Good morning. Welcome to Johnson Controls Fourth Quarter 2020 Earnings Call. Your lines have been placed on listen-only until the question-and-answer session. This conference is being recorded. If you have any objections, please disconnect at this time.

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

Antonella Franzen:.

Thanks, Antonella, and good morning everyone. Thank you for joining us on today's call. As the effects and impacts of COVID are still fresh in our minds, I hope you and your families are continuing to stay healthy and safe. Before we get started with the prepared remarks, I wanted to take the time to officially welcome Olivier to the team.

Olivier is on the call today and will be actively participating in our guidance discussion and in Q&A. Many of you have already had the opportunity to speak with him briefly at a few of our investor conferences in early September. And if not, we look forward to speaking with many of you over the next several weeks.

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 in his first 10 weeks. As we said at the time of his announcement, Olivier will formally assume the role of CFO immediately following the release of our 10-K in just a few days..

Thanks, George, and good morning, everyone. So let's get started with our year-over-year EPS bridge on Slide 6. As you can see, operations, net of mitigating actions, was an $0.11 headwind. Despite continued volume pressure and some unfavorable mix, freights 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 save was a $0.04 tailwind as anticipated, and net financing costs were a $0.02 headwind. Our lower share count, given the significant share repurchase activity over the past 12 months, benefited us $0.05.

Moving to our segment margin bridge on Slide 7. 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, up 70 basis points year-over-year to 34.3%.

With the 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 and as planned, 13% of the consolidated EBIT level. Overall, segment EBITDA margin declined 20 basis points on an organic basis to 15.6%.

So let's turn to Slide 8 for a look at our segment results in more detail, and my comments will also focus on the segment end-market performance that's included on Slide 9. For North America, revenues declined 6%, with install down 9% and service down 3%.

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 installed business related to new construction remains under pressure..

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 now where the difficult work around our internal transformation, portfolio rationalization and leadership changes is now largely complete.

While there is always more work to do in an organization of this size, we are very excited about the growth opportunities in front of us. Our portfolio is very well aligned with the strong secular trends, including sustainability and energy efficiency, urbanization in 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 broadest direct channel footprint to enable extensive go-to-market advantages.

Our vision for this merger five years ago was to ultimately lead the evolution from managing traditional building systems and 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 are very well positioned to accelerate and leverage our unique competitive advantages.

As I mentioned earlier, we have developed three growth priorities, all designed and calibrated around gaining share, scaling OpenBlue, 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.

With the steps we've taken to strengthen the balance sheet over the last two years and the improvements we've made to our liquidity position and cash generation capabilities, we are now in a better position to pursue a more balanced but disciplined capital allocation plan. Please turn to Slide 14.

The launch of OpenBlue 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. OpenBlue 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 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 OpenBlue 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, OpenBlue. 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. OpenBlue is also fueling some of the most ambitious projects in the world such as BEA and the next World Cup. Over the last several months, we have had numerous releases under OpenBlue.

For example, in August, we launched our comprehensive suite of digital solutions under the OpenBlue Healthy Buildings label, bringing together intelligent, connected hardware, software-based analytics in dashboards as well as mobile applications aimed at accelerating building occupancy by instilling confidence and 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, and we earned the highly coveted ISA, Secured Development Life Cycle 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 OpenBlue will be our ability to tailor our service offerings to individual customers based on their unique needs.

This platform enhances lead generation; improves attachment rates; increases average revenue per user; and over time, should sustainably accelerate our service growth rate by 2 to 3 percentage points with a very attractive margin profile.

In late September, we launched a new flexible tiered service offering powered by OpenBlue, which increases our capabilities around real-time remote service and monitoring as well as predictive analytics. Lastly, turning to Slide 16. Demand for indoor air quality and healthy building solutions remain a key focus area.

And we have seen significant uptick in interest from our customers since the beginning of the pandemic. For example, year-to-date sales of our YORK MERV 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 are 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 served these markets, we have also rapidly innovated or redeveloped several new products for customized applications.

I won't spend time on each one listed on this page, but this collection represents why we believe we are uniquely positioned to fulfill the different customer needs regarding healthy buildings. 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 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..

Thank you, George, and good morning, everyone. I'm pleased to be with you on the call today, and I'm thrilled to be part of the Johnson Controls team.

I've been in the office for about 10 weeks now and have fully immersed myself in learning the business and with the help of Brian and the finance team, understanding the strength and opportunities we have in front of us as an organization. I cannot thank Brian enough for his guidance and alliance through this transition.

I thought I might quickly share with you my initial impressions and perspective, before I get into our forward outlook. I've been asked by some of you, why I was drawn to this role at Johnson Controls? And I would tell you, there were a number of reasons. From a personnel standpoint, how we do things is incredibly important to me.

I wanted to be part of an organization with culture, diversity and inclusion matters. We are focused on the environment matters where developing people and meritocracy matters. I'm impressed by what the team has achieved over the last two years, its strategic vision and the operational discipline that has been established.

I also recognize there is still work to be done, particularly around optimizing the cost structure of our business model. I am very positive about the growth opportunities of the end markets we serve, smart, safe, healthy buildings and by our vision around services, digital and product innovation.

Finally, I'm excited about the ability we have to drive above-market growth with best-in-class margins. That seems like a natural point to transition to our outlook, starting on Slide 17.

I mentioned my optimism about our served markets, and I think this depiction of our business mix shows a very balanced revenue profile, roughly split one-third each for products, install and service.

We have one of the largest installed bases of buildings globally with an unmatched direct channel footprint, both of which we can leverage to generate very attractive service opportunities. As George mentioned, service, powered by OpenBlue, is expected to be an attractive vector of profitable growth for the Company.

Looking at our installation portfolio, we are roughly evenly split between new construction and renovation retrofit, although many parts of this business remain challenged by the effects of the ongoing pandemic, our portfolio of LC building solutions and retrofit activity can moderate the weakness in new build.

Product revenue at 35% represents those products sold through our indirect channels and will not include products and equipment installed through our direct channel. This is our short-cycle business that is typically booked and shipped. Turning to Slide 18.

This slide provides our end-market exposure as well as a few economic indicators on the fiscal year basis we utilize as an input to our planning process. Construction outlook is a barometer for the new construction portion of our installation business in North America, which is about 15% of our total sales.

GDP tends to be the barometer for service market growth. As the market forecast indicate, the global macro environment remains uncertain. However, given the attractiveness of our portfolio and the elements of our go-forward growth strategy George discussed, we feel very confident that we are positioned to outgrow our end markets.

Now let's turn to Slide 19 with our views of fiscal '21 and our Q1 guidance. Current forecast for market recovery suggests a stronger second half of the year. We will continue to manage costs over the course of the year, keeping tight controls on the amount and timing of temporary cost reversals as volumes continue to normalize.

We also have the carryover benefits from the permanent cost actions we took in the back half, which will partially offset the return of temporary cost. This, along with our focus on higher-margin revenue growth, is expected to result in ongoing EBIT margin expansion.

Regardless of the presidential election outcome, we are very confident in our ability to maintain a 13.5% tax rate in fiscal '21.

Free cash flow on a reported basis will approximate 95% for the full year and should follow a fairly normal cadence, with the majority of our cash being generated in the back half, in line with our traditional cash flow seasonality.

With the majority of the large cash adjustments now being behind us, we are transitioning to an unadjusted cash flow metric. As part of our disciplined capital allocation, we expect to deploy the remaining $1 billion of proceeds from the Power Solutions sale to share repurchases.

Now for our Q1 guidance, we expect to start the year off with organic sales decline in the range of 5% to 7%. The continued focus on the cost side will allow us to expand our EBIT margin 20 to 40 basis points and EPS should be in the range of $0.39 to $0.41. Overall, continued strong performance in a challenging environment.

With that, operator, we can open the line for questions..

Thank you so much. Our first question is from Deane Dray with RBC Capital Markets. Sir, your line is open..

Just to start off on the forward look and guidance, and we suspect that a lot of companies are still going to keep the annual guidance suspended, but you've given us enough data points in the forward look on free cash flow and the conversion to back into an EPS number. Just want to make sure our math is right, we're getting a $2.45 to $2.50 range.

I just want to make -- and that looks like a bracket's consensus. I just want to make sure that math is right.

And is it just the point of still heightened uncertainty that's keeping you from framing that guidance officially?.

So let me give you a bit of colors before to answer specifically to your question. We have, as you sense from the call, very confident about the position of the Company, and we believe we're going to be able to navigate this uncertain environment as we did last year.

Now as you alluded to, at this point in time, there was a lot of uncertainty regarding what is happening in the pandemic. We have had, particularly over the last few weeks, additional lockdown and restrictions in Europe, and we have a second wave in U.S. So in this context, we believe we have a solid plan. We have momentum building, and we'll be agile.

As you said, we have stress-tested our plan and we believe that despite the uncertain environment, we're going to be able to deliver a very good EBIT margin expansion and a strong cash flow performance. Now let me answer to your question specifically.

Based upon the current market trajectory and all of that is still a bit known where that would go, we were looking at organic revenue growth in the low to mid-single digits range. Our sales force today is targeting growth part of the market, focusing on indoor quality and LC buildings and in verticals such as data centers, warehouse and institutions.

And as George indicated, we're investing heavily in new product launches. Now if you look at your EPS range today, we believe it's not an unrealistic expectation..

Great. That's real helpful. And then on the -- I really appreciate all the new color on OpenBlue. A number of your HVAC peers have started giving at least some framework on what the indoor air quality funnel might look like. I was hoping you could quantify for us. You gave a data point on 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 I would hope you could frame for us that opportunity as it stands today..

Deane, let me just kind of frame up what we're doing on indoor quality, how important it is, and then I'll kind of frame up what we see here within the pipeline. So I would start by saying it's clear that this is front and center with all of our customer engagement.

So the education that has been had around air quality and the impact that, that has in mitigating the impact of the virus, that's certainly front and center. Now there's many critical elements to delivering clean air. It includes ventilation, filtration, disinfection and then isolation.

And it's also combined with sensors around temperature, humidity, occupancy and ultimately ties to billing controls. And so our clean air strategy has been focused on finding the right balance between air quality as well as energy efficiency.

And it's based on science, backed recommendations on clean air delivery rate which is ultimately clean air changes per hour. We're performing a number of assessments at 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's really no one better position now to be able to help our customers operate healthy safe buildings.

It really is built on the combination of our HVAC portfolio with our security and building software platforms that do uniquely enable us to provide more powerful solutions based on specific customer outcomes.

Now in addition to that, Deane, we've got over 16,000 service experts around the globe, which is 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 a couple of hundred million dollars for 2021.

And now longer term, I think 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 replacements and other emerging solutions.

So as we look out over a few years, we think clean air, the market itself is multibillions of dollars in incremental market. And then with that, 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 that's with universities, that's partnering with technology companies that have additional capabilities that 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 channel where we can get partners and ultimately bring the best solution to the market..

Our next question is from Jeff Sprague with Vertical Research. Your line is open, sir..

Best of luck, Brian. Two for me. First, George, and this maybe picks up a little bit on what you were talking about. But you were kind of talking about OpenBlue adding one to two points to your sales growth. And now you're saying two to three.

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 this. So I just wonder if you could elaborate a little bit more on your thinking around that incremental growth rate and how the customer conversations are going..

Yes. Let me start, Jeff, by talking about the strength of our OpenBlue 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 combine with our long-standing expertise and buildings with cutting-edge technology.

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 and data, allows us to be able to create new outcomes.

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 solutions. So let me talk a little bit about the progress we've made.

In the last 90 days, 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 OpenBlue Workplace, new tiered flexible service offerings under OpenBlue, OpenBlue 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 OpenBlue 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 OpenBlue in everything we do and the enhancements we're making to our go-to-market strategy.

We have already built -- when you look at the pipeline that now OpenBlue is connected to. So our multiyear pipeline is well over $1 billion of opportunity when you take what OpenBlue does not only as a stand-alone, but how that combines with our core capabilities in how we go to market.

And then like I said, we've supported that with partnerships with Microsoft, Accenture, Cisco and Intel. And when you look at these partnerships, they're integral, I would say, on many levels to ultimately deliver a complete outcome-based solution that our customers are asking for. And we believe that we have a lot to offer as a partner..

Just on the cost headwinds and tailwinds, you gave a very explicit table and chart on the Q3 call. I'm wondering if all those numbers are basically the same, the $240 million to $260 million tail on permanent and kind of what you gave us on the temporary.

And I guess whether the answer is yes or no, can you give us a little bit of color on how these kind of feather in and out over the course of this year?.

So Jeff, before answer to the specific of your questions, we have said that in the past, but we want to repeat it because it's very important. We believe we have the opportunity to improve the return on sales of our business going forward. And we believe we have opportunities in both growth margin and OpEx management.

And if you look at the prepared remarks from Brian, improving the margin rate by about one full point year-on-year last year despite the environment was remarkable. So that says a lot about the execution discipline of the Company. And we believe we have said that, and we have done some modeling lately.

We believe that the 30% incremental is an achievable and required goal for the Company. Now to answer specifically to your question, the net $40 million that Brian mentioned before is still valid. We would expect those costs to come back mainly in the second half of the year. So we believe that it's the best way to plan for those costs.

However, we're still looking at levers to mitigate those costs to come back in the second half, but it's too early for us to commit, Jeff, at this stage..

Our next question is from Nigel Coe with Wolfe Research. Your line is open, sir..

Just wanted to come on the back of Jeff's question there. So the -- obviously, the temporary costs coming in towards the back end of the year.

The structural costs, is that more linear through the year? Or are we seeing some of those coming through in the 1Q guide?.

So at the moment, for the first half of the year, we have a net benefit to the P&L when you look, Nigel, at the permanent and temporary cost coming back. And the headwind will come in the second half and more in the Q3 fiscal quarter, Nigel..

Great. And then obviously, the service kind of acceleration is really encouraging and also $1 billion pipeline. Is that $1 billion, that funnel, has that been built since you sort of soft launched OpenBlue? I think it was mid-2000.

I can't exactly remember the date, but I think in the last seven months, has that all been built in that time frame? And do you have any indication on sort of the time line to the service revenue acceleration?.

Yes. Let me go back, Nigel, to the pipeline. That pipeline is when we do, as we're doing installs and now taking our digital capabilities with OpenBlue 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 spin-off services from that. And so that's when what I talked about there with the digital blue pipeline.

As far as the services, what we get with OpenBlue, it allows us to be able to not only differentiate 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 OpenBlue allows us to do.

It enhances our ability to be able to immediately attach service contracts. And we're starting to see a nice pickup in our contractual services, and that will continue to improve as we go forward.

And then from a revenue per customer standpoint, it ultimately allows us to now build, on top of that base of service, new capabilities and be able to deliver enhanced value, which ultimately then we get paid for.

And so it's really a combination of not only expanding our installed base with OpenBlue, but then being able to mine that installed base with additional services on a recurring basis..

Just to clarify, the funnel though has been built this year, correct?.

Yes. The funnel, I mean, when we look at our pipeline, what we've done, Nigel, is take everything that we do with how we go to market.

OpenBlue now becomes part of what we offer and how we differentiate not only the solutions that we go to market with and install, but also the capabilities that we deploy to be able to attach service and then perform the service over the life cycle of that installation..

Our next question is from Steve Tusa with JP Morgan. Your line is open, sir..

Just curious, how much does the one of the big differentiators versus you guys in your HVAC equipment peers, at least, is your control system, the kind of Metasys platform. Maybe that brand has changed.

But how much of a differentiator is having that controls legacy, if you will, the building controls legacy over and above the kind of HVAC and Fire & Security?.

Yes, Steve, let me just start by talking about commercial HVAC and the importance of not only the equipment but also the digital capabilities.

When we look at these markets, they're very attractive with long-term secular drivers that ultimately align 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 now 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 and healthy 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 Metasys and then being able to connect every other device and every other 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 now industry-leading controls, embedded software with also our digital offerings and building automation software that all complement the core.

So 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, just one other nitpicky one, you guys bought in a JV, I think, at least on the cash flow statement, it suggests you guys had some activities there.

Was there -- were there any P&L -- was there any P&L impact from that? Sometimes companies that we cover buy in JVs and they book a gain on their ownership.

And any impact on the P&L from that front?.

Steve that was related to the buyout of Qolsys, we had a majority interest in Qualsys already. And we bought out, during the quarter, the remaining 42% of those shares. So the activity that you're referring to was an entity that we historically have consolidated. So there was no unique P&L in Q4 related to that..

Our next question comes from Gautam Khanna with Cowen. Your line is open, sir..

I had a couple of questions, George, maybe if you could elaborate on the IAQ opportunity. Carrier had talked about it at 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 IAQ sort of becomes a table stakes for some of these commercial building operators, because it seems like there is a conflict between energy draw going up when you utilize some of these solutions and what has been the compelling case to renew applied systems, which is the energy consumption drops with the new technology.

Just how you kind of frame that.

Do you think it's table stakes? Do you think it's kind of a short-term blip while we have COVID and then maybe you revert back or just your opinion on that topic?.

Yes. So when we talk about indoor air quality as part of as the market, and so you've seen numbers from Navigant where there's like 1.7 trillion of square footage and about a quarter of that is ultimately non-resi space.

And then within that, today's level of air purification is well below what would be now in this environment, perceived as being acceptable. And so, as I talked about, there is a key element of being able to provide the right solution.

It does include multiple domains or multiple capabilities, whether it be maintaining or maximizing the ventilation, bringing the highest level of filtration. So it might be today, MERV 8 and moving towards MERV 13. It includes deploying potential disinfection technologies, and then like in health care, it's isolation.

And so what we do is be able to not only provide the best solution that ultimately delivers what we call the clean air delivery rate, which is clean air changes per hour with a level of purification, but also making sure that we're doing that and optimizing the energy required to ultimately perform and deliver on that outcome.

And so, we are working feverishly here, not only in how we deploy these multiple capabilities, but how we optimize those with our building controls and ultimately bring in the best solution at the least amount of energy required.

We believe that there's optimization that can be had, where you can get to a much higher standard while you're still delivering on the sustainability goals of our customers. And that's what we're ultimately focused on doing with the technology elements that we have underway..

Our next question is from Nicole DeBlase with Deutsche Bank. Your line is open, ma'am..

I just wanted to focus a little bit on the first quarter guidance. It looks like you guys are kind of projecting organic revenue decline similar to what you saw in 4Q.

Just curious, if that reflects kind of stabilization in organic trends throughout the quarter or if you did see improvement into the later parts of the quarter and into October?.

So Nicole, we are seeing today, you're right, a gradual improvement in our business environment, both for our field business and our global product segment. So, if you look at our order book, and I'm not talking about revenue for now, we'll give you the specificities in a 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 field business specifically, we saw -- we are seeing in Q1 orders velocity for our field business being sequentially better by one or two points relative to Q4.

And what you see is you have our in-store business, which is book now, but the orders were recorded about two quarters ago, give or take. So you see this in-store business because of this lag in the quarter, being still down.

And you see, as George mentioned, an acceleration of our service business, which is largely offsetting what is happening in installed. So that's for our field business. If you look at our Global Products, again, we see today that we are gaining shares in the product we sell.

And we're experiencing because of our product portfolio, the impact of the delay in commercial HVAC and Fire & Security businesses. And as we move into Q1, we see today a slightly larger revenue decline relative to Q4.

And what is happening, and you saw that in our opening remarks, Nicole, Q4 was very strong, and largely -- not largely, but in part due to the demand we satisfied in Q4 due to the depressed Q3 we had. So, if you look at this 2-year stack, Q1 financial year '21 will be similar to Q4.

So overall, an environment from a revenue standpoint, which is comparable to Q4, and we believe it's a prudent approach, despite an improvement in the level of order velocity. But as you saw in our guide, we believe we're going to be able, nevertheless, to protect the bottom line due to our cautious cost mitigation activities..

Got it. That's really helpful and then maybe just a follow-up also on first quarter. When we think about the 20 to 40 bps of expected margin improvement, can you just talk about any divergences between the segments? I know global products faced some unique challenges this quarter.

Does that continue into the first quarter? And anything on the field businesses that we should make sure we think about?.

one, exception of fixed costs and to product mix and our field business is keeping its momentum from a margin improvement standpoint..

Our last question will come from Scott Davis with Melius Research. Mr. Davis, your line is open..

A couple of questions.

But first, just is -- George, is M&A still on the table as a possibility in 2021?.

Yes. I mean, absolutely, we're 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 open 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 Qolsys, 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 on OpenBlue, George, and I know there's been a ton of questions, but just to clarify. When you do an install, I imagine there's a fair amount of upfront customization.

And do you charge for that? Or is that part of kind of the SaaS pricing you expect over time to have perhaps a breakeven period and then a more profitable period after that? Is that a way to think about it?.

Yes. So Scott, when you think about our installed business today, it is an applied business where we apply engineering. We configure solutions. We deploy those solutions with install. And then ultimately, we look to attach and get the life cycle 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 contract and pursue -- continue to pursue that.

What OpenBlue does for us, it really changes the level of engagement with our customers, where now with OpenBlue, we can significantly change the outcomes that we can produce with the installations or solutions that we propose 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 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 OpenBlue 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..

Thank you for your question. I will now turn the conference back over to George for some closing remarks..

Yes. Just to wrap up here, I want to thank everyone again for joining us this morning.

I'm incredibly proud of how our teams responded in the time of the global pandemic and 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..