The operator welcomes participants to the Johnson Controls First Quarter 2024 Earnings Conference Call and explains the format of the call. Jim Lucas, Vice President of Investor Relations, introduces the speakers and reminds listeners that forward-looking statements will be made. He also mentions the use of non-GAAP measures and provides a link to access the press release and presentation. George Oliver, Johnson Controls' Chairman and CEO, thanks everyone for joining the call.

The speaker thanks everyone for joining the call and begins discussing the company's performance in the first quarter. They mention overcoming a cyber disruption and connecting with key customers, leading to positive feedback and confidence in the company's products and services. Despite challenges, the company delivered solid results and expects a return to normalized seasonality in the future. The speaker also mentions the strength of their digital building solutions platform and applied HVAC business, but notes a reduction in adjusted EPS guidance due to headwinds in China.

The company's commercially focused portfolio and long cycle backlog driven businesses, along with a record backlog, provide clarity for improvement in fiscal 2024. The CEO thanks the outgoing CFO and introduces the new CFO, who has been with the company for nearly 20 years. The company has a strong foundation of operational excellence and a value creation framework, with a focus on capturing sustainable and healthy building trends. The company is committed to disciplined capital allocation and has made progress in creating a digital services model. The addition of FM Systems has increased capabilities for serving customers and digital is an enabler for creating recurring revenue and supporting sustainable service growth.

The company is changing its approach to service, focusing on creating multiple options for customers, increasing job size and margins, and utilizing digital solutions. They have successfully reduced costs and are continuing to simplify and standardize their portfolio. They are also evaluating strategic alternatives for non-commercial product lines to maximize value for shareholders. Despite disruptions from a cyber incident, the company's financials for the quarter were in line with previously provided guidance.

In the first quarter, the company's total revenue remained flat at $6.1 billion, with a 1% decline in organic sales due to weak performance in the global residential HVAC and China's in-store business. Segment margins also decreased by 90 basis points, impacted by tough comparisons and China's macro environment. Adjusted EPS exceeded guidance, but the quarter was still affected by the cyber incident, China's weakness, and tough comparisons. Net debt increased to 2.2 times, but the company maintains a strong cash position. In the global products segment, organic sales declined 1%, with commercial HVAC showing strength and continued investments in the applied HVAC business leading to share gains. Fire and Security declined slightly.

The company expects a return to growth in calendar 2024 for the shorter cycleandric business. Industrial refrigeration had a strong quarter, while global residential declined due to market softness in North America. However, the company is improving its market share in North America and sees momentum building. The European heat pump market remains weak, but there was strong growth in Japan. The company's book to bid business is normalizing and its global product third-party backlog decreased. The company expects margins to improve throughout the fiscal year. In building solutions, orders increased in North America and EMEALA, but declined in APAC due to the weakening China real estate market. Organic sales were flat, with growth in service offsetting a decline in install.

The building solutions segment saw a decline in margins due to weakness in China, but backlog remained at record levels. In North America, orders and sales increased, with strong demand in various sectors. Margins also expanded due to higher margin backlog and strong service business. In EMEALA, orders and sales grew, driven by strength in service and institutional projects. Overall, the segment saw growth in both new construction and retrofit, as well as in recurring contracts and shorter-cycle business.

In the second quarter, Segment EBITDA margins were flat due to growth in service being offset by lower margin installed backlog. However, there is potential for strong margin expansion in EMEALA for the remainder of the fiscal year. In Asia-Pacific, orders declined due to weakness in the China-installed business, but overall orders grew slightly due to growth in shorter-term transactions. Sales in Asia-Pacific also declined due to weakness in the installation business, but the service business saw growth. Segment EBITDA margins in Asia-Pacific declined due to weakness in China. The company is now looking towards the future with optimism, as they have recovered from a cyber-incident and have a healthy backlog and pipeline of opportunities. They are expecting flat sales in the second quarter, with continued weakness in China and global residential HVAC.

The company expects strong performance from North America and EMEALA, led by their resilient service business. They anticipate a challenging quarter for global product before stabilizing in the second half. The company predicts a segment EBITDA margin of approximately 14.5% and adjusted EPS in the range of $0.74 to $0.78 for the second quarter. For the full year, they expect mid-single digit top-line growth and a 50 to 75 basis point expansion in segment EBITDA margin. Due to a weakening macro outlook in China, the company is updating its adjusted EPS guidance range to approximately $3.60 to $3.75. They anticipate a return to normal seasonality, stabilization of global products, and conversion of higher margin backlog in Building Solutions. The company expects a free cash flow conversion of approximately 85% for the full year. The first question from a research analyst focuses on the company's recent performance.

The speaker discusses the company's transformation into a comprehensive solutions provider for commercial buildings and their focus on sustainable and smart buildings. They have invested in capabilities and differentiated solutions, including a leadership platform with Open Blue, to lead the industry. This will result in above-market growth and improved margins as they capitalize on secular trends and offer a digitally enabled service.

The company's focus on software-enabled services is expected to result in higher recurring revenue and stronger margins. The company also anticipates above-market growth, increased margins, and predictable cash flow. Asset sales are being pursued in order to simplify the portfolio and prioritize resources towards the company's go-to-market strategy. These sales are expected to create additional value for shareholders.

The company believes it is currently on the right path to simplify its portfolio, drive margin expansion, and deliver consistent cash flow. The focus is on differentiating their value proposition to customers in order to drive growth. The company's operating margin target of 14.5% has been affected by the deteriorating economic environment in China, but they expect a recovery in the second half of the year. In the second quarter, the company expects a recovery in their field-based business, Building Solutions, as the cyber disruption is behind them and they have taken actions to improve productivity and cost structure.

The company is confident in its ability to deliver on margin rates in North America and EMEALA due to cost actions and seasonal volume increase in the Global Products business. The negative organic growth in the quarter was impacted by a six-week disruption, but the company remains focused on its long-term strategy. The announcement of evaluating strategic alternatives was made after careful consideration by the Board and management team to deliver value to shareholders.

The company's transformation strategy has focused on leveraging its strengths and differentiated products, as well as its digital platform and engineering expertise to become a comprehensive solutions provider and generate recurring revenue. The company is seeing momentum in converting this value proposition into revenue. The noncommercial businesses have a different business model and the company is positioning them for continued growth while accelerating progress in the Building Solutions business. The company is reviewing less than 25% of its portfolio, which has margins in line with the overall company.

George R. Oliver discusses the debate about separating Resi and Light Commercial businesses from the larger commercial efforts of the company. He explains that the businesses are now performing well and there is a plan in place to manage any potential overlap with applied rooftops. This separation will not erode the value proposition of the company's comprehensive commercial solutions and will allow for more growth and value creation.

The speaker, Nigel Coe, asks about the recent portfolio review and potential strategic alternatives for certain assets. George R. Oliver, the speaker, cautions against making assumptions and states that they are in the early stages of pursuing options. Nigel Coe then asks about potential deployment of cash, to which Oliver responds that they will continue to do bolt-ons in their Comprehensive Commercial Solutions business to support technology and global growth.

The speaker discusses their intent to make their business accretive through bolt-ons and deployment back to shareholders in order to offset any dilution from divestitures. They also mention signs of bottoming out in the short cycle for their Fire and Security business, with a robust pipeline of opportunities and a focus on differentiating their solutions. The speaker also addresses the question of why now, mentioning secular tailwinds and transitions in the market towards heat pumps and refrigerant transition.

The speaker discusses the positive prospects for residential markets in North America and globally, but acknowledges concerns from investors about commercial weakness. They explain that the decision to divest certain assets is a result of a continuous review of the portfolio and a strategic approach to delivering value to shareholders. The speaker also mentions the company's goal of becoming a leading comprehensive commercial solutions provider. The next question is about China and the speaker's prepared comments.

The speaker is explaining that the company's weakness this quarter was due to a combination of market deterioration and their own selectivity. They are working to align resources with the market and have a strong pipeline for future growth. They are not providing specific details on their noncommercial assets, but clarify that they do have residential and international assets. The Light Commercial business is currently showing at 6% of sales, lower than previous quarters.

The company's Light Commercial sales were not shifted into Applied, as the ducted business was up 10% and the company has been investing in capacity. The 9% difference in sales is due to a math exercise.

During a recent conference call, Andrew Kaplowitz asked for more information about the order cadence and backlog within Building Solutions. CEO George R. Oliver responded by stating that the cyber incident did cause a dip in orders, but the company's pipeline is expanding and they are confident in their ability to convert orders and build backlog. He also mentioned their success in services and their goal of achieving high single-digit services for the year. Kaplowitz then asked about the challenges in EMEALA and when changes would have an impact. Marc Vandiepenbeeck, who previously ran Building Solutions in EMEALA, responded by saying that the margins have been challenging due to projects ending, but they are implementing changes that will have a positive impact in the future.

The company has been working on implementing their enterprise field operating model in order to remain focused and disciplined on sub-segments of large markets that provide the most value for customers and the company. This has led to improvements in book margin and they are confident that EMEALA will return to a comparable profit level. The company is expecting 4% organic sales growth for the year, with an implied 8% growth in the second half. This growth includes both Global Products and Building Solutions, including growth in U.S. Resi HVAC and China Building Solutions.

The company expects to see a recovery in growth in Asia Pac in the second half of the year, which will offset the slower growth in North America and EMEALA. Both the Business Solutions and Global Products segments are expected to grow at a similar rate in the second half of the year. The company is also considering different methods of financing, such as receivables factoring, but may need to reassess their tax rate in the future due to changes in the rate.

The company will review different ways to finance itself and take appropriate action to align with their financial commitments. They have seen improvement in pricing power in their Business Solutions segment due to their simplification of their business model. They have also seen strong momentum in pricing and margins in their Global Products segment, particularly in their Applied HVAC businesses.

George R. Oliver, the CEO of Johnson Controls, discussed the company's performance in the residential market and stated that they have been able to maintain strong pricing despite not being one of the top players in the industry. The company is expecting a 10% increase in revenue for the March quarter, driven by a return to normal seasonality and the resolution of disruptions in the cybersecurity sector. Despite some challenges in the first quarter, the company is expecting growth in the second quarter.

During a recent earnings call, Christopher Snyder asked about the impact of cyber and market trends on the company's performance in the past two quarters. Marc Vandiepenbeeck, the company's executive, stated that it was difficult to measure the exact impact of cyber versus market trends, but the company has seen a few points of benefit in the second quarter. The company also discussed stabilization in its global products division, with strong order rates across all product lines except for residential, which is down 20% but expected to improve. Finally, the company was asked about the timing of its guidance and earnings report, which were released late in the fourth quarter with only a few weeks left.

The disruption caused by cyber incidents in China slowed down data flow and impacted the company's outlook. As a result, they have become more cautious and selective in their deals. The company has also been focused on simplifying and standardizing costs across their portfolio, which has allowed them to become more efficient. They are now looking to capitalize on further simplification opportunities, with a focus on standardizing processes, automation, and utilizing good data.

The company has been able to align its commercial resources and standardize its operating system around a commercial focus, resulting in significant growth in service orders. They have also improved their fundamentals, such as increasing their detach rates and connected assets, leading to high single-digit service growth. However, the North American region was impacted by a cyber disruption, resulting in some softness in service orders in the first quarter.

The company's day-to-day business relies heavily on automation and their system to book orders and generate revenue. The fundamentals of this business have not changed and the recovery is expected to come in the second half of the year. In mature markets like EMEALA and Asia, the focus is on maximizing the potential of their installed base and continuously improving their business model to drive long-term growth. In China, the company is focusing on sub-segments with strong potential for long-term service revenue. The potential divestiture of Resi will not affect the company's ability to achieve their goal of 100% free cash flow conversion. They have been working on improving their free cash flow by optimizing billing and inventory management.

The speaker, George R. Oliver, concludes the conference call by discussing the company's transformation journey and progress, strong fundamentals, and confidence in delivering for shareholders. He looks forward to updating everyone on their progress and thanks them for attending.

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