Johnson Controls International plc (JCI) — Q1 2020 Transcript

Good morning and thank you for joining our conference call to discuss Johnson Controls’ first quarter fiscal 2020 results. The press release and all related tables issued earlier this morning as well as the conference call slide presentation can be found on the Investor Relations portion of our website at johnsoncontrols.com. With me today are Johnson Controls’ Chairman and Chief Executive Officer, George Oliver, and our Vice Chairman and Chief Financial Officer, Brian Stief. Before we begin, I would like to remind you that during the course of today’s call, we will be providing certain forward-looking information. We ask that you review today’s press release and read through the forward-looking cautionary informational statements that we have included there. In addition, we will use certain non-GAAP measures in our discussions and we ask that you read through the sections of our press release that address the use of these items. In discussing our results during the call, references to adjusted EBITA and adjusted EBIT margins exclude restructuring and integration costs as well as other special items. These metrics are non-GAAP measures and are reconciled in the schedules attached to our press release and in the appendix to the presentation posted on our website. Additionally, all comparisons to the prior year are on a continuing ops basis, excluding the results of Power Solutions. GAAP earnings per share from continuing operations attributable to Johnson Controls’ ordinary shareholders was $0.21 for the quarter and included a net charge of $0.19 related to special items, which Brian will address in his comments. Excluding these special items, non-GAAP adjusted diluted earnings per share from continuing operations was $0.40 per share compared to $0.26 in the prior year quarter. Now, let me turn the call over to George.

Thanks, Antonella, and good morning everyone. Thank you for joining us on today’s call. Before we get into the details of the quarter, I would like to provide a few thoughts as we look ahead to the rest of fiscal 2020. We continue to see good momentum across the majority of our key performance metrics with Q1 providing a strong start to the year. We saw 70 basis points of margin expansion this quarter. This resulted from a reduction in structural costs, improved project execution, accelerated service growth, expansion in gross margins, and driving innovation. All of these initiatives will remain key focal points for us as we go forward. We have also made significant progress in improving our cash generation profile with important steps towards better management of our trade working capital and continued discipline around CapEx spending. We still have more work to do to bring free cash conversion up to 100% on a sustainable basis, but I am extremely pleased with the progress we have made to-date. As we will discuss on the next slide, orders were flat in the quarter, but I am confident given the continued strength we see in our pipeline, we will see acceleration in Q2. Our primary end markets, commercial HVAC, building controls, Fire & Security remained healthy and we are well positioned as leaders in each market. We have significantly strengthened our balance sheet over the course of the last nine months with ample flexibility when it comes to future capital deployment opportunities. Finally, we remain intently focused on execution in building a strong performance culture to drive sustained performance and maximize shareholder value. Turning to some details for the quarter starting with orders on Slide 4. Orders for our Field businesses were flat in aggregate in Q1 as we faced tough prior year comparisons given the timing of announced price increases. Last year, our announced price increases were effective in January, which resulted in a pull-forward into Q1 fiscal ‘19. This year we accelerated our announced price increases to be effective in October, which resulted in a pull-forward into late fiscal ‘19. Looking forward, our order pipeline remains robust with an attractive mix of service and a balanced profile of small and large projects. We expect order growth in Q2 to be in the mid single-digit range and we remain very confident in our low to mid single-digit growth target for the full year. Backlog ended the quarter at $9 billion, up 6% organically versus the prior year and up 2% on a quarter sequential basis which provides high visibility through 2020. Turning now to Slide 5 for a quick recap of the financial results in the quarter, sales of $5.6 billion increased 3% on an organic basis. Within the Field businesses, total service revenues grew 3% in the quarter on top of mid single-digit growth in the prior year. Our service business represents over $6 billion in revenues or a little more than 40% of our Field revenue base and provides us with a very profitable, resilient revenue stream. As growing and expanding our service offering has been a key priority, we recently appointed a dedicated global service leader. Ganesh Ramaswamy joined the team from Danaher and will drive improved consistency of fundamentals across our global direct channel, leverage our infrastructure and investments, and work closely with regional leaders to execute on our strategic priorities. With the strength and depth of our portfolio, we have tremendous opportunity to strengthen our core service business while building and deploying new service solutions leveraging our digital capabilities. Adjusted EBIT of $448 million grew 13% on an organic basis driven by solid 7% growth in segment profit and a continued focus on reducing corporate expense. Overall, underlying EBIT margins expanded 80 basis points year-over-year, excluding a 10 basis point headwind from FX. Adjusted EPS of $0.40 increased 54% over the prior year with solid operational performance and a significant contribution from the deployment of proceeds related to the Power Solutions sale. Adjusted free cash was an outflow of under $100 million in the quarter in line with our normal seasonal pattern, but a significant improvement over the last two years. 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 a look at our year-over-year EPS bridge on Slide 6. You can see that operational performance including synergies and productivity saves contributed $0.09. Deployment of the Power Solutions proceeds benefit both our year-over-year share count and net financing charges, which added $0.06 and $0.03 respectively. Other net items in the first quarter were roughly $0.01. This results in our first-quarter adjusted EPS of $0.40, up 54% year-on-year. Now, let’s move to Slide 7 and look at our segment results on a consolidated basis. Sales of $5.6 billion increased 3% organically led by 4% growth in our Field businesses and 2% in global products. Segment EBITDA of $625 million grew 7% organically driven by volume leverage from the Field, strong price-cost realization in our products businesses, and continued productivity saves and cost synergies. Lastly, Q1 segment EBITDA margin expanded 40 basis points to 11.2%. If you look at the margin waterfall, underlying operational improvement contributed 50 basis points, and this included a 10 basis point headwind related to our retail business in North America. This was partially offset by 10 basis points related to other items in the quarter. Now, let’s take a look at each segment in more detail, so starting on Slide 8, North America. North America sales grew 3% organically with balanced growth in both install and service activity. Growth was led by Fire & Security, which grew mid single-digits in the quarter led by higher install activity. Our applied HVAC and control businesses increased low single-digits in the quarter given the double-digit growth in equipment last year. Performance Solutions declined low double-digits this quarter due primarily to a tough prior year compare of over 30%. As we expected, adjusted EBITDA increased 2% and EBITDA margin was in line with the prior year at 12%. Favorable volume leverage and benefits from synergy and productivity saves were offset by a 30 basis point headwind related to our retail business. And as we mentioned on our Q4 call, we expected to see continued margin headwind in retail given the change in mix to increase project revenue. Orders declined in the quarter as George mentioned and this was primarily due to the timing of price increases in our applied HVAC business which did provide a 3 percentage point headwind. We expected to start the year off a bit slower in North America, but we are confident that orders will accelerate to mid single-digit range in Q2 given current pipeline activity. Backlog in North America remained strong at $5.8 billion, up 7% year-over-year.

Turning to EMEA on Slide 9, sales grew 7% organically with installs up 10% and service up 5%. Growth was positive across all regions and across HVAC and Controls, Fire & Security, and Industrial Refrigeration. Our HVAC and Controls business grew high single-digits, helped in part by easier prior year comparisons, but also benefiting from order strength in the back half of 2019 for our shorter cycle controls business. Growth was particularly strong in Europe, which increased low double-digits and in the Middle East which was a soft spot through fiscal ‘19 we saw mid single-digit growth. Fire & Security grew mid single-digits with solid growth across both install and service activity in all regions, led by mid-teens growth in our subscriber business in Latin America. Industrial Refrigeration, which was predominantly in Europe, remains a bright spot in the region and that was up high-teens in the quarter with solid growth in both install and service. Adjusted EBITDA increased 21% and EBITDA margin expanded 120 basis points to 9.7%. We continue to benefit from favorable volume leverage as well as our continued efforts around reducing structural costs and improving project execution in this business.

Our orders in EMEA/LA increased 4%. This was led by continued strength in our Controls platform, particularly in Latin America. Orders in Europe were up slightly on a tough prior year comparison and backlog ended the quarter at $1.7 billion, up 8% year-on-year. So, let’s move to Slide 10 on APAC. APAC sales grew 3% organically, led by higher demand for project installations, which grew 9% in the quarter. Fire & Security, which, as you know, represents about 30% of APAC sales, saw continued strength of low single-digits overall. HVAC and Controls, which represents the remaining 70% of APAC sales, was relatively flat year-over-year. Adjusted EBITDA increased 8% with margins up 60 basis points to 11.4%. Favorable volume leverage, productivity, synergy saves, and improved execution were partially offset by a higher mix of install versus service in the quarter. Asia-Pac orders were up 1% against the tough 9% prior year comparison consistent with the trend we have seen over the last several quarters. Backlog in APAC increased 2% year-over-year to $1.6 billion. The environment in APAC remains competitive and the economic conditions in some areas remain uncertain. We continue to experience macro-related headwinds in some of our key markets in Asia, including the ongoing trade dispute and now the coronavirus which are overhangs in China, as well as the ongoing unrest in Hong Kong. That being said, we are seeing nice improvement in the underlying fundamentals in our APAC businesses, but we are monitoring the situations very closely.

So, let’s turn to Slide 11, Global Products. Global Products sales in the quarter increased 2% organically driven primarily by strong price realization. We saw BMS sales grow high single-digits in this quarter despite a low double-digit compare in the prior year, led by strength in our Security Products business. HVAC and refrigeration equipment was flat, with mixed performance across the individual platforms. I’d also point out that we have recently restructured our distribution channels in Canada to allow us to better serve the residential and light commercial markets and to accelerate our growth. Total residential HVAC declined low single-digits driven by a high single-digit decline in our APAC residential business, as well as a mid single-digit decline in our North American business. As we detailed for you last quarter, we expected continued pressure in our APAC residential business, primarily due to the softer market conditions in Japan. Our North American business was negatively impacted in the quarter by the Canadian distribution restructuring I mentioned previously and lower-than-expected shipments in our furnace business due to lower heating degree days in the quarter. Given the low double-digit prior year comparison, we expect this weakness to continue into the second quarter. Light commercial unitary grew low single-digits on a low-teens prior year comparison with sales in North America flat due to weakness in our national accounts business. Our VRF business continues to outperform, growing mid single-digits while our applied HVAC equipment declined mid single-digits primarily due to the pressures in APAC. We continue to see very strong demand for replacement chillers in North America. IR equipment grew mid single-digits in the quarter, helped by a relatively easy prior year comparison. Finally, Specialty Products grew low single-digits on solid demand for fire suppression products, particularly in North America. Product segment’s EBITDA increased 6% and the EBITDA margin expanded 40 basis points as the under-absorption on lower volumes was more than offset by positive price realization and the ongoing benefit of cost synergies and productivity.

So, let’s move to Slide 12 in corporate expense. Corporate expense was down 13% year-over-year to $81 million driven primarily by the continued benefits of synergy and productivity saves, as well as our ongoing actions to reduce our cost structure given the Power Solutions divestiture. On Slide 13, free cash flow reported Q1 free cash flow was just under $400 million. Excluding a little more than $100 million in one-time cash outflows related to integration and the $600 million tax refund that we received in the quarter, adjusted free cash was an outflow of less than $100 million, which is a $100 million improvement versus last year. This was primarily due to continued improvement in working capital management as we saw trade working capital as a percentage of sales decline 60 basis points. We continue to expect adjusted free cash flow conversion of 95% excluding the $300 million in one-time cash outflows related primarily to integration and the $600 million tax refund. So let me turn to the balance sheet on Slide 14. Net debt was up slightly as we continue to deploy cash toward share repurchases despite Q1 being our seasonally weak cash generation quarter. You can see share repurchases in the quarter were $650 million, roughly in line with the cadence that we expect for the full year. Before I turn it back to George for his closing remarks, I’d want to briefly mention a couple of items on Slide 15. First, during the quarter, we recorded a restructuring impairment charge of $111 million, about half of that is cash and about half of that is non-cash. The cash impact of that, we expect to see in the current year and is included in our guidance. The cash restructuring charge reflects costs associated with the final year of the JCI-Tyco merger integration activities as well as the ongoing reduction in costs related to the Power Solutions divestiture. Secondly, in the quarter, we recorded a non-cash stock charge of $30 million related to Swiss tax reform and this will not impact our 13.5% rate for the year. Lastly, we also adopted a new accounting standard related to operating leases, which results in a gross up of other non-current assets and other current and non-current liabilities in our balance sheet. Overall, we are off to a great start in fiscal ‘20 with strong earnings and cash flow and improving margins. And with that, I will turn it back over to George for his closing remarks.

Thanks, Brian. Before we open up the line for questions, I just want to reiterate that we continue to expect our fiscal 2020 earnings per share before special items to be in the range of $2.50 to $2.60, which represents earnings growth of 28% to 33%. We have included the full details of our guidance as previously provided in the appendix to the slides. Our first-quarter results reflect a strong start to the fiscal year and a continued commitment to solid execution into improving the underlying fundamentals of our business. I am confident that we are well-positioned to deliver continued long-term shareholder value. With that operator, please open up the lines for questions.

Thanks. Good morning, guys.

Good morning, Nigel.

Good morning, Nigel.

Just of the nice margin trends in the Asia-Pac and EMEA Latin America segments, you have had some challenges especially in Asia-Pacific. Do you feel like you are now in a better position going forward and based on the backlog and the mix kind of outlook do you expect to continue to see sort of margin leadership from those two segments?

Yes, Nigel. We have made really nice progress as Brian talked about within the margin structure within Asia-Pac. With the growth being in low single-digits, we have worked – this quarter we delivered 60 basis points year-on-year. And that’s also with unfavorable mix with our installed growth growing faster than service, but I think the fundamentals, the way that we are pricing – the way that we are selling value, all of that is playing out within the structure, and we believe that now with the fundamentals we are going to continue to improve on a go-forward basis.

I would just add to that, that in 2018, Nigel, as you probably recall, we took a restructuring charge and some of that related to our European businesses. I think we are really seeing the benefit in ‘19 and now into ‘20 of the results of some of those actions that were taken in 2018.

Great, thank you. And then my follow-up is your comments on the residential HVAC markets. We all know it’s quite a warm winter, but the comments on continued challenges in Q2, is that more a function of the restructuring you are doing in Canada or is that a reflection more with the market?

Nigel, what I would say, it’s both. When you look at our performance here in Q1, it’s been mainly globally we are down a bit and a lot of that is driven by our performance or the market in Japan, which we are down in line with the market in Japan. In North America, it’s been too. When you look at the overall furnace market, we are extremely strong in that space and that market is down kind of high single-digits and right now that’s continuing. And when you look at our restructuring of our Canadian distribution channels, what we have done is we have taken multiple channels. We have consolidated that and now we are going to be expanding our points of distribution to effectively now be much better positioned to accelerate growth in that region. That is all playing out here in the first and second quarter and we will be positioned in the second half to be able to pickup from a growth standpoint from there.

Thanks, George. Thanks, Brian.

Thank you. Good morning, everyone and thanks for pulling your call up to kind of accommodate all of us. I appreciate that. George, on the price kind of pull forward on orders, we normally think of that being potentially kind of a residential phenomenon, but not something that would kind of impact the larger company given the nature of kind of applied and commercial projects, you just kind of speak to how broadly the timing of orders might have been affected by pricing and your kind of visibility on Q2 orders?

Yes, I mean, we have – historically, we have had our price increases in January. As we have been working on price costs over the last couple of years, we have made a lot of progress. So as we have been planning for 2020, we made a decision to pull forward. And with that with the announcements there is a behavior that goes along with those announcements. When you look at last year and for instance in North America, we had high-teens growth in our product last year in North America because of the price being effective in January. When we announced the increase being pulled into October, certainly we benefited in the fourth quarter of last year because of the same phenomenon. What I would tell you, Jeff, is that the underlying activity is very strong across the board. Our pipelines pretty much across the board are high single-digits – mid to high single-digits. And so my confidence in being able to deliver low to mid single-digit order growth in the second quarter and be positioned here for the year is very strong and that ultimately correlates to the revenue that we are projecting for the total year.

And Jeff, just to quantify the impact of that for you, when you look at our overall Field orders, they would be up low single-digits on an underlying basis.

Okay, thank you for that. And just on investment spend, not called out in the bridge, has this now kind of normalized and it will just kind of track with revenue growth from here or should we expect kind of other initiatives maybe to pop up and be part of the earnings equation?

As we have committed over the last couple of years, our reinvestment in the sales channels, as well as the reinvestment in products now, as a percent of revenue is flattening out in 2020 and beyond. What’s happening, Jeff, is that we are continuing to add sales in line with what we see the market activity to be. So, we are continuing to add sales, but we are getting productivity with all of the expansion that we have done over the last couple of years. In engineering and R&D, we are continuing to obviously increase the dollars with the reinvestment, but maintaining that now as a percent of the overall revenue that’s being achieved. We feel good – we are also similarly doing combining the footprint, we are making sure that we are getting good productivity on the dollars that we are spending and ultimately tracking that to the new product introductions that we are bringing to market to make sure that we are getting the appropriate volumes and returns on those investments.

Great, thank you. Appreciate it.

Thank you. Good morning.

Good morning.

Good morning, Deane.

I just want to follow-up on Jeff’s questions on pricing and George, just so we are clear, will price increases be more of a dynamic decision based upon material costs or will there be strategy around anticipating customer behavior, but just may address the timing of price increases going forward?

Yes. What I would say, Deane, if you go back two years ago, we had negative price costs and the market – with the market changes we weren’t positioned to be able to move quickly to stay ahead of that. We have made significant improvements now building out our strategic pricing capability across our businesses. So, it is more dynamic where we are tracking the markets, we are tracking our win-loss. We are making sure that we are selling value and bringing value propositions to our customers instead of just this annual price increase. Historically, that’s what’s happened within the industry we are in. But I believe that now we are much more dynamic relative to what’s happening in the markets that we are serving. As a result, you saw nice progress with our price costs last year, where we actually turned the headwind we had in ‘18 to a tailwind in ‘19 and that’s continuing now in 2020 with probably, I estimate, over a point of our top line will be driven by continued very positive price cost.

Thank you. And then just as a follow-up now that they have declared the coronavirus a global health emergency. I know your 2020 guidance does not anticipate impacts, but it’s likely happening, giving all the shutdowns going on? Any sense of where and how you are tracking, steps you are taking internally? Just anything you would share would be helpful? Thanks.

What I would start by saying about 6% of our revenue is achieved in China. Overall, it is significant, but in the grand scheme, relatively small. We’ve been working very well across all of our teams that are positioned in China. We’ve got not only all of the business units totally aligned, but we’ve got full support of our EHS professionals, our facilities leaders and security where we get a daily update from our Asia-Pac leader, certainly, a top priority for us to make sure that all of our people are safe and protecting them. As you know, most provinces have mandatory holiday extension now through February 10 and that most of the travel within China now has been curbed or curbed significantly. We are also assessing the supply side to have a pulse on what’s happening with our supply. There could be some supply chain disruptions. To-date, it’s been minimal. What I would say, it is a fluid situation and that we are monitoring it very closely. At this stage, Deane, it’s hard to assess – difficult to assess, but could have some deferral of activity. We will have to keep everyone updated.

Understood. Thank you.

Hi, good morning guys.

Good morning, Scott.

Hey, Scott.

I don’t want to fixate too much on the price, because it’s been beaten to death, but it’s pretty interesting that after all these years, pulling it forward to October did – were the competitors been – do they do the same thing or were you out there for a whole quarter with higher prices generally than your competitors and that would have had some negative volume impact perhaps?

Yes, I believe that given the way that price increases occur within the industry, we are now ahead. Therefore, we have the issue that last year we had a very strong first quarter with our HVAC equipment and then this year, because we had pulled it forward, we had seen some of that benefit in the fourth quarter of last year. Overall, we are in line with where we thought we would be.

Okay, yes. Just the mechanics are interesting. My follow-up is just on the replacement chiller, the North America replacement chiller market, is there a sense I have never seen the data out there on kind of the age of the installed base when you are talking about the bigger chillers? Is there a sense that the installed base is old and there is a long tail that there is a greater sense of upgrading or replacement for energy efficiency, any – just some of that is a little bit obvious, but just trying to get a sense of how long that tail of demand is?

Yes. I mean, it’s all of the above. I think given the value proposition with our new chillers and the ability to be able to reduce energy consumption and drive efficiency, there is certainly a big value proposition there. So, it’s looked at in total value. When you look at what their current cost is to maintain and what the energy consumption is, we typically will go in and create a value proposition that not only we can improve their operating cost, but also reduce energy. So, you got to look at it as in total cost. I think as we now launch new products, we bring our digital capabilities in how we optimize the operation of the equipment, how that integrates with the overall building systems? I think there is a real attractive value proposition for our customers. So, we are seeing a nice pickup there.

Okay, thanks. Helpful. Thanks. Good luck, guys and good job this year. Thank you.

Thanks, Scott.

Hi, good morning.

Good morning.

Good morning.

I guess a question around the retail business you kind of called it out the last couple of quarters it’s now in the bridge. Just wondering can be lumpy, how long should we expect to kind of hear you calling out the retail headwind as it relates to the North America business?

Hey, John. Our retail business, when you size the business, it’s roughly about $900 million. We have a presence globally. We have the industry leader. I mean, loss prevention, inventory intelligence, and traffic insights. It’s a very profitable business because it’s a high value proposition for our retail customers. Now, that all being said, there has been lots of change in the industry given the proliferation of online shopping requiring, as we look at our overall offering, more towards digital solutions, a lot more installations that occurred during the quarter. I believe that with the value proposition the way that we are aligned we are going to continue to see the business perform but it’s going to be a different mix within the business. We are watching carefully and working closely with each one of our retail customers and laying out what the year looks like and how we are going to be positioned to be able to support their year, but it is given what’s happening within the retail space that there is a lot of change that’s happening and we are going to make sure that we are positioned to be able to capitalize on that change and support the customers through that.

Great. Thank you for that. And then I guess some in the past, you have talked about the impact around PFAS and the AFFF, wondering if you can just provide us any kind of update there?

John, there is no change in our position. You have to keep this in perspective. Tyco and Chemguard make life-saving firefighting foam, not PFAS chemicals. Tyco and Chemguard purchase compounds that contain trace amounts of PFAS, which they blend to make the foam. Their firefighting foam is made to exacting military standards. The majority of the foam in issue is specified and used by the U.S. government and military and therefore is subject to government contract to the defense. Tyco fire products and Chemguard have always acted responsibly in producing these firefighting foams. Therefore, we feel confident in our ability to defend these claims. I would also like to share a few other facts. PFAS chemicals have been used by other companies since the 1940s in many products and applications. We didn’t start producing firefighting foam until the mid-1970s, which was over 30 years later. These foams are used only intermittently and predominantly at very specific sites such as military bases. Lastly, when you look at third-party scientific studies, that are also recognized, firefighting foam accounts for only a very small percentage of PFAS that has historically been used in this country. Overall, our position has not changed. We feel very good given what we have done for our government military customers and certainly, there is really no additional updates.

Great. Good quarter and thanks for the updates.

Hey, guys. Good morning.

Good morning, Steve.

Good morning, Steve.

What’s going on in the – so, I think one of our businesses in North America I think was down, it was a solutions business or something, is that like the performance contracting business? You guys still do that stuff?

Yes, I mean, it’s – our solutions business saw the large performance contract, Steve. And as we have always talked, the order intake on that can be pretty choppy given the size of the contracts and then the flow of those contracts can give you some pretty significant variations quarter to quarter, but it’s not a huge part of our business, but it can impact when we talk about that particular business, you can have some big swings quarter-to-quarter.

Okay. And then any – just to kind of level set people, any color on whether the second quarter, anything standout as far as abnormal seasonality anywhere, you mentioned – do you expect the orders to pickup a bit, anything on free cash or the underlying business results that we need to kind of keep in mind for the second quarter?

Steve, I’ll take that. On the organic growth, we are looking at low single-digits and that’s again against a prior year comparison of 6%. When you break that out, the Field businesses will be low to mid single-digit and that’s to a compare of 5% and products will continue low single-digits and that’s to a comparison of 7%, so overall continued performance on the top line. There will be, as Brian mentioned, within products some additional pressure in Q2 on North America residential, but as we go through the year, we still feel very good in the second half of the year. EBITDA margins are expanding in line with the guidance for the year, 40 to 60 basis points and we see expansion across all segments. The normal seasonality to our year is typically 30% in the first half, 70% in the second half, but because of the share repo this year, it’s a little bit more skewed to the first half. The overall consensus is in line with our guidance for the year and the guidance that I reiterated earlier was EPS range of $2.50 to $2.60 and that would be an increase of 28% to 33%.

Wow, great.

I would just add to that, Steve, I think from our corporate expense standpoint we had a pretty low quarter. As you have probably seen in the past, the second quarter tends to be a little bit higher. Our guidance sits out there for corporate expense. It’s still pretty solid as we sit here today. When it looks – when you look at cash flow, I think cash flow we would continue to see some improvement like we saw in the first quarter. So, all-in-all, we feel real good about the second quarter.

Hey, George. Just one more quick follow-up on the – one just the general strategic question, I don’t think anybody has asked it yet, but obviously, a lot of these companies progressing on their splits? How do you guys view? Is there any change in your view on kind of the strategic imperative to grow the residential business, more structurally?

I mean, we have been focused. When you look at our strategy, Steve, we have been focused on executing and getting the fundamentals in place delivering on our commitments and ultimately driving results. That’s the focus for us here in 2020. We have been returning in line with what we committed, a significant amount of capital to our shareholders. We have a lot of underlying momentum across the organization whether it be the margin fundamentals on how we are launching new products, we are upgrading our leadership and ultimately now deploying our digital strategy. When you look at our positions, that’s one that we have been investing heavily in the residential spaces that we have been investing heavily with new products and technology. We are seeing progress, because it is a critical element of our line card and how we ultimately support our customers. We are going to continue to stay focused on executing, on delivering on the commitments, and certainly keeping a pulse on what’s happening within the industry as far as any type of consolidation.

Great. Thanks for the detail, guys. Always appreciate it.

Hi, good morning.

Good morning, Julian.

Good morning.

Maybe just a question around the EMEA/LA region, mainly Middle East Africa piece for you and a lot of your competitors that’s been pretty soft for much of the past sort of 12, 18 months albeit lumpy? I think you sounded better, Brian, in the prepared remarks on trends in Middle East, Africa, so maybe just help us understand how you are looking at the applied markets there? And also just remind us of the scale of that piece today?

Yes. So, Julian, I’ll give you the overview of EMEA/LA. We have made a tremendous amount of progress in EMEA/LA over the last couple of years, not only in expanding our footprint from sales – from a service standpoint pretty much across the region. When you look at our performance in the first quarter, organic growth 7%, it was both install and service, HVAC and control is up high single-digits, Fire & Security up mid single-digit, and Industrial Refrigeration as Brian said to an easy comparables, but up high-teens. We have made tremendous progress. With good leverage on the margin rate would be the volume – good productivity savings in cost synergies. Overall, we are executing extremely well even within the current environment, we are seeing the pipeline continue to expand and we are converting orders kind of mid single-digits with the backlog up 8%. We have done over the last couple of years the restructuring as Brian talked about the work we have done from a go-to-market is really beginning to play out. That all being said in the Middle East, certainly part of that does represent about 10% – 12% of the overall EMEA/LA revenue. Last year was tough for us, but we are beginning to see obviously with easier comparisons. The work that we are doing around service and seeing some of the project installations come back. Overall, I’d say when you look at the whole region, we have made a lot of good progress in the last couple of years and competitively I think we are positioned in an extremely strong position. I don’t know, Brian, you want to?

No, I think you summarized it well. I think we had a pretty easy comp in the fourth quarter or the first quarter of fiscal ‘19, and so that benefited certainly in the current year, but I think we are better positioned today than we were a year ago for sure.

Thanks. And then my second question just around corporate cost, I heard the color on second quarter versus first quarter, but for the year as a whole, maybe just highlight the confidence in that range, so corporate costs that you have given on Slide 21, particularly in light of a very good performance in Q1? Where do we stand today in terms of realized stranded cost reduction since the Power divestment and how much stranded cost is still left to come out from that and whether that view has changed over the past 9 months?

So, our corporate expense guide for the year is $330 million to $340 million and we ended up at $81 million in the first quarter. That tends to be a lower quarter for us. I think there is going to be a tick up in the second and third quarter. Our guidance of $330 million to $340 million is still a pretty good number, maybe on the lower end of that, but I think that’s probably a good number to use for now. As it relates to the Power Solutions stranded costs take out, I think we had communicated that we were going to have about a $10 million benefit that we saw in ‘19. There was going to be about $30 million in 2020 and then the full run-rate $50 million benefit we would see in ‘21 forward. We saw probably about what you would expect a pro-rata portion of that $30 million here in the first quarter. We would expect that $30 million to be delivered throughout the course of the year.

Great. Thank you.

Good morning, guys.

Good morning.

George or Brian, obviously it was nice to see that tax payment helping your GAAP cash, but adjusted cash is maybe slightly better than your normal seasonal weakness? When you look at 2020 and the initiatives that we are going to keep your cash conversion down to 95%, such as equity income from our JVs versus dividend and pension? Did you see any more improvement in trade working capital versus your expectation that can help you in 2020 and how are you thinking about your ability to collect dividends from your JVs in 2020?

The trade working capital as a percentage of sales as I mentioned did improve by 60 basis points quarter-over-quarter. We saw a day improvement in DSO, a day improvement in DPO. We saw a 5-day improvement in days on hand in the inventory side. So, all-in-all, we made progress really across the three key metrics. As we look at the 95% for the year, that type of improvement was contemplated when we gave the 95% guidance. I would tell you that as you know this is the first year that we are going to end up in the situation where we have got reported cash flow in excess of adjusted cash flow. Because of that $600 million tax refund we got in the first quarter, but we still tend to be a little bit short of 100% converter, because of the level of our CapEx, the fact that we don’t get is the entire amount of our equity income out in terms of dividends from our JVs and then we still have this pension income that doesn’t come with any cash. Now, that’s offset with some amortization benefit. So, I think longer term, we are going to get to that 100% level, but sitting here today, the headwinds are still a little bit more than the tailwinds we have got. So our targets are 100%, but I think 95% is a good number for this year.

Thanks, Brian. And then George, can you give us some more color into the inventory destock situation that you had last quarter in Japan and Taiwan, resi HVAC was still down in Q1 there, but it was not embedded last quarter I know you talked about the headwinds in North America impacting Q2, but do you still see the APAC situation not being a headwind as we go into Q2?

The unitary commercial is that what you have asked Andrew.

Yes on the because you said Japan might sort of be an overhead and as you go Q1 looks like that may be getting a little better but just your comments on Japan and Taiwan in the next couple of quarters.

Yes so when you look at the we talked a little bit about the softness we had in our furnace business which the market itself is down about 9%. We have a strong presence in that market and certainly that hit us. Brian did talk a little bit about the restructuring that we are doing in our Canadian distribution which short-term we did see a little bit of a headwind. I think as we get through this first and second quarter that’s going to turn into a tailwind going forward. We are going to significantly increase our points of distribution and so you will see a little bit where you get a lot of different factors playing together here. We think that Q2 will continue to be a little bit soft, but as we get through the year we are going to be positioned to get back to above market growth within our business.

And Andy, just specifically related to Taiwan and Japan, as we said last quarter we expected the stocking to be complete in Taiwan in Q4 and it was so our Taiwan business was fine on the A-Pac side and as expected we did continue to have some pressure in Japan in our A-Pac residential business. We do expect that to start flattening out as we get into the second quarter.

That’s helpful guys. Thank you.

Yes thanks. Good morning guys. Couple of questions. First I was wondering if you could comment on the M&A pipeline I know you talked about $1 billion sort of set aside for potential acquisitions where do we stand there?

We are constantly looking at both Gautam. We are continuing to reinvest organically. We have got a pipeline across our businesses where we have gaps in technology or products looking at both. At this stage, there is nothing significant but we are continuing to strengthen our regional footprint and continuing to look at our product portfolio to make sure that we are making the appropriate place in line with the organic investments for making.

Okay. And just as you look at the portfolio do you see any incremental potential for divestments as we move forward?

Yes, we have been continuing to review the portfolio across the board and we have been making small divestitures where businesses that are non-core and businesses that we don’t want to continue reinvesting in. Again, there has been nothing significant there, but that’s a process that we continue constantly looking at the portfolio.

Hey, Gautam. I would just say that I think when you look at the activity in the current year we have got our business held for sale right now we would expect that to close in the current year and there are some other investments that we will probably make but I think you can almost look at our M&A activity in the current year as with the inflows and the outflows will be relatively the same. I don’t think there is going to be anything significant in fiscal ‘20.

That’s helpful, Brian. One last one for me just as we look at the fiscal ‘21 what do you think the…

Let me just frame ‘21 and we gave our framework that we gave guidance for 20 and what that ultimately would look like in 2021 as it relates to the deployment of capital with the buybacks and like in addition to that I am very confident that when you look at the fundamentals that we are building across these businesses from margins standpoint on a go-forward basis that we are going to be positioned we have a pipeline of productivity and savings that ultimately is going to position us to sustain margin improvement year on year similar to what we have seen here over the last couple of years. I wanted one to understand that that’s going to continue now with that there is some restructuring as it relates to some of the take out of some of the structure that we have in place across the globe. Normally, that would probably be in the $50 million maybe a little bit more range on an annual basis, well with very strong payback within the year relative to the margin rate that we can achieve. So I feel very confident that with the framework that we have provided relative to the buybacks and how that’s going to play out as we are positioned for 2021, the work that we have done in reducing the debt cost and now with the margin rates that we are achieving, we are going to be positioned to deliver what I would say is incrementals that are 30 plus on our incrementals. That will position us extremely well to continue margin expansion and be able to deliver longer term on the margin rate that we originally said we could get to which is somewhere 15% to 16%.

Thank you very much guys.

Thanks, Gautam.

Thanks. Good morning. If we can look at North America, we are seeing some improving indicators, both indicators, ABI and Dodge Momentum. Can you maybe just talk about the pace of quoting activity on the longer cycle project business and what kind of confidence that gives you in sustainability of growing the backlog?

When you look at North America, I know if you look at the quarter, organic growth was 3%, a mix pretty much across all of the domains, the capabilities. Margins were flat, but overall, the margin rate we did operationally deliver not only with the volume and the productivity, 40 basis points, but that was offset with the retail mix and some of the cost pressure there. When you look at orders, we did talk about the orders down 1%, a lot of that was timed because of the price increases. But when you look at the backlog, backlog was – backlog year-on-year is up 7% to $5.8 billion. The mix of that backlog is both short and long-term projects and as we project the year, we are positioned here for kind of mid – low to mid single-digit top-line growth. We are positioned here to continue to deliver orders that are kind of mid single-digit, low to mid for the year, mid single-digits in the second quarter. Within the mix of those orders then we will be positioned to be able to convert those orders similar to what we are doing this year as we positioned for 2021. The cadence that we have and how we look at backlog and how we look at churn, I absolutely support what we are going to achieve for this year and as we build the backlog as we plan for 2021 we feel confident that with the pipeline that we are currently working to convert that will position us well for 2021.

And operator, with that, I am going to pass it over to George for some closing comments.

Thanks everyone for joining our call this morning. As discussed, we are off to a strong start to the year, positioned well to deliver on our full-year commitments. As it relates to orders, I feel very confident in mid single-digit order growth in Q2, which then ties to the overall guidance of low to mid single-digit growth for the full year. I look forward to seeing many of you soon. On that operator, that concludes our call.