The Johnson Controls Third Quarter 2024 Earnings Conference Call began with an introduction from the operator and a welcome from Jim Lucas, Vice President of Investor Relations. The call featured George Oliver, Chairman and CEO, and Marc Vandiepenbeeck, CFO, who discussed the company's fiscal third quarter results. These results exceeded expectations, with 3% organic sales growth and a 150 basis points increase in segment margin, surpassing the company's guidance. The call also mentioned forward-looking statements and non-GAAP measures, with further details available on the company's website.

Johnson Controls is proud of their strong financial performance in the past quarter, with a significant increase in free cash flow and 9% growth in their service sector. They also saw a 5% increase in orders, with a strong demand for their data center solutions. The company has made investments in this area and has a leading position in North America, with plans to expand internationally. They also announced two divestitures and the initiation of their CEO succession plan.

The Board has begun the search for a new CEO and the current Chair will remain to assist with the transition. Patrick Decker has been appointed to the Board and the company's guidance for adjusted EPS has been tightened. The company has also made progress in simplifying its portfolio, most recently by selling its Residential and Light Commercial HVAC business to Bosch for $8.1 billion.

Johnson Controls is expecting to receive $5 billion in net proceeds from the sale of their Residential and Light Commercial HVAC business and Air Distribution Technologies business. These sales will simplify their manufacturing footprint and allow them to focus on higher growth areas such as commercial HVAC, fire, controls, security, and services. This will result in a more focused operating model and increased exposure to the fast-growing data center industry.

Johnson Controls is confident in their portfolio transformation and expects to see an increase in demand in their key vertical. They have a focused business model that aims to deliver consistent outcomes for customers and create value for shareholders. By serving customers over the lifecycle of a building, they can provide safe, sustainable, and cost-effective solutions. This leads to long-term customers and potential for significant revenue growth. Their local and centralized teams work together to ensure operational excellence and grow their installed base.

The company is focused on building strong relationships with customers during system deployment to drive recurring revenue. They have improved operational execution and use data from connected equipment to detect issues and provide cost savings for customers. They also work closely with building owners to plan for building retrofits and sell additional services. This approach has led to significant margin expansion and the company is committed to delivering comprehensive solutions and value for all stakeholders. In the first quarter, total revenue grew 3% organically, driven by strong service growth, while the System business in China remained weak.

The company's segment margin expanded by 150 basis points to 17.9%, driven by strong productivity and the conversion of higher-margin backlog. Adjusted EPS increased by 11% and exceeded guidance by $0.04, with operations contributing $0.18 of the growth. The company also saw improvements in cash flow and net debt, and organic sales in the Global Products business grew by 3%. Commercial HVAC was a bright spot, while Fire & Security declined. Global Residential grew mid-single digits, with strong growth in APAC offsetting declines in Europe.

The Global Ducted Residential business saw growth of 10% due to improvement in the North America residential market. Adjusted segment EBITDA margin also increased by 240 basis points. Building Solutions had a 5% increase in order momentum, with 12% growth in service orders and 2% in systems orders. Organic sales increased by 4%, with backlog remaining at record levels. In North America, orders increased by 5% and sales were up 8%, with strong growth in HVAC & Controls. EMEA/LA saw an 11% increase in orders.

In the fourth quarter, the company saw strong growth in controls, fire and security systems, with a focus on higher quality growth and improved cash flow conversion. The EMEALA region saw 8% organic growth, driven by a 15% increase in the service business. In Asia Pacific, orders declined due to a focus on more attractive markets, but the service business saw high single-digit growth. Overall, backlog and sales declined due to ongoing weaknesses in China. The company remains confident in continued margin improvement and has solid momentum going into the fourth quarter.

The company's margin backlog is at a historical level and their Global Products business has stabilized and returned to growth. They anticipate 7% growth in the fourth quarter, driven by strong demand in North America and EMEA/LA. They expect segment EBITA margin to be approximately 19% and adjusted EPS to be in the range of $1.23 to $1.26. For the full year, they are tightening adjusted EPS guidance to a range of $3.66 and $3.69, with organic sales expected to grow approximately 3%. They are also seeing improvement in working capital metrics and strong free cash flow performance. The company has recently announced the sale of their Residential and Light Commercial HVAC business, which represents 20% of the sale and the majority of their previously highlighted non-core portfolio. They will report this business as discontinued operations and provide fiscal year 2025 guidance on a continuing operation basis.

The company has taken steps to address the dilution to EPS caused by two transactions, including share repurchase, debt pay down, and restructuring. They have transformed into a comprehensive solution provider for commercial buildings and have simplified their portfolio through divestitures. They expect sustainable margin expansion and double-digit EPS growth, and the CEO is excited for the future. The first question in the Q&A portion of the call is about the impact of data centers on backlog.

The speaker is discussing the growth in backlog and the role of data centers in driving this growth. They mention that data centers currently make up 10% of sales and will continue to be a significant source of growth in the future. The backlog is expected to shift towards a higher mix of data center projects over time. The speaker also mentions that the backlog is expected to result in strong double-digit growth in 2024.

The speaker is discussing the ratio of service and digital revenue compared to traditional OE revenue, which they have been working on for several years. They believe this ratio is achievable and based on real data from customers who have installed base connectivity and are using data for additional services. The revenue multiplier varies based on market vertical and product line.

George Oliver, CEO of the company, believes that it is important for the company to focus on outcomes rather than just traditional services. The company's conversion to OpenBlue technology and data is expected to significantly reduce attrition and build a strong base for future service growth. When asked about the company's overall top line growth outlook, Oliver stated that the 3% growth rate for the year is abnormal due to cyber headwinds in the first quarter. He expects the company's longer-term algorithm to be closer to mid-single digits, driven by mid- to high-single digit growth in the service business and mid-single digit growth in the systems business.

The fundamentals driving a better mix for the company vary depending on the product line, with HVAC benefiting from decarbonization and data center growth. There has been some softness in the Fire & Security market, but there are signs of recovery and the company expects mid-single-digit growth for that business. The CEO, George Oliver, will be stepping down and a search for his successor is underway, with both internal and external candidates being considered. Patrick, who has been appointed to the Board, may also be a potential candidate for the CEO position.

The company has seen good free cash flow in the third quarter and expects it to continue in the fourth quarter. Working capital has improved and the company has invested in expanding capacity and its ERP system. They believe they can exceed their 85% conversion rate for the year.

The company has reached a settlement regarding PFAS liability and expects to continue improving its performance. There may be some noise in the earnings due to the transition to disc ops, but the overall algorithms are expected to hold through. There was a significant gain from insurance recoveries related to the AFF settlement and the company will continue to address cash outflows related to the settlement.

The company has discontinued the production and sale of fluorinated firefighting foams by June 2024 and has received $351 million from insurers for related claims. The company expects to receive more payments over the next few quarters and believes they are well covered by insurance. The next quarter's guidance will include discontinued operations. The company will provide more detailed guidance in the next quarter.

The speaker discusses the company's positive outlook, citing sequential improvement and divestment plans. They mention the success of improved processes in the Global Products business, leading to increased margins and productivity. They also note that the business will return to a more regular seasonality in 2025. The next question asks for details on the expected proceeds and impact of the ADT exit, as well as any updates on destocking and its potential impact on Global Products in 2024.

The company has not disclosed the financial terms of a recent business transaction, but it is part of their simplification journey and will have an immaterial effect on the overall company after buying back shares. They have also reduced their manufacturing footprint and SKU complexity. The company expects stock levels to return to normal and they have improved their productivity and lead times. They are confident in their ability to pick up volume and grow with less inventory.

Jeff Sprague from Vertical Research asks about the portfolio changes and the impact on the company's 2024 base. George, who is leaving the company, responds that the changes will not affect their current guidance. They plan to return most of the proceeds from the transaction to shareholders through a share repurchase program, similar to a past divestment. The timing of the closing will determine how they address their leverage, which could be within the next 12 months or sooner.

The speaker is responding to a question about the company's performance in the Asia Pacific region. They mention that the recovery in that region has been slower than expected, leading to a tighter revenue growth forecast for the year. However, they also note that there has been sequential improvement and expect this trend to continue in Q4. They anticipate a challenging quarter in Q4, but see the business recovering in 2025. The speaker also mentions that the company's order intake in Q3 was a good improvement from Q2 and they expect positive momentum to continue into 2025.

The company has been improving its backlog and redeploying resources in the Chinese market, but remains disciplined in dealing with jobs and counterparties. The operating model has been refined in North America and is being applied in EMEA/LA to focus on markets with higher margins and stronger service attach. This has led to modest growth in the system business and larger growth in the service business. The operating model has been fully deployed in North America and is being implemented in EMEA/LA and Asia.

The speaker mentions that the market has moved quickly and they are pivoting to adapt. They also mention that APAC is pivoting quickly and the operating model is maturing globally outside of North America. The next question asks about the economics of the divestiture of air distribution technologies, to which the speaker responds that the financial terms are not disclosed but it is a smaller transaction. They also mention that they are looking at investing in liquid cooling technologies for data centers as it aligns with their current portfolio and there is a growing opportunity in this area.

The CEO search at the company is focused on finding someone with a strong background in industrial and technological expertise to complement the company's product, service, and solutions offerings. The recent addition of Patrick to the board has brought in a world-class executive with experience in transforming a similar company, which aligns with the company's goals of simplification and succession.

The CEO of Johnson Controls discusses the company's strong operating and domain experience and their ability to lead the company to the next level. The company's orders have been affected by lumpiness in the data center vertical, but they expect to see increased orders in the future due to a strong pipeline and multiyear agreements with customers. They do not provide specific guidance on orders.

The speaker thanks the Johnson Controls team for their hard work and dedication, and expresses confidence in achieving a 19% EBITA margin in the fourth quarter due to strong visibility and sequential improvement.

Johnson Controls has successfully transformed into a pure-play provider of comprehensive solutions for commercial buildings, positioning the company for long-term sustainable growth. The company's strategy has already shown positive results and the CEO is excited about the future. The conference call has now concluded.

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