Johnson Controls(JCI)2024-07-31 16:02Financial Data and Key Metrics - Organic sales growth was 3%, in line with the guidance of low single-digits [6] - Segment margin expanded by 150 basis points to 17.9%, exceeding the guidance of 17% [7] - Free cash flow generation was more than $500 million higher than the comparable period one year ago [7] - Orders grew 5% during the quarter, with backlog increasing by 10% [7][8] - Adjusted EPS of $1.14 was up 11% year-over-year, exceeding the high end of the guidance range by $0.04 [20] - Net debt decreased to 2.3 times, within the long-term target range of 2 to 2.5 times [20] - Adjusted free cash flow improved approximately $700 million year-over-year to $1.3 billion [20] Business Line Performance - Service led with 9% growth, validating the company's transformation efforts [7] - Global Products business grew 3% year-over-year, with Commercial HVAC growing mid-single digits [21] - Fire & Security declined low single-digit, while Industrial Refrigeration grew approximately 20% [21] - Building Solutions orders grew 5%, with service orders up 12% and systems orders up 2% [22] - North America sales grew 8% organically, with HVAC & Controls up over 20% year-over-year [23] - EMEA/LA orders grew 11%, with service up over 25% [24] - Asia Pacific sales declined 19%, primarily due to weakness in China's systems business [26] Market Performance - North America system business grew 9%, while service grew 6% [23] - EMEA/LA sales grew 8% organically, with service up 15% year-over-year [24] - Asia Pacific service business grew 8%, despite a 19% decline in overall sales [26] Strategic Direction and Industry Competition - The company is transforming into a pure-play provider of comprehensive solutions for commercial buildings, focusing on commercial HVAC, fire, controls, security, and services [13][14] - Data center exposure increased to nearly 10% of sales, up from 7% in fiscal year 2023, with expectations for further growth [14] - The company announced divestitures of its Residential and Light Commercial HVAC business and Air Distribution Technologies business, representing roughly 20% of current sales [8][11] - The company is focusing on delivering safe, healthy, and sustainable buildings, leveraging integrated domain expertise and an extensive branch network [15][16] Management Commentary on Operating Environment and Future Outlook - The company is tightening its full-year adjusted EPS guidance to a range of $3.66 to $3.69 [10] - The company expects strong double-digit growth in the data center vertical, with robust demand continuing to accelerate over the next few years [32][33] - The company is confident in its ability to deliver sustainable long-term growth, driven by a resilient service business and continued demand in North America's system business [26][27] Other Important Information - The company initiated a CEO succession plan, with George Oliver remaining as Chairman of the Board to facilitate a smooth transition [9] - Patrick Decker was appointed to the Board of Directors, bringing experience in leading a transformation at his prior company [10] - The company expects to report the Residential and Light Commercial HVAC business in discontinued operations beginning in the fiscal fourth quarter of 2024 [12] Q&A Session Summary Question: Impact of data center growth on backlog - Data center backlog is expected to grow strongly, with the business now representing about 10% of sales, up from 7% a year ago [32][33] - The company expects strong double-digit growth in the data center vertical, with multiyear agreements contributing to large orders [89] Question: Long-term growth outlook and Fire & Security business - The company expects mid-single-digit growth in the long term, driven by mid- to high single-digit growth in the service business and mid-single-digit growth in the systems business [41] - Fire & Security is expected to maintain mid-single-digit growth, with the service and recurring component driving higher growth [42] Question: CEO succession timeline and Board appointment - The CEO succession plan is underway, with both internal and external candidates being considered [45] - Patrick Decker's appointment to the Board reflects the company's commitment to refreshing the Board with relevant skills and experience [10][45] Question: Free cash flow and capital deployment - The company expects adjusted free cash flow conversion of approximately 85% or better for the full year [27] - Proceeds from divestitures will be used for share repurchases, debt paydown, and restructuring to offset stranded costs [29][68] Question: Asia Pacific recovery and backlog growth - The company expects a recovery in Asia Pacific in fiscal year 2025, with sequential improvement in orders and backlog [71][72] - The company remains disciplined in its approach to the Chinese market, focusing on attractive opportunities and counterparties [72] Question: Portfolio changes and leverage strategy - The company plans to return most of the net proceeds from divestitures to shareholders through share repurchases, while maintaining its investment-grade rating [68] - The company is confident in its ability to deliver consistent, predictable results following the portfolio transformation [30] Question: Data center and liquid cooling technologies - The company is well-positioned in the data center market, with investments in liquid cooling technologies and partnerships to provide full solutions [80][81] Question: CEO search attributes - The company is looking for a CEO with strong operating experience, domain expertise, and the ability to lead the next phase of growth [84][85] Question: Order acceleration and pipeline visibility - The company expects lumpiness in orders due to the data center vertical, with large multiyear orders contributing to growth [87][89] Question: Fourth-quarter EBITA margin visibility - The company has strong visibility into the 19% EBITA margin for the fourth quarter, driven by backlog conversion and improved productivity [92]