Summary of Johnson Controls Conference Call Company Overview - **Company**: Johnson Controls - **Event**: Oppenheimer's 20th Annual Industrial Growth Conference Key Points Leadership Transition and Strategy - New CEO Joaquin has been proactive in his first two months, visiting eight countries and engaging with customers and factory operations [3][4] - Focus on lean initiatives and value creation opportunities, emphasizing a long-term journey rather than immediate results [4][6] - The company is redefining its strategy and portfolio, identifying areas for growth and potential divestitures [5][6] Operational Changes - Revised reporting structure aligns with industry peers, aiming for cost reduction and improved accountability [8][10] - The new structure aims to eliminate redundancy and improve customer focus, transitioning from a dual operating model to a unified approach [11][12] - Anticipated reduction in corporate costs, with guidance for Q3 at approximately $80 million, down from $130 million in Q2 [15][16] Financial Performance and Growth Targets - Long-term goal of double-digit earnings growth, leveraging existing cost structures and improving operational efficiency [21][25] - Gross margins are strong, but SG&A costs have historically been higher than competitors, indicating room for improvement [22][20] - Lean management initiatives expected to enhance gross margins and operational performance over the next few years [24][25] Service Revenue and Resilience - Service revenue is characterized as true recurring income, with multiyear contracts linked to sold systems [29][30] - Historical resilience during economic downturns, with a potential increase in service demand as maintenance is deferred [30][31] OpenBlue Technology Platform - OpenBlue is a differentiated offering with significant growth potential, currently under 1% penetration of the installed base [33][40] - The platform provides operational insights and efficiency improvements, with a compelling ROI of up to 55% over three years [32][33] Market Demand and Pipeline - Observed softness in certain verticals, but overall health in core markets remains strong [44][46] - Data centers and complex manufacturing are experiencing robust growth, while commercial real estate shows mixed signals [50][51] - Tariff impacts expected to affect revenues by about 2%, but the company has strategies in place to mitigate these effects [58][60] Cash Flow and Capital Structure - Achieved 100% free cash flow conversion, driven by improved supply chain and procurement practices [64][65] - Lean management expected to enhance inventory management and reduce capital intensity over time [66][67] Conclusion - Johnson Controls is undergoing significant transformation under new leadership, focusing on operational efficiency, customer-centric strategies, and leveraging technology for growth. The company is well-positioned to navigate market challenges while pursuing long-term financial goals.

Financial Data and Key Metrics Changes - The company reported second quarter sales growth of nearly 5% to $8.2 billion, with adjusted EBITDA growth of over 13% and significant improvement in year-over-year free cash flow [10][29][39] - Adjusted EBITDA reached $145 million, representing a 13% increase compared to the prior year quarter, with an adjusted EBITDA margin rate of nearly 1.8%, the highest since Q3 of fiscal 2023 [38][39] - Free cash flow generation climbed to $193 million in the quarter, approximately $77 million more than last year, bringing year-to-date free cash flow to slightly more than $30 million, an improvement of nearly $250 million compared to the previous year [40][41] Business Line Data and Key Metrics Changes - Sales in the natural products business increased by over 8% compared to last year's second quarter, while the conventional products business was up just over 2% [29] - Wholesale volumes were up about 3%, indicating sequential acceleration and favorable trends compared to industry benchmarks [30] - Retail sales were down about 3% due to five store closures, with same-store sales down about 40 basis points, showing a sequential improvement of about 100 basis points compared to Q1 [31] Market Data and Key Metrics Changes - Inflation remained largely unchanged at approximately 1.5%, close to a percent lower than last year's second quarter [31] - The company expects a sequential deceleration in sales growth from 4.6% in the first half of fiscal 2025 to around 3% in the second half, reflecting the timing of new customer onboarding [44] Company Strategy and Development Direction - The company is focused on increasing value for customers and suppliers while improving free cash flow and strengthening its balance sheet [12][25] - A realignment of the wholesale business into two product-centered divisions aims to provide more tailored solutions to customers and suppliers [20][21] - The company is committed to continuous improvement and has implemented lean management practices across its operations to enhance efficiency and effectiveness [15][16] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the multi-year strategy and the ability to deliver long-term financial objectives, with an increased full-year outlook for all financial metrics except capital spending [11][43] - The company has not observed significant changes in consumer behavior recently, maintaining strong performance among its customer base [84] - Management highlighted the importance of innovation and product expertise in meeting customer needs, particularly in the natural products segment [56][100] Other Important Information - The company has successfully consolidated its Fort Wayne distribution center, transferring its volume to more efficient facilities, and is actively marketing other closed distribution centers [17][48] - The company has reduced net leverage to 3.7 times, the lowest level since fiscal 2023, and is on track to achieve a long-term deleveraging goal of less than 2.5 times by the end of fiscal 2027 [41][42] Q&A Session Summary Question: Can you touch on the changes in the wholesale realignment and the benefits seen? - Management indicated that the realignment focuses on product expertise and functional dedication in sales, procurement, and merchandising, which aligns with customer needs [55][56] Question: Were there duplicate costs during the Fort Wayne DC closure? - Management confirmed that operating expenses were ramping down quickly, with expectations for significant cost reductions moving forward [67][68] Question: What is the core sales growth in conventional products? - Management noted that conventional volumes were roughly flat, but the company has seen improvements in existing customer business [78][79] Question: Are there any changes in end customer behavior? - Management reported no significant changes in consumer behavior, with strong performance continuing among customers [84][85] Question: What is the exposure to imports and potential impacts of tariffs? - Management acknowledged the evolving situation and emphasized the importance of supply chain diversification and resiliency [88][89] Question: What are the expectations for productivity gains in the new DCs? - Management expects mid-single-digit productivity gains from the newly implemented lean daily management practices [92][93] Question: How is the demand for natural and organic products by conventional retailers? - Management confirmed that there is still significant momentum for natural and organic products across various channels [111][112]