The operator welcomes participants to the Johnson Controls’ Second Quarter 2024 Earnings Conference Call and introduces Jim Lucas, Vice President of Investor Relations. Jim reminds listeners that the call is being recorded and directs them to the company's website for the press release and conference call slides. He also mentions that the call will include forward-looking statements and non-GAAP measures, and encourages listeners to refer to the company's SEC filings for more information. George Oliver, Chairman and CEO, and Marc Vandiepenbeeck, CFO, will be speaking on the call.

In the second quarter, Johnson Controls had a strong performance with adjusted EPS meeting expectations and sales growth returning after a cyber disruption. Margin expansion was driven by productivity and backlog conversion, with orders increasing by 12%. The backlog remains at record levels and the company's focus on delivering engineered solutions for commercial buildings sets them apart. Free cash flow is improving and the company is taking steps to strengthen their balance sheet. They have settled a lawsuit and discontinued a receivable factoring program. They are also pursuing strategic alternatives for non-core product lines. The company is confident in their ability to meet financial objectives for the year.

Johnson Controls' core business is its engineered solutions, including commercial HVAC controls, fire, security, and services. They have implemented an end-to-end operating model globally to better serve customers. Their solutions focus on energy efficiency, clean electrification, and digitalization, and include both systems and services. They have a scalable service model that drives consistent growth and higher margins. The service business will continue to contribute to long-term margin expansion. Their solutions are enabled by connected equipment, allowing for data collection and a better occupant experience. The company's transformation into a pure-play provider of comprehensive solutions for commercial buildings presents an opportunity for further growth and investment in the most attractive opportunities.

Johnson Controls is committed to effectively allocating resources and has positioned itself to benefit from the growing demand for data centers. They have invested in technology, research and development, and expertise to provide comprehensive solutions for commercial buildings, making them a preferred partner in the industry. In fiscal 2023, their sales to data centers were $2 billion and their orders for the first half of the year have already surpassed those for the entire year of 2023.

In the fifth paragraph, the speaker discusses the company's investment in capacity to meet the growing demand for data centers. They highlight their advanced chiller technology and extended offerings in air handling units and computer room air handlers. They also mention their plans for next generation technologies and a successful case study for a half gigawatt facility. The company's pipeline for data centers is strong and they are expanding their capacity to meet demand. The speaker expresses excitement for future opportunities in this vertical. They then turn the call over to Marc to discuss financial details and highlight the company's ability to deliver on commitments to customers and drive value for shareholders.

In the second quarter, the company's adjusted EPS was $0.78, a 4% increase from the previous year and at the high end of their guidance. The growth was driven by improved operations and productivity, but was offset by higher financing charges. The company ended the quarter with $800 million in cash and their net debt remained within their target range. Adjusted free cash flow also improved year-over-year. In their global product business, organic sales declined by 1%, with declines in volume offsetting price increases. Commercial HVAC and industrial refrigeration saw growth, while fire and security and global residential HVAC declined.

The global ducted residential business declined in the mid-single digits, with a decline in North America offsetting strength in Latin America. However, dealer growth and distributor sell-through are increasing, and momentum is building in the North America market. Building solutions orders grew 12%, with strong growth in service orders. North America orders increased 19%, driven by strong demand in data centers. Sales in North America were up 8% organically, and segment margins expanded 110 basis points. Total backlog grew 15% year-over-year.

In the EMEA/LA region, orders were up 8% with a focus on driving higher margin into the backlog. Controls had strong order intake and sales grew 4% organically, with low teen service growth offsetting a decline in the system business. The segment EBITDA margin also expanded by 170 basis points due to improved productivity and positive mix. In Asia Pacific, orders declined 9% due to selectiveness in the China system backlog, but service orders grew high single digits. Sales declined 23% in Asia Pacific, but the service business grew 7%. The segment EBITDA margin declined due to weakness in China, but the backlog remains at historical levels. Third quarter and fiscal year ‘24 guidance is positive with good momentum and a stable product book-to-bill business.

The company is introducing third quarter sales guidance, expecting low single-digit growth due to continued pressure in their system business in China. They anticipate strong contribution from North America and EMEA/LA, with a return to growth in global product sales. They maintain their full year guidance, with mid-single digit sales growth and an expected expansion of segment margins. Adjusted EPS is expected to be in the range of $1.05 to $1.10. The company remains confident in their ability to deliver on financial and operational commitments. The first question in the Q&A session is about whether anything was pushed from 1Q into 2Q.

In this paragraph, Marc Vandiepenbeeck discusses the company's fourth quarter guidance and the factors contributing to their confidence in seeing a ramp up in performance. He mentions that some orders slipped due to a cyber incident, but the strength of their orders in Q2 is due to positive trends in their data center and other core businesses. He also explains that they feel strong about Q3 and have regained momentum, especially in their short-cycle businesses. Despite revenue pressure in China, they are expecting a strong performance in other regions. Overall, they are maintaining their guidance for the balance of the year.

The speaker discusses the expected performance for the second half of the year, including the need for acceleration in China and growth in the residential business. They also mention the switch to a new refrigerant and the need for improved service growth to achieve the high end of their guidance. They provide an update on deal timing and mention making good progress in non-core businesses. The speaker also addresses a warranty add-back in products and the implications for low-double digit organic growth in the fourth quarter to reach the mid-single digits for the full year.

The company is facing a global product quality issue that requires a remediation plan to address a recently identified firmware issue. The company is currently testing the firmware update and will announce when the remediation is complete. There have been no reports of injuries or damage related to the issue. The company expects higher single-digit growth in the fourth quarter, not low double-digit growth as previously mentioned. They are not planning to change their approach with JC Capital, a tool used to strengthen relationships with customers. They had a strong start to the year in terms of trade working capital.

The speaker discusses improvements in receivable management and inventory management, including a five-day improvement in the cash collection cycle. They mention maintaining an 85% free cash flow conversion despite investing in organic growth opportunities. The speaker then addresses a question about the correlation between the APAC numbers and applied and fire and security, stating that they are looking at each domain and differentiating their approach to capture secular trends around data centers and key end-markets based on their backlog and conversion.

The company is seeing a decline in the construction market, particularly in the commercial sector, but is confident that their strong pipeline and differentiated solutions will lead to positive orders and revenue by the end of the year. They are also well-positioned in the data center market, with investments in cooling technologies and partnerships with key clients.

The company is partnering with technology companies to understand how to deploy their cooling technology in data centers. They are investing in innovation and capacity to meet the increasing demand for their solutions. They are also providing a full range of solutions including air handlers, craws, and controls. The data centers of the future will require a wide range of cooling solutions, and the company is working closely with data center operators to differentiate their solution and meet the demand. Their orders in the first half of the year have already exceeded their projections for fiscal year 2023, and they have a strong pipeline for future growth.

The company has been increasing its capacity to meet the growing demand and is confident in its ability to continue this trend in the future. They are currently addressing a quality issue but do not expect it to have a significant impact on their operations. The implied growth mentioned earlier was for the fourth quarter. The company's global products saw a mid-single-digit decline in applied products and a mid-teens increase in light commercial products, which may be due to challenging comps from the previous year.

Oliver, speaking on behalf of the company, discusses the strong growth in applied volume and pipeline due to addressing secular trends in the data center and industrial expansion, as well as sustainability. The company is positioned to continue this trend. In response to a question about second half assumptions, Marc explains that the segment margin is expected to be around 17.5% in Q4, compared to 14.5% in the previous quarter. This is driven by improvements in the mix of the service business, which is more profitable than the system business.

The company is seeing an increase in volume in both their residential and book-to-bill businesses, which has led to improved absorption and productivity in manufacturing. They have also addressed their base cost and are comfortable with their current position. For the full year, they are expecting a mid-teen negative growth in Asia Pacific, but sequential growth in the fourth quarter will help achieve their weighted average performance. The company expects $2 billion in data center sales by 2023, with a significant pickup already seen this year due to their cooling technologies.

The company is working with hyperscalers and colos to provide integrated solutions, which has resulted in an increase in orders for air handling, craws, building controls, and fire services. They expect to see further growth in services in the second half of the year, as they were previously pacing high-single digits before a cyber incident set them back in the first quarter. They are regaining momentum and executing well on their strategy globally.

The company is focused on becoming a commercial solution provider and leveraging their entire installed base to deliver differentiated outcomes for their customers. North America was the most impacted region, but they have seen progress and expect to see strong service growth in the future. Orders and growth in EMEA/LA and APAC have already recovered and are expected to accelerate, while in North America, orders were up 50% in HVAC applied and controls, with a strong pipeline for future orders.

Andrew Kaplowitz asks George and Marc about their progress in improving margins in EMEA/LA and their confidence in reaching double-digit margins by the end of the year. Marc responds by saying they are pleased with their performance and have made rapid progress due to their transformation and application of an end-to-end operating model. He also mentions two strong tailwinds in the region and their ability to achieve and maintain double-digit margins by the end of the year. Andrew then asks George about their pipeline of opportunities in China and whether they are undergoing a transformation from traditional to non-traditional markets.

The speaker, George R. Oliver, is confident about the company's sales recovery by the end of the year, despite a tough comparison to last year's ramp up. He explains that they are broad-based in all end markets and have a strong pipeline and conversion rate. He also mentions a $33 million product quality charge and clarifies that it is only affecting a portion of their product portfolio.

The CEO and CFO of Johnson Controls discuss the impact of a faulty sensor in their fire detection business and the estimated cost of remediation. They also mention the benefit of unwinding their factoring program and the expected improvement in Global Products margins in the second half of the year. They attribute the previous year's tough performance to supply chain disruptions.

The company experienced a shortfall in orders due to disruptions, but they have now returned to normal lead times and are seeing good flow of orders. They have also improved productivity and taken out significant G&A costs. The negative mix in the quarter came from volume challenges in APAC, but the overall mix is neutral to margins. The Q4 guidance may seem lower due to fluctuations, but the company is expecting high-single digit organic growth.

Marc Vandiepenbeeck discusses the company's projected growth for the year, stating that they are aiming for a 10% growth rate in Q4. He clarifies that the goodwill charge in the quarter was due to an impairment in their subscriber business, caused by the Argentinian Peso. The impairment is non-cash and will not affect their ability to deliver free cash flow for the rest of the year. Vandiepenbeeck also mentions the upcoming PFAS settlement, which will be paid in two installments and may involve negotiations with their insurers for recovery of cash.

The speaker discusses the company's significant insurance with 20 insurers and their efforts to recover a material portion of the settlement. They are unable to give an exact timeline for the recovery. The next question is about the potential divestments, and the speaker declines to speculate on the level of interest from potential buyers. They mention optimizing shareholder value and returning proceeds to shareholders. The divestiture will require action around base cost of operating, and they have already started planning for this. The speaker is unable to provide a timeline or tax basis for the assets, as it depends on the structure of the divestiture.

The speaker is responding to a question about the breakdown of products and services offered by JCI in the data center industry. They estimate that about two-thirds of their offerings are related to cooling technologies, while the remaining third includes air-handling, fire suppression, and security systems. They also mention that their engineering and product offerings are well-suited for the complex needs of data centers.

The speaker, Oliver, discusses the strong service and support capabilities of their company in relation to the installation of equipment across different domains. They see significant potential for deploying their system to support large operations and plan to provide targets for reset working capital metrics in the future. Another speaker, Marc, mentions that they are still early in the process but expect to give a strong view on next year's resources and long-term algo. A question is asked about labor inflation and how it may affect contract structures, to which the speakers do not provide a direct answer but mention their clean balance sheet.

The speaker is asked about resetting the contract structure to adjust for higher inflation and labor costs. The speaker responds by saying that they have built robust pricing and costing strategies and are factoring in higher inflation in their long-term planning. They are also focused on delivering stronger margins in their solutions business. In terms of bookings, the data center market is doing well, but the company is also seeing broad-based growth in other markets.

The applied business of the company is focused on technology, with a portfolio of water and air cooled chillers, Silent-Aire packaged cooling solutions, and addressing sustainability goals for customers. The company is seeing growth in various markets, including data centers, industrial refrigeration, education, and government. The company has been investing in technology and has seen success in applying it to different verticals. There may be further investments in product development and capacity in the future.

George R. Oliver discusses Johnson Controls' reinvestment and capacity expansion in the data center space, which has positioned them as a significant leader in the industry. They have been strategically engaged with key players and are prepared to support their future buildouts. This is all part of Johnson Controls' strong foundation of operational excellence and value creation framework.

The company is confident in their ability to accelerate and create returns for shareholders based on their Q2 results and strategy. They believe they are capturing trends in sustainability and healthy buildings and will continue to create value for shareholders. The call has concluded.

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