Operator:

Good morning, and welcome to the Johnson Controls Third Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note, today’s event is being recorded. I would now like to turn the conference over to Jim Lucas, Vice President, Investor Relations. Please go ahead.

George Oliver:

Thanks, Jim, and good morning everyone. Thank you for joining us on the call today. Let’s begin with Slide 3. We were very pleased to deliver fiscal third quarter results that exceeded almost all of our targets. Organic sales growth was 3%, which was in line with our guidance of low single-digits. We delivered a robust 150 basis points of segment margin expansion to 17.9%, which exceeded our guidance of 17%. We are also proud of our free cash flow generation during the quarter, which was more than $500 million higher than the comparable period one year ago. Service led the way, once again, with 9% growth, which continues to validate our transformation efforts. It is encouraging as we continue to build momentum toward meeting our full year financial objectives. Orders grew 5% during the quarter. We expect some quarterly fluctuation in our order pattern, given the strong demand for our data center solutions. With the investments we have made over the last few years in technologies for data centers, the launch of a dedicated organization and our one-of-a-kind offerings, we remain well positioned in this fast-growing segment, with solutions that are clearly resonating with customers. We have built a leading position in data centers in North America, due to a unique and compelling customer value proposition. As our customers expand internationally to meet the rapidly growing demand for data centers, we grow alongside them as they choose to partner with Johnson Controls around the world. Our backlog grew 10% in the quarter, as we continue to see demand for our solutions, both systems and services. The growth in orders and backlog give us increased confidence in our ability to continue delivering sustainable long-term growth. As part of our ongoing business transformation, we announced two divestitures, our Residential and Light Commercial HVAC business and our Air Distribution Technologies business. These two transactions represent roughly 20% of current sales. At the same time as our earnings results, we announced this morning that I informed the Board it is time to initiate our CEO succession plan. Following recent significant milestones in our portfolio transformation and as we move to the next phase of growth, I believe that now is the right time to begin the process of identifying the next leader the new Johnson Controls. Accordingly, the Board has engaged a nationally recognized search firm and begun a comprehensive search for the company's next CEO. Once my successor has been named, I will remain Chair of the Board to help facilitate a smooth transition. I am confident in our position as Johnson Controls enters its next chapter, and I remain committed to supporting the full team as we work to ensure Johnson Controls realizes its full potential. Along with the initiation of the company's succession plan, we also announced that as part of our ongoing Board refreshment efforts and following a constructive dialogue with Elliott Management, Patrick Decker has been appointed to our company's Board of Directors effective immediately. Patrick brings experience to our Board, and having led a transformation of his prior company, and his appointment reflects our commitment to continuously refreshing our Board to ensure the skills and experiences of our directors appropriately reflect our ongoing transformation. Lastly, before moving to the next slide, we are tightening our full year adjusted EPS guidance to a range of $3.66 to $3.69 from a range of $3.60 to $3.75. Marc will give additional details later in the call. We have made tremendous progress on our business transformation into a simpler, higher-growth company, positioned to deliver more consistent, predictable results. Turning to Slide 4. We have made good progress on simplifying our portfolio. Most recently on July 23, we reached an agreement to sell our Residential and Light Commercial HVAC business to the Bosch Group in an all-cash transaction. The transaction includes 100% of our North America Ducted business and our 60% interest in our Global Residential joint venture with Hitachi. The total transaction is valued at approximately $8.1 billion, which results in approximately $6.7 billion of consideration to Johnson Controls. We are expecting net proceeds of approximately $5 billion after tax and transaction expenses, the majority of which will be used to accelerate returning capital to shareholders and also address leverage. The Residential and Light Commercial HVAC transaction is expected to close in approximately 12 months, subject to required regulatory approvals and other customary closing conditions. We expect to report the operating results of the business in discontinued operations beginning in the fiscal fourth quarter of 2024. In addition, on June 18, we agreed to sell our Air Distribution Technologies business to Truelink Capital. The sale of Air Distribution Technologies is also an important step in simplifying our manufacturing footprint, with the elimination of nearly 30% our manufacturing facilities. Taken together, these two transactions represent significant milestones in our portfolio transformation. We are now even better positioned going forward as a pure-play provider of comprehensive solutions for commercial buildings. Our efforts in turning into results and the value of our transformation is coming into focus. Slide 5 presents a pro forma look at the new Johnson Controls, representing composition of our company going forward. Following completion of the two divestitures described earlier, we will be a simpler, higher growth company focused almost exclusively on our engineered solutions offerings. These solutions include commercial HVAC, fire, controls, security and services, forming the smart building trifecta of energy-efficient equipment, clean electrification and digitalization. The benefits of our transformed portfolio include an enhanced margin profile, less complexity and a more focused operating model. In addition, these divestitures further increase our exposure to the fast-growing data center vertical to nearly 10% of sales from 7% as of fiscal year 2023. We expect this percentage to further increase over time given the robust demand we are seeing in this key vertical. While we will continue to look at opportunities to further enhance the portfolio, we believe that the largest elements of the portfolio transformation are now complete. Turning to Slide 6 to discuss our focused business model and how we plan to deliver more consistent, predictable outcomes for our customers and maximize value for shareholders over the life cycle of buildings. Johnson Controls has a unique value proposition for our customers that directly translates to shareholder value creation. Our ability to serve our customers over the lifecycle of the building allows us to deliver safe, healthy and sustainable buildings. As a simpler and more streamlined company, we are now better positioned to leverage our integrated domain expertise, coupled with our extensive branch network to significantly expand margins. Our journey with the customer provides system and service solutions that maximize the opportunities around the lifecycle of the asset, delivering outcomes to the customer that save energy, reduce emissions and optimize building lifecycle costs, all while improving the overall occupant experience. Most importantly, our ability to drive direct outcomes ensures that we have long-term customers that use several of our services, which creates a compounded impact for the customer and for our shareholders. In fact, $1 of systems revenue has the potential to generate up to 10 times the revenue over the lifecycle of the solution. It all starts with our local teams supported by our centralized engineering teams to provide operational excellence throughout the construction of the new building, starting with the product and technology development through the installation of the new systems. This grows the installed base. Throughout system deployment, our teams are building customer intimacy and confidence in our team to ensure we are creating linkage with our service offering. We have redoubled our focus to build this initial relationship and greatly improved our operational execution over the past few years to drive an enhanced margin profile and grow service. Simply put, service and maintenance delivers recurring revenue for us, and this provides resilient revenue throughout economic cycles. Moving to Parts & Repairs. Our service organization is digitally enabled and unlocks additional value by collecting data from the connected equipment within the building. Leveraging this data lets us detect issues before they occur, leading to reduced downtime and cost savings for the customer. The last part of the cycle is the building retrofit, including the monetization and technology refresh of existing systems. We work closely with the building owner to discuss lifecycle planning and the prioritization of the building needs. We have found this to be the perfect opportunity for Johnson Controls to sell additional domains. By compounding the effects of this cycle, we are able to deliver solutions to our customers, leading significant margin expansion. The ongoing transformation of our portfolio into a quality pure-play provider of comprehensive solutions for commercial buildings means that we can service these buildings to deliver outcomes that matter. Accordingly, we are extending our journey with our customers, while capitalizing on attractive opportunities in the market. Together, this delivers value across our stakeholder base for customers, employees and for our shareholders. With that, I'll turn it over to Marc.

Operator:

[Operator Instructions] Today's first question comes from Scott Davis at Melius Research. Please go ahead.

George Oliver:

Thanks, Scott.

George Oliver:

Yes. Let me give you a framework, and then Marc can talk a little bit more about the -- how it's being built in backlog and converting. We're already now -- we said in the prepared remarks that we're about 7% a year ago. When we look at the business today, it's about 10% of sales on a pro forma basis. It continues to be very strong. We're working across all of the hyperscalers colos. We've got a global team now, making sure that our leadership technology and all of our domains, that we're positioned now to be able to provide the best solutions globally. So that pipeline is continuing to build. And I think as we think about our orders and backlog, certainly, this is going to be a higher mix of backlog playing out. In many cases, it is a multiyear backlog. And for us, we look at the next 12 months as far as how we book the backlog. And then as we think about the growth, Scott, going forward, this is going to be strong double-digit growth in 2024. It's going to be, for this year, a strong double-digits and continuing to accelerate over the next few years given the work that we're doing. Marc, do you want to talk about the mix a bit?

Scott Davis:

Okay. That's helpful. And I'm just looking at this Slide 6 and the 10:1 numbers on service and digital versus the OE side. I don't remember seeing that before. Maybe you've put it up, and I just have missed it. But is this kind of a theoretical number? Or you actually have expectation that these are achievable type ratios going forward?

Marc Vandiepenbeeck:

And that revenue multiplier evolves based on market vertical and product line. So -- we've tried to lay that out on that chart. HVAC is a multiplier that's a little lower than 10 turn, while you go to Security Controls and then Fire provides the higher level of multiplier over the life cycle of the product. So depending on the market vertical, depending on the product, that multiplier expands, but this is a real experience data that we've looked through over the past few years, and we believe we can continue to deliver that that through operating model we've now implemented.

Operator:

Thank you. And our next question today comes from Julian Mitchell at Barclays. Please go ahead.

George Oliver:

Thanks, Julian.

George Oliver:

Great question. So let's start first with the 3% for the full year. Really, we had a lot of cyber headwind in the first quarter that if you did somewhat that growth rate year-on-year. So I'll tell you for longer-term algorithm, 3% is absolutely what absolutely what -- not our expectation would be. It'd be closer to mid-single digits, and that's really on the basis of a mid- to high single-digit growth in our service business and a mid-single-digit growth into our systems business overall. And so those fundamentals driving a better mix overall are different depending on the different product line. And right now, HVAC is benefiting from a lot of tailwind coming from decarbonization, data center and other market verticals that have really propped up the growth there. And you're right. We've seen a little bit of softness overall in the market on Fire & Security this year. We are seeing, particularly in our book-and-bill business, some sign of recovery, and we think can maintain that mid-single-digit growth over time for that business. As the service and recurring component aspect of that business will continue to be higher than mid-digit target.

Nigel Coe:

Hi. Thanks, good morning. George, you had one hell of career, so congratulations and good luck with your next steps. Yes. So just on that topic, do you have a time frame in mind for this succession? I know you obviously want to find the right person to do search. But any timeline? And then maybe just touch on Patrick's appointment to the Board. Obviously, you know Patrick very well. What sort of skills kind of made him the right person to the Board? And I wonder if maybe he's under consideration for the next year?

Operator:

Thank you. And our next question today comes from Steve Tusa with JPMorgan. Please go ahead.

George Oliver:

Thanks.

Marc Vandiepenbeeck:

Great question, Steve. So you're right, we saw a really solid improvement year-on-year, and the momentum year-to-date has been quite strong. We're seeing working capital fundamentals continuously improving and continue to trending very positively. The work we've done on lowering inventory and improving our SOE S&OP process have allowed us to really drive overall more predictability to the working capital. As far as that 85-plus conversion for the year, we continue to invest aggressively in parts of the market that are attractive to us, particularly increasing the capacity in our data centers as we expand more lines in our factory in North America and elsewhere as well as continue to involve the investment in our ERP landscape. We do believe that the momentum allows us to probably do better than 85%. And structurally, in over term, we'll be able to continue to improve on that. But as of today, I'll tell you, 85 plus is where we're comfortable.

Marc Vandiepenbeeck:

Yes, we'll start providing guidance next quarter on continued operation you're right, there's going to be a little bit of noise, but we are very comfortable that the overall algorithms we've committed to for next year will hold through as we navigate to that continued operation. As you know, some of that residential, like commercial business had solid cash flow. But the momentum that we see in our core business, thanks to that singular operating model, is really providing strong tailwinds that will allow you to continue to improve on our free cash flow conversion and our overall free cash flow performance.

Noah Kaye:

Thanks. So in the release, there's a call out of the gain, the significant gain on some of the insurance recoveries from that AFF settlement. Can you just walk us through where your expectations are in terms of actual cash outflows relative to the $750 million settlement that was previously disclosed now that; you've gotten some benefit from insurance and maybe talk through the timing of those outflows?

Marc Vandiepenbeeck:

Yes. So from a timeline, no, we took the charge in Q2 for $750 million. That's part of the settlement. And in the third quarter, we had received from the first few agreements with a venture of about $351 million. So we recovered almost half right off the bat. And those payments will go back to the water provider according to our agreement. There's more payments that are going to come and come in over the next few quarters, and we believe that we're well covered from an insurance standpoint, and the net effect overall will be de minimis. The timing between recoveries and we see -- in payments may slip from one quarter to the other. But overall, we think we're in good shape there.

Joe Ritchie:

Thanks and good morning, everybody. Congratulations, George, on the succession announcement. Marc, I want to -- just one quick clarification on the 4Q guide. So as discontinued ops out of the 4Q guide? And if so, what is the impact of that? And then going forward into fiscal year 2025, how should we think about GP margins at this point? You guys put up a great number this quarter. Just trying to understand kind of like the puts and takes of the moving pieces with some of the portfolio divestitures.

Operator:

Thank you. And our next question comes from Joe O'Dea with Wells Fargo. Please go ahead.

Marc Vandiepenbeeck:

Yes. Let me start with ADT, and then I'll give some color on destock. But George, you can add more. So that business, we signed on June 18, we expect to close the transaction actually this quarter. We've not disclosed the financial terms of the business because it is a smaller transaction and really not that material. I think what's important to remember is this is really part of our simplification journey. We really eliminating, I'm sorry, about 30% of our manufacturing footprint, but we're also eliminating a whole series of SKU and complexity. This is a very commodity business, and accessory business and it's evolved a lot over the past decade since we acquired that business. But it's an important step in our journey as a prepaid provider. And the net effect of that divestiture after we buy back some shares is immaterial to the overall company. On destocking…

Marc Vandiepenbeeck:

On destocking, I think we see a stock level getting back hopefully to normalization. There are some pockets of the market that are still and simplifying a little bit their stock level. But overall, I think that for most part, that large destocking is behind us. And we feel very confident, particularly when product have been refreshed that we have a new norm and a new standard on our stock levels, and the distribution seems to be holding up pretty good.

Operator:

Thank you. And our next question today comes from Jeff Sprague at Vertical Research. Please go ahead.

Marc Vandiepenbeeck:

Got you, Jeff. So on disc ops, this is not changing any of our commitment and is actually -- we feel very comfortable with where we've guided from a full portfolio as well as where we think the continued operating business will go. As far as the use of proceeds and what we plan on doing, so we expect the transaction to close in next 12 months. And we plan to return most of the net proceeds to shareholders through a share repurchase program, very similarly to what we did a few years ago when we divested our Battery Power Solutions business. As far as addressing our leverage, it will very much depend on the timing of the closing. We're thinking 12 months, but it could go three months either way. And so we could easily see ourselves growing into our existing debt level and not have to redeploy much or we could see ourselves in the transaction close much, much quicker than we anticipating having to address some leverage at that point. Our goal is to remain committed to our investment-grade rating, and we'll work with the agency, depending on the timeline as to what's most appropriate to be able meet that commitment. And I'll leave it at that.

Andy Kaplowitz:

Good morning, everyone. George, congratulations.

Andy Kaplowitz:

Could you update us on what you're thinking regarding the ability to start growing backlog in earnings in Asia Pac? And what your expectations are for Q4 bookings and backlog? Backlog was up slightly sequentially in Q3. And I know you've talked about expecting a bigger uptick by the end of year, while telling us that China is still muted. So do you still see bookings beginning to accelerate in Q4? And do you still see recovery in that region in FY 2025?

Operator:

Thank you. And our next question comes from Andrew Obin with Bank of America. Please go ahead.

George Oliver:

Thanks, Andrew.

George Oliver:

Great question. So the discipline that we've put in place is really part of our overall operating model. And operating model really started as we refined it in North America a couple of years back. And you can see North America really benefiting from that discipline over time and that focus. There's really two things that are happening. We centralize more the decision-making process as which vertical and which markets we really approach. And we really focus that commercial organization towards those parts of the market where we see a very much attractive margin as we can sell value and we have customers that are interested in our product and see value over that cycle, but also parts of the market where you see a stronger service attach. And when you do that, you're able to actually drive modest growth in the system business but a much larger growth in our service business as that service attach yields better outcome overall. So that's that operating system has been really fully deployed in North America. That's probably where the maturity is at the highest. EMEA/LA still going through that. I see EMEA,LA closing the gap with its regional peers. Asia had a strong operating model. I think the market moved on us very fast, and we are repivoting as quick as we can. But you'll see, as I mentioned on the prior question, you'll see APAC repivoting very quickly, and that operating model maturing across the board outside of North America, including in EMEA/LA.

Deane Dray:

Thank you. Good morning, everyone and add my congrats to George.

Deane Dray:

I don't think you've given much detail here, but could you share us with any of the economics of the divestiture of air distribution technologies?

Deane Dray:

Got it. Thank you. And then second question, George, there's been a lot of interest in your peers regarding not just data center, but liquid cooling technologies and data center. You've seen your peers make direct investments in technologies, businesses. Is this something that you all are looking at as well? You've got certainly components that are part of these technologies, but there's a big developing opportunity high growth, and it seemed like it would be a good fit.

Operator:

Thank you. And our next question today comes from Gautam Khanna with TD Cowen. Please go ahead.

George Oliver:

Thanks. Good morning, Gautam

George Oliver:

Well, I mean as we think about the company and the simplification of the company, it's important that we bring a lot of domain expertise and industrial expertise. We're a company that is a product technology company. We're a service company and how we deploy that technology. Certainly, we're solutions in how we actually go to market. So there's a lot of experiences there that we'd be looking for to complement. As we did the Board refreshment with Patrick, just to talk to that a little bit, we are constantly looking for qualified board candidates and how we think about refresh and succession. And Patrick is a fantastic addition, a world-class executive with experience transforming Xylem, and similar experience going from an industrial products company into an advanced technology service solution enterprise. So as we think about CEO succession and the like, obviously, strong operating experience, strong domain experience and the ability to be able to take the incredible foundation that we've built here to the next level, leading the new Johnson Controls.

Nicole DeBlase:

Yes. Thanks. Good morning, guys. And I'll add my congrats to George on the announcement today. Just wanted to ask about orders. So you guys mentioned lumpiness around data center may be contributing to the 5% organic growth this quarter. I guess how do you think about the potential opportunity for order acceleration from here based on what you're seeing in the pipeline today as we try to calibrate expectations for the next few quarters? Thanks.

George Oliver:

And I think just to add on to that, when you look at the value proposition that we bring to data centers with our portfolio multi-technologies, in the way that we've been building out capacity to be able to serve our customers as they achieve their growth, these become multiyear agreements. And so as we're positioning, you can get very large orders multiyear. And that's what we're seeing as we're partnering and making sure that we're positioned to get more than our fair share bringing our technologies and capabilities with the full solution to our customers globally.

Brett Linzey:

Hi, good morning and congrats to George. Just wanted to come back to the fourth quarter guide. So 19% EBITA margin, I wanted to understand your level of visibility there. Is this something that you're converting out of backlog and you have line of sight to? Just any color towards that 60% incremental margin.

Operator:

Thank you. And this concludes our question-and-answer session. I'd like to turn the conference back over to George Oliver for any closing remarks.

Operator:

Thank you, sir. Ladies and gentlemen, this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful rest of the day.

Operator:

Good morning, and welcome to the Johnson Controls Second Quarter 2024 Earnings Conference Call. [Operator Instructions] Please also note today's event is being recorded.

James Lucas:

Good morning, and thank you for joining our conference call to discuss Johnson Controls' Second Quarter Fiscal 2024 Results. The press release and related tables that were issued earlier this morning as well as the conference call slide presentation can be found on the Investor Relations portion of our website at johnsoncontrols.com.

We have intentionally positioned the company to benefit from this emerging trend due to our relentless innovation efforts and inherent strategic advantages. These include:

one, creating leading technologies around a broad range of air-cooled and water-cooled chillers to support the exponential growth in cooling demand. Two, investing in R&D teams and world-class test laboratories to design, build, test and demonstrate performance of equipment over the entire data center operating envelope. Speed is the key, so we are investing to accelerate the pace of innovation.

Operator:

[Operator Instructions] And today's first question comes from Steve Tusa with JPMorgan.

Marc Vandiepenbeeck:

Yes. So in terms of push from Q1 to Q2, we had some orders that did slip due to the cyber incident and the recovery in the momentum. I wouldn't say it's material in terms of what pushed from 1 to 2. There was some smaller ones. But the strength of our orders in Q2 is really coming from the fundamental positive trend we're seeing in our data center business and some other core businesses.

C. Stephen Tusa:

And then lastly, just any updates on deal timing?

Operator:

And our next question today comes from Nigel Coe with Wolfe Research.

Marc Vandiepenbeeck:

So let me start first with the Global Product quality issue, which is really not a warranty issue, it really is a quality issue. The reserve really relates to an anticipated remediation action we need to address in a very recently identified firmware issue within some of our legacy products that are sitting in the field. We are currently testing that firmware update within those device, and we are developing a remediation plan for this particular issue, and we'll announce when we are done with the full remediation.

Nigel Coe:

Yes. The low double-digit implied organic sales growth in the fourth quarter.

Nigel Coe:

Okay. And then my follow-up question is on the factoring change. Obviously, I think most of us agree that good news to try and clean up the kind of cash generation. Just wondering what other measures you are considering to improve the quality of the free cash flow? And in particular, is there any change in the way that you're sort of approaching the market via JC Capital?

Scott Davis:

I just -- I'm looking at the APAC numbers and applied obviously down a fair amount. But fire more flattish -- Fire & Security more flattish. I'm just -- to me, it's -- I would have expected those to be a little bit more correlated. So was there more project selectivity on the applied side? Was that what you were saying, George? I kind of lost the train of thought there for a sec when you were talking about it.

Scott Davis:

Okay. That's actually really helpful. And then switching over to data center side. I mean where -- I understand your traditional capabilities and then Silent-Aire gave you, I think it was air-handling capabilities at a higher level. Where are you as far as capabilities at chip-level cooling? And is there anything -- any partnerships that you are forming to address liquid cooling?

Joseph O'Dea:

Marc, just a couple of clarifications to start. First, in terms of the quality issue and confidence that there are not kind of additional reserves going forward. Anything from a time line to remediate? And then secondly, just related to your answer to Nigel's question, when you're saying high single-digit implied growth, was that a back half of '24 comment? Or was that a fourth quarter comment?

Joseph O'Dea:

Got it. And then I wanted to ask on Global Products and the applied organic down mid-single digits, the Light Commercial up mid-teens. And when we look kind of a year ago, both had pretty challenging comps. And so just any additional color on the difference in those organic trends in the quarter, regional or otherwise?

Operator:

And our next question comes from Julian Mitchell with Barclays.

Julian Mitchell:

That's a very clear answer. And then just my second question, just to understand that data center exposure a little bit better. I think George, you gave a very clear explanation of the products and the focus points for JCI. But in terms of sort of revenue, the $2 billion of sales you mentioned, George, I think that's a 2023 number, is it? And just to understand maybe any sense of how those sales split across kind of HVAC, BMS and Fire & Security?

Operator:

And our next question today comes from Noah Kaye with Oppenheimer.

George Oliver:

Well, what we need to see is where we were. I mean we were pacing high single digits pretty consistently in the last couple of years when the cyber incident hit in the first quarter, that really set us back -- set the momentum back because it hit a number of our systems that ultimately execute not only from orders, but ultimately, how we fulfill service. So we are regaining the momentum as we said.

Marc Vandiepenbeeck:

Yes. So that 50% was around HVAC applied as well as control for North America, North America in terms of orders this quarter. So a very, very strong momentum. A lot of it came from that data center, some of the key colos and key hyperscale are accelerating their orders. But what's also incredible to see is the pipeline continued to grow even after a lot of orders are coming in. So we think that momentum is going to continue building, and we are very comfortable about achieving those targets.

Andrew Kaplowitz:

George or Marc, can you update us on your progress in terms of improving your margin in EMEA/LA? I know you've talked about all the changes you made in terms of project selection. Would you say your progress in line with what you expected? And what's your confidence level that margin should reach double digits by the end of the year?

George Oliver:

Yes. So a year ago, as we were rebuilding up to the second wave of cyber, there was a hole, and we were rebuilding our volume there and rebuilding inventory. And if you look at year-on-year in Q1 and Q2, there was a ramp last year. And obviously, we have a tough compare to that. What I would tell you is we are broad-based. So we're not just in the commercial resi, but it's we're in broad-based all of the end markets. What I would tell you, market back, we know where the opportunities are, how we're positioning, how we're deploying each of our technologies and differentiating the solutions we go to market. We're back really building, so building not only a very strong pipeline, but we're converting at historical rates as far as how we're converting to orders.

Operator:

And our next question today comes from Joe Ritchie with Goldman Sachs.

Marc Vandiepenbeeck:

On the factoring and the finance charges, yes, the unwind of the factoring will provide some benefit in the balance of the year. What's offsetting part of that is the PFAS settlement. As you know, we are going to settle $750 million for the half, as well as slightly higher interest rate environment than we had originally anticipated. But I think the factoring and the cost benefit that it provides gives us confidence that our guidance is at the right level.

George Oliver:

When you look at Global Products historically, when you're in a more stable environment year-on-year, I mean, last year, we had a tough year because as we were really working down backlog and have built up with all of the supply chain disruption. And then when lead times went back to normal, obviously, we were a shortfall of orders and orders coming in through the year. As Marc said, we're back to normal flow of orders to fulfillment. We've got our lead times down back to where they were. And so we're seeing good flow, right, from market demand, orders, building backlog and then converting.

Operator:

And our next question today comes from Jeff Sprague of Vertical Research.

Marc Vandiepenbeeck:

I mean I would think of Q4 in the teens, 10% of the growth. And I think you're right, there's a step function change between Q3 and Q4 from a growth standpoint. But I don't think it's that challenge if you see the momentum we see in orders.

Marc Vandiepenbeeck:

High single digit to attain the midpoint of where we are guiding. To get to the high end, you would need that 10% growth rate in Q4.

Marc Vandiepenbeeck:

That goodwill relates to an impairment charge we took on our subscriber business. That subscriber business sits within our EMEA/LA segment. And it came really from a combination of small actual result delta versus an internal forecast we had but it was mostly associated over time the effect that the Argentinian peso had in the mix of results of that particular business. Then I'll remind you that, that impairment is noncash in terms of what the charge relate to. And it has absolutely no impact on our ability to deliver free cash flow for the balance of the year.

Marc Vandiepenbeeck:

Yes. The PFAS settlement will be in 2 tranche. The first tranche coming shortly and the second tranche later in the year. I do not want to speculate on the timing of the recovery of the cash from the insurance. I would tell you we have significant insurance with about 20 insurers. We are doing everything we can to recover as much as we can. We have a line of sight of recovering a very material portion of the settlement. But at this stage, I'm not being able to pin down an exact time line on that recovery.

Gautam Khanna:

I had a couple of questions on the divestments. First, I was curious if you could characterize the level of interest from potential seaters. If you could talk about maybe the aggregate tax basis. And if you could also speak to any potential dis-synergies and if you have any quantification of that, that would be helpful.

Gautam Khanna:

Can you speak to the timing or the tax basis of the assets, so we can...

Operator:

And our next question today comes from Deane Dray at RBC Capital.

George Oliver:

Yes, I would say it's about -- it's in the range where about 2/3 would be chillers, and the others would be -- air handling would be crawls, would be fire and security, all of the other systems that ultimately support the deployment of the cooling technologies.

Marc Vandiepenbeeck:

It's absolutely part of the offering and those very complex solutions. We are really set up with our engineering and our product offering to really leverage that market. And that's where we see the pipeline continuously growing as the complexity and the structure of those data center continue to increase.

Deane Dray:

Terrific. And just one last quick one for Marc. I know it's still early, but when would be the earliest we might hear some reset working capital metric targets?

Operator:

And our next question today comes from Andrew Obin with Bank of America.

George Oliver:

No. What I would say is when we went through that high inflationary period, obviously, that exposed a lot of our weakness because we were in a low-inflationary period for so long. We've built very robust pricing and costing pricing, and then from a selling standpoint, focusing on value. And so as we plan long term now, we're factoring in. We're, from a costing standpoint, anticipating higher than level -- higher than the kind of the market forecast on inflation.

Andrew Obin:

Great. And then just a follow-up question. If we look at the bookings on data center, clearly got a lot of attention, growing 50% plus. What's happening? You guys have kindly provided a very nice pie chart of your end market breakout. Can you just highlight what else is doing well? And if there are any headwinds within your key end market verticals on applied?

Marc Vandiepenbeeck:

Commercially, Europe, I made a comment in the opening remarks around industrial refrigeration growing really fast. There's multiple pockets of the market that are growing, probably not as fast as what we're seeing in data center, which is really unprecedented and continue to see that pipeline growing, but we see pipeline growth across the board.

Operator:

And our next question today comes from Steve Volkmann with Jefferies.

George Oliver:

When you look at our reinvestment, and we've been talking about this for multi-years, applied, when we look at our applied cooling, we're a significant leader in that space across the globe, and we've been investing in multigenerational technologies. And if you would go to our technology center in New York, Pennsylvania, our JADEC center, you would see that. So we've been significantly elevated reinvestment over the last number of years, which has ultimately positioned us with the competitive advantage we have today in data centers. So that's going to continue.

George Oliver:

Yes. Let me wrap up. I want to thank everyone for joining us today, and I'd like to end the call by highlighting the strong foundation of operational excellence at Johnson Controls and our value creation framework. I think we demonstrated with the disruption in Q1. And then as we've now come back and created momentum in Q2, gives us a lot of confidence that we're beginning to see not only the results, but now more important, the opportunity to be able to accelerate here as we go forward.

Operator:

Good morning, and welcome to the Johnson Controls First Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation there will be an opportunity to ask questions. [Operator Instructions]. Please note today's event is being recorded. I would now like to turn the conference over to Jim Lucas, Vice President, Investor Relations. Please go ahead.

George R. Oliver:

Thanks, Jim, and good morning, everyone. Thank you for joining us on the call today. Now let's begin with Slide 3. We are gaining momentum as we exit the first quarter. Our team has been unbelievable in managing through the recent cyber disruption which occurred early in the quarter. While it is challenging to comprehensively quantify the overall business impact as we recovered from the incident, we are back on track. In fact, over the course of the last 120 days since the cyber incident, we have connected with many of our key customers, solidifying already strong relationships and strengthening their trust and confidence in Johnson Controls. It is clear from their feedback that our value proposition continues to resonate, and customers believe in our products and services. As we enter the new calendar year we are seeing positive signs. During the quarter, we delivered solid first quarter results, generally in line with our forecast. The fundamentals of our business are strong as we met expectations for sales, margins, and adjusted EPS in the face of headwinds from the cyber disruption, ongoing weakness in global residential HVAC, and significant slowing in China. Olivier will discuss the details of our financials more specifically later in the call. Looking forward, we expect fiscal 2024 to return to more normalized seasonality in our businesses and the operating environment to be more in line with what we saw prior to the pandemic and recent supply chain disruptions. Our position of building a leading digital building solutions platform continues to be core to our strategy, and we are pleased with the strength of our applied HVAC business, especially as we serve the fast growing data center market. We are updating our fiscal 2024 guidance today, reducing the full year adjusted EPS range by $0.05, reflecting growing headwinds in China. Our commercially focused portfolio and long cycle backlog driven businesses, in addition to our record backlog, gives us more clarity of improvement as fiscal 2024 progresses. Before we continue, I would like to take the time to thank Olivier for his partnership over the last few years, and wish him the best of luck in the next chapter of his career. When Olivier informed me that he was taking a role outside the company, we implemented our internal succession plan, and I am very pleased that Marc Vandiepenbeeck is assuming the role of CFO. Marc has been with Johnson Controls for nearly 20 years, with increasing responsibility in finance roles, including CFO of Building Solutions North America. Last year, we moved Marc into an operating role as President of EMEALA. Marc brings deep finance expertise and understanding of our customers, global markets, and operational knowledge. I am confident that we will continue to build on the foundations already in place, and I look forward to partnering with Marc in his new role. Now turning to Slide 4, I'd like to highlight the strong foundation of operational excellence at Johnson Controls and our value creation framework. We are capturing the secular trends across sustainable and healthy buildings. We have the right strategy and operating system in place to create value for our shareholders and as part of our commitment to disciplined capital allocation, we remain focused on deploying resources to the right opportunities. Our team has made great progress the last two years, creating a digital services model, and our investments have been a key enabler. The addition of FM Systems gave us increased capabilities to serve our customers as they improve their workplace environments. Digital is a strong enabler to creating recurring revenue, retaining customers, and supporting higher sustainable service growth rates. Within service we are changing the game from deploying a mechanical contractor to creating multiple options for our customers. We are increasing job size, improving margins, and creating scalable solutions. In addition, we are maximizing value creation through digitally enabled offerings and accelerating our life cycle solutions entitlements across all of our domains. Our team's model has a strong foundation and we will continue to accelerate the pace of change. At the same time, we have successfully removed many layers of cost across the organization. But we know there is more work to be done. We serve an incredible market, and it is on us to capitalize on the opportunities in front of us. We will continue to simplify and standardize across our portfolio. As we continue to focus on simplifying the company, we are always assessing opportunities to advance our transformation into a comprehensive solutions provider for commercial buildings. As part of the continuous evaluation of our portfolio, we are in the early stages of pursuing strategic alternatives of our non-commercial product lines, in line with our objective to maximize value to our shareholders. We are very excited about our future and are confident we are on the right path to simplify our portfolio, drive margin expansion, deliver consistent cash flow, while serving our customers in the best possible way. I will now turn the call over to Olivier to go through the financial details of the quarter. Olivier.

Marc Vandiepenbeeck:

Thank you, Olivier, and good morning, everyone. Before I discuss our guidance on Slide 9, I want to say how excited I am for the opportunity to partner with George as we simplify and transform Johnson Controls into a comprehensive solution provider for commercial buildings. We exited our first quarter with a cyber-incident behind us and the momentum we lost at the start of the year has recovered. We entered the second quarter with a backlog that remains at historical levels, a healthy pipeline of opportunities, and strong momentum in our industry-leading service business. We are introducing second quarter sales guidance of approximately flat year-on-year, which assume continued weakness in China and global residential HVAC. We expect strong contribution from North America and EMEALA, led once again by our resilient service business. As we return to seasonality more in line with historical patterns, global product has one more challenging quarter before stabilizing in the second half. For the second quarter, we expect segment EBITDA margin to be approximately 14.5%, and adjusted EPS to be in the range of $0.74 to $0.78. For the full year, we continue to expect the top-line growth of mid-single digit led by stronger performance in North America, further improvement in EMEALA, stabilization in global products, and a cautious outlook on China. We expect segment EBITDA margin to expand approximately 50 to 75 basis points for the full year, as price costs remain positive and mix continue to improve throughout the year. As George mentioned earlier in the call, given the weakening macro outlook in China, we are updating our adjusted EPS guidance range to approximately $3.60 to $3.75. The overall guide assumes a return to normal seasonality, second-half stabilization of global products, and a conversion of higher margin backlog in Building Solutions. We continue to expect adjusted free cash flow conversion of approximately 85% for the full year. The improvement we saw in cash flow for the start of the year demonstrate that our working capital improvement are gaining momentum. With that, operator, please open up the lines for questions.

Scott Davis:

Hey, good morning. Good morning, guys. Can you hear me okay, hopefully?

Scott Davis:

Yeah, fine. Thanks. George, I think it's been a tough couple quarters. Maybe if we take a step backwards, what do you think long-term this portfolio, the growth rate and margin levels and the cash generation, what is kind of your, I don't want to call it dare to dream, but what is the vision of where you think you can get two, three, four years down the road when in a more normalized environment?

Scott Davis:

That's helpful, George. And when you think about asset sales, you know, and there's some nuance here clearly, but is it more a function of simplifying the portfolio so you can execute on those KPIs that you just mentioned, or is it or do the asset sales themselves kind of change the growth and margin profile of the company?

Operator:

Thank you. And our next question today comes from Steve Tusa with J.P. Morgan. Please go ahead.

George R. Oliver:

Good morning Steve.

Marc Vandiepenbeeck:

Yeah, thanks, Steve. So first, I want to address the change in guidance, right. Since we issued our guidance in December, the impact of the economic environment in China on our business has deteriorated. And we have factored originally a fairly cautious outlook in China in the initial guide. However, that outlook has further worsened. We refocused the organization going through that tumultuous environment in China. We see a path of recovery to that volume and recovery of the backlog as well in the second half of the year, but it started to bottom out in Q2. We have more clarity on some of the actions we've taken around productivity and cost structure, and that support the recovery in that backlog. Now focusing on Q2 on the different business, if you look at our field-based business, Building Solutions, the cyber disruption is really behind us. And the loss momentum that we had in Q1 is now recovering and supporting the shorter-cycle businesses, particularly our service mix. If you look at North America and EMEALA, particularly, the margin we have put in the backlog over the last six months, but particularly during the first quarter, gives us confidence that we're going to be able to deliver on the margin rate for those businesses. There's a lot of benefit of cost actions we've taken early on in the year and later last year, but there's also more return to seasonality in our Global Products business as we see the volume providing marginally in those operations. If you combine all of that, I think we see with confidence that margin being attainable, Steve.

George R. Oliver:

So let me just comment on the quarter as far as momentum. We did have a significant disruption, as Marc said, for about six weeks of the first quarter, and part of that did have an impact on our momentum and our ability to be able to convert and the like. And so that's -- that was more of a short-term impact in Q1, in addition to the year-on-year adjustment that we've had in Global Products. As far as the timing, I'm sure you can appreciate, Steve, that the Board and the management team, we've had a very thoughtful approach to the strategy. We assess all avenues that will deliver value to our shareholders. Our strategy -- our transformation has been focused on really leveraging all of our combined strengths and our differentiated product, our digital platform. And then from a go-to-market standpoint, the depth and expertise that we have from an engineering standpoint to ultimately be a comprehensive solutions provider and our ability to be able to take the value proposition and be able to convert that to recurring revenue through services. We're seeing that momentum, which is beginning to convert and as we look at the difference in the business models within the businesses when we talk about the noncommercial businesses, there is a different business model relative to how we serve the market. And I think this allows us to be able to position those businesses for continued growth, while we're creating value, while we're focused on really now accelerating the progress we've made within our Building Solutions business.

Jeffrey Sprague:

Hey, thanks, good morning everyone. I wonder if we could just drill a little bit more, George, into kind of the portfolio review. And specifically, as you know, the business is complex day-to-day for you running it. It's even more complex for us on the outside looking in. So can you just size for us what we're talking in noncommercial assets, I think I put an estimate out there, I don't know if I'm in the ballpark or not, but just give us some sense of the total revenues that we're talking about that are under review in consideration and maybe kind of the average profitability across that basket?

Jeffrey Sprague:

And how did the margins stack up versus the average of JCI?

Jeffrey Sprague:

Okay. And then just kind of coming back to maybe a more granular point on this then. Even preceding you, I think, as you well know, there was always this debate about, can you extract Resi from kind of legacy, York, the Resi and then Light Commercial applied are tied together, and maybe it undermines your larger commercial effort if you exit that business. So maybe you found a way to separate Resi and Light Commercial or you think you can, but can you provide any additional context on that and how the Light Commercial business in particular might factor into your strategic thoughts on where the business goes from here?

Jeffrey Sprague:

Alright, I will leave it there. Thanks.

Nigel Coe:

Thanks, good morning. So another question on the portfolio review. So the press release on Friday highlighted Hitachi, but also talked about Residential, Light Commercial for York. And I just wanted to make it very, very clear that we're talking here about just the U.S. residential assets. But there's also a mention of the ATT business as well. So any more color in terms of the noncommercial assets because it does feel like there are some commercial businesses here? And then on the Hitachi side, obviously, Hitachi still has 40% of that business. How much flexibility do you have to seek options for your majority control of the asset?

Nigel Coe:

Okay. Worth a try though, isn’t it. But if we do assume that you execute on some form of strategic realignment for the portfolio, if you had, let's say, $5 billion of cash coming in the door today, how would you look to deploy that, George?

Nigel Coe:

Okay, I will leave it there, thanks.

Noah Kaye:

Great. First, a shorter-term one. You did mention signs of bottoming out in Fire and Security on the short cycle. Can you just give us some more indicators and confidence there?

Noah Kaye:

Okay, thanks. And I think I'd like to return to the why now question that was asked earlier, and maybe frame it slightly differently. Obviously, the U.S. market went through a tough year last year with volume trends. But certainly, there's some secular tailwinds as we look out in the next couple of years, refrigerant transition, ongoing price mix benefits, easier comps. And then you have the transition, both in North America and globally towards heat pumps. So there seem to be some positive prospects, both North America and globally for residential and at the same time, there's, I think, overarching concern from many investors around non-res, right, commercial weakness. And so I guess in that context, why now is a particularly a cute question because I think from a cycle perspective, the market doesn't necessarily see the same trends ahead that would seem to inform this decision. So maybe kind of talk to us about why this makes sense for you and why now?

Noah Kaye:

Appreciate that thoughtful answer. Thanks George.

Joseph Ritchie:

Thanks, good morning. Congratulations to Marc. And Olivier, we'll see you on the other side. The -- let me just start with Asia because you referenced China a few times on your prepared comments. I'm just trying to understand like how much of the weakness that you saw this quarter was this the market deteriorating versus your own selectivity? And then as you kind of think about the next few quarters, should we be expecting material order declines to continue?

Joseph Ritchie:

Okay, thanks George. And I know that you don't want to provide a ton of specificity on what noncommercial means. Just maybe from my own edification and remembering the old Tyco assets, I mean I think you still had some residential ATPs, international assets as well. Just correct me if I'm wrong, if you don't? And then also just a point of clarification, the Light Commercial business is showing at roughly 6% of sales. I think the last several quarters, we've been seeing it closer to 9%. Did you guys shift a portion of the Light Commercial sales into Applied, just want to understand that a little bit, too?

Joseph Ritchie:

So was there a re-cost because it's showing like that business is lower as a percentage as your total sales than it was in the last few quarters?

Marc Vandiepenbeeck:

Joe, the difference is that the 9% is our fiscal 2022 sales in the prior year versus when we move forward, it's now our fiscal 2023, now that, that year is final. It's just a -- it's a math exercise.

Operator:

And our next question today comes from Andy Kaplowitz with Citigroup. Please go ahead.

George R. Oliver:

Good morning.

George R. Oliver:

Yes. So as we talked about, we did lose some momentum because of the cyber incident. And so when you look at the sales conversion cycle, it did lengthen in the first quarter by about a week, a little bit better than a week. And so when you look at our pipeline, it continues to expand and does support the acceleration of orders in Q2 and through the remainder of the year, in line with what we were projecting prior to having the impact that we had. So we're very confident that with the pipeline, with the generation -- pipeline generation and then our ability to be able to convert with the cycle times we convert with, we're back to where we were. And then that also being combined with our success in services and being able to continue to build strong pipelines for services, convert to PSAs, building backlog, and then ultimately, supporting our ability to get services, deliver high single-digit services for the year.

Marc Vandiepenbeeck:

Oh, great question. So right away, when I took the role last year, we started to work on implementing our enterprise field operating model. That's very similar to what we did in North America a few years ago. Johnson Controls operates in markets that are very sizable and complex, but that provides ample opportunity for us to grow. But when you face large market, it's important to remain focused and disciplined on the sub-segments of that markets that provide the right level of product capabilities, leverage our engineering talent, and our solutions. And we are looking for those sub-segments of the market that provide the most value for both our customers and the company. As we continue to simplify, standardize, and I would say rationalize that business, the operating model becomes easier to adopt in the field, in the regions, and the benefits of that model get amplified. We get a lot of leverage. And that's really what we've been focused on over the last six to eight months. There's still work to be done, but I see great improvement in our book margin. And as we start seeing the benefit of that model and the actions we've taken, so I'm very confident that EMEALA will return to a comparable profit level that the other field segment are seeing.

Operator:

And our next question today comes from Julian Mitchell with Barclays. Please go ahead.

Marc Vandiepenbeeck:

Yes. So thank you. So as you look at the breakdown between our Business Solutions segments and Global Products, we see a recovery in growth in Asia Pac in the second half of the year. So that will turn positive. And as we continue to see the other segment, BS&A in North America and EMEALA continuing to clog at mid-single digit, you can see the balance of those two offsetting and getting very strong single digits all the way to almost double-digit in the second half of the year. That support the growth you're seeing on the slide. When it comes to Global Products, we continue to see an improvement in orders. As we said, we believe that Q2 is really the bottoming out and the stabilization of that business, and we see quite good momentum in the recovery into Q3 and accelerating into Q4, supporting that number you see on the slide.

Marc Vandiepenbeeck:

That's right.

Marc Vandiepenbeeck:

Yes. So starting on that last question on tax rate. Obviously, there are some headwinds there with the good changes in the rate. We are continually assessing it, and we'll continue to look at it. But you're right, there is a headwind longer-term on the rate. When it comes to factoring, we always look at different methods to finance the company. And as you said, when lead times got difficult, when inventory were a little bit more elevated than traditionally, factory became a logical avenue. We will continue to review the most economical ways to finance the company. We'll make sure that we take appropriate action against that program to align it with the financial commitment we've made to you, both in terms of profitability and free cash flow conversion.

Gautam Khanna:

Hey, good morning guys.

Gautam Khanna:

I was wondering if you could comment on pricing in the various verticals. What you're seeing with respect to pricing power? And then I had a follow-up.

Gautam Khanna:

Okay, and could you expand that commentary on the Resi market as well, are you still able to get price, is there any pushback, are you seeing any evidence of trade downs or movement to repair versus replace and the like?

Gautam Khanna:

Thank you.

Christopher Snyder:

Thank you. So for revenue, you guys are guiding March up about 10% sequentially, which is a good deal stronger than the typical mid-single-digit ramp that we've seen in most years. Maybe can you just talk about the drivers of this, the sharp increase into the March quarter? I understand there's a couple of points of cybersecurity catch-up, but it sounds like GP maybe has yet to stabilize. I think you said it troughs in the March quarter, so I would expect some headwinds there still remain? Thank you.

Christopher Snyder:

And was it 1 -- I know you guys called out 1 point in the December quarter, if I remember correct. Was it 1 point again from cyber in the March quarter?

Christopher Snyder:

Got it, thank you. And then for my follow-up, on Global Products, you guys talked about seeing stabilization. Can you maybe talk about the respective product lines within that, but being Resi, Light Commercial, and Fire and Security, are they all showing stabilization, are any leading, any lagging on that normalcy? Thank you.

Christopher Snyder:

Thank you.

Nicole DeBlase:

Yeah, thanks, good morning guys. So we've covered a lot of ground here. I guess the last thing I just wanted to ask about is, I'll just keep it to one question, is you guys gave guidance and reported earnings obviously pretty late in the fourth quarter, with only a couple of weeks to go. So how did China take you by such a surprise where we're only a month later and we have to cut guidance by $0.05? Thank you.

Operator:

Thank you. And our next question comes from Joe O'Dea with Wells Fargo. Please go ahead.

George R. Oliver:

Yes, so let me reflect on that. I mean we've been through a major transformation, taking a set of businesses that were a lot of a lot of variation in the fundamentals within the operating system. We now have standardized that across the board. That has allowed us to become much more efficient, reducing layers and ultimately, the cost that is required to support the business. As we continue now, so it's a twofold not only standardizing the processes but then with automation and IT supporting those processes with good data, that is all accelerated within the company, which has allowed us to be able to now capitalize on more simplification. That's one element. And then from a selling standpoint, as we then standardize our operating system around commercial, we've also been able to align our commercial resources in line with the market with the segmentation that we're driving to be able to drive our growth, and we're seeing a significant pickup there also. So it's really across the board on all of our cost elements in line with being much more simple, much more standard, and more agile in how we now pursue growth.

George R. Oliver:

Yes. Let me just touch upon the fundamentals, and Marc can talk a little bit about the orders. The fundamentals here, we're increasing our detach rates and now we're up to mid to upper 40 percentile. We're getting a more -- a higher percentage of our installed base served. This year, we're going to be able to expand our connected assets by well over 10,000. We're going to be able to get PSA growth longer-term services up over 20%. And then when you look at the way that we're connecting our services, we're getting much lower attrition rates. That all now is playing out and positioning us for a strong high single-digit service growth again this year. On the order rates, as we look at any one of those elements, we're consistently driving that strategy across all three regions. So Marc, maybe you want to comment?

Joseph O’Dea:

Thank you.

Deane Dray:

Thank you, good morning everyone. Just a quick question from me please. Regarding the potential or expected divestitures, a separation of Resi, what would that do to RemainCo in terms of free cash flow potential, just maybe down to the level of working capital, does that change your ability to hit this target of 100% free cash flow conversion?

Operator:

Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to George Oliver for any closing remarks.

Operator:

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.

Operator:

Good morning, and welcome to the Johnson Controls Fourth Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Jim Lucas, Vice President, Investor Relations. Please go ahead.

George Oliver:

Thanks, Jim, and good morning, everyone. Thank you for joining us on the call today. Before discussing our fourth quarter and fiscal 2023 results, I wanted to take a moment to thank all of our employees for their quick agile response to the cyber incident beginning in the last week of September. Our teams responded quickly and worked diligently to minimize the impact from the incident. We greatly appreciate everyone's patience from customers to suppliers, to shareholders as we work through our remediation efforts. We now have the incident behind us and our operations are back to normal. Now let's begin with Slide 3. We feel it is important to not lose sight of the strong year we had in fiscal 2023, regardless of the impact on our fourth quarter results from the cyber incident. For the full year, we grew sales organically 8%, expanded segment margins 80 basis points to 15% and delivered adjusted EPS growth of 17%. We saw continued strength in our Service business as our efforts in maximizing our large installed base are coming to fruition. In fact, we grew service 10% for the year with solid order momentum ending the fiscal year. Our total backlog grew 9% to $12.1 billion as demand remains strong across our Commercial Building Solutions offerings. In fiscal 2023, we generated $1.8 billion in free cash flow, which represented 76% conversion. During the year, we returned $1.6 billion to shareholders via dividends and share repurchases. Our capital allocation strategy remains unchanged, targeting to return 100% of our free cash flow to shareholders through dividends and share repurchases. We have the highest conviction ever in our strategy to lead in Building Solutions, and we'll continue to prioritize allocating capital accordingly toward that objective. Overall, we are pleased with our continued execution despite macro-driven headwinds over the fiscal year and believe that we are well positioned heading into fiscal 2024 with our strong backlog and resilient service business. We're initiating guidance for fiscal 2024 for approximately mid-single-digit sales and adjusted EPS growth, respectively, and for free cash flow conversion of approximately 85%. Olivier will provide additional color on the guidance later in the call, but fiscal 2024 will show improvement following a seasonally slower first quarter. Now turning to Slide 4. Demand for our Building Solutions is accelerating with our customers around the globe, as we are developing Applied Solutions to deliver outcomes that save energy and reduce emissions, while improving the overall occupant experience. We are able to achieve these outcomes not only through our leading domain expertise and applied HVAC & Controls solutions, but also through world-class fire detection and protection and smart security solutions enabled by an industry-leading digital platform, OpenBlue. All of our systems build on each other in are complementary components of our total solutions offering. The journey starts with our customer as we design, digitize and deploy solutions that achieve efficiency, sustainability and decarbonization. This turnkey offering drives operations, service and maintenance, which underpin our as-a-service offerings that make buildings smarter through our digital solutions. This helps our customers enable peak operating conditions, protect investments and achieve the lowest life cycle cost. Johnson Controls is unique with our value proposition to make buildings smarter through OpenBlue. Our comprehensive ecosystem of connected digital solutions for buildings can break down silos and connect building systems regardless of equipment OEM and make them interoperable to build resiliency and efficiency. We were honored recently to be ranked number two on the Guidehouse Insights leaderboard in an assessment of leading energy service companies. The recognition underscores our commitment to excellence and sustainability on a global scale. It is a testament to our hard work and continued commitment to helping clients meet their sustainability goals. Moving on to Slide 5. Fiscal 2023 saw continued strength in install orders, which creates a strong service opportunity over the life of the equipment. As we advance our digital strategy, including more than doubling our connected assets during the fiscal year, we are gathering more intelligence through data. This data allows us to better segment customer needs and create more proactive offerings across all of our domains, effectively utilizing our industry-leading service organization of over 20,000 professionals that make over 5.5 million visits annually. With our large installed base, improved operations and strong pipeline, we see a long runway of continued growth for our service business. Turning to Slide 6. Our value creation framework remains unchanged. We truly believe we are well positioned to drive continued growth, delivering solutions across sustainable and healthy buildings, while leveraging the increased adoption of OpenBlue to drive margin expansion. Our pipeline remains strong in our longer-cycle Building Solutions business, as we continue to realize top line growth. Our shorter-cycle businesses in Global Products, primarily global residential HVAC and parts of Fire & Security are stabilizing as the new fiscal year progresses. Converting our strong top line growth into improved margins and cash flow is our top priority. We are beginning to see our gross margins improve as supply chain disruptions continue to lessen. Within Building Solutions, we are also seeing stronger margins in our record backlog and as service continues to accelerate, we should see favorable mix as well. Cash flow is a key area of focus for us. On the receivables front, we are making progress in improving the longer collection cycle historically associated with our installed business. Inventories in our short-cycle businesses continue to reduce as lead times normalize, and we are adding capacity to meet the strong demand in our applied HVAC business. As you can see, we are very excited about the opportunity ahead. I will now turn the call over to Olivier to go through the financial details of the quarter. Olivier?

Operator:

[Operator Instructions] And today's first question comes from Jeff Sprague with Vertical Research. Please go ahead.

Olivier Leonetti:

Thank you for your question, Jeff. Regarding the free cash flow, we had an impact in the first quarter, which we believe will be about $200 million. If you look at the guide for 2024 at 85%, that includes two elements; one, some restructuring and also some investments in CapEx to support the strong demand in our applied business, George mentioned that in his opening remarks. If you look at the levers of improvement for free cash flow, we see, one, inventory reducing as we reduce our inventory in resi. Two, in receivables, we believe we're going to be able to demand more upfront payments as our lead times have improved, and also we have implemented our supplier financing program across the network, and that will help further improve GPO. To go back to your net financing charge is the byproduct of higher interest rate. We are going to refinance some debt. We have some commercial papers as well, which are going to be priced at the current higher interest rate. Factoring is a small proportion of the cost.

George Oliver:

Yes. So when we look at our orders, Jeff, obviously, they continue very strong. And I think we're seeing strong growth in office data centers, health care, state and local government, education. We do see manufacturing, industrial bookings continue at an elevated level after a strong growth in construction starts. It is focused on the EV and semiconductor manufacturing. And then when we look at our pipeline, it's very strong. And a lot of that pipeline is focused on these key verticals. I would say from a booking standpoint, we were tracking prior to the cyber incident, a little bit better. And then with the outage, I think we're somewhat slowed a bit in that last week. But I think as we look at first quarter and for the year with the pipeline that we have, we're going to see continued strong order growth. And I think when you look at our – mainly around Commercial HVAC trends, it's clear that we're gaining share pretty much across all of the industries. That's creating significant equipment sales into our Building Solutions business, which is creating a really nice installed base that we're now capitalizing on the service opportunity. In Building Solutions, our applied orders were up about 20%. And then in the ducting space, when you take out resi, our commercial ducting was up over 50%. So our portfolio of Commercial HVAC is playing out strong. And that ultimately is what's driving the installed base within our commercial -- within the Commercial Building Solutions business.

Joe Ritchie:

Thanks. Good morning everyone.

Joe Ritchie:

Hey guys, can we start on just the mix impact this quarter. I was a little surprised to see the Business Solutions business see $100 million impact from mix. And also because it seems like your service business has farly exceeded growth versus install this quarter. So what exactly is going on within Business Solutions that's driving negative mix and is that expected to reverse in 2024?

Joe Ritchie:

Okay. Got it. Understood. And I guess maybe my one follow-on question then would be on 1Q. And so to look, it's December 12, we're clearly well into the quarter. You've given a fairly narrow range for the first quarter. I guess, I'm just trying to understand two things. Number one, confidence that, that will be the range when you report results? And then secondly, just any help that you can give on the bridge? Because even if you adjust for the insurance settlement from last year, it seems like a relatively large decline in the first quarter despite flat organic sales expected this year.

Operator:

Thank you. And our next question today comes from Scott Davis of Melius Research. Please go ahead.

George Oliver:

Good morning.

George Oliver:

Yes, Scott, let me take that one. When you look at -- as we look at data centers, we've been obviously, reinvesting in all of our applied product to have the full portfolio to be able to capitalize on what we see to be incredible growth here over the decade. And so when you look at a typical data centers, let's take a 100-megawatt data center that requires roughly about 30,000 tons of cooling. That can be served. Right now, the big trend is air-cooled chillers. We're the leader in the space with the investments that we've made and being able to deliver on those capabilities and that's where we're seeing significant growth in serving that set of customers. And so it can either be air cooled or water cooled. Of course, water cooled we're in a strong position. So roughly about 30,000 tons of cooling. So when you look at the market at 2024, we're projecting somewhere at 15 gigawatts to 20 gigawatts, which will amount to about five tons of cooling needs. Now because of our position with our strong portfolio of the full technology to serve these, we believe we're positioned to get, let's say, half of that volume going forward, which -- the overall volume would be greater than $2 billion. And so for us, this has been a position of incredible strength. A lot of that is because of our multigenerational developments we've made at our engineering center. Just a comment on that, we've -- just in the last 90 days, we've had customers representing over 20% of the US GDP at our technology center because as we're laying out long-term plans with our customers, we're making sure we're positioned with the applications that ultimately achieve their needs. And so it is a very attractive space for us, Scott. And then from a service standpoint, once we get that unit installed, we're getting very strong service growth on top of that, which will then be over the lifecycle of that installation.

George Oliver:

Yes, I think it's both. I mean the criticality of the applications that we provide and then the ability to be able to operate within those conditions. And then from a data standpoint, making sure that we're secure relative to what we do and how we manage the data that ultimately delivers the outcomes that we can deliver. Certainly, the work that we've done around OpenBlue and the cloud-based technology there, none of that was absolutely -- was not interrupted at all with our cyber incident. So a lot of that is, we believe it's high-margin service opportunity not only at the equipment level, but then with the use of all of the data to enhance how that equipment is actually operated in their environment.

Steve Tusa:

Hi. Good morning.

Steve Tusa:

Can you just provide a little bit more detail around the impact from the cyber-attack? I mean, I think you said $0.04 in the fourth quarter, but it was kind of late in the fourth quarter. And then in particular, which businesses it impacted just kind of the mechanics of the thing? And then just clarify what you're saying in the first quarter, I think you said $200 million in cash, but then $0.02 of earnings, I might have missed. I'm not sure I can reconcile like all those numbers. So maybe just a little more mechanical detail on the impact of the cyber-attack?

George Oliver:

Steve, just when you look at the overall event, it did create significant distraction internally. We -- it wasn't one or two days. It actually was about three weeks, which was the better part of October. So, while we're able to quantify some of the impact, I think it's harder to put a number to the overall impact in October. As you -- as we -- although we maintained operations, we weren't necessarily operating at full efficiency. But I would tell you the way that our teams have responded and actually got back to operations has been remarkable. And so I do believe, just from an overall momentum standpoint, we lost a little bit of momentum in October. But I can tell you, in November and December, we gained that back.

Steve Tusa:

Okay. And so I guess I'm just struggling to see how you get from like $0.50 in the first quarter, which seems like an operating base to I don't know, $3.75 for the year. That just seems like a pretty steep hill. And I mean, are you -- I know you're probably assuming that the comps maybe get a little bit easier in some of the products businesses. But I mean, are you assuming like recovery, true kind of economic underlying recovery in some of those short-cycle businesses for the back half of the year?

Operator:

Thank you. And our next question today comes from Julian Mitchell with Barclays. Please go ahead.

Olivier Leonetti:

So, if you look at the key driver of free cash flow, they are going to be around working capital, mainly in inventory. If you look at our level of inventory, we are at about -- we are going to close the year at about 54 days of inventory. We used to be before those supply chain events at about 45. A day of inventory is worth about quite a lot in terms of free cash flow. So inventory is going to be a key variable. Receivables also would be unchecked to declining as we are improving the way we manage that particular balance sheet line. Some of that will include upfront payments as our cycle has been improving to satisfy demand. We're able to demand for acceleration of products. We're able to demand more upfront payment and the final one would be supply chain financing, which we are now deploying across the world. Factoring will be flat year-on-year.

Olivier Leonetti:

It would be timing related. We'll catch that up in the second quarter.

Olivier Leonetti:

We are going to go through a more normalized seasonality in terms of EPS performance as now the supply chain is going back to what we had pre-COVID. If you look at the themes for EPS earnings growth expected in Q2, momentum in Building Solutions have indicated, GP stabilizing in Q2 and then going to an increase in profit contribution in the second half. Those would be the theme for the flow of EPS across the year.

Nigel Coe:

Thanks. Good morning, everyone.

George Oliver:

Good morning.

Olivier Leonetti:

So if you look, let me start with the end. On free cash flow, we are going to have an impact of about 10 points of conversion to two elements. One is higher CapEx actually due to the demand we have, mainly in the data center. That's about 3-points of conversion and restructuring, we expect to have 7-points of conversion due to restructuring, the impact, the payback of those restructuring actions is about the year or below that. And we have actually quite a few projects to improve the profitability of our enterprise. On Q1, I go back to what I indicated earlier in the Q&A session of momentum in Building Solutions, that's what we see in Q1. Weakness in global product due to the resi demand, some more normalized comp as the supply chain is normalizing for our global product division and then of course, the impact of cyber.

Olivier Leonetti:

So we see no structural reasons for the EMEA/LA margin to be double digits. And we expect margin to turn positive in Q2. Clearly, we have work to do in the region. The margin profile of the region is mainly due to the realization of lower margin orders into the revenue. We see that turning the other way, so turning positive in Q2, Nigel.

Andy Kaplowitz:

Hi, good morning, everyone.

Andy Kaplowitz:

So your orders accelerated slightly actually in Q4, up 9%, I think, for Building Solutions led by North America. And I know you talked about the strength already and Applied and in markets such as data centers. But as you know, some leading indicators of non-res have been a little weaker. So do you see order growth holding up here across your businesses throughout FY '24? And do you see your backlog staying around that $12.1 billion number for your long-cycle businesses in '24? I think any incremental color would be helpful.

Andy Kaplowitz:

That's very helpful. And then maybe you could give us just a little more color on your expectations for Global Products. Do you see global residential markets, for instance, turning positive in the second half? And as the greater segment turns, how are you thinking about the European heat pump market? I think you mentioned GP stabilizing overall in the second half, but maybe you can talk about your confidence level that destocking ends in the second quarter, as you guys mentioned?

Operator:

Thank you. And our next question today comes from Noah Kaye with Oppenheimer. Please go ahead.

Olivier Leonetti:

So we believe, Noah, that fundamentally, we have the ability to be a 30% incremental company. We will achieve improvement in margin through two levers; one, gross margin as we improve our mix as we improve our operations. And the second lever is going to be through OpEx as we keep standardizing and centralizing our operations. And we have, as we see a strong portfolio of ideas and projects to improve the profitability of our enterprise. As I indicated earlier, typically, those projects have below one year payback. We don't think we need to update today our productivity programs. I think you will see that being embedded in the guide, Noah.

Noah Kaye:

Yes. Appreciate it. Maybe a little bit surprised positively, I would say that the cyber incident didn't more significantly impact the service business. One, can you kind of explain why that was the case? And two, just talk about how the service and install operations performed during this challenging period for IT infrastructure for the company?

Operator:

Thank you. And our next question today comes from Joe O'Dea with Wells Fargo. Please go ahead.

George Oliver:

Good morning.

George Oliver:

So when you look at our global product book-to-bill businesses that really depend on channel, starting with resi, certainly, we saw a pullback in resi and that was obviously more so in the US versus globally, but overall, there was a decline within resi. So we've been working to offset obviously offset the inventory and get positioned for what we believe the new demand to be. And I think as you look at the book-to-bill, it's getting more normalized relative to on a go-forward basis that we've seen the adjustment -- when we look -- when we track our inventories, so I think we're back to where we were historically relative to what's in the channel with our distributors. And so I'm somewhat optimistic that, that's stabilizing going forward. When you look at the rest of our book-to-bill businesses, and it's mainly around Fire & Security controls, the same hold true there. So we think that we're through most of the headwind with the adjustment of inventory in the channel, we've also adjusted our inventory in line with what we believe the forward-looking demand to be. And so it's important that we're positioned to be able to support that demand on a real-time basis, which we are. And as we go through reviews business-by-business, looking at what is actually happening, we are encouraged that now we're seeing orders across the board starting to build back our backlog so that we can be positioned here through the course of 2024 to continue to build on the revenue base on a go-forward basis. So I mean we're somewhat optimistic, and I feel that we've -- the headwind that we saw in the second, third, fourth quarter, some of that now is normalizing, and we're back to seeing growth.

George Oliver:

Yes. I'll talk a little bit about operations. When you look at our Building Solutions across the globe, certainly, there was significant disruption where from a cycle time standpoint, some of our projects got extended a month or two, as we look at where we are today, we're back to almost where we were. And what we're believing now is our operational, the operating system that we've deployed, we can create now cycle time as a competitive advantage and being able to respond with the improvements that we've made within our supply chain and within our factories and ultimately within the field and how we execute on projects. So I'm very confident now that, that's going to be a critical strength of ours. Your question relative to resources, we have been very attractive in being able to recruit labor, pretty much across the globe and have not been constrained by labor across both our project-based business as well as our service business. And then in our critical factories, we've been able to recruit, retain and develop, the talent is ultimately going to be critical to delivering on our capabilities. So that feels very good. As it relates to commercial buildings, even though there is a thought that maybe buildings is going to be a pullback, the work that we're doing within buildings is differentiating. And so as we go into a building now, especially with the focus on energy savings and decarbonization. There's no company that's consuming as much data as we are within the building. And so because of that, we can actually do upgrades and deploy new technologies and utilize our data platform, consume all of the data within the building, and in many cases, get a payback on what we do within the building. And so that is our focus. And now with building standards being implemented in many jurisdictions not only here in North America but across the globe, we believe that, that really presents a big opportunity for us in that space, especially with the focus on energy and decarbonization.

Deane Dray:

Thank you. Good morning everyone. Just wanted to follow-up on the potential timing of the insurance recovery, the business interruption insurance, would that be a fiscal 2024 event? And is that embedded in your guidance?

Deane Dray:

Okay. Well, that's -- if you get that in the first quarter, that's pretty fast. So that's impressive.

Deane Dray:

And then, …

Deane Dray:

…just a second question on China. Just -- it was called out several times as being a source of weakness, especially in Building Solutions. Any color there just in terms of at the margin, what might be changing?

Deane Dray:

Okay. Thank you.

Andrew Obin:

Yes guys. Good morning.

Andrew Obin:

Hi. Can I just think it seems that JCI is facing as we look more growth, more investment, more inflation, so more CapEx, more working capital. So how do we think about this 100% cash conversion target going forward, that we are in a more, growthy and more inflationary environment, right? How do you balance growth and growth opportunities and investment versus cash conversion?

Andrew Obin:

Got you. And I just -- just clarify if I got it wrong. I think you had $220 million in impairments and restructuring charges, whether incremental impairments in that number? And if yes, what were they?

Andrew Obin:

What assets do we impair?

Operator:

Thank you. And our next question today comes from Brett Linzey with Mizuho Americas. Please go ahead.

Olivier Leonetti:

So on price cost today, we see price cost to be positive we believe we're going to be able to keep the level of pricing we saw in the second half of the year.

Brett Linzey:

Okay. Great. Thanks for that. And then just a quick follow-up on the capacity expansion. Encouraging to hear, I guess, maybe just a little bit more context. Is it just simply targeted on data center? Are there other geographies? And is there any way to size what that investment was?

Operator:

And this concludes our question-and-answer session. I'd like to turn the conference back over to George Oliver for any closing remarks.

Operator:

Thank you. This concludes today's conference call, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.

Operator:

Good morning and welcome to the Johnson Controls, Third Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Jim Lucas, Vice President, Investor Relations. Please go ahead.

George Oliver:

Thanks, Jim, and good morning everyone. Thank you for joining us on the call today. Let’s begin with slide three. Johnson Controls delivered strong quarter that met the high end of our guidance. We delivered 9% organic sales growth, adjusted segment EBITDA margin expansion of 130 basis points and 21% adjusted EPS growth. Our longer cycle building solutions business continued to show strength globally, and service momentum accelerated, driven by our enhanced solutions and increase adoption of our digital offerings. Orders grew 8% overall with service orders leading the way with 12% growth. Our backlog ended the quarter up 8% to $12 billion across both install and service. We remain confident in the resiliency of our backlog and order momentum as our performance during the quarter solidifies our investments in building a world-class service organization. We continue to see a strong pipeline of opportunities and the outlook for orders in our longer cycle businesses remains robust. In our shorter cycle Global Products business are applied in rooftop businesses delivered another quarter of very strong double digit growth and demand remained strong. We also continued to see strength in our commercial ducted and fire detection businesses. Consistent with trends in the industry, our ducted North American residential business remain soft. Overall, we are encouraged by the continued strength and good visibility across our building solution segments. As we look ahead for the remainder of the year with one quarter to go, we are narrowing our full year adjusted EPS guide to approximately $3.55, which represents the midpoint of the previous range. At Johnson Controls, we continue to expand on the solid foundation that we have built with strong order momentum and a record backlog driving consistent top line growth. We have made good progress in enhancing profitability across our portfolio throughout the fiscal year and we have significant actions underway that we believe will result in further margin expansion. Now turning to slide four, we have spent the past few years investing more strategically in our service business and we are seeing strong returns from those investments. During the third quarter service orders in sales, both grew 12%. Our service business has transformed from a traditional break and fix business to helping customers proactively and more efficiently optimize management of all assets in the building. Digital is becoming an important enabler to driving more service opportunities and growth. We also accelerated sales of our higher margin parts business, which once again grew at a strong double digit pace in the quarter. Decarbonization is an area of focus across the entire Johnson Controls portfolio. This includes our sustainable infrastructure or SI business, as well as many products and solutions in our portfolio such as heat pumps, energy-efficient refrigerants and digital solutions. In fact nearly 55% of revenue comes from sustainable products and solutions. We continue to see strong demand in our SI business with orders growing 20% in the quarter. Heat pump sales were up mid-single digits globally, with very strong double digit growth in our applied and industrial refrigeration businesses. During the quarter we acquired M&M Carnot, a leading provider of natural refrigerant solutions, with ultra-low global warming potential or GWP. M&M designs equipment and controls that use carbon dioxide, which has a GWP of 1. By contrast, traditional refrigerants can have GWPs in thousands, magnifying rather than solving global warming. We've spent the past few years defining our multi-phased digital strategy to transform environments to more effectively use data to drive outcomes for our customers and we continue to gain momentum. In the quarter we grew our connected revenue at a high single digit rate and we surpassed 16,000 connected chillers. We're now expanding OpenBlue into connecting controls and security to better optimize customer assets and improve outcomes in buildings, further differentiating our offering. Historically, building required standalone system to manage each asset within the building. Today connected buildings are creating a single digital dashboard optimized for energy, but still require multiple systems to manage the assets. We are making great progress in creating the digital threat throughout the building life cycle and connecting controls is the next step in the evolution of this journey. Moving on to slide five, we recently announced the acquisition of FM:Systems, which is an important next step in adding critical capabilities to OpenBlue. FM:Systems is a leader in the growing Integrated Workplace Management System or IWMS sector. IWMS furthers our OpenBlue capabilities, allowing Johnson Controls to offer a one-stop solution that helps customers accelerate their digital transformation journey, improve building efficiency, and reduce operational costs. FM:Systems advances OpenBlue’s capabilities and brings a significant amount of data including service, space utilization, and real estate portfolio management. The addition of FM's capabilities into OpenBlue enhances Johnson Controls relationship with customers by providing a full suite of integrated outcome based solutions. Turning to slide six. Extreme temperatures are increasingly straining buildings, putting at a risk the ability to deliver comfortable and healthy indoor environments. Our OpenBlue Digital Solutions help optimize indoor air quality, comfort and energy consumption, while monitoring outdoor air conditions, ensuring our customers can meet their operating objectives, even in the most extreme conditions. When paired with our OpenBlue Digital Services, we are uniquely positioned to help our customers deliver a healthy, indoor environments, while optimizing costs, reducing emissions, and ensuring HVAC equipment is operating at peak performance, ready for any condition. We spoke earlier to the progress we are making expanding margins and we are not done. Supply chains are improving, which have normalized lead times, allowing us to create better operating leverage in our manufacturing facilities. We continue to make progress in improving our SG&A structure and have additional actions underway to further optimize our performance. On capital allocation, we have established a track record of being prudent and disciplined. In fiscal 2023, we have returned $1.3 billion to shareholders via share repurchases and dividends, in addition to investing in several strategic acquisitions. Climate change is a defining theme of this century. With nearly 40% of emissions coming from buildings, we have the technology and the people to turn buildings from one of the greatest challenges into one of the biggest and best solutions. I will now turn the call over to Olivier to go through the financial details of the quarter. Olivier?

Operator:

[Operator Instructions] Our first question will come from Nigel Coe with Wolfe Research. You may go ahead.

George Oliver:

Yes, good morning, Nigel. Let me start by saying our overall commercial business, both products and services, remains incredibly strong. And what I would say is across the board, hitting on all cylinders, we do continue to see strong bookings in our applied, in our rooftop – commercial rooftop businesses across the board. When you look at our Building Solutions, you know we made great progress during the course of the year, improving the margins and the service momentum now is expected to continue. And when I look at our Building Solutions business, we've got a very strong backlog. And more important is, within that backlog, the mix of services that are coming through with the momentum that we've been building and now adding FM:Systems is going to be a big add to that. Now, referencing the orders in Q4, in revenue in Q4, when you look at our residential and Fire & Security businesses, we have been experiencing some short-term pressure in our shorter cycle book-to-bill business and it's in those two areas. The inventories in the channel are resetting as we've been able to improve lead times and so therefore there are some short-term adjustments in the book-to-bill revenues. But what I would say is with those adjustments, we're continuing to execute with the deployment of our new products and we're seeing good traction there and as we project going forward, we still see that coming back and being very strong as we set up for 2024. So on the resi I think it's in line with what you're seeing across the industry and on Fire & Security is mainly in our products business, which ultimately is a book-to-bill business and therefore we're seeing that adjustment.

George Oliver:

No, Nigel what I'd say is that, you know we're still building the ‘24 plan, but I’d touch upon some key items here that I think really set us up well for ‘24. When you look at the commercial markets and as I talked a little bit earlier, we see that are incredibly healthy, and are playing to our strengths, especially with the secular trends that are underway within the commercial space. And so that, we see with our orders up 8%, with our backlog up and our Building Solutions business that $12 billion and even in our Global Product business, despite some of the inventory adjustments, we are up about 8% in our Global Product business also. And so when you look at that, that momentum is going to continue. Now if you add the stimulus spending that we don't believe has really been materialized yet, is in the background. And I believe with these secular trends and the combination of what we're doing in HVAC with our digital platform and our services are going to benefit really nicely from the investments that ultimately are going to be needed to drive sustainability. Then if you look at our backlog, we look at this very closely. It's very resilient and very strong with the idea that we believe that even through the next quarter we've got an incredible pipeline that we're converting. We're working to develop the backlog, so that when we plan and ultimately enter into next year, we're going to have a nice backlog to work from. Then the last is really the acceleration of the transformation of our Building Solutions business to services. You know that proposition is playing out. I would call it our flywheel, which has been accelerating, which is about creating installed base, getting that base connected with higher attach rates, with higher revenue per customer. That leads to lower attrition and then all of that spins out additional business like with our spare parts and upgrades and the like, so. You know I feel that the current trends that we see and how we're being set up, we're going to set up for a nice 2024. But again, we can't predict the environment, but the trends that are underway, do play our strengths.

Nigel Coe :

Okay, that's good detail. Thanks guys.

Operator:

Next question will come from Steve Tusa with JPMorgan. You may now go ahead.

George Oliver:

Good morning, Steve.

Olivier Leonetti:

So if you look at the top line today, in the Building Solution Business, the top line is very strong. The order moment is expected to continue in the fourth quarter. We have good visibility today based upon where we are today in the quarter. You have in the top line some inventory adjustments happening in the channel that is impacting our shorter cycle business, resi and Fire & Security. George mentioned that that would be an impact on Global Products, but we see that as being temporary. If you look at the margin, we believe that the fill business, our business solution, business margin will keep improving. In the Global Product business, we see the margin being slightly flat. What is happening in the global business, you have that in Q3, it's happening in Q4. So it's some absorption as we are ramping applied volumes to drive market share and lead time. We have had some absorption impact and also we are normalizing inventory. Inventory in finished goods went down by about 20 days in about two quarters, that is impacting also absorption. So that's the story in terms of margin, Steve and revenue.

A - Olivier Leonetti:

The revenue in global product would be growing low single digits to flat, and the margin would be expanding to flat for global products, because of the two phenomenons I've mentioned Steve.

A - Olivier Leonetti:

We don't talk about price anymore for the building solution business, because we sell a solution. It's difficult to differentiate price from volume anymore, and we have discussed about this. But you know overall, pricing and value proposition is resonating with our customers.

Steve Tusa :

So then – sorry, so I guess how do you calculate – if you don't calculate price, how do you calculate price cost then in your slides, on slide 12 for the solutions business?

George Oliver:

And Steve, just a comment on that. As we've discussed, we've been building models, robust models from a COGS to value proposition standpoint, and it's calculated on, based on the inflation that we've built into our long cycle businesses and then how that plays out, to then the value proposition that we bring to our customers with the differentiated install, then ultimately which then leads to our service growth, and that's what's in the overall equation there as far as price.

Olivier Leonetti:

Thank you, Steve.

Joe Ritchie:

Thanks. Good morning, everyone.

Olivier Leonetti:

Morning Joe.

A - George Oliver:

Well, let me take that, Joe. On the resi side, I think in line with what everyone's seeing in the industry, we've seen a significant adjustment and we've taken that in the first half and now through the third quarter, a pretty significant adjustment. We're now – we believe we're now in line with the industry relative to our volumes and the like. Now, when you look at, we do believe there's some additional de-stocking in Q4. But I think through that we'll set up here in the first quarter. First, second quarter of next year I think will be pretty normalized. The other, on the Fire and Security, when you look at those businesses, it is mainly a product of when we saw a significant ramp when lead times were extended, we developed significant backlog and we've been working down that backlog. The good news I see now is on the input side. As we're now moving forward, we're starting to see a pickup now of some of that backlog. And so our ability to be able to then take on the orders, create the backlog and then be positioned from a supply chain to respond, we're in a much better position. And so we'll see some of that play out here in the fourth quarter as it relates to Fire and Security. But we do believe it's short term and we do believe it's totally aligned with the lead times, the lead time adjustments that have been made, and I would tell you that when we look at some of the core products and new products that we're bringing into that segment, we're seeing some nice pickup on market share with some of the new products.

George Oliver:

Well, as it relates to the overall growth, I mean I think this is the first that we've seen where now our service growth on a sustained basis is outpacing our install. And so when you go back to the strategy of the company with our building solutions business, was to make sure we use install very strategically and how we build our install base with our assets, with our equipment, and then with the digital assets and enable us to be able to extract, you know over the life cycle the services. And now with the digital content that we have, we're not only enhancing what historically we've done, but it's now given us the opportunity to add additional services with the customers that we're serving. And so we feel very good about continuing to sustain that growth rate of services. That will be a natural mix, you know with the revenues that turn within our building solutions business globally. And we’re seeing it; the traction is in every one of the regions. I mean, this is not isolated into one vertical or one region; it's pretty much across the board. And so with that, that combines what Olivier said around margins. We continue to drive strong productivity, both in COGS as well as SG&A. So that combined with the mix of services is going to continue to accrete margins within our building solutions business.

George Oliver:

Thanks, Joe.

Noah Kaye:

Good morning, thanks to taking the questions. First, it looks like guide is now for higher amortization of intangible, and that's driving about a $0.05 EPS headwind versus the prior guide. Can you (a) can firm that math; and then (b) talk about the timing expectation for accretion on some of the acquisitions you've made. I assume those acquisitions are what's driving the higher amortization for the year.

Noah Kaye:

All right, that's helpful. And then, you know just to better understand the free cash flow conversion dynamics, it sounds like you do expect some inventory reduction you know here in 4Q. But as we think about what needs to happen for you to kind of get back to close to that 100% free cash flow conversions we set for ’24, what are you going to be focused on?

Noah Kaye:

I appreciate that. Thank you.

Jeff Sprague:

Hey, thank you. Good morning, everyone. I just want to come back to service margins and kind of – George and you addressed this to some degree in a prior question. But certainly the key KPI in my view in this quarter was the significant lift in North America margins in the quarter and you delivered on that. Is service mix playing a really significant role in that performance in the quarter or are we actually just seeing more kind of COGS and SG&A programs and other things you're trying to do on productivity and maybe you could just give us a little bit more color on how you would expect that North American margin to progress into the fourth quarter.

Olivier Leonetti:

I would add Jeff, they go together. We are now driving in-store to drive services. It wasn't the case before. So you will see margin expansion also, because we are very selective on install and to your point on the SG&A, the much more is to come in terms of SG&A leverage as we standardize our operations further and we're in the middle of this and leverage functional excellence. And we have said that and our level of conviction is actually increasing. We believe we can deliver over the next year and forward, 30% incremental for the company because of those two phenomena, margin and SG&A.

Olivier Leonetti:

It's quite exclusively relating to deals, and if you look at our peers today, we are the only one to have not adjusted for deal amortization in our EPS. So we are looking at that as a potential for next year Jeff, but all deal related. And the Tyco-Johnson Controls merger would be the lion's share of this amortization.

Operator:

Our next question will come from Julian Mitchell with Barclays. You may now go ahead.

Olivier Leonetti:

So on productivity, we are far from being done. Our program that we announced about two years ago is going to end, we're well on track. We'll deliver about $340 million for FY’23 through SG&A and COGS, but much more is to come in terms of productivity, both impacting sales and G&A against standardization and driving functional excellence are going to be the drivers for this. Price cost, George mentioned it. We are very bullish about the value proposition of offering, either through solution and including services, but also through the product portfolio where we have a strong in commercial sustainability offering. So all of that should drive a margin expansion through G&A, scaling gross margin and price cost.

Julian Mitchell :

That's helpful. Thank you. And then, I guess my second question on the top line. So looking at slide 12, you have the 4% install orders growth in North America and EMEA/LA in the third quarter. Just wondered, given the sort of the macro data out there, dodge [ph] start square footage and so on, and interest rates, you think those install order numbers decelerate from that 4% in the two regions or they can sort of hold the line when you look out?

Julian Mitchell :

Perfect. Thanks very much.

Operator:

Next question will come from Nicole DeBlase with Deutsche Bank. You may now go ahead.

Olivier Leonetti:

Good morning, Nicole.

Nicole DeBlase :

Maybe just starting with the price cost dynamics in EMEA/LA specifically. So I know that segment is kind of lagging a bit with respect to execution of higher price backlog. Is the expectation that price cost turns positive? You know, could that happen in the fourth quarter? Is that more of like a 2024 event?

George Oliver:

Nicole, when we look at all the work we've done on the price cost over the last couple of years, especially in this inflationary environment, when you look at the margins and backlog in our EMEA/LA business are very strong going forward, and so it's a matter of just the timing of the conversion.

Olivier Leonetti:

The answer is absolutely yes. If you go back to the quarter, we had because – we are ramping the manufacturing of applied, we want that to be very competitive in lead time. We have a very competitive set of products. So as we are ramping manufacturing of lead time, we had an impact in conversion costs. Again, as we have normalized for inventory, we have produced less that is impacting conversion cost as well. The combined impact of those two elements is a bit more than a point in the quarter, Nicole. And we believe that we will have some of that happening in Q4, but we see absolutely margin expansion happening in our global products business.

Olivier Leonetti:

Thank you, Nicole.

Chris Snyder:

Thank you. I wanted to follow up on the destock headwinds on the indirect side for resi, Fire & Safety. Can you just maybe quantify what that headwind means for fiscal Q4 organic growth in the guided? Like where would that 4% be if it wasn't for these headwinds? Thank you.

Chris Snyder:

Thank you. I appreciate that and it sounds like from some of the prior commentary that you guys would expect this headwind to alleviate in the early part of fiscal ‘24. So obviously that's a tailwind to the 4% organic guide for the fiscal fourth quarter. Are there any sort of negative offsets there? Is there anything kind of getting worse from here as we try to build the organic bridge into next year? Thank you.

Chris Snyder:

Thank you.

Gautam Khanna :

Thanks. Good morning guys.

Gautam Khanna :

I'm wondering if you could comment on supply chain and your own lead times, manufacturing lead times and whether you anticipate that will have any impact on orders, just as lead times shrink. Is there a risk of kind of an order – less urgency to place orders that could show up in any given quarter and if so, when would you expect that to be a potential factor if at all?

Gautam Khanna :

Has there been any spillover effect of the direct channel, that lead times have come in?

Olivier Leonetti:

And George said that earlier, Gautam, the order rate for the Building Solution business is very strong in Q4.

George Oliver:

Thank you.

Andrew Obin:

Yes, good morning. Can you guys hear me?

Andrew Obin:

Yes, so as we think about these, semi-fabs and EV plans, I think Ethan was kind enough to give us sort of range for average content per plant. Could you guys just sort of do something similar? You know, how big a unit goes on average into one of these, so we can just sort of size the opportunity. And then the part two, when do you guys actually book these projects in your backlog formally? Right, at what stage. Is it a year into construction, just trying to sort of follow up on your commentary. How you should start booking more equipment eventually, but just trying to size the timing and scope of this into ‘24. Thank you.

Olivier Leonetti:

And additional color Andrew, we mentioned that earlier, the stimulus we have had in the U.S., or in Europe, so the IRA or the equivalent stimulus in Europe, have not impacted the demand so far. So we believe that those trends we are starting to see are going to be maintained. And last one, we book an order when we received a signed firm contract Andrew.

George Oliver:

Yes, we've always said, when you look at our procurement organization and the work that they do, even through this period of time, we've been strategically sourcing and making sure we're leveraging our scale and demand to drive productivity, drive savings, to try to offset some of the inflationary pressures on the commodities and the like. So our team has done a really nice job through the cycle to do that, and the answer is of course, yes. I mean, we're now planning for continued strong productivity with our scale, with our buy, making sure that we're positioned at the lowest cost, with the leverage of our overall volumes that gives us a competitive advantage, when you look at our product cost or all of our costs within our cost of goods.

George Oliver:

So on that, I want to close the call. I want to thank everyone for joining us this morning and certainly your continued interest in Johnson Controls. I do believe we're at the beginning of an era that will be defined by deep decarbonization and sustainability. And we are, as Johnson Control is well positioned to be an important contributor to empowering our customers in every industry to create healthy, safe spaces for people on the planet. And I think our strategy is clear. It's playing out. We have a strong portfolio and now it's just about continued execution. So with that operator, that concludes our call today.

Operator:

Good morning and welcome to the Johnson Controls Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note today’s event is being recorded. I would now like to turn the conference over to Jim Lucas, Vice President, Investor Relations. Please go ahead.

George Oliver:

Thanks, Jim and good morning everyone. Thank you for joining us on the call today. Let’s begin with Slide 3. We are proud of our second quarter performance, which saw sales, segment EBITA and adjusted EPS all exceeding the high-end of our guidance. During the quarter, sales grew 13% organically as we realized strong pricing and improved volumes across both our shorter cycle global products and longer cycle business solutions. The overall demand backdrop remains robust with orders growing 8% for Business Solutions and continued momentum with service orders growing 14% in the quarter as the adoption of our digitally-enhanced solutions continues to materialize and provide value for our customers. Our resilient backlog grew 9% to a record $11.7 billion and our service backlog increased by 15%. We made great progress executing on our higher margin backlog build and continue to convert at a faster pace, resulting in improved gross margin performance and strong incrementals. In addition, we realized $75 million in productivity savings and are on track to meet our targets of delivering $340 million in savings for the full year. As a result, adjusted segment EBITA margins expanded 120 basis points. As we move into the second half of the fiscal year, our strategy remains sound as we continue to execute our resilient backlog, deliver on our productivity initiatives and advance our digital transformation. Our pipeline remains healthy and we expect momentum to stay positive. While global macro conditions remain uncertain, we are confident in the fundamentals we have built across our business. Our visibility into the second half of the year provides confidence in raising the lower end of our full year adjusted EPS guide, which Olivier will provide more details on later in the call. We continue to anticipate strong top line growth and backlog conversion in the second half, which should lead to continued margin expansion. Now turning to Slide 4, we continue to demonstrate our unique value proposition and accelerated our leading position through our pillars of growth. We have a significant market opportunity ahead of us connecting smart, healthy and sustainable buildings. As the call for climate action intensifies, we are seeing strong tailwinds for our sustainability, infrastructure and decarbonization offerings. As we have stated in the past, nearly 40% of global energy emissions come from buildings. At Johnson Controls, we play a vital role in helping our customers bridge the gap towards a net zero future. Our systematic approach to digitization is creating a new class of smart buildings, helping reduce energy emissions, improve efficiency and optimize cost. We are well positioned to capture secular trends to help build towards a more sustainable future. OpenBlue is a key differentiator as we advance our leadership position across our vectors of growth. Last quarter, we highlighted the significant progress through our digital transformation journey. And today, we continue to see increased adoption of our OpenBlue platform across multiple use cases. By combining our dynamic product portfolio and services, we are making significant progress in expanding our global footprint of smart building solutions, helping better serve our direct channels through real-time monitoring of connected devices. Our integrated domain expertise and unique capabilities set us apart and we look to continue this momentum as we help our customers deliver their objectives. While we continue to scale and capitalize on these emerging opportunities, we remain committed to building on our strong operational foundation in further expanding our margin profile. We have made great strides in successfully navigating inflationary headwinds and supply chain constraints over the year. As these have eased, our ability to execute is important. We see the results through our progress with our suppliers, disciplined pricing approach and delivering on our productivity savings plan. Lastly, we look to maintain our prudent approach to capital allocation and drive long-term shareholder value through our attractive dividend growing in line with net income as well as consistent share repurchases. Year-to-date, we have returned over $700 million in capital, including roughly $250 million in share repurchases and nearly $500 million in cash dividends. Moving on to Slide 5, there has been a lot of focus in the past couple of months around commercial construction, particularly with regards to the commercial office sector. While Johnson Controls does have exposure to this sector, it represents a small portion of our overall business. In addition, we have a large installed base, and there continues to be demand for retrofit projects. This slide highlights the overall diversity of the Johnson Controls portfolio. Within Commercial, we are diversified with exposure from retail, lodging and hospitality, sports and entertainment to warehouses. Beyond Commercial, we have a broader exposure to Institutional, Industrial, Data Centers and Government sectors. Funding both for new construction and especially retrofit comes from many different avenues. There remains a lot of pent-up stimulus funds in both the U.S. and Europe that have not yet been released. We have a strong backlog today, and we continue to see a long runway for growth as we leverage our broad portfolio of products and solutions. In addition to our diversification of the verticals we serve, a key differentiator of our portfolio is the ability to leverage our large global installed base of equipment. As we further digitize our offerings to create smart connections, we can create more predictive outcomes for our customers as we help them use the power of data to make net zero a reality. On to Slide 6, service is a key area of focus for us as we leverage our large installed base. We once again saw a strong double-digit growth in sales and orders. We are making tremendous progress in taking what has historically been a mechanical break and fix business in building a solutions-based business that creates a higher margin recurring revenue stream from our large installed base. As we create more predictive outcomes, it not only helps our customers achieve better results, but it also allows us to better leverage our global field operations more effectively. We are creating more standardization across our field operations and capturing better data from our connected solutions. As a result, our higher-margin Parts business grew over 20% in the quarter, and we see this as a growth contributor to our overall service strategy. Decarbonization is an area of focus across the entire Johnson Controls portfolio which includes our sustainable infrastructure or SI business that the KPIs on this slide represent. In addition to SI, decarbonization touches many products and solutions. Nearly 55% of our products and solutions drive sustainability. This includes heat pumps, energy-efficient refrigerants and digital solutions, to name just a few. As an example, when we upgrade an asset or a solution in the field, it drives efficiency at the building level such as software for controls or upgrading a chiller. Within SI specifically, we continue to see strong orders, revenue growth in a very healthy pipeline. The healthy buildings market opportunity remains strong as evidenced by our almost $2 billion pipeline. We are seeing increased traction among both federal and international regulators as productivity benefits associated with well-managed indoor environments come to the forefront. Recently, the European Parliament voted to include a promising enhancement to the energy performance of buildings directive, which would require indoor environmental quality monitoring of buildings. Johnson Controls is encouraged by the latest developments as the IEQ language has the potential to drive increased adoption of digital building systems and deliver improved health and wellness all while accelerating the decarbonization of buildings. Turning to Slide 7, we are honored to be continually recognized for our dedicated sustainability efforts. During the quarter, we received several recognitions, including being named as one of the World’s Most Ethical Companies for the 16th time by Ethisphere. We were especially honored to be named to the Clean200 for the eighth consecutive year. Every year, 200 out of more than 6,000 companies are selected for the high proportion of their revenue earned through a sustainable business. We are proud of the recognition and we’ll continue to further our strategy to help tackle building emissions globally. I will now turn the call over to Olivier to go through the financial details of the quarter. Olivier?

Operator:

[Operator Instructions] And today’s first question comes from Nigel Coe with Wolfe Research. Please go ahead.

George Oliver:

Good morning, Nigel.

Olivier Leonetti:

Thank you for you question. Price cost will remain positive, of course, in the line rate for the second half of the year as we keep materializing the strong margin backlog we have in the P&L.

Nigel Coe:

Okay. But no hard disclosure around price cost, okay? And then on the pie chart of the exposure, I thought that was really helpful. So roughly 20% Commercial. Obviously, that includes service renovation and new builds. So who is – to distill is down to just the commercial office new builds, what the message here is it’s like low single-digit exposure to commercial office new build. And so if you can just maybe just comment on that. And then thinking about the exposure to regional bank lending, when you look around that pie chart, where do you see the exposures over and above commercial office?

Olivier Leonetti:

So as we put in George’s preparing remarks, we have a low exposure to the office business. Your number is in the ballpark, Nigel. Our customers also have many funding sources. So we don’t see today an exposure to what is happening in the U.S. in the banking industry. Another data point, as George indicated, the backlog is strong and very resilient, which is another indicator about the strength of the financing sources.

George Oliver:

Thank you.

Jeff Sprague:

Thanks. Good morning, everyone.

Jeff Sprague:

Hi, good morning. These service orders look order line fantastic, actually. I’m wondering if you could provide a little bit more color on the composition. Obviously, you introduced the call with highlighting some of the secular things that you put in place. But when we think about, for example, North America service orders up 14%, should we think of that as driven by existing customers who are taking more of your upsell? Is that the primary driver or is this a recapture of installed base that maybe you weren’t serving before. I’m sure it’s a lot of different things, but I just wonder if you could kind of characterize maybe the key drivers there.

Jeff Sprague:

Great. Thanks for that. And then just on Europe and corporate, it sounds like you took a couple of hits that you just digested and moved on. Can you give us some sense of what these were, how large they were and if they are kind of truly non-recurring in nature?

Jeff Sprague:

Great. Thanks, I will leave it there.

Operator:

Thank you. And our next question comes from Steve Tusa with JPMorgan. Please go ahead.

George Oliver:

Good morning.

George Oliver:

See, when we look at our revenues, that takes into everything we do within those verticals for the company, including our Global Products business and then the field business, both install and service. Through cycles, the new construction goes down, the service and retrofit goes up. But as we’ve been now capitalizing on the opportunities with the new service offerings that we have, we are seeing a natural pickup of additional retrofit because of that along the lines of these secular trends.

Olivier Leonetti:

We should see the margin to pick up, Steve, in Q3 sequentially by more than 2 points sequentially. And as I indicated, we should be about flat year-on-year. The underlying performance of EMEALA is very strong, as I indicated, and the backlog margin is now being realized at an elevated rate.

Olivier Leonetti:

Correct. The numbers we discussed, Steve, are still intact for Q3 across the plat [ph] including for North America.

George Oliver:

Thank you, Steve.

Noah Kaye:

Good morning, thanks for taking the questions. So you’ve got the acceleration in orders sequentially this quarter on a tougher comp. Maybe comment on orders expectations for the back half and pockets of strength that you see?

Noah Kaye:

Okay. Thanks, George. And then maybe you can characterize the inventory build in terms of composition and how you see that working down. Certainly, it’s normal to see some seasonal build in parts of the business, but that sort of longer cycle, higher components portion of it, but just being interested in your characterization. Thanks.

Olivier Leonetti:

Not much more to add. If you look at the inventory turns in Q2, we improved sequentially by 6 days. We didn’t want to reduce the inventory by much more than that due to the strong demand we will have to satisfy in Q3. For the full year, we expect inventory to be back at the level it was at the end of ‘22. And as we have discussed before, we want to keep improving the inventory turns as we get into ‘24.

Olivier Leonetti:

Thank you.

Scott Davis:

Hi, good morning.

Scott Davis:

George, the parts numbers that you gave, kind of echo Sprague’s comment on service and parts, pretty amazing. What – I mean, I understand digital is a big role here but is there any way to think about kind of your capture rates and how they have improved over time with digital? Is it – I’m trying to picture for the most part, if something breaks, people want to replace like-for-like, but maybe around the world, it’s not always that case? But how much has digital, I guess, improved your take rates or capture rates on those spare parts, I guess, is my question.

Scott Davis:

Yes. No, it does. And I think maybe just as a natural follow-on, when you use the term vintage, I think is appropriate. I think there is always been a view that these – the big chillers just last forever. And in fact, they seem to last a very long time. But given decarb or other drivers, are you seeing the actual kind of useful life or vintage come down because there is a greater interest in people pulling 35-year old or 30-year-old units out of service because it just doesn’t make any sense, where maybe in the past, it did make sense to keep them alive?

Scott Davis:

Very interesting. Thank you. Best of luck, guys. Appreciate it.

Olivier Leonetti:

Thank you, Scott.

Chris Snyder:

Thank you. So volumes in the quarter really stood out with a nice improvement to up 3% versus, I believe, down 1% last quarter. Does this pickup just reflect the catch-up in volumes pushed out of last quarter or more so supply chain improvement or company capacity additions. And with that, we look at like around 9% organic in the back half, how much volume is expected on that?

Chris Snyder:

Thank you. I appreciate that. And then I also wanted to follow-up on service orders, but specifically the relationship between service and equipment orders. Service obviously has some pretty good secular tailwinds with OpenBlue and the market share opportunity that brings. But there are also is a connection between service and equipment when we look at attaching, right? So I guess my question is, if we do hit a period of cyclical pressure and equipment orders are down on that, what is the ability or the opportunity to kind of grow service orders through the cycle? Thank you.

Chris Snyder:

Thank you. Appreciate that.

Julian Mitchell:

Hi. Good morning. There has been a lot of questions on the Building Solutions side, so maybe looking at Global Products for a second. You have had very, very good operating leverage first half of this year and the last 2 years. You are running up against some tough comps in the back half. So, I just wondered how you are thinking about the degree of margin expansion year-on-year in Global Products. And then looking out beyond the very short-term – when we look at some of your peers, Honeywell’s margins are quite a bit higher, your HVAC peers are somewhat lower. So, how should we think about kind of normal operating leverage or incremental margins in Global Products beyond 2023?

Olivier Leonetti:

Yes, absolutely. If you look at the second half for GP, as you said, Julian, the strength in the year-on-year margin trend will start to normalize because of the tough comp. And what will take over in terms of margin profile for the second half is our solution business, where you see the trend, which happened in Q2 is going to accelerate in the second half of the year. So, that’s your first question. Regarding your second question beyond ‘23, we believe we can deliver 30% incremental. George mentioned a few of the points supporting this. We believe in a Global Product, we have strong product offering, heat pump is going to be part of this. And then we also are very bullish about what our Building Solutions margin could be at the back of solution services enabled by digital. On top of that, we have strong operating leverage capability in the P&L. As we keep growing, we have invested over the last 2 years. We believe that this investment will start to slow down, and we should be able also to increase leverage next year.

George Oliver:

Yes. Let’s reflect on what we have been. We did the merger with the divestiture of the seating business back in 2016 with the merger with Tyco and Johnson Controls. And then we said from the strategy that we laid out was to really step back and understand what the future buildings would be and what was going to be required to ultimately win with the trends that were underway. We said, at the end of the day, the value proposition with a leading HVAC business, combined with having a leading building management platform that the two combined is ultimately what’s going to be required to be able to deliver smart, sustainable, healthy, most productive, most efficient buildings. And that has been our strategy. So, as we have been looking at our portfolio, continuing to strengthen HVAC, not only with our organic investments, but also looking at potential bolt-ons or gaps that we might have. And heat pumps has been a huge focus of ours, I mean our – when you look at our heat pump portfolio, about half of our HVAC portfolio is made up of heat pumps. We have had significant reinvestment into heat pumps, and that’s going to be a continued focus of ours as you stated, from an M&A standpoint. And then on the digital side, what’s happening, the combination of what we have done in our building management system platforms coming together, now with a leading data platform with OpenBlue, it really does position us to now differentiate the solutions that we can ultimately serve our customers with, Julian, with the combination. And so with that, from a capital deployment, we have been certainly providing – returning a lot of capital back to our shareholders through dividends and in share repurchases, and that’s continuing to be strong, and we are going to continue to focus on from an inorganic standpoint where we can leverage the strength of the strategy that we are executing organically and how do we complement that with M&A.

Julian Mitchell:

Great. Thank you

Joe O’Dea:

Hi. Good morning. Thanks for taking my questions. I wanted to start – I think George, you said about 50-50 mix in office on the sort of new versus retrofit side. Just wanted to confirm that it would be something simpler or something similar for non-res exposure? And then could you talk about sort of retrofit and how much of that activity is dependent on third-party financing or most of that just internally sourced from customers as well as the push versus pull dynamic. How much of these sales do you think you are sort of generating on the sort of push side and going out there and selling the advantages versus customers coming to you and asking for this?

Joe O’Dea:

Got it. And then Olivier, just thinking about the back half of the year, I mean it seems like from a sort of top line growth perspective, looks like the third quarter would be in a pretty tight band across the segment, something like high-single digit, low-double digit growth and then Q4, maybe more mid-single digit, high-single digit across the segments. The question is, when you look at it, where do you see the greatest upside risk? Is this primarily a function of ongoing supply chain constraints? And if those were to ease, and where could you see things come in a little bit better?

George Oliver:

I think a key statistic is when we look at our Global Products business, which kind of spans all of our markets, when you – with the exception of the softness we see in resi ducted, our backlog in our Global Products business, when you look at both direct and indirect, is up over 20%. And so you realize that, that ultimately plays to our strength with the work we are doing around the commercial sectors.

Operator:

Thank you. And our next question today comes from Nicole DeBlase with Deutsche Bank. Please go ahead.

George Oliver:

Good morning.

Nicole DeBlase:

Maybe just starting on the orders, really strong in the quarter, accelerated versus 1Q. Any thoughts on how orders are trending into April? Has that strength continued? And also, any thoughts on how you guys are seeing orders in the third quarter just because the comp – the 2-year stock comp does get a little bit tougher from here. Thank you.

Nicole DeBlase:

Okay. Got it. Thank you. And then I know it’s a small part of your business, but just wanted to discuss the North America resi market. I was just a little bit surprised to see it down high teens for you guys, just a little bit worse than peers. Can you just talk a little bit more about what you are seeing with respect to price versus volumes and the inventory dynamics in the channel? Thank you.

Nicole DeBlase:

Thanks. I will pass it on.

Operator:

Thank you. And our next question today comes from Joe Ritchie at Goldman Sachs. Please go ahead. Hello Joe, your line is open or is it perhaps muted. I apologize we will go on to the next question, and that comes from Deane Dray at RBC Capital Markets. Please go ahead.

George Oliver:

Hi Deane.

George Oliver:

Yes. When we look at all of the programs that have been playing through with the COVID programs, the Infrastructure Act, the Inflation Reduction Act. And then in Europe, the 55, the building standards, we are tracking that pretty much across the board, and we participated in ultimately developing those bills. And so as we are tracking this, we have seen – if you look at the problems now, our customers are trying to solve, whether it would be education or healthcare or any of these type of problems. We are seeing – we started to see a pickup last year, and that’s continuing this year and being able to now add funding, getting to our customers and ultimately converting. That’s going to take – when we look at the deployment of all of that, Deane, over the next 10 years, it peaks roughly about 5 years out. So, it’s not going to come into play immediately, but we are beginning to see those moneys flow to the customers that ultimately can put it to work in solving some of these problems that they are solving around sustainability and healthy buildings and the like. So, we do see that as a – we size the market on a run rate basis about $250 billion when we did our Investor Day. We believe that the funding that’s coming into play more than supports the ability to be able to capitalize on that market opportunity. And then with our not only leadership product, but the solution set that we are building with digital, then positions us to really get more than our fair share.

Olivier Leonetti:

It is included in our guide. And again, we discussed about this. We have clear line of sight of what needs to be done. We have reduced inventory sequentially by about six days. And we have – we could have done more and indicated why we did not. We need to satisfy the strong demand we have in Q3, but we have clear line of sight of this inventory reduction, and that’s indeed embedded in our guide.

Operator:

Thank you. And our next question today comes from Gautam Khanna with TD Cowen. Please go ahead.

George Oliver:

Good morning.

Gautam Khanna:

I had a question that I was hoping you could help us with, which is on orders related to install. So, I wanted to get a sense for how much is equipment price up year-over-year in the orders? And then how much does equipment price represent as a percentage of a total job you will book? I am trying to understand like are you booking an install higher volumes as well as higher prices. If you could give us some color on that.

Gautam Khanna:

Okay. And can you say how much price is up on equipment maybe year-over-year within the installed business?

Gautam Khanna:

Okay. And then could you maybe refresh us on your targeted – maybe over the next 12 months where you think service attach rates, how much of that could grow? Previously, you guys were talking about 40%, where are you targeting over the next 12 months?

Olivier Leonetti:

We think that this low-double digit growth in services is going to be – is potentially subject to an acceleration. As we keep digitizing services offering, this service business will increase. Attach rate is one dimension, that’s not the only one.

Brett Linzey:

Hey. Good morning all. Just wanted to come back to Slide 5 and specifically the decarbon, the healthy pipeline, about $10 billion. Can you just remind us what the hit rate or the conversion rate typically looks like there? And then is there anything unique or elongated about some of the timing on those projects?

Brett Linzey:

Great.

Operator:

Thank you, sir. This concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day.

Operator:

Welcome to Johnson Controls First Quarter 2023 Earnings Call. Your lines have been placed on listen-only until the question-and-answer session. [Operator Instructions] This conference is being recorded. If you have any objections, please disconnect at this time. I will turn the call over to Jim Lucas, Vice President, Investor Relations.

George Oliver:

Thanks, Jim, and good morning, everyone. Thank you for joining us on the call today. Let’s begin with Slide 3. Fiscal 2023 is off to a strong start with solid Q1 results. Our teams across the globe have executed well delivering strong financial performance for our shareholders, while pushing the pace of innovation to provide our customers with the next phase of digital solutions across our vectors of growth. During the quarter, we accelerated growth across to our service-based businesses, drove higher margins and delivered profitability at the high end of our adjusted EPS guidance range. Overall, organic revenue grew at a healthy pace and our $11.3 billion backlog remains resilient, growing 11% year-over-year. Our service strength was resilient and remains a key competitive differentiator. While order timing, supply chain realization and China policies have impacted our global products in field install order flow during the quarter, we are seeing incremental improvements in order momentum heading into Q2. As we mentioned over the last few quarters, we remain focused on the fundamentals of our business in improving our operational execution. Our teams have done a great job advancing our initiatives to accelerate growth and optimize the efficiency of our cost structure. During the quarter, we delivered $90 million in productivity cost savings, and are on track to reach our $340 million savings target over the course of this fiscal year. We are also committed to our prudent approach to capital allocation, reinvesting in new products and technology to drive long-term shareholder value while continuing to return capital to our shareholders. We recently announced our plans to enhance our growing industrial heat pump portfolio with the acquisition of Hybrid Energy. Acquisitions are an integral part of our growth strategy and by investing in Hybrid’s patented high temperature heat pump technology, we are continuing to strengthen our leading global product portfolio and provide our customers with the most efficient sustainable building solutions. We are well-positioned to capitalize on large growth opportunities across our dynamic product portfolio and field business. Through our integrated domain expertise, global coverage and scale, we are leading the way towards smart, healthy, and sustainable buildings for our customers. While the global macroeconomic environment remains uncertain based on our strong start to Q1 and our expectations for the remainder of the year, we are raising the lower bookend of our adjusted EPS guidance range for the year. Now turning to Slide 4. During the quarter, our OpenBlue platform continued to expand as we enhanced our capabilities leveraging the power of AI and providing customers with unique insights. A good example is the deployment of OpenBlue enterprise manager at a leading tech manufacturer to help them meet their energy and sustainability goals. In addition, we have recently installed OpenBlue companion at their facility to enhance employee productivity and space utilization. From advancing predictive analytics to integrations at the edge, our full suite of solutions empowers our customers to meet their carbon emission goals and create a healthier, more productive workspace for their people. To date, we have enhanced the existing connectivity of over 11,000 chillers through OpenBlue, representing a 79% increase year-over-year. Moving on to Slide 5. Our digital service journey has accelerated since we launched our innovative OpenBlue platform in fiscal 2021. At that time, we entered the first phase of our digital transformation with a focus on enhancing data mining capabilities. Over fiscal 2022, we launched the OpenBlue gateway enabling data access at scale and increased connectivity across our growing installed base. We are now positioned for the next phase of our journey as we standardize our field operations globally. Linking the benefits of real time monitoring of connected devices to our extensive service network. We can provide our customers with faster response times while optimizing the deployment of our global field service presence. We are beginning to see the results of our digital offerings enabling service growth. During the first quarter, service orders and revenue grew 10% year-over-year, with continued growth, we are in a great position to reach the goal we set out at our Investor Day in fiscal 2021 to capture $2 billion in additional service revenue by 2024. On to Slide 6, with nearly 40% of the world’s carbon emissions coming from commercial and industrial buildings, the goal of achieving net zero starts at the building level. Through our vast sustainable infrastructure partnership ecosystem, we play in an integral role in helping our customers achieve these targets no matter where they are in their decarbonization journey. Starting with our established advisory services and goal setting partnerships with KPMG and Accenture, we help customers take the first step to accelerate and solve their decarbonization and efficiency goals. We are also able to help fast track our customers’ net zero targets through carbon reduction services, collaborating with leading renewable energy supply and distributed energy providers. With our comprehensive customer solutions and strategic partnerships, we are positioned to take full advantage of favorable regulatory tailwinds and continued momentum. During Q1, we realized over $200 million in organic revenue, growing over 20% year-over-year with orders over the last 12 months, growing at 6%. Turning to Slide 7. The Healthy Buildings opportunity remains attractive as our customers invest in indoor environmental quality improvements post-COVID. Solving for the indoor air quality and energy consumption challenges of hybrid work models is driving a compelling intersection of our Healthy Buildings and sustainability strategic growth vectors. We are in a leadership position, thanks to OpenBlue indoor air quality as a service, which continued to gain momentum in Q1 as well as our leading IAQ and space management capabilities in OpenBlue Enterprise Manager. In our Healthy Buildings business, trailing 12-month orders increased 11% year-over-year, and our pipeline of $1.2 billion remains strong. Looking forward, we expect continued growth momentum as the value of indoor environmental quality improvements delivers benefits for our customers. On to Slide 8. We are honored to be continually recognized for our dedicated sustainability efforts. Among other honorable recognitions, two of Johnson Controls leaders were awarded for their efforts. Chief Sustainability Officer, Katie McGinty, was named one of 2022’s most influential women executives for sustainability leadership by Women Inc. magazine. Anu Rathninde, President of Asia-Pacific, received the ESG Exploration Character Award of the Year from the 2022 ESG Pioneer 60 awards by Jiemian. I am proud of our team for leading by example and executing on our values. I will now turn the call over to Olivier to go through the financial details of the quarter. Olivier?

Operator:

[Operator Instructions] Our first question is going to come from Nigel Coe from Wolfe Research. Nigel, your line is open.

George Oliver:

Good morning, Nigel.

George Oliver:

Yes, when you look at our field orders, what is encouraging? Although, the install was up 1%, services was up over 10%, and we’re very encouraged with the progress we’re making there, Nigel. On the install side, it’s mainly a couple of factors here that impacted us here in the quarter. It was – the China – the COVID lockdowns, we have incredible pipeline, but because of the disruption and ultimately the delay in getting those closed impacted us in the quarter, and that’s 1% to 2%. And then in our project-based business as we now drive our vectors of growth around sustainability and healthy building. There’s larger projects and a lot of these, it’s hard to predict that timing conversion and so that amounted to another roughly 1% to 2%. Those are the key drivers, as far as the orders – field orders. Nigel, the backlog is up over 11%. The pipeline continues to be strong double digits in our conversion. And so as we’re now executing on the strategy, we are encouraged that our conversion is going to continue very strong here in Q2 and beyond for the year. And then now the way that we’ve been set up here with the backlog being up for the year really does give us a lot of confidence in our ability to be able to deliver on the guide that we provided for the full year.

George Oliver:

We’re making tremendous progress on our margins and it’s not only – this has been over the last couple years instilling a discipline around price costs and more important about the value propositions that we’re bringing to the market with our vectors of growth. And so we’ve got – you see that not only in our shorter cycle business with our global products and the strength that we’re having in margins that’s combined not only the value proposition, but now also the additional productivity that’s playing through and the leverage that we’re getting on that. And so as we project the current year, we’re going to continue, going to see momentum in margins, because the longer cycle business, we’ve got strong margins and backlog. As we increase the velocity on the turn of these projects, you’re going to start to see much stronger margins come through on the rest of the year. So Olivier, maybe you can comment on the segments.

Nigel Coe:

Great. That’s very helpful. Thank you.

Joe Ritchie:

Thanks. Good morning, everyone.

Joe Ritchie:

Olivier, I want to pick up off that last point on field margins improving. And so you guys called out unfavorable mix both in North America and EMEA/LA, I want to understand that a little bit better. And then specifically on North America, I know that you guys saw this sequential improvement last quarter, but the margins now have been down year-over-year for the last seven quarters. So just help us understand what’s driving the confidence in those margins getting better from here and what was the issue with unfavorable mix that was coming through the field business this quarter?

Joe Ritchie:

Okay. That’s good to hear. And I don’t usually ask questions on the North America resi business, because it’s a small portion of the overall portfolio, but it was pretty interesting to see that business down 20%. I think you guys called out product mix in the channel. So maybe provide a little bit more color, what’s happening there? That seems to be a little bit lower than what we’ve seen reported so far from some of your peers.

Joe Ritchie:

Got it. Very helpful. Thank you.

Operator:

Our next question comes from Steve Tusa, JPMorgan. Steve, your line is open.

George Oliver:

Good morning, Steve.

George Oliver:

Yes. At the high level, Steve, when we look at our build for the year, we were in a very different place this year than we were last as we’re now continuing to accelerate our capacity expansion across our product-based businesses. And we’ve seen a nice ramp, for instance, in our applied businesses. In some cases, we’re expanding capacity 2 or 3 times, and we tried to see that volume come through. And then we have worked with our supply chain. So we’re very much aligned now going into our seasonal ramp as well as the recovery of our backlog to be able to begin to accelerate here in Q2, and that will continue through the seasonality that we see in Q3 and Q4. And so we’re in a very different place than we were a year ago and being able to execute on that ramp. And I’m very encouraged with the work that we’ve done, especially across our applied business where, from a core strength, that is our strength, and we’re beginning to see that pick up across the board. So Olivier, I don’t know if you got any additional.

Steve Tusa:

So like is $1 around the right number for 3Q and then it kind of steps up a bit from there? Or is it more fourth quarter weighted, maybe just a little more precision to get people in line?

Steve Tusa:

Okay. And then one – just one last one on non-res activity. You said that things are – you expect things to pick up here. What are you seeing in January on that front? I assume you’re seeing some positive things? And what’s the latest outlook on how things trend in the back half of the calendar year?

Steve Tusa:

Great. Thanks a lot.

Operator:

Our next question comes from Julian Mitchell from Barclays. Julian, your line is open.

George Oliver:

Good morning, Julian.

Olivier Leonetti:

So if you look at, first of all, the full guide, it’s unchanged, 80% to 90% free cash flow for the full year. If you look at the seasonality of your question, we believe we’re going to go back to historical free cash flow generation seasonality. That means that we should be year-to-date at the end of Q2, close to breakeven from a free cash flow standpoint. You can infer from that, that we would be positive in Q4 – in Q2, I’m sorry. So breakeven year-to-date at the end of Q2, positive in Q2. You’re right. Inventory was the key variable explaining what happened in free cash flow in Q1. Largely, George covered that. Resi and some mismatch of inventory is what is explaining this trend. We believe that this is going to keep improving all through the year. We have detailed action in place. And we believe that breaking even after the first half is an achievable goal from a free cash flow standpoint.

Julian Mitchell:

Thanks very much. And then I just wanted to circle back to the North America Field business again, because you’ve had, I think, seven quarters now of down margins year-on-year. The Q1 margin was 200 points lower than it was two years ago. And I think you’d mentioned mix as a headwind specifically in the first quarter, but clearly, there have been issues predating that, pulling down the margin. And it seems like it’s taken longer than you’d expected to get that North America field margin to turn the corner. So I think clearly, the guide embeds an improvement there getting to that $1 of EPS, for example, in Q3. But maybe give us a bit more color on what you’re doing kind of inside that organization to get the margins to turn around. And how much of the improvement in margin is that internal self-help versus getting some sort of macro or supplier benefits?

Olivier Leonetti:

Absolutely. So as a byproduct of the speed of the backlog conversion, we would see, as I indicated earlier, Julian, margin expansion, I can go a bit more into the details of the numbers here. So probably in Q2, we will expect segment EBITDA margin to increase close to a full points. And today, for Q3, we are planning actually close to a 4 points margin improvement in this business, not assuming a significant change in churn rates of the backlog.

Operator:

Our next question comes from Scott Davis from Melius Research. Scott, your line is open.

George Oliver:

Scott, as we look at what we’ve done as we’ve been executing on the strategy that we outlined a couple of years back and where we are in that journey, it’s really now capitalizing on a much bigger value proposition as we focused on our vectors of growth. And that’s not only in how we pulled together our combined capabilities within our products. But now with OpenBlue and ultimately are creating solutions that deliver on an outcome for our customers. And the outcome is typically focused on energy reduction, obviously heightened indoor environmental quality and then ultimately leading to an autonomous building. And as we focused on our core and then when you look at the contribution that our HVAC business has to being able to achieve those outcomes, it is significant. And so the value proposition comes with being able to create a solution that’s very different than what historically has been provided leveraging our technology and then being able to really leverage the core in how we ultimately deliver on that with the technology that we have in our products. And so we’re confident that when you look at how we’re pricing today, the value proposition we bring and the new products that we’re bringing to market, our new product investment is up about 25%, 28% year-on-year. We’ve got the leading portfolio in heat pumps. Heat pumps now today are going to be a big part of the solution and being able to reduce energy while we’re continuing to enhance the indoor air quality. And we have new heat pumps pretty much across the board where that technology is being applied across our entire portfolio from the most complex industrial applications with our chillers and industrial refrigeration across all of our commercial products rooftops as well as our applied air-cooled chillers going into data centers and then across our residential portfolio. So I’m confident that with the technology, the value proposition and then our ability to fundamentally change how we serve our customers with solutions that focus on outputs delivering for them, we’re seeing significant momentum on that.

George Oliver:

Yes. The way that we’ve leveraged our Fire & Security portfolio today, it’s still very attractive. It’s still 40% of our revenues. It’s quarter building systems. On the digital side, they are critical systems that do integrate with an overall smart building. And because of the sensors that these systems bring into the building, very important for the data that we collect within OpenBlue and how we ultimately create a smart building. So it starts there. Now you would argue that there’s more around the security systems. So whether it be access control, intrusion or video, those are very important sensors and systems that historically have been separate and apart but then ultimately converge with our building controls and the other digital systems within the building that with now – with OpenBlue, we can bridge all of those systems into one solution, into one data set. So it starts there. And then from a fire standpoint that when we install a fire system, that the value proposition that we bring through service is significant in our ability to be able to connect and monitor and ultimately be very proactive in how we support our customers through service. So those are the two – when you think about Fire & Security, the value proposition that it has into the solution set that we’re building and ultimately differentiating the outputs that we can create for the customers that we serve, Scott.

George Oliver:

Thank you, Scott.