Johnson Controls' Vice President of Investor Relations, Jim Lucas, welcomed participants to the Third Quarter 2023 Earnings Conference Call and introduced Chairman and Chief Executive Officer, George Oliver, and Chief Financial Officer, Olivier Leonetti. He reminded listeners that forward-looking statements may be made and advised them to review risk factors and cautionary statements. George Oliver then began the call by announcing that Johnson Controls had delivered a strong quarter that met the high end of their guidance.

Johnson Controls had a successful quarter with 9% organic sales growth, 130 basis points of adjusted segment EBITDA margin expansion, and 21% adjusted EPS growth. Orders and backlog both increased 8%, and the outlook for orders in the longer cycle businesses remains robust. Global Products businesses had strong double-digit growth, and the company is narrowing their full year adjusted EPS guide to approximately $3.55. Johnson Controls has made good progress in enhancing profitability throughout the year and are taking significant actions to further expand margins.

Johnson Controls has invested in their service business and seen strong returns, with service and sales orders growing 12%. They have also accelerated the sales of their higher margin parts business, and their sustainable infrastructure business has seen orders increase by 20%. They have also implemented a digital strategy to use data to drive outcomes for customers and have surpassed 16,000 connected chillers. They have also acquired M&M Carnot, a provider of natural refrigerant solutions, to help reduce global warming.

Johnson Controls is expanding OpenBlue to include connecting controls and security to optimize customer assets and improve outcomes in buildings. They recently acquired FM:Systems, a leader in the IWMS sector, to provide customers with a one-stop solution to accelerate digital transformation, improve building efficiency, and reduce operational costs. OpenBlue Digital Solutions help optimize indoor air quality, comfort, and energy consumption, while monitoring outdoor air conditions to ensure customers can meet their operating objectives in extreme temperatures.

In the quarter, total sales grew 8% with organic sales increasing 9%, and adjusted segment EBITA increased 17% with margin expanding 130 basis points to 16.4%. Adjusted EPS of $1.03 was at the high end of the guidance and increased 21% year-over-year, due to positive price costs and SG&A and COGS actions. Net financing costs, FX and non-controlling interest created headwinds.

In the third quarter, Global Products saw 6% organic sales growth, 8% of price, and a slight volume decline. Fire & Security grew low single digits and Industrial Refrigeration had another strong quarter with 20% growth. Building Solutions orders increased 8% organically and service orders grew 12%. Total sales increased 10%, and adjusted segment EBITA increased 35% with margins expanding 240 basis points. Both service and installed backlog increased 8% year-over-year.

Building Solutions performance in North America saw orders increase by 5%, with service increasing 8% year-over-year. Sales grew 10% organically, with HVAC & Controls and Fire & Security each growing in the low teens and high single digits respectively. Segment margins expanded 270 basis points year-over-year to 14.4%. In EMEA/LA, orders grew 10%, with service increasing 19% year-over-year. Sales grew 9%, with Applied commercial HVAC and Fire & Security growing in the high single digits. Segment EBITDA margins declined 10 basis points to 8.6%, but increased 190 basis points sequentially.

Johnson Controls reported a 6% year-over-year increase in backlog to $2.3 billion, with double digit growth in both service and installed in the Asia Pacific region. China reported 14% growth, while North East Asia reported high teens growth. Sales in Asia Pacific increased 16%, with 19% growth in service and 14% growth in install. Segment EBITDA margins expanded 110 basis points to 13.9%, and the balance sheet ended the third quarter with $1.1 billion in available cash. For the fourth quarter, Johnson Controls is expecting a 4% sales increase, a 60 basis points expansion in segment EBITDA margins, and 11% year-over-year growth in adjusted EPS.

The fourth quarter sales growth for Global Products is expected to be down mid-single digits, with residential HVAC being a headwind. Commercial businesses, both products and services, remain strong. The First & Security Products have headwinds, but George Oliver did not elaborate on the details of the headwinds.

George discussed the strong bookings across their applied and commercial rooftop businesses, as well as the progress made in their Building Solutions business. He mentioned the short-term pressure seen in their residential and Fire & Security businesses due to inventory resetting. However, he expects these areas to come back strongly in 2024. He concluded by discussing how they are preparing for FY'24, suggesting that the top line environment should be positive.

George Oliver discussed how the commercial markets are playing to their strengths, with orders and backlog up 8%, and the potential stimulus spending that could further benefit their HVAC digital platform and services. He also discussed the resilience and strength of the backlog, and the acceleration of the transformation of their Building Solutions business to services, which has been creating an installed base with higher attach rates and revenue per customer.

Olivier Leonetti and Nigel Coe discussed the trends that will lead to a successful 2024. Leonetti mentioned that they are expecting gross margin expansion and SG&A leverage due to standardization and functional excellence. For the fourth quarter, the Building Solution Business has a strong order moment and good visibility, but there are inventory adjustments impacting the shorter cycle business, such as residential and Fire & Security. They expect the fill business margins to improve.

Steve Tusa asked about the revenue and price of the global product and field business. Olivier Leonetti responded that the revenue for the global product would grow low single digits to flat, and the margin would expand to flat. He also stated that they no longer differentiate price from volume for the building solution business, but that their pricing and value proposition is resonating with customers. George Oliver added a comment in response.

George Oliver states that there has been significant de-stocking in the residential side of their business in the first and third quarters, and they believe there will be some additional de-stocking in the fourth quarter. He believes that by the first and second quarters of next year, the demand patterns should be normalized.

George Oliver is discussing the Fire and Security business of the company, which has seen a significant increase in lead times and backlog. He believes that the backlog will be cleared in the fourth quarter, and that the company is gaining market share with new products. He also states that the service growth has been out-pacing install growth, and the company's strategy is to strategically use install and digital assets to extract services over the life cycle.

The company expects to sustain growth of services and accrete margins in their building solutions business. They are guiding for higher amortization of intangible assets, which will result in a $0.05 EPS headwind, and the accretion from acquisitions is expected to start at the beginning of the next fiscal year. In the fourth quarter, they expect to reduce inventory, which will help with free cash flow conversion.

The North American margin saw a significant improvement in the quarter, and this was attributed to a combination of service mix, cost of goods sold, and SG&A programs. George Oliver explains that the backlog from 2021 caused the margin pressure last year, but the current quarter saw a significant improvement.

The Building Solutions business has been able to maintain strong margins during the inflationary cycle and the value proposition of services has been driving in-store to drive services. Olivier Leonetti believes that the company can deliver 30% incremental due to margin and SG&A leverage in the next year. Jeff Sprague asked if they were considering an ex-amortization EPS construct.

Olivier Leonetti and Jeff Sprague discussed the amortization of deals, specifically the Tyco-Johnson Controls merger, and the profit drivers of price, cost, and productivity benefits. Leonetti mentioned that the company is well on track to deliver $340 million in savings from their two-year cost out program in FY'23, and that they are confident in their value proposition and ability to expand their margins.

George Oliver and Julian Mitchell are discussing the pricing and top line growth of the company. Oliver states that the company's pipeline is continuing to grow, and they are seeing broad strength across different verticals such as industrial, data centers, and government. He also mentions that they are making sure that they are positioned to capitalize on where the growth will occur and that their value propositions are tied to creating the most amount of value.

Olivier Leonetti states that there is nothing fundamentally different in the EMEA/LA business that would prevent them from achieving a strong level of segment every day margin. However, there are two factors that have caused a 150 basis point headwind in margin in the fourth quarter: pension costs and FX in their business in Argentina. If these factors are removed, the margin in EMEA/LA would have increased by 140 basis points. There will be similar impacts in Q4, but nothing structural.

George Oliver and Olivier Leonetti discuss the impact of inflation and backlog in the EMEA/LA business. Nicole DeBlase then asks about the potential to expand Global Products margins in Fiscal '24. Olivier Leonetti responds positively, explaining that the impact of ramping up manufacturing of applied and inventory normalization has had an impact of more than a point in the quarter. He believes there will still be some of that happening in Q4, but that margin expansion is possible. Olivier Leonetti estimates that the destock headwinds on the indirect side for resi, Fire & Safety in Q4 will be about 1 to 1.5.

Chris Snyder asked George Oliver if there were any negative offsets to the 4% organic guide for the fiscal fourth quarter, and Oliver responded that the Fire & Security products in the Building Solutions business were coming back nicely, but the indirect channel was facing pressure due to reduced lead times. Gautam Khanna then asked if there would be any impact on orders due to shrinking lead times.

George Oliver and Olivier Leonetti discussed the potential for a decrease in the urgency of orders in the global products business due to improved supply chain and reduced lead times, which has already been playing out over the last few quarters. They also discussed the direct channel, which has not seen any spillover effect, and the strong order rate for the Building Solutions business in Q4.

George Oliver explains that they have been aggressively expanding their product portfolio and capacity to meet the demands of the market, which has allowed them to increase their market share. He also states that they have been building backlogs in their applied equipment and can provide an average size. He further explains that they have more than doubled their capacity and are pacing with full utilization, allowing them to respond to demand and create value with their offering. Finally, he notes that some of these projects can take over a year.

George Oliver states that the company has strategically sourced and leveraged their scale and demand to drive productivity, offsetting inflationary pressures on commodities. This has allowed them to extract pricing concessions from their supply chain into 2024. Olivier Leonetti adds that the stimulus in the US and Europe has not impacted the demand so far and that they only book an order when a signed firm contract is received.

Johnson Controls is planning to maintain strong productivity and cost efficiency while contributing to deep decarbonization and sustainability. George Oliver closed the call by thanking everyone for their interest and emphasizing Johnson Control's strategy to empower customers to create healthy and safe spaces. He concluded by stressing the importance of continued execution.

This summary was generated with AI and may contain some inaccuracies.