dated maturities at very attractive rates.
This included the issuance of our first Green bar one of few industrial companies to do so with a 625 million 10 year note that will be used to finance eligible great projects, which further underscores our commitment to sustainability.
Overall, our net debt leverage remains at a very strong 1.8 times still well below our target range.
As mentioned to you last quarter, given our strong balance sheet position and cash flow generation, we resumed our share repurchases in Q4, completing the remaining $750 million of the planned 2.2 billion for fiscal 20.
Moving to free cash flow on slide 12.
We continue to see extremely strong cash flow performance across the company.
Reported free cash flow in Q4 was 900 million with adjusted free cash flow of $1 billion.
Full year adjusted free cash flow was over 1.9 billion, representing a conversion of 115% well.
Well above the prior year, primarily due to aggressive management of Capex.
Covert covered related cash tax benefits.
With that I'll turn it over to George to provide you an update on our go forward strategy. Thanks, Brian Please turn to slide 13.
As we have come to the end of our original full year integration period, we are at a point, where the difficult work around our internal transformation portfolio rationalization and leadership changes.
Now largely complete.
While there is always more work to do in an organization of that size.
We're excited about the growth opportunities in front of us.
Our portfolio is very well aligned with the with the strong secular trends, including sustainability and energy efficiency urbanization, and smarter and safer buildings and infrastructure.
We are uniquely positioned to serve these trends with a holistic approach that leverages. The most comprehensive product portfolio in the industry combined with the largest installed base and brought us direct channel footprint to enable extensive go to market advantages.
Our vision for this merger five years ago, what to ultimately lead the evolution from managing traditional building systems, becoming an outcome based solutions provider supporting more intelligent connected spaces and places.
Given the improvement in our growth and operational fundamentals over the last few years, we're very well positioned to accelerate and leverage our unique competitive advantages.
As I mentioned earlier, we have developed three growth priorities all designed in calibrated around gaining share.
Scaling opened blue accelerating new product introductions, and driving higher service attachment rates and sales growth.
At the same time in some respects enabled by these growth priorities. We will remain focused on driving improved margin performance attacking the cost structure with the same intensity we have over the last four years.
The steps weve taken to strengthen the balance sheet over the last two years and the improvements we made to our liquidity position in cash generation capabilities. We're now in a better position to pursue a more balanced but disciplined capital allocation plan.
Please turn to slide 14.
The launch of open Blue represents the next stage in our journey.
Although it is still very early we have achieved significant success in creating momentum with customers and partners.
Opened blow is immediately compelling to a wide variety of customers looking to connect plan and manage space for enhanced security sustainability and experiences.
This platform addresses a series of solutions for a variety of environments.
Worldwide, we saw an engagement with a range of customers from one of the largest and most respected real estate developers in Asia to multiple sports venues across the world and everything in between.
For example, let's look at universities, we began opened blue engagements at Stanford Brown, Tulane, Kent State University of Arkansas and others.
Our work with the National University of Singapore demonstrates our deep collaboration with Microsoft, creating a living laboratory for a new breed of customizable contact free applications built on Johnson controls unifying digital technology suite opened blue.
From a technology perspective, I mentioned, our collaboration with Microsoft We've also begun new work with a portfolio of technology companies, including Accenture, Cisco and Intel.
Open Blue is also fueling some of the most ambitious projects in the world such as beef and.
And the next World Cup.
Over the last several months, we have had numerous releases under opened blue for.
For example in August we launched our comprehensive suite of digital solutions under the open blue healthy buildings label.
Free and together intelligent connected hardware software based analytics and dashboards as well as mobile applications aimed at accelerating building occupancy by instilling confidence in assisting in the management of COVID-19 risk.
We remain focused on creating the world's best technologies and proud that we received over 600 patents. We earn the highly coveted is a secure secured development lifecycle assurance certification the highest standard in product security.
Let's turn now to slide 15.
As we have mentioned to many of you over the last few months one of the biggest benefits of open blue will be our ability to tailor our service offerings the individual customers based on their unique needs.
This platform enhances lead generation improves attachment rates increases average revenue per user.
Over time should sustainably accelerate our service growth growth rate by two to three percentage points with a very attractive margin profile.
In late September we launched a new flexible tiered service offering powered by opened blue, which increases our capabilities around real time remote service in monitoring as well as predictive analytics.
Lastly, turning to slide 16 demand for indoor air quality in healthy building solutions remain a key focus area.
We have seen significant uptick in interest from our customers since the beginning of the pandemic.
For example year to date sales of our coat merge 13 filters are up over 400% year over year.
Our second half residential indoor air quality products were up 84% year over year.
And in most cases the revenue dollars for any one of these products individually.
Smaller, but in aggregate have been enough to partially offset some of the weakness we are seeing.
In addition to some of our core offerings that have always serve these markets. We have also rapidly innovated or redevelop several new products for customized applications.
I wont spend time and each one listed on this page, but this collection represent what we believe we are uniquely positioned to fulfill the different customer needs regarding healthy building.
This focus on targeted innovation is one facet of our goal to accelerating new product introductions.
Over the next three years, we expect to gain nice nice share and plan to launch over 150, new products in fiscal 21 alone.
With that I would now like to turn things over to Olivier to provide you with his initial impressions and our thoughts on fiscal 21. Thanks.
Thank you Josh and good morning, everyone I'm pleased to be with you on the call today and Im tweets to be part of the Johnson controls team.
I've been in deal fees for about 10 weeks now and up 40, I mess myself in learning the business and we'd be at both Brian and the finance team and extending the strength and opportunities we have in front of us as an organization.
Thanks, Brian enough for your guidance and Lyons to these transition.
I thought I might quickly share with you my initial impressions and perspective before I get into our fault outlook.
I've been asked by some of you why watch it grow into this role.
Johnson controls and I would tell you.
There were a number of reasons from especially the standpoint, how we do things he is incredibly important to me.
I want that to be part of an organization, which could shop diversity and inclusion matters were focused on the environment methods were developing people and maybe took a seat methods.
Im impressed by what the team has achieved over the last two years his strategic vision and deep operational discipline, that's been established or.
Also recognize Dave's team work to be done, but you could andy around optimizing the cost structure of our business with them.
I am very positive about the growth opportunities off the end markets, we serve small safe empty buildings and bio vision around services, Vichy told and product innovation.
Finally, I am excited about the ability we have to drive above market growth. We are best in class margins.
That seems like not short pulling to transition to our outlook starting on slide 17.
I mentioned my optimism about our SEF market and I think this depiction of our business mix shows that refinanced woven you profile repartee speed once said each fall products installer and service.
We have one of the largest installed base is a building globally with an unmatched jacked, China footprint, both of which we can leverage to generate very attractive heavy so both entities as George mentioned.
Service powered by open loop is expected to be an attractive vector of profitable growth for the company.
Looking out to our installation bottle for yield we have roughly evenly split between new construction and renovation retrofit or though many pops up distribution. That's remained challenged by the effects of the ongoing pandemic.
Before you have to see building solutions and retrofit activity Cambodia rate the weakness in new build.
Product revenue of 75% represents dose products sold through our indirect channels and we know that include products and equipment installment through our direct channel.
She is our short cycle business, that's typically book and ship.
Turning to slide 18 dislike provides our end market exposure as well as a few economic indicator on to cease code yet bases, we utilized as an input to our planning process.
Construction outlook is about momenta, but the new construction portion of our installation business in North America, which is about 15% of our total sales.
GDP tends to be development time for said base market growth.
As the market forecasts indicate the global macro environment remains uncertain. However, given the attractiveness of our portal for you Andy elements of our go forward strategy. George discussed we feel very confident that we are positioned to outgrow our end markets.
Now, let's turn to slide 19, we saw our views of fiscal 21, and our Q1 guidance.
Forecast for Mckitrick market's recovery suggest a stronger second half of the yet.
We continue to manage cost or the cost of the yet keeping tight controls on GM Mount aim timing of temporary cost reversals as volumes continue to normalize.
We also have to carry over benefits from dependent and cost actions. We took in the back half, which we partially offset the return to complete cost.
These along with our focus on higher margin revenue growth is expected to result in ongoing EBITA margin expansion.
Regardless of the presidential election outcome, we are very confident our ability to maintain a setting that half tax rate in fiscal two in Q1 free.
Free cash flow on the recovery bases will approximate 95% for the 40 Act and should follow a Saturday no more tenants with a majority of our cash being generated in the back half in line with our traditional cash flow seasonality.
With a majority of the large cash adjustments now being behind US we have put transitioning to an end adjusted cash flow metrics.
Hotspot to follow a disciplined capital allocation, we expect to deploy.
The remaining 1 billion of proceeds from the polar solution sales to share repurchases now for Q1 guidance, we expect to start the year off with organic sales decline in the range of 5% to 7%.
Continued focus on the cost side, which will allow us to expand our EBIT margin 20 to 40 basis points and EPS should be in the range of 39 to 41 cents. While before continued strong performance in a challenging environment, we stopped operator, we kind of.
On the line for questions.
Thank you so much.
Time, if you would like to ask a question. Please press star one on your Touchtone phone. Please ensure that your line is muted. Please record your name and affiliation to be introduced in respect of time, we ask you limit yourself to one question and one follow up question.
Our first question is from Deane Dray with RBC capital markets. Sir Your line is open. Thank you good morning, everyone and welcome Olivier and vessel up to Brian.
Thanks.
And could it it just to start off from the forward looking guidance and we suspect that a lot of companies are still going to keep the.
Annual guidance suspended.
You've given us enough data points in the forward look on free cash flow and that conversion to back into an EPS number just want to make sure.
Our math is right or getting up to 45 to 250 range.
Just want to make an up looks like it brackets consensus around to make sure that math is right and is it just a point of still heightened uncertainty that's keeping you from framing that guidance officially.
So let me give you a bit of quotas before too and so specifically to your question. We have as you sense from the cold very confident about the position of the company and we believe we're going to be able to navigate a decrease and certain environment. As we did last year now as you lead it to.
At this point in time.
We saw a lot of uncertainty regarding what is happening in the pandemic, we have out of particularly over the last few weeks. Additionally, look down and restrictions in Europe, and we have a second wave.
In U.S. So if these contacts we believe we have a solid plan, we have momentum building and will be our jive.
As you said, we have stressed test at our plan and we believe that despite the uncertain environment, we're going to be able to deliver.
Very good a beat and margin expansion and strong cash flow.
Now let me answer to your question specifically.
Based upon the current market trajectory and all of that you see the big known where would that we would goal we were looking at to organic revenue growth in the low to mid single digits rain wrench.
Our sales force today's targeting gross profit the markets focusing on indoor air quality and seed buildings endings ft core such as data centers warehouse and institutions say, that's jada indicated we are investing heavily in new product launches.
Now.
If you look at your EPS range today, we believe it's not an area.
We had historic expectation.
Great. That's real helpful. And then on the I really appreciate all the new color on open Blue a number of your HVAC peers have started giving at least some framework on what the indoor air quality of funnel might look like I was hoping you could quantify for US you gave a day to pay.
And on the other the filtration orders being up but can you give us a sense of what the funnel looks like.
We're seeing a bit of the retrofit North America business, starting to come through but we're hoping you could frame for us that that that opportunity as it stands today.
The let me let me just kind of frame up what we're doing on indoor air quality, how important it is and then I'll kind of frame up what we see here within the pipeline. So.
So I would start by saying it's clear that this is front and center with all of our customer engagement. So with the education that has been had around air quality and the impact that that has in mitigating the impact of the virus that certainly front and center.
There's many critical elements to delivering clean air includes ventilation filtration disinfection, and then isolation and it's also combined with sensors around temperature humidity occupancy in and ultimately ties to building controls.
So our clean air strategy has been focused on finding the right balance between air quality as well as energy efficiency and is based on science backed recommendations on clean air delivery rate, which is ultimately clean air changes per hour.
We're we're performing a number of assessments starting points to align our solutions and services to each customer application and ultimately their clean air delivery rate target.
And we're not simply making product recommendations and there is really no one better positioned now to be able to help our customers operate healthy say buildings. It really is built on the combination of our age back portfolio with our security and building software platforms that do uniquely enable us to provide more pubs powerful solutions based on.
Specific customer outcomes now in addition to that we've got over 16000 service experts around the globe.
Has the size and strength of our direct channel footprint, which we believe creates a significant competitive advantage and so as we look at this today with all of this activity right from assessments to deploying capabilities. We're looking at a pipeline of of a couple of hundred million dollars for for 2021 now longer term.
Like the the focus on clean air and striking the right balance between proper ventilation filtration disinfection and then energy efficiency will ultimately lead to increased service activity system.
System replacements and in other emerging solutions.
As we look out over a few years, we think clean air the market itself is multi billions of dollars in incremental market and now with that no not only with our strong position, but we've been expanding our partnerships to be able to accelerate our penetration.
In our go to market and Thats with universities, that's partnering with technology companies that have additional capabilities that we can we can combine with ours that ultimately drive the highest disinfection solution and then that combined with our attractive channel. We believe that we have a unique unique channel where we can we can go.
Good partners and ultimately bring the best solution to the market.
Great I appreciate all that color and best of luck to everyone.
Thank you for your question. Our next question is from Jeff Sprague with vertical research. Your line is open Sir.
Thank you good morning, everyone and best of luck Brian.
Two from me first George and this may be picks up a little bit on what you were talking about but.
You were kind of talking about open blue, adding one to two points to sales growth and now you're saying to this three.
You know your confidence level is clear in your voice this morning, but interesting that you're already thinking a higher number before we're too far into the site just wonder if you could elaborate a little bit more on your thinking around that incremental growth rates and how the customer conversations are going.
Yeah, Let me, let me start just by talking about the the strength of our open loop platform and so for everyone on the call. It is a complete suite of connected solution that enables the delivery of more impactful sustainability, new occupant experiences and enhance safety and security that does combined with our long standing.
Expertise in buildings with cutting edge technology in.
And it does enable us along with our customers and partners to fundamentally transform how spaces and places are experienced and that are ultimately safe and protected.
So what it does is it combines everything that we do in a building and through leveraging connectivity in data allows us to be able to create new locums and we truly do believe that this differentiates what we do through our direct channel footprint with the significant installed base of equipment and service that we have today that we can actually amplify this now with digital subs.
Sure. So let me talk a little bit about the progress we've made.
In the last 90 days is as I said in my prepared remarks, we've had significant engagement customer engagement right from the start and we've kept the momentum going with the release of several new solutions, including open blue workplace, New tiered flexible service offerings under open loop open Blue enterprise and there's many many more coming over the next.
Several months, including five that are planned in the first quarter now let me move to customers. When you look at the customer wins, we're very excited I mean, the one example, I talked about was one of the largest real estate developers in Asia, who is.
The leader in facility management. They ultimately selected our open Blue Enterprise manager solution, which is a software solution that helps customers manage large portfolios of properties they've now deployed that across 42 of their buildings in Singapore. So.
We're embedding open blue and everything we do in the enhancements, we're making to our go to market strategy. We've already built when you look at the pipeline that now opened blue is connected to so our multiyear pipeline, it's well over a billion dollars of opportunity. When you take what opened blue does not only as a standalone, but how that combine.
And with our core capabilities in how we go to market and then like I said, we have supported that with partnerships with Microsoft Accenture, Cisco and Intel and when you look at these partnerships are integral I would say on many levels to ultimately deliver a complete outcome based solutions that our customers are asking for.
And we we believe that we have a lot to offer as apart.
Thanks for that and.
Just on the.
The cost headwinds and Tailwinds you gave a very explicit table in short on the Q3 call I am wondering if all those numbers are basically the same the 240 to 260 million tail on permanent and kind of what you gave us on the temporary.
And I guess, whether the whether the answer is yes, or no can you give us a little bit of color on how.
How these kind of feather in and out over the course of this year. Thank you.
So Jeff before onset to the specific up to your questions.
We have said that seem to pass, but we want to repeat it because the two very important we believe we have the opportunity to improve the return on sales of all the business going forward and we believe we have opportunities in both gross margin and Opex management and if you look at the prepared remark from from Brian improving.
The margin rate by about one point young yet last year. Despite the environment was remarkable so that sales about about digs exertion DCP enough of the company and we believe we have set data and we have done some modeling lately, we believe that that said, 80% incremental easily achievable and require.
Our goal for the company.
Thats one so specifically to your question.
The net 14 media and that Brian mentioned before Easter developed.
We would expect those costs to come back maybe the second half of the year. So we believe that it's the best way to plan for those cost or whatever which team looking at I leave us to mitigate dust costs to come back in the second half based to a need for us to come meet chips at these.
So at this stage.
Thank you for that I'll pass it on.
Thank you so much for your question. Our next question is from Nigel Coe with Wolfe Research. Your line is open Sir.
Thanks, Good morning.
Just wanted to come on the back of Jeff's question. There. So the obviously the the the state the Tempe costs coming in towards the backend of the the structural costs is that more linear EPS for the Oh, we've seen some of those come through and then once you guys.
So at the moment for the first half of the yes, we have a net benefit to the PNM and when you look Nigel I'd to permanent and temporary costs coming back and that headwind will come in the second half and more in that area.
Q3 fiscal quarter Nigel.
Great. Thank you.
And then obviously that that service kind of acceleration this is really encouraging and.
And then also the building pipeline.
In building the.
Funnel has that been built.
Since you since you so supply push the open Lou I think in mid 2000.
And the data, but I think in the last several months for that because that will be built in that timeframe and do you have any indication on on sort of the timeline to the service revenue acceleration.
Let me, let me go back Nigel to the the pipeline that pipeline is when we do as we're doing installs and now taking our digital capabilities with open blue and combining that with our core capabilities and ultimately then deploying that as a solution. So that isn't just service that is ultimately creating.
A much bigger installed base with our digital capabilities that will then spinoff services from that.
So thats, one what I talked about there with the digital blue pipeline.
As far as the services, what we get with open blue.
Allows us to be able to not only differentiates the core of what we do with our services, making everything connected utilizing data to optimize our delivery of service and then adding new services on top of that and that's what opened Blue allows us allows us to do it enhances our ability to be able to immediately attach service contract.
And we're starting to see a nice pick up in our contractual services.
We will continue to improve as we go forward and then from a revenue per customer standpoint. It ultimately allows us to now build on on top of that base of service new capabilities and be able to deliver enhanced value, which ultimately then we get we get paid for and so it's really a combination of not only expanding our in store.
All base with open Blue, but then being able to mine that installed base with additional services on a recurring basis.
Thanks, George just to clarify that.
Although it's being built this year correct.
Yeah, the funnel I mean, the when we look at our pipeline, while Weve done Nigels take everything that we do with how we go to market open.
Opened blue Nile becomes part of what we offer in how we differentiate not only the solutions that we go to market with an install but also the capabilities that we deployed to be able to attach services and then perform the service over there over the lifecycle of the installation.
Okay I'll leave it there thanks.
Thank you for your question. Our next question is from Steve Tusa with JP Morgan. Your line is open Sir.
Hey, guys good morning.
Hi, good morning, just.
Just curious.
How much does the one of the big Differentiators versus you guys in your.
HVAC equipment peers at least.
As you know you're right your control system, the kind of Medicis platform maybe.
Maybe that brands changed but how much of a differentiator is having.
That you know.
Controls legacy if you will the building controls legacy over and above the kind of HVAC and fire and security.
Yes, Steve.
Let me just.
Let's start by talking about commercial HVAC and the importance of not only the equipment, but also the digital capabilities.
When we look at these these markets are very attractive with long term secular drivers that ultimately aligned with our core capabilities in both equipment as well as digital.
And the secular trends of energy efficiency and sustainability.
Enabling us to be able to know mine a much larger installed base with the connectivity with our digital offerings and then the ability now as we discussed previously with Nigel which opens up an opportunity for us to be able to build on additional services.
And then ultimately capitalizing on the emerging trend with indoor air quality unhealthy buildings.
So all of these trends the ability to be able to take a holistic solution with our equipment plus our digital platforms, which from a building system standpoint. It is medicis and then being able to connect every other every other device in a real the system within a building is what uniquely positions us to be able to bring the most.
The best solution, the most efficient solution and ultimately delivering on the customers' priorities and when I look at what we do we're very well positioned with that combination of not only leadership products that we've been reinvesting in but also no industry, leading controls embedded software with also our digital.
Offerings and building automation software that all complement the core although we push intelligence to the edge the ability to be able to take that intelligence within one platform and to be able to create new outcomes is a competitive advantage and we're going to continue to not only differentiate what we install but also how we go about.
Capitalizing on the service opportunity, which is what contributes to being able to accelerate our service growth on a go forward basis right. So said differently. The control system is key and then just one.
Maybe correct me if I'm wrong about it they just one other nitpicky one you guys bought in.
JV I think at least on the cash flow statement. It suggests you guys had some activity. There was there were there any.
PNM was there any PNM impact from that sometimes companies that we cover by in Jvs and they book a gain on on there.
On their ownership and any impact on the piano from that front.
Let's see that was related.
Related to the buyout of calls US we had a majority interest in costs are ready and we bought out during the quarter the remaining.
42% of those shares so the activity that you're referring to.
Was with an entity that we historically have consolidated so there there was no.
Unique PML in Q4 related to that great. Thanks, guys.
Thanks. Thank you. Thank you for your question. Our next question comes from Gautam Khanna with Cowen Your line is open.
Yes.
Thank you congrats Brian and Olivier.
Thank you.
Had a couple of questions George maybe if you could elaborate on the Q opportunity carrier had talked about it's like $9 billion to $10 billion.
In aggregate I wondered if you would agree with that assessment secondly.
Maybe if you can talk about whether you think guidance you sort of becomes a table stakes for some of these commercial building operators because it seems like there is a conflict between energy.
Energy draw going up.
When you when you utilize some of these solutions and what has been a compelling case to.
Our new applied systems, which as you know the energy consumption drops with the new technology.
How you kind of frame that do you think it's table Stakes do you think it's kind of a short term.
While we have Cove it and then maybe we were back or just.
Just your opinion on that.
Okay.
Yes, so when we talk about indoor air quality as far as the market and so you've seen numbers from Navigant, where there is like a trillion seven of square footage and and about a quarter of that is ultimately nonresi space and then within that today's level of air purification.
Patients is well below what would be now in this environment perceived as being acceptable and so as I talked about the key elements of.
Being able to provide.
The right solution that does include multiple domains are multiple capabilities, whether it be maintaining or maximizing the ventilation, bringing the highest level of filtration. So it might be today motivate and moving towards more of 13.
It includes deploying potential disinfection technologies, and then like in a in a healthcare its isolation and so what we do is be able to not only provide the the best solution that ultimately delivers what we call the clean air delivery rate, which is clean air changes.
However, with a level of of purification, but also making sure that we're doing that and optimizing the energy required to ultimately perform and deliver on that outcome.
So we are working feverously here not only in how we deploy these multiple cable capabilities, but how we optimize those with our building controls in the us.
As we bring in the best solution at the least amount of energy required. We believe that theres optimization that can be had where you can get to a much higher standard while you still delivering on the sustainability goals of our customers and that's what we're ultimately focused on doing with the technology developments that we have underway.
Thank you.
Thank you for your question. Our next question is from Nicole Deblase with Deutsche Bank. Your line is open ma'am.
Thanks, Good morning, guys.
Owning.
I just wanted to focus a little bit on the first quarter guidance and.
Looks like you guys are kind of projecting organic revenue decline similar to what you falling for Q.
Just curious if that reflects kind of stabilization inorganic trends throughout the quarter or if you did see improvement into the later parts of the quarter and into October.
So just code we are seeing today youre right, a gradual improvement in our business environment, both for our seniors business and our growth by product segment. So if you look at our order book and I'm not talking about hoping you for now we'll give you the specifics specifics.
During the second and order book is more representative of the current velocity of the business, we see Q1 as being an improvement over Q4. So if you look at our feet business specifically.
We so we are seeing in Q1 orders Vito city for our fee business being sequentially better by one or two points or that Youve to Q4, and what you see is you are oh instead.
In store business, which is.
Book now, but the old those were recalled at about two quarters ago give or take so you see these installed building thats because of the slack in the quarter be steel.
Down and you see as George mentioned, an acceleration of our service business, which is largely offsetting what is happening.
In in store, so thats, what the orthopedic business. If you look at our global product again, we see today that we are gaining shares in deposits we sales.
And we expand seeing because of our product portfolio.
The impact of delaying commenced short HVAC and fire and security businesses and as we move into Q1, we see today.
Slide could either large.
Over new decline or not cheap to Q4 and watch is happening and you saw that in our opening remarks, Nichol Q4 was very strong and largely not large but in part due to the demand we satisfied in Q4 due to the debt.
Depressed Q3, we are so if you look at this tool, yes Pac Q on Q on shore yet to in Q1.
We'd be similar to Q4, so Oklahoma or.
And then from meant from a revenue standpoint, which is comparable to Q4 and we believe it's a prudent approach. Despite an improvement in the level of Ulta velocity that you saw in our guide we believe we're going to be aboard nevertheless to protect.
Bottom line due to our cautious.
Cost mitigation activities.
Got it thanks, Thats really helpful. And then maybe just a follow up also on the first quarter. When we think about the 20 to 40 Bips as expected margin improvement can you just talk about any guidance.
Urgent cents between the segments.
Global products faced some unique challenges this quarter did that continue into the first quarter and you know anything on the field businesses that we should make sure we think about.
We believe that without getting into too much details we see some.
Negative impact on our global product business for two reasons one acts.
Execution of fixed costs and to product mix.
And our fee business is he is keeping its momentum from the machine improve.
Improvement standpoint.
Got it thank you I'll pass it on.
Thank you Nicole.
Thank you for your question. Our last question will come from Scott Davis Melius Research Mr. Davis Your line is open.
Hey, good morning, everybody.
Good morning.
Morning.
Couple of questions, but first just as George has M&A still on the table is a possibility in 2021.
Yeah, I mean, absolutely were going to be very disciplined, but certainly as we look at our capabilities and as we look to enhance some of our positions in technology and as we build out opened blue, there's certainly going to be opportunities that we're going to pursue and have been pursuing we've done some in the past year, we've done some bolt ons we completed.
The acquisition of quell says, which has helped us from an interactive standpoint technology capability that we're now leveraging more broadly so yes, that's going to be as we think about growth, it's part of our capital deployment.
Okay.
And then I'd open glowed, George and this I know, there's been a ton of questions, but just to clarify when when you're doing install I imagine there is a fair amount of upfront customization and do you charge for that or is that part of the you know.
The SaaS pricing expect over time to have perhaps a breakeven period and then more profitable period. After that is that a way to think about it.
Yes, so Scott when you think about our install business today. It is an applied business, where we apply engineering, we configure solutions, we deployed those solutions with install and then ultimately we look to attach and get the lifecycle service and so today in many ways, we do incur a lot of engineering upfront.
Before we ultimately.
Get a contract and then we take the contracting and pursue continue to pursue that would open blue does for us it really changes the level of engagement.
With our customers. We are now with open blue weakened significantly change the outcomes that we can produce with the installations or solutions that we proposed and then with that that is incremental to what we historically would have done and certainly get paid for that upfront with the ability now to be able to attach recurring revenue.
Onto that onto that service on a go forward basis, and so that's why when I say when we look at our pipeline of projects and we begin to deploy opened blue with those projects. It truly does differentiate how we can go to market and ultimately create outcomes that historically, we haven't been able to achieve.
Okay. That's.
That's helpful. Thanks, Good luck guys. Thank you.
Thanks Scott.
Thank you for your question I will now turn conference back over to John for some closing remarks.
Yes, just to wrap up here I want to thank every everyone again for joining our call. This morning.
I'm incredibly proud of how our teams responded in a time of global pandemic in the progress that we've made as an organization and I'm extremely pleased with our continued strong performance and very excited about the future opportunities, which we discussed today I hope that you and your families remain safe and I look forward to speaking with many of you soon so operator that concludes our call.
This does conclude today's conference call. We thank you all for participating you may now disconnect and have a great rest of your day.
Speakers standby.