The operator introduces the Johnson Controls Fourth Quarter 2023 Earnings Conference Call and explains the format and recording of the call. Jim Lucas, Vice President of Investor Relations, then introduces the speakers: Chairman and CEO George Oliver and CFO Olivier Leonetti. Jim reminds listeners of the risks and uncertainties involved and mentions the use of non-GAAP measures. George thanks everyone for joining the call.

The company's fourth quarter and fiscal 2023 results were impacted by a cyber incident, but the company's employees responded quickly and efficiently to minimize the impact. Despite this setback, the company had a strong year with 8% organic sales growth, increased segment margins, and 17% adjusted EPS growth. The company's Service business showed continued strength and the total backlog grew by 9%. The company also generated $1.8 billion in free cash flow and returned $1.6 billion to shareholders through dividends and share repurchases. The company remains confident in their strategy and will continue to prioritize allocating capital towards their objective of leading in Building Solutions. Overall, the company is pleased with their continued execution and believes they are well positioned for fiscal 2024.

Johnson Controls is initiating guidance for fiscal 2024 with mid-single-digit sales and adjusted EPS growth and a free cash flow conversion of 85%. The company's Building Solutions are in high demand and they are focused on providing outcomes that save energy and reduce emissions through their expertise in HVAC & Controls, fire detection and protection, and smart security solutions. Their digital platform, OpenBlue, allows for seamless integration of building systems and has helped them rank highly in an assessment of leading energy service companies.

The company's strong service business and digital strategy have led to continued growth and a strong pipeline. They remain focused on driving growth and delivering solutions while leveraging OpenBlue to improve margins. The company is also seeing improvements in gross margins and cash flow, with a focus on improving the longer collection cycle for receivables.

In this paragraph, the speaker discusses the financial details of the quarter, starting with a summary of total sales and organic sales growth. They mention a 1% headwind from a cyber incident and a flat year-over-year adjusted segment EBITA. They then go into more detail about the EPS bridge and how adjusted EPS increased by 6% despite the cyber incident. The speaker also discusses the performance of different segments, including flat organic sales in the Global Products business and strong growth in Commercial HVAC and Industrial Refrigeration.

The global residential market saw a decline of high-teens due to a significant drop in North America and lower growth than expected in Europe. The backlog for global products decreased by 4%, leading to an 85 basis point decline in adjusted segment EBITA margins. Building Solutions saw strong order momentum with 9% growth, driven by a 7% increase in service orders and a 10% increase in install orders. Organic sales grew by 5%, with a 1% headwind from a cyber incident. Adjusted segment EBITA increased by 5%, but margins declined due to a higher mix of equipment installations and weakness in China. Building Solutions backlog remains at record levels, with a 9% increase to $12.1 billion. Service backlog and installed backlog also saw growth.

Orders in North America increased by 8%, with strong demand in various sectors including office, data center, health care, government, and manufacturing. Sales in North America were up 8% organically, with growth in both installed and service businesses. Total backlog also increased by 10% year-over-year. In EMEA/LA, orders were up 6%, driven by growth in commercial and industrial sectors. Sales in this region grew 3% organically, with strong growth in service. However, segment EBITA margins declined due to lower margin jobs in the backlog.

In the Asia Pacific region, orders grew by 3% due to a strong demand in the institutional sector. Sales declined by 6% due to weakness in China, but the service business saw double-digit growth. Overall, Fire & Security grew mid-single digits while HVAC & Controls declined high single-digits. The segment's EBITA margins decreased by 50 basis points, but the backlog remained flat. The company ended the quarter with $800 million in available cash and reduced net debt. In 2023, $1.6 billion was returned to shareholders through dividends and share repurchases. Free cash flow conversion was better than expected, and the company is implementing changes to improve cash collection. Although inventories remain elevated, there was a five-day improvement sequentially in the fourth quarter, with further improvement expected in fiscal 2024. The company expects to face headwinds in fiscal 2024 due to continued growth investments and restructuring.

In fiscal year 2024, the company is starting with a strong backlog and high demand in various markets. They expect first quarter sales to be flat due to the cyber incident and weakness in China. The service business is expected to continue its momentum. The company predicts stable performance in the second half of the year, with mid-single digit organic sales growth and improved margins. Adjusted EPS is expected to grow by 4-9%. Cash usage is expected to be normal with a slight impact from the cyber incident, and free cash flow conversion is projected to be 85% for the full year.

The company has made great progress in advancing their service strategy, commercial products offering, and backlog in their longer-cycle Building Solutions business. They expect to see a strong recovery from the cyber incident in 2024. The free cash flow includes restructuring and investments in CapEx, and they plan to improve inventory and receivables. The net financial charges are going up due to higher interest rates and refinancing debt, with factoring being a small part of the cost.

George Oliver, CEO of Johnson Controls, discusses the company's strong order growth in the quarter, with a focus on key verticals such as office, data centers, healthcare, and government. He also mentions strong growth in manufacturing, particularly in the EV and semiconductor industries. However, the recent cyber incident may have slowed bookings in the last week. Overall, the company is gaining share and seeing significant equipment sales and service opportunities in their Commercial HVAC business.

Joe Ritchie from Goldman Sachs asks about the mix impact on Business Solutions this quarter, which saw a $100 million negative impact. Olivier Leonetti explains that this is due to the company gaining share in the high-end market, where they generate a high profit margin through equipment sales and services. Joe also asks for clarification on the narrow range for first quarter results, and Olivier mentions strong order momentum continuing.

The speaker discusses the company's performance in the first quarter, highlighting strong momentum in the Building Solutions business and weakness in the Global Products division. They also mention the impact of cyber and normalized seasonality in GP. The next question is about the company's presence in the data center business, and the speaker explains that they have invested in their applied product portfolio to capitalize on the expected growth in this sector. They provide an example of a typical data center and mention their leadership in air-cooled chillers.

The company is projecting significant growth in the market by 2024, with potential revenues of over $2 billion. Their strong portfolio and multigenerational developments have positioned them well to secure a large portion of this market. They have also seen strong growth in their service business, particularly in heat-intensive data centers, which have higher margins due to the criticality and complexity of the applications they provide. The company's recent cyber incident did not affect their work on cloud-based technology.

The speaker discusses the impact of a recent cyber-attack on their company's revenue and earnings. They estimate a 1% decline in revenue for both the fourth quarter and the first quarter, with a $0.04 impact on earnings in the fourth quarter and $0.02 in the first quarter. The attack mainly affected short cycle operations and caused a delay in cash collection, resulting in a $200 million impact. The event also caused significant internal distraction for the company.

The company experienced a three-week delay in operations due to a natural disaster in October, resulting in a loss of momentum. However, the company's teams responded well and were able to regain momentum in November and December. The company has substantial insurance coverage to help cover costs. The company expects earnings growth to return in the second quarter and sees momentum in its Building Solutions business. The company anticipates stabilized growth in its Global Product division in the second half of the year, with commercial and service strength driving growth.

The speaker is asking about the free cash flow and its components for 2024. They mention a $100 million net income growth and $300 million free cash flow growth, and ask for clarification on the extra $200 million in free cash flow. The speaker also asks about the impact of cyber events and factoring on the free cash flow. The response states that inventory, receivables, and supply chain financing will be the key drivers of free cash flow, and that factoring will be flat year-on-year. The speaker also asks about the pace of EPS recovery throughout the year.

The speaker discusses the expectations for Q2 earnings in 2024, stating that historically, Q2 has accounted for about 19% of full year earnings. They anticipate a more normalized seasonality in terms of EPS performance as the supply chain returns to pre-COVID levels. The themes for EPS growth in Q2 include momentum in Building Solutions and a stabilizing GP, with an increase in profit contribution in the second half of the year. In response to a question, the speaker clarifies that the 1Q guide includes an impact of 10 points of conversion, with higher CapEx due to demand in the data center and restructuring actions with a payback period of about a year.

In paragraph 19, the speaker discusses the weak performance in global product demand and the impact of cyber issues in Q1. They also mention a $60 million increase in CapEx and the struggling margins in the EMEA/LA region, with an expectation for them to turn positive in Q2. In response to a question about order growth, the speaker mentions the strength in North America and the expectation for orders to hold up in FY '24, with a backlog of $12.1 billion in long-cycle businesses.

George Oliver, CEO of the company, explains that they have a strong tracking system for lead generation and conversion across all critical markets. The pipeline generation has remained strong, especially in the service business, where they are seeing significant growth in longer-term contracts. Despite a decline in economic conditions, they believe their value proposition will continue to hold up and they are well-positioned to capitalize on growth opportunities. As for Global Products, they expect the residential market to turn positive in the second half and are optimistic about the European heat pump market.

The CEO discusses the challenges facing the residential market in 2023, including higher costs and weaker consumer spending. However, he believes that the transition to new refrigerants will stabilize sales and create opportunities for the company. They have pulled ahead new product launches to ensure a smooth transition and are working with all stakeholders. Additionally, the CEO sees heat pumps as a $100 billion market with potential for growth, as they currently make up one-third of the company's HVAC sales.

The speaker believes that there is potential for strong productivity gains in the company, which will contribute to improved margins. They have set a target of $340 million in productivity savings by 2023 and believe that the company has the ability to achieve a 30% incremental margin through a combination of improved mix and operations.

The second lever for improving profitability for the company is through operational expenses, with a strong portfolio of projects that have a below one year payback. The company has a global operating system in place to identify and capitalize on opportunities for expanding margins. The recent cyber incident did not significantly impact the service business, and the company's business continuity plans were successful in maintaining operations and keeping a focus on customers. The company was proactive in communicating with stakeholders and was able to accomplish its goals.

In the fourth quarter, the company saw a decline in residential channel inventory, particularly in the US. They have been working to offset this decline and are now back to their historical levels. The CEO is optimistic that this trend will stabilize going forward.

The company believes they have overcome the challenges they faced with inventory adjustments and are now seeing an increase in orders and backlog. They are optimistic about future growth and are seeing improvements in project operations and labor availability. The company is also experiencing unexpected strength in the North American office market and may be gaining market share.

The company believes that their operational system can give them a competitive advantage by improving their supply chain and execution. They are confident in their ability to recruit and retain talent, and their work in commercial buildings is differentiated due to their focus on energy savings and decarbonization. They see a big opportunity in this space with the implementation of building standards and the increasing focus on energy and decarbonization.

Deane Dray asks a follow-up question about the timing of the insurance recovery and Olivier Leonetti clarifies that some costs will be reimbursed in Q1 of this year. Deane then asks about China's weakness in Building Solutions and George Oliver explains that they have a large installed base and are capitalizing on service opportunities, but are concerned about the deteriorating macro environment. They are planning for continued pressure in China and hope to be proven wrong. Andrew Obin from Bank of America then asks a question.

JCI is facing growth, investment, and inflation, which may impact their 100% cash conversion target. However, they believe that their fundamentals are strong and they are investing in certain parts of the business to support growth. They expect to improve free cash flow through working capital, inventory reduction, faster collections, and supply chain financing. They also had $220 million in impairment and restructuring charges.

In paragraph 29, Andrew Obin asks Olivier Leonetti about the assets that were impaired. Leonetti explains that there were some open blue assets associated with the FM System acquisition that will be discontinued, as well as an impairment related to the business in Argentina. He also mentions restructuring charges. The next question is from Brett Linzey about pricing and cost. Leonetti and George Oliver both state that they expect price cost to be positive for the year and that they are able to maintain strong pricing due to their value propositions and digital content. They also mention a capacity expansion, but do not provide specific details on the size or location of the investment.

George Oliver, CEO of Johnson Controls, discusses the company's strong position in the data center market and its ability to capitalize on secular trends such as decarbonization and sustainability. He also highlights the company's broad-based position in the applied portfolio, which will enable them to capitalize on increased demand in various verticals. Oliver concludes by expressing confidence in the company's ability to succeed through strong execution and a focus on margin, free cash flow, and digitization of their service offering.

The speaker expresses confidence in their team's ability to deliver value and results in the upcoming fiscal year and concludes the conference call. The operator thanks everyone for attending and ends the call.

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