Q4 2023 Johnson Controls International PLC Earnings Call

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Good morning and welcome to the Johnson Controls fourth quarter 2023 earnings conference call. All participants will be

Good morning, and welcome to the Johnson controls fourth quarter 2023 earnings Conference call.

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I would now like to turn the conference over to Jim Lucas, Vice President, Investor Relations. Please go ahead. Good morning, and thank you for joining our conference call to discuss Johnson Control's fourth quarter fiscal 2023 results. The press release and all 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.

Jim Lucas: I would now like to turn the conference over to Jim Lucas Vice President of Investor Relations. Please go ahead. Good morning, and thank you for joining our conference call to discuss Johnson controls fourth quarter fiscal 2023 results. The press release and all 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.

Johnson controls dot com.

Joining me on the call today are Johnson Control's Chairman and Chief Executive Officer, George Oliver, and Chief Financial Officer, Olivier Leonetti. Before we begin, let me remind you that during our presentation today, we will make forward-looking statements. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Johnson Control.

Joining me on the call today are Johnson controls, Chairman and Chief Executive Officer, George Oliver and Chief Financial Officer Olivier <unk>.

Speaker Change #5: Before we begin let me remind you that during our presentation. Today, we will make forward looking statements listeners are cautioned that these statements are subject to certain risks and uncertainties many of which are difficult to predict and generally beyond the control of Johnson controls.

Speaker Change #5: These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risk factors and cautionary statements in our most recent Form 10-Q Form 10-K, and today's release, we will also reference certain non-GAAP measures reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are contained in the schedule.

These risks and uncertainties can cause actual results to differ materially from our current expectations.

We advise listeners to carefully review the risk factors and cautionary statements in our most recent Form 10-Q , Form 10-K , and today's release.

We will also reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are contained in the schedules attached to our press release, and in the appendix to this presentation, both of which can be found on the investor relations section of Johnson & Johnson's website. I will now turn the call over to George.

George: As a pass through our press release and in the appendix to this presentation both of which can be found on the Investor Relations section of Johnson controls website, I will now turn the call over to George.

George: Thanks, Jim and good morning, everyone. Thank you for joining us on the call today.

Thanks, Jim, and good morning, everyone. Thank you for joining us on the call today.

Before discussing our fourth quarter in 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 .

George: 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.

George: Our teams responded quickly and worked diligently to minimize the impact from the incident.

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 effort.

George: Greatly appreciate everyones patience from customers to suppliers to shareholders as we worked through our remediation efforts. We now have the incident behind us and our operations are back to normal.

We now have the incident behind us and our operations are back to normal.

George: Now, let's begin with slide three 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.

Now let's begin with slide three. 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.

George: For the full year, we grew sales organically, 8% expanded segment margins 80 basis points to 15% and delivered adjusted EPS growth of 17%.

For the full year, we grew sales organically 8%, expanded segment margins 80 basis points to 15%, and delivered adjusted EPS growth of 17%.

George: We saw continued strength in our service business as our efforts in maximizing our large installed base are coming to fruition.

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.

George: In fact, we grew service, 10% for the year with solid order momentum ending the fiscal year.

George: Our total backlog grew 9% to $12 $1 billion as demand remains strong across our commercial building solutions offerings.

Our total backlog grew 9% to $12.1 billion as demand remains strong across our commercial building solutions offering.

George: In fiscal 2023, we generated $1 $8 billion in free cash flow, which represented 76% conversion.

In fiscal 2023, we generated $1.8 billion in free cash flow, which represented 76% conversion.

George: During the year, we returned $1 $6 billion to shareholders via dividends and share repurchases.

During the year, we returned $1.6 billion to shareholders via dividends and share repurchase.

Our capital allocation strategy remains unchanged, targeting to return 100% of our free cash flow to shareholders through dividends and share repurchase.

George: 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 will continue to prioritize allocating capital accordingly toward that objective.

George: We have the highest conviction ever in our strategy to lead in building solutions, we will continue to prioritize allocating capital accordingly towards that objective.

George: 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.

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.

George: We are initiating guidance for fiscal 'twenty 'twenty four for approximately mid single digit sales and adjusted EPS growth, respectively and for free cash flow conversion of approximately 85%.

We are 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 percent.

Olivier will provide additional color on the guides later in the call, but fiscal 2024 will show improvement following a seasonally slower first quarter.

George: Olivier will provide additional color on the guidance later in the call, but fiscal 'twenty 'twenty four will show improvement following a seasonally slower first quarter.

Now turning to slide four, 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.

George: Now turning to slide four.

George: Demand for our building solutions is accelerating with our customers around the globe as we are developing applied solutions to deliver outcomes, the same energy and reduce emissions, while improving the overall occupant experience.

George: We are able to achieve these outcomes not only through our leading domain expertise in applied HVAC and controls solutions, but also through world class fire detection and protection and Smart security solutions enabled by an industry, leading digital platform opened blue.

We are able to achieve these outcomes not only through our leading domain expertise and applied HVAC and control 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 building each other in a complementary components of our total solutions offer.

George: All of our systems build on each other and our complementary components of our total solutions offering.

George: The journey starts with our customer as we design digitize and deploy solutions that achieve efficiency sustainability and de carbonization.

The journey starts with our customer as we design, digitize, and deploy solutions that achieve efficiency, sustainability, and decarbonization.

George: This turnkey offering drives operations service and maintenance, which underpin our as a service offerings that make building smarter through our digital solutions.

This turnkey offering drives operations, service, and maintenance which underpin our as-a-service offerings that make building smarter through our digital solution.

George: This helps our customers enabled peak operating condition protect investments and achieved the lowest lifecycle cost.

This helps our customers enable peak operating conditions, protect investments, and achieve the lowest lifecycle cost.

Jones Controls is unique with our value proposition to make building smarter through Open Blue.

George: Johnson controls is unique with our value proposition to make building smarter through open blue.

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.

George: Our comprehensive ecosystem 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.

George: We were honored recently to be ranked number two on the guide How's the insight leader Board and an assessment of leading energy service companies.

We were honored recently to be ranked number two on the Guidehouse Insights Leaderboard in an assessment of leading energy service companies.

George: The recognition underscores our commitment to excellence and sustainability on a global scale and is a testament to our hard work and continued commitment to helping clients meet their sustainability goals.

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 goal.

Yeah.

Moving on to slide five fiscal 2023 saw continued strength in install orders, which creates a strong service opportunity over the life of the equipment.

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 five and a half million visits annually.

George: As we advance our digital strategy, including more than doubling our connected assets during the fiscal year, we are gathering more intelligence through data.

George: 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 20000 professionals that make over five and a half million visits annually.

George: With our large installed base improved operations and strong pipeline, we see a long runway of continued growth for our service business.

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 six.

Our value creation framework remains unchanged. We truly believe we are well positioned to drive continued growth delivering solutions across sustainable and healthy buildings.

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 Open Blue to drive margin expansion.

George: Leverage leveraging the increased adoption of open blue to drive margin expansion.

Our pipeline remains strong in our longer cycle building solutions business as we continue to realize top line growth.

George: Our pipeline remains strong and our longer cycle building solutions business as we continue to realize top line growth.

Our shorter cycle businesses and global products, primarily global residential HVAC and parts of fire and security are stabilizing as the new fiscal year progresses.

George: Our shorter cycle businesses in global products, primarily global residential HVAC and parts of fire and security are stabilizing as the new fiscal year progresses.

George: Converting our strong topline growth into improved margins and cash flow is our top priority.

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.

George: We are beginning to see our gross margins improve as supply chain disruptions continued to lessen.

George: Within building solutions, we are also seeing stronger margins and a record backlog and our service continues to accelerate we should see favorable mix as well.

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.

George: 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 install business.

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.

George: Inventories in our short cycle businesses continued to reduce as lead times normalized and we are adding capacity to meet the strong demand in our applied HVAC 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.

George: 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? Thanks, George, and good morning, everyone. Let me start with the summary on slide seven. Total sales grew 3% to $6.9 billion, while organic sales increased 2% with another strong quarter from our service business, which grew 9% organically. The cyber incident was a 1% headwind in the quarter.

Olivia: I will now turn the call over to Olivia as you go through the financial details of the quarter Olivier Thanks, George and good morning, everyone. Let me start with the summary on slide seven total sales grew 3% to $6 $9 billion, while organic sales increased 2% with another strong quarter from our service business, which.

Olivia: Grew 9% organically the cyber incident was a 1% headwind in the quarter.

Olivia: Adjusted segment EBITDA was flat year over year with margins declining 50 basis points to 16% price cost was positive and we believe that shrunk.

Adjusted segment ABA was flat year-over-year with margins declining 50 basis points to 16%. Price cost was positive and we delivered strong productivity savings, achieving our $340 million target for the year.

Olivia: Connectivity savings, achieving all what $240 million target for the yet.

Turning to our EPS bridge on slide 8. Adjusted EPS of $1.05 increased 6% the over year and include a $0.04 headwind from the cyber incident.

Olivia: Turning to our EPS bridge on slide eight adjusted EPS of $1.05 increased 6% year over year and include a false sense Edwin from the cyber incident.

Operations contributed twist.

of the growth in the quarter, benefiting from positive price cost and our ongoing SG&A and COGS actions. Below the line, we saw favorability from non-controlling interest and a lower share count.

Of the growth in the quarter benefiting from positive price cost and our ongoing SG&A and Cogs actions below the line, we saw favorability from Noncontrolling interest and a lower share count.

Let's now discuss our segment results in more detail on slides 9 through 12.

Olivia: Let's now discuss our segment results in more detail on slides nine through 12.

Olivia: Beginning on slide nine organic sense in our shorter cycle global products business, excluding the 2% headwind from the cyber incident were flat year over year.

Beginning on slide nine, organic sales in our shorter cycle global products business, excluding the 2% headwind from the cyber incident, were flat year over year. With price offsetting.

Olivia: We surprised upsetting the decline in volume.

Olivia: Group of products saw continued strength in commercial HVAC, which grew high single digits after growing mid teens in the comparable period, one year ago.

Global products saw continued strength in commercial HVAC, which grew high single digits after growing mid-teens in the comparable period one year ago.

Demand remains strong and our leading position in commercial HVAC was further extended in fiscal 2023.

Olivia: Demand remained strong and our leading position in commercial HVAC was further extended in fiscal 2023.

Client security declined low single digits as inventory further rebalanced as lead times improved materially year over year.

Olivia: Fire and security declined low single digits as inventory fed that rebalanced as lead times improved materially year over year.

Industrial refrigeration at another strong quarter, going over 45%, driven by EMILA.

Olivia: And just sure if Christian nation, I had another strong quarter growing over 45% driven by email.

Olivia: Global residential declined high teens, driven by greater than 30% decline in North America, and a high single digit decline in rest of world.

Global residential decline ITs driven by greater than 30% decline in North America and a high single digit decline in rest of world.

Olivia: North America faced challenging year over year comparisons.

North America faced challenging year-over-year comparisons as we were still working out of a backlog from last fiscal year.

Olivia: We were still working out of our backlog from last fiscal year.

Olivia: In Europe, the heat pump market, Oba horn expanse lower growth than anticipated.

In Europe , the heat pump market overhaul experienced lower growth than in Spain.

As our book-to-bill business begins to normalize with improved lead times, our global products' third-party backlog decreased 4% from the prior year to $2.5 billion and remained flat sequentially.

Olivia: As our book to Bill business begins to normalize with improved lead times, our global products third party backlog decreased 4% from the prior year to $2 $5 billion and remained flat sequentially.

Olivia: Adjusted segment EBITDA margins declined 85 basis points against a tough comparison to 21% as continued weakness in group by residential offset positive price cost and productivity savings.

Adjusted segment EBITDA margins declined 85 basis points against a tough comparison to 21% as continued weakness in global residential offset positive price cost and productivity savings.

Olivia: One of the biggest factor impacting our global products margin performance is due to lower absorption costs in.

One of the biggest factors impacting our global products' margin performance is due to lower absorption costs in global residential businesses.

In global residential business.

Moving to slide 11 to discuss our building solutions performance order momentum remained strong with 9% growth.

Moving to slide 11 to discuss our building solutions performance. Order momentum remains strong with 9% growth.

Olivia: <unk> orders grew 7% in the quarter and 11% for the full year as our transformation into a savvy sled organization gains momentum.

Service orders grew 7% in a quarter, and 11% for the full year as our transformation into a service-led organization gains momentum.

Install orders increased 10% led by double-digit orders in North America and Imila.

Olivia: In store orders increased 10% led by double digit orders in North America, Andy Miller.

Olivia: Organic sales grew 5% driven by strong growth in service of 9% installed grew 2% organically against a tough comparison to.

Organic cells grew 5% driven by strong growth in service of 9%. Install grew 2% organically against a tough comparison. The cyber incident was a 1% headwind in the quarter.

Olivia: <unk> was a 1% headwind in the quarter.

Adjusted segment EBIT A increased 5% while margins declined 10 basis points as a higher mix of equipment installations and weakness in China offset positive price cost and savings from productivity initiatives.

Olivia: Adjusted segment EBITDA increased 5%, while margins declined 10 basis points as a higher mix of equipment installations and weakness in China offset positive price cost and saving for.

Productivity initiatives.

Yes.

Strong equipment sales are an important contributor to future higher margin recurring service revenue.

Strong equipment says I, an important contributor to future higher margin recurring services revenue.

Building solutions backlog remains at record levels, growing 9% to $12.1 billion.

Olivia: Building solutions backlog remains at record levels growing 9% to $12 $1 billion service backlog increased 12% and installed backlog grew 8% year over year.

Service backlog increased 12%, and installed backlog grew 8% year over year.

Olivia: Let's discuss the building solutions performance by region on Slide 12.

Let's discuss the building solutions performance by region on slide 12.

Olivia: Orders in North America increased 8% with continued strength across our edge back end controls platform.

Orders in North America increased 8% with continued strength across our HVAC and controls platform, up over 20% year-over-year. Overall, there was robust demand in our office, data center, healthcare, government, and manufacturing sector.

Olivia: Over 20% year over yet of a hole there was robust demand in our office data center, CAC government and manufacturing sectors.

Install orders increased 11% year-over-year with solid growth in new construction.

Olivia: In store orders increased 11% year over year with solid growth in new construction.

Sales in North America were up 8% organically with broad-based growth across the portfolio. Our installed business grew 9% with continued momentum in new construction, up 25% year over year.

Olivia: In North America were up 8% organically with broad based growth across the portfolio. Our installed business grew 9% with continued momentum in new construction up <unk>.

5%, yeah, but yes.

Organic sales in service grew 7% in the quarter and 8% for the full year, driven by strong performance across our shorter-term transactional business, which is the direct result of having a large customer base.

Org and he says in Saturday's grew 7% in the quarter and 8% for the full year driven by strong performance across our shorter turn transactional business, which is the direct result of adding a large customer base.

Olivia: Status across our HVAC and controls platform grew high teens year over year, what find security cheap.

Sales across our HVAC and controls platform grew high teens year over year, while fire and security was flat.

It's flat.

Segment margins expanded 70 basis points year over year to 15, 4% driven by ongoing productivity benefits. The continued execution of higher margin backlog and strength in our higher margin service business.

Segment margins expanded 70 basis points year-over-year to 15.4% driven by ongoing productivity benefits, the continued execution of higher margin backlog and strength in our higher margin service business.

Olivia: Total backlog ended the quarter at $8 $3 billion up 10% year over yet.

Total backlog ended the quarter at $8.3 billion, up 10% year over year.

In Mila, orders were up 16% with solid contributions of 16% growth from both surveyed and in stock.

Olivia: <unk> orders were up 16% with solid contributions of 16% growth from both Saturday and install.

Olivia: Demanding commercial remains strong growing 50% year over year, driven by HVAC insecurity.

Demand in commercial remains strong, growing 50% year over year, driven by HVAC and security.

As the decarbonization efforts in Europe continue to gain momentum, our offerings in industrial refrigeration and HVAC and controls increased orders by over 20% across the industrial sector. By region, order growth was broad-based.

Olivia: As the decarbonization efforts in Europe continued to gain momentum offerings in ended sure. Okay for initiation and etch vacuum controls increased orders by about 20% across the industrial sector by region or the growth was broad based.

Olivia: Saturday Manila grew 3% organically led by mid teen growth in service with double digit growth from both our recurring contracts and our shorter cycle transaction of business.

Sales in Imila grew 3% organically, led by meeting growth in service with double-digit growth from both our recurring contracts and our shorter cycle transactional growth.

apply commercial HVAC and fire and security grow low single digits within the quarter.

Olivia: Commercial HVAC and fire <unk> security grew low single digits within the quarter.

Segment EBIT A margins declined 160 basis points to 7.8%, driven primarily by execution of lower margin jobs within the background.

Olivia: Segment, EBITDA margins declined 160 basis points to seven 8% driven primarily by execution of lower margin jobs within the background.

Backlog was up 10% year-over-year to $2.3 billion.

Olivia: Backlog was up 10% year over year to $2 $3 billion in Asia Pacific orders grew 3% driven by double digit growth in service with healthy growth across all etch back end controls platform.

In Asia-Pacific, orders grew 3% driven by double-digit growth in service with healthy growth across our HVAC and controls platforms. Overall, we saw strong demand in the institutional sector growing over 30%.

Olivia: Overall, we saw strong demand in the institutional sector growing over 70%.

Yes.

Saturday nights, yet Pacific declined 6% as the installation business was impacted primarily by weakness in China.

Sales in Asia Pacific declined 6% as the installation business was impacted primarily by weakness in China. Our service business continued the momentum of double-digit growth, increasing 11% in the quarter and 14% for the full year. Overall, fire and security grew mid-single digits, while HVAC and controls declined high single digits.

Olivia: Our service business continued the momentum of double digit growth, increasing 11% in the quarter and 14% for the full year.

Olivia: Although horn find security grew mid single digits, while etch backend controls declined high single digits.

Segment EBITDA margins declined 50 basis points to 13.5% as weakness in China offset ongoing productivity savings and positive price costs.

Olivia: Segment, EBITDA margins declined 50 basis points to 13, 5% as weakness in China, offset ongoing productivity savings and push it cheap price cost.

backlog of $1.5 billion is flat year over year. Turning to on balance sheet and cash

Olivia: Backlog of $1 $5 billion is flat year over year.

Olivia: Turning to our balance sheet and cash flow on slide 13, we ended the fourth quarter with approximately $800 million in available cash and net debt declined to one nine times, which is lower than our long term target range of two to two and a half times.

we ended the fourth quarter with approximately $800 million in available cash and net debt declined to 1.9 times, which is lower than our long-term target range of 2 to 2.5 times. As George mentioned, during 2023, we returned $1.6 billion to our shareholders via dividends and share repurchase.

Olivia: As George mentioned during 2023, we returned $1 $6 billion to our shareholders via dividends and share repurchase.

Olivia: Our free cash flow conversion of 76% was better than our updated guidance.

Our free cash flow conversion of 76% was better than our updated guidance.

Olivia: On the working capital front, our receivable collection as extended as our installation business critical to generate our service business has grown.

On the working capital front, our receivable collection has extended as our installation business, critical to generate our service business, has grown.

Olivia: We are making structural changes such as more upfront payments to improve our cash collection cycle in the installation business.

We are making structural changes, such as more upfront payments, to improve our cash collection cycle in the installation.

Olivia: One inventories remain elevated versus historical levels, primarily due to the challenges in our global residential businesses. We saw overall inventories improved five days sequentially in the fourth quarter.

While inventories remained elevated versus hysterical levels, primarily due to the challenges in our global residential businesses, we saw overhaul inventories improve five days sequentially in the fourth quarter.

We anticipate further improvement entering fiscal 2024.

Olivia: We anticipate further improvement entering fiscal 2024.

Olivia: We have the fundamentals in place to be a 100% cash conversion company overtime or wherever continued growth investments and some further restructuring in fiscal 2020 full would be headwinds in the fiscal year.

We have the fundamentals in place to be a 100% cash conversion company over time. However, continued growth investments and some further restructuring in fiscal 2024 will be headwinds in the fiscal year.

Olivia: Now, let's discuss our first quarter and fiscal 2024 guidance on slide 14.

Now let's discuss our first quarter and fiscal 2024 guidance on slide 14.

We're entering fiscal year 2024 with a backlog at historical levels, strong momentum in our industry-leading service business, and broad-based demand across end markets.

Olivia: We are entering fiscal year 2024, with a backlog at historical levels strong momentum in our industry, leading service business and broad based demand across end markets.

We're introducing first-quarter self-guidance of approximately flat year-over-year as we return to normalized seasonality.

Olivia: When crude you're seeing first quarter set a guidance of approximately flat year over year as we return to normalized seasonality.

Our forecast includes a roughly 1% headwind from the cyber incident as well as continued weakness anticipated in China.

Olivia: Our forecast includes a roughly 1% headwind from the cyber incident.

Olivia: As well as continued weakness and she painted in China.

We expect building solutions momentum to continue, led by our resilient service business.

Olivia: We expect building solutions momentum to continue led by our resilient service business.

Global products faces a tough year-over-year comparison as we were working to elevated backlogs in the comparable quarter last year, especially in residential HVAC and certain far-end security indirect channels.

Olivia: Global products faces a tough year over year comparison, as we were working to elevated backlogs in the comparable quarter last year, especially in residential HVAC and certain fire and security and direct channels.

For the first quarter, we expect segment EBIT A margin to be approximately 13% and adjusted EPS to be in the range of 48 to 57.

Olivia: For the first quarter, we said, we expect segment EBIT aid margin to be approximately 13% and adjusted EPS to be in the range of 48 to 50 cents.

We're expecting a slower start of the year as we return to more normalized seasonality, incur the negative impact from the cyber incident, and anticipate continued weakness in China.

Olivia: We are expecting a slower startup date, yet as we would tend to more normalized seasonality and could then you get to the impact from the cyber incident, and then seek gate continued weakness in China.

For the full year, we anticipate global products to stabilize in the second half of 2024 as backlog continues to normalize and building solutions converts its higher margin backlog. We expect organic cells to grow approximately mid-single digits with building solutions leading the growth, particularly in service.

Olivia: For the full year, we anticipate global products to stabilize in the second half of 2020 full as backlog continues to normalize and building solutions convents, it's higher margin backlog.

Olivia: We expect organic sales to grow approximately mid single digits with building solutions, leading the growth, particularly in service.

Olivia: Segment, EBITDA margins I expect that to expand approximately 25 basis points or greater as price cost to remain positive and mix improved throughout the year.

Segment A margins are expected to expand approximately 25 basis points or greater as price cost remains positive and mix improved throughout the year.

Olivia: Adjusted EPS should be in the range of approximately $3 65 to $3 80, representing growth of 42, 9% year over year.

Adjusted EPS should be in the range of approximately $3.65 to $3.80 representing growth of 4 to 9% year-over-year.

Olivia: For the first quarter, we anticipate our no more seasonal cash usage with incremental impact from the cyber incident.

For the first quarter, we anticipate our normal seasonal cash usage with incremented impact from the cyber incident.

We expect free cash flow conversion to be 85% for the full year.

Olivia: We expect free cash flow conversion to be 85% for the food yet.

Olivia: All of our results and guidance reflect great progress advancing our service strategy enabled by digital.

Our results and guidance reflect great progress advancing our service strategy enabled by digital, momentum in our commercial products offering, and we enter fiscal 2024 with strong order momentum and record backlog in our longer cycle building solutions business. With that operator, open up the lines for questions. Thank you.

Olivia: Momentum in our commercial products offering and we enter fiscal 2020 full with strong order momentum and record backlog in our longer cycle building solutions business with that operator open up the lines for questions.

Speaker Change #8: Thank you well now begin the question and answer session.

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At this time, we will pause momentarily to assemble our roster.

Speaker Change #10: So far we will pause momentarily to assemble our roster.

And today's first question comes from Jeff Sprague with Vertical Research. Please go ahead. Hey, thank you. Good morning, everyone.

Speaker Change #10: And today's first question comes from Jeff Sprague with vertical research. Please go ahead.

Jeff Sprague: Hey, Thank you good morning, everyone.

<unk>.

Maybe we could just touch on cash flow a bit more.

Maybe we could just touch on cash flow.

Bit more.

You know, A, how much kind of recovery, you know, from the cyber incident do you kind of expect embedded in this 85% in 2024? And then also, just it seems peculiar, Olivier, your net financial charges.

A.

How much how much kind of recovery.

Jeff Sprague: The cyber incident do you kind of expect.

Jeff Sprague: Embedded in this 85% and in 2024.

Olivier: And then also just it seems peculiar Olivier your net financial charges are going up to 420 million per your guide versus 280 last year is there something going on in the factoring or something else and.

are going up to $420 million per year guide versus $280 last year. Is there something going on in factoring or something else in the capital structure that would explain that sort of delta year over year?

Jeff Sprague: And kind of the capital structure that would explain that sort of delta year over year.

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 dollars. If you look at the guide for 24 at 85 percent

Speaker Change #12: Thank you for your question, Jeff regarding the free cash flow.

Speaker Change #12: We had an impact in the first quarter, which we believe would be about $200 million if.

Speaker Change #12: If you look at the guide for 'twenty four at 85%.

85%.

That includes two elements. One, some restructuring and also some investment.

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 he needs opening remarks, if you look at the levers of improvement for free cash flow, we see a one.

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.

Speaker Change #12: Inventory, reducing AR as we reduce our inventory in risky.

Two, in receivables, we believe we're going to be able to demand more upfront payments as our lead time have improved, and also, we have implemented our supplier financing program across the network, and that will help further improve GPO.

Speaker Change #12: Two in receivables, we believe we're going to be about to demand more upfront payments.

Speaker Change #12: Our lead times have improved and also we have implemented our supplier financing program across the network and that will further improve G. P O two.

To go back to your net financing charge, is the by-product 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.

Speaker Change #12: You go back to your net financing charge is the byproduct of higher interest rates.

Speaker Change #12: We are going to refinance some debt we have some commercial papers as well would shop when to be priced at the current higher interest rate factoring is a small proportion of the costs.

And then separately, could you just address, I mean, orders obviously looked pretty solid in the quarter. Was there any impact from the cyber and the ability to kind of book orders, either as you ended the September quarter or as you've entered this particular quarter? Maybe just give us a little bit more color on what the challenges were in the business as you worked your way through this.

Speaker Change #14: And then separately could you just address the orders, obviously looks pretty solid in the quarter was there any.

Speaker Change #14: Impact from the cyber and the ability to kind of bulk orders.

Speaker Change #14: The rest you ended the you know that the September quarter or as you've entered this particular quarter.

Speaker Change #14: Maybe just give us a little bit more color on you know what the challenges were you know in.

Speaker Change #14: In the business as you work your way through this.

Speaker Change #14: Yes, so we look at our orders on Jeff you know obviously the continued very strong and I think where we're seeing strong growth in in office data centers health care state and local government education, we do see manufacturing industrial bookings continue at an elevated level after.

Yeah, so when we look at our orders, Jeff, you know, obviously they continue very strong and I think we're seeing strong growth in office data centers, healthcare, state and local government, education.

We do see manufacturing industrial bookings continue at an elevated level after a strong growth in construction starts.

Speaker Change #14: Strong growth in construction starts are really focused on the E V in semiconductor manufacturing.

It is focused on the EV and semiconductor manufacturing.

And then when we look at our pipeline, it's very strong.

Speaker Change #14: And then when we look at our pipeline, it's very strong and a lot of that pipeline is focused in these key verticals I would say from a from a bookings standpoint, we were tracking prior to the cyber incident, a little bit better and then with the <unk> outage you know I think we're somewhat slowed.

And a lot of that pipeline is focused in 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, you know, I think we're somewhat slowed a bit in that last week.

Speaker Change #14: Slowed a bit in that last week.

But I think as we look at, you know, first quarter and for the year with the pipeline that we have, we're going to see continued strong, strong water.

Speaker Change #14: I think as we look at first quarter and for the year with a pipeline that we have we're going to see continued strong strong order growth and I think when you look at our.

And I think when you look at our, you know, mainly around, you know, commercial HVAC trends, it's clear that we're gaining share pretty much across all of the industries, that's creating, you know, 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,

Speaker Change #14: Mainly around commercial HVAC trends, it's clear that where we're gaining share pretty much across all of the industries that is creating.

Speaker Change #14: 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 that are applied orders were up about 20% and then.

You know, in the ducting space, when you take out Resi, our commercial ducted was up, you know, over 50%. So, you know, our portfolio of commercial HVAC is playing out strong. And that ultimately is what's driving, you know, the install base within our commercial, you know, within the commercial building solutions business.

Speaker Change #15: And the ducting space when you take out Rosa our commercial on Doctor was up Oh.

Speaker Change #15: Over 50%. So you know our portfolio of commercial HVAC is playing out strong and that ultimately is what's driving the installed base within our commercial.

Speaker Change #15: In the commercial building solutions business.

Speaker Change #16: Thank you next question today comes from Joe Ritchie of Goldman Sachs. Please go ahead.

Thank you. And our next question today comes from Joe Ritchie at Goldman Sachs. Please go ahead.

Joe Ritchie: Hi, Thanks, good morning, everyone.

Yeah.

Yeah.

Hey, guys can we start on just the mix impact this quarter and it was.

Speaker Change #18: We're a little surprised to see the business solutions business C 100 million dollar impact for mix and also because it seems like your service business has farley exceeded growth.

Speaker Change #18: Versus install this quarter, so what what exactly is going on within business solutions, that's driving negative mix.

Speaker Change #18: And is that expected to reverse in 2024.

Speaker Change #18: So if you look at D equipment sets today, particularly in our in the high end of all our markets. We are gaining share. This is a strong part of the market.

Speaker Change #18: This business is very attractive for us because for one dollar odd where we typically generate over the lifecycle of the equipment and the $9 of solutions, including for the lot of services and you saw also joined services today, we clearly have momentum.

Services is growing.

Fast enabled by digital and as a reminder services is twice.

Speaker Change #18: The profit of the average of the company.

Speaker Change #18: So this decent mix is 10 is based upon equipment sales.

which would generate attractive profit with the service and UTN solution and UTN.

Speaker Change #18: Which would generate attractive profit with the Zalviso nucci and solution on Youtube.

Speaker Change #19: Okay got it understood and I guess, maybe my one follow on question then would be on one Q.

Okay, got it, understood. And I guess maybe my one follow-on question then would be on 1Q.

Speaker Change #19: And so I look at December 12th where clearly you know well into the quarter, you've given a fairly narrow range for the for the first quarter I guess I'm just trying to understand two things number one I.

Speaker Change #20: Confidence that that will be a range well when you were a port results and then and then secondly, just any 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 you know flat organic sales expected this year.

Speaker Change #21: So if you look at Q1, we see a strong order momentum continuing.

So, if you look at Q1, we see a strong order momentum continuing.

If you look at, of course, the confidence, we have now a few days to go before the end of the quarter, so that by itself answers the question. If you look at what is happening in Q1, we have strong momentum in our building solution business. Service solution powered by digital is going fast. We see weaknesses in our global products division, particularly as it comes from Resi.

Speaker Change #21: If you look at of course, the confidence we have now a few days to go before the end of the quarter. So that by itself answer to the question.

Speaker Change #21: Look at what is happening in Q1, we have strong momentum in our building solutions business.

Speaker Change #21: This solution are taught by digital is growing fast we see weaknesses in our global products Division, particularly as it comes from receipt.

We have some impact also in China. Also, we have the impact of cyber, which is about 1% of the top line and is difficult to dimensionalize exactly about 2 cents of EPS. And last but not least.

Speaker Change #21: We have some impact also in China.

Speaker Change #21: Oh, so we have the impact of cyber.

Speaker Change #21: Which is about a 1% of the topline and it's difficult to dimensionalize exactly about about two.

Speaker Change #21: <unk> <unk> of EPS and last but not least GP now is going to a more normalized seasonality.

GP now is going through a more normalized seasonality after a few years of supply chain impact.

Speaker Change #21: After a few years of supply chain impact.

Yeah.

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

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

Hey, good morning, guys.

Good morning.

You guys give us, kind of help us understand the materiality of data centers, it seems ... ?? ?? ?? ?? ?? ??

Can you guys give us kind of help us understand the materiality of data centers it seems I'm.

Speaker Change #21: Obviously really bullish commentary we've heard from for many folks and.

really bullish commentary. We've heard from many folks.

Don't always think about JCI and the data center business, but certainly you guys have a meaningful presence.

Speaker Change #21: Don't always think about GCI in the data center business, but certainly you guys have a have a meaningful presence so.

Speaker Change #22: Can you help size that for us.

Speaker Change #23: Yeah, Scott, Let me, let me take that one when you look at you know as we look at data centers. We've been obviously reinvesting in all of our applied product to have a whole portfolio to be able to capitalize on what we see to be incredible growth here over the decade.

Yeah, Scott, let me take that one. When you look at, you know, 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.

Speaker Change #23: So when you look at a typical data centers.

And so when you look at a typical data center, let's take a 100-megawatt data center.

Speaker Change #23: But let's take 100 megawatt data center.

Speaker Change #23: That requires roughly about 30 30000 tons of cooling that.

Speaker Change #23: That can be served right now the big trend is air cooled Chillers were the leader in this space with the investments that we've made.

Speaker Change #23: And being able to deliver on those capabilities are and that's where we're seeing significant growth.

Speaker Change #23: And serving that set of customers.

Speaker Change #23: And so it can either be air cooled a water cooled of course water cooled, where we're in a strong position.

Speaker Change #23: So roughly about 30000 tons of cooling. So when you look at the market in 'twenty four we're projecting somewhere 15% to 20, gigawatts, which will amount to about five tons of cooling needs.

Speaker Change #23: Cause of our position with our strong portfolio of the full technology to serve these we believe we're positioned to get.

Speaker Change #23: So, let's say half of that volume going forward, which is the overall volume would be greater than $2 billion.

Speaker Change #23: And so for US this has been a position of incredible strength a lot of that is because of our multi generational developments. We've made in our engineering Center I'm just a comment on that just in the last 90 days, we've had customers representing over 20% of U S. GDP at our technology Center, because there's we're laying out long term.

Scott: Our plans with our customers, we're making sure we're positioned with the applications that ultimately achieve their their their needs and so it is a very attractive space for Scott and then from a service standpoint once once we get that.

Scott: Installed we're getting very strong service growth on top of that which will then be over the lifecycle of that installation.

Speaker Change #25: That's helpful George and when you think about putting a servicing and an AI kind of.

Heat intensive data center.

Is that higher margin he has a higher margin, but because of higher mark. If it is is it a higher margin because of the complexity or because of just the scale that you're just getting so much more.

Content into that facility.

Yeah, 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 we're secure relative to what we do and how we manage the data that ultimately delivers the outcomes that we can deliver.

Speaker Change #26: The the work that we've done around open blue and in the cloud based technology. There none of that was absolutely. It 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.

Speaker Change #26: Thank you and our next question today comes from Steve Tusa with Jpmorgan. Please go ahead.

Speaker Change #27: Hi, Good morning morning, Steve.

Speaker Change #28: Can you just provide a little bit more detail around the impact from the cyber attack and I think he said four cents in the fourth quarter, but it was kind of late in the fourth quarter and then in particular, you know which businesses 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.

Speaker Change #29: And two cents of earnings I Might've missed I I'm not sure I can reconcile like all of those numbers. So maybe just a little more mechanical detail on the impact of the cyber attack that we gave.

Speaker Change #30: You are some of the numbers in Q4, we are we believe that the impact on the on the top line was about 1%. It would be the same in Q1, what you have going on Steve I would go to D. P. S impact in the second is what you're losing in Q4, you recover some of it in Q1 right. That's why you have those.

Speaker Change #30: Numbers going on so 1% in venue in in Q4 and in Q1 G. E. P. S impact in Q4 is about four cents and the impact in Q1 about two cents.

Speaker Change #30: What is mainly impacted these everything which is socks short cycle, if you need to satisfy demand for something that you need to have an inventory. If you don't have it you lose it that's where the impact will be my 200 million impact in.

Speaker Change #30: Josh It's lower collection in the AR in the first quarter.

Speaker Change #31: Because we're not able to build immediately as we could not be immediately then that is delayed collection. That's the 200 million Steve Steve just okay. Just when you look at the overall you know event. It did create significant distraction internally, we it wasn't one or two days it actually it was about three weeks, which was the better part.

Speaker Change #31: October so while we're able to quantify some of the impact that I think it's harder to put a number to the overall impact in October as.

Speaker Change #31: As you as we although we maintained operations, we werent necessarily operating at full efficiency.

Speaker Change #31: 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.

Speaker Change #31: Just from an overall momentum standpoint, we lost a little bit of momentum momentum in October but I can tell you in November December we've gained that back.

Steve: Steve a scanner so detailed we have a substantial insurance corporates and the large proportion of our cost including business disruption.

Covered by insurance.

Okay, and so I guess I'm just struggling to see how you get from like 50 cents in the first quarter, which seems like an operating base to you know I don't know 375 for the year that just seems like a pretty steep tailwind. I mean are you is I know, you're probably assuming that you know the comps maybe get a little bit easier on some of the products businesses, but I mean.

Steve: Are you assuming like recovery true kind of economic underlying recovery in some of those.

Steve: Short cycle businesses for the back half of the year.

Steve: So what we see happening.

Steve: Is oney, earning growth to two return doing Q2, what we see today is momentum in our building solutions business, we've talked about that at length equipment services enabled by digital and are resonating with our customers. We see G. P stabilizing in Q2 and more number.

Steve: Our lives growth in the second half for our global.

Division.

If you look at the theme for the year, our commercial strength. So they shrinks, we service expected to grow high single digits, Chris into yet.

Speaker Change #33: Thank you and our next question today comes from Julian Mitchell with Barclays. Please go ahead.

Julian Mitchell: Hi, Good morning, I guess wanted to.

Speaker Change #35: I understand some of the free cash flow I'm moving parts again, maybe as we talk just dollars year on year was is the easiest thing for 'twenty 'twenty four so I think youre guiding about $100 million of net income growth.

Speaker Change #35: About $300 million of free cash flow growth in 2024.

Speaker Change #36: So I'm just trying to understand that extra kind of 200 million in the free cash.

Speaker Change #36: Yeah, how much of that is sort of capex, maybe coming down or working capital coming down substantially.

Speaker Change #36: I'm, just trying to understand as well, what's the full year impact of cyber in the free cash.

Speaker Change #36: Year on year, and if theres anything to be aware of on on factoring I know you mentioned supply chain finance. Thank you.

Speaker Change #36: So if you look at the key driver of free cash flow, they're going to be around.

Speaker Change #36: Working capital mainly in inventory if you look at our level of inventory. We asked about are we going to close the year at about 54 days of inventory we used to be before.

Speaker Change #36: Those supply chain events after about 45 a day.

Speaker Change #36: Entry is what about you know quite quite a lot in terms of free cash flow. So inventory is going to be a key via board.

Speaker Change #36: Receivables also would be on checked two declining how should we are improving the way we manage that particular balance sheet line. Some of that will include our upfront.

Up front payments.

Mel Watt high court has been improving to satisfy demand, we're able to demand for consideration of products, we're able to demand more upfront payment and the final one would be supply chain financing.

Speaker Change #36: Which we're now deploying across the world factoring would be flat year on year.

Yeah.

Thanks, Ravi and the the Ciba 200 million free cash headwind in Q1 is that like a headwind of 200 for the year as a whole are you assuming you recapture most of that in cash flow and the balance of the year. It would be timing related would catch desktop Ah in D C.

<unk> quarter.

And then my follow up question would just be on the pace of the E. P. S recovery through the year.

Speaker Change #36: Historically I think Q2 is about 19.

Speaker Change #36: 19% or so of our full year earnings is that roughly what we should expect for 2020 full in terms of the seasonality.

Speaker Change #36: We are going to go to a more normalized system that achieve EPS performance US now the supply chain is going back to what we had a COVID-19. If you look at the themes for our E. P S, earning growth expected in Q2.

Speaker Change #38: Momentum in building solutions have indicated a GP stabilizing in Q2, and then going to an increase in our profit contribution in the second half those would be the theme for the flow of EPS across the year.

Speaker Change #38: Thank you and the next question today comes from Nigel Coe with Wolfe Research. Please go ahead.

Thanks, Good morning, everyone.

Good morning, I know, we've talked around this a fair amount here, but oh on the Bunk you guide maybe.

Speaker Change #38: I really struggle to get down to that range, you know, Don and flat sales and.

Speaker Change #39: And the 13% secondly, Eva EBITDA margins. So is there anything below the line from corporate timing.

Speaker Change #39: On the interest the only thing.

Speaker Change #39: Anything below the line you can think about that just just any help there would be helpful. And then on the free cash flow you know the restructuring am I I'm not sure. If you did quantify that to Julians question, but what sort of payback are we always seen on this restructuring action, but where should we draw a handful.

Speaker Change #39: Actual cost savings that's going to April.

Speaker Change #39: So if you look let me start with D and on free cash flow, we're going to two of our an impact of about 10 points of conversion to two elements.

Speaker Change #39: One is a higher capex actually due to the demand we have mainly the ended at a center that's about three points of conversion and restructuring we expect two of our seven points of conversion due to restructuring jam packed the payback of those restructuring actions he's about to.

Yeah.

Well below that and we are.

Speaker Change #39: A few projects to improve the profitability of our enterprise.

Speaker Change #39: Q1, I'd go back to what I indicated earlier in the Q&A session.

Speaker Change #39: Mentor them in building solutions, that's what we see in Q1 weakness seen grobart product due to the receipt demand.

Speaker Change #39: Some more normalized comp as the supply chain is normalizing for our global product Division and then of course the impact of cyber.

Speaker Change #40: Okay and just on the Capex. It just seems like it's about a 60 million dollar increase that there's just wanted to just verify that but maybe you could talk can we get can we just dig into the EMEA a L a segments.

Speaker Change #40: You know the margins had been struggling for so long now and you know we've got inflation growth in orders and backlog, but inflation is down 5%. This quarter. So I'm just wondering if you could just maybe just talk about what the problems are in and in that region.

That's all.

So we see no structural reasons for the Mila Mount gene to be double digits.

Speaker Change #40: And we expect our margin.

Speaker Change #40: Margin to turn positive in Q2.

Clearly.

We have work to do in the region.

Speaker Change #40: The margin profile of the region is mainly due to.

Speaker Change #40: The realization of lower margin orders into the whole venue.

Speaker Change #40: We see that turning the other way so turning positive in Q2 of Nigel.

Speaker Change #41: Thank you and our next question today comes from Andy Kaplowitz with Citigroup. Please go ahead.

Hey, good morning, everyone.

Good morning.

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 end markets such as data centers, but as you know some leading indicators of nonresident been a little weaker so do you see little growth holding up here across your businesses throughout FY 'twenty four and do you see your backlog.

Speaker Change #41: Staying around that 12.1 billion dollar number for your long cycle businesses in 'twenty four I think any incremental color would be helpful.

Yes.

Do Andy and when we look at we've got a pretty robust tracking across all of the critical markets across the regions and we're tracking not only lead generation to conversion to to where we're positioned.

Speaker Change #41: Boy, our resources in and differentiate and ultimately win so the pipeline generation continue to be very strong and it's in line with what I previously discussed.

Speaker Change #41: As far as the segments that are driving that and I think as we look at our service business. That's on the when you think about new projects and new opportunities to build install so that has been very strong and while we're also seeing is that on the service side with the work that we've been doing with not only.

Speaker Change #41: Going back into the installed base getting connectivity getting use of the data and then bringing forward new value propositions, where we're seeing significant pickup in our PSA has in being able to get longer term contracts and built the base there.

Speaker Change #41: So in spite of you know.

Speaker Change #41: When you look when you segment, our building solutions, whether it be installed still strong and then our ability to be able to even in our economic decline.

Speaker Change #41: With the value proposition that we're bringing to our customers within service I believe that that's going to continue to hold up and so right now there's no even though we look at the same metrics you look at Dodge starts and a b I and all of the key metrics being a little bit weaker at the end of the day with the with the way that we prioritized our growth.

Speaker Change #41: And how we're deploying our resources, we're positioned to capitalize on where the growth will occur.

Speaker Change #42: That's very helpful. And then maybe you could give us just a little more color on your expectations for global products T. C. Global residential markets for instance, turning positive in the second half and he has a greater segment turns you know how are you thinking about the European heat pump market. I think you mentioned G. P. Stabilizing overall in the second half, but maybe you could talk about your cough.

Speaker Change #43: And in travel that Destocking ends in the second quarter as you guys mentioned.

Let's start with rosy.

You look at the U S. Resi market. Obviously, there was challenges is set up for for resi in 2023, both in units as well as overall sales.

Hum.

With the recession I think when we look at the the reason for that is higher cost of equipment, it's weaker consumer spending.

Speaker Change #43: It's now people going back to work and they're reducing their home improvement spending so a lot of contributors to that I.

Speaker Change #43: I do believe that as we look at the transition here with the refrigerant changes.

Into more stabilization where.

Although there'll be less units certainly with the new refrigerant launches, that's going to demand more price because of the the refrigerant and so on a sales basis I think were you know.

Speaker Change #43: <unk> is well positioned now to be able to deliver our portfolio of refrigerant changes in time for the implementation on January one.

Speaker Change #43: We have pulled ahead, our new product introductions by as much as two or three months to ensure that were giving our distributors enough time to rebalance their inventory in and ultimately restart with the new upward 54, B refrigerant products and again, we're working with all of our constituents right from the suppliers to our distributors to the partners to make sure we have a smooth transition.

Speaker Change #43: So we do believe it normalizes and somewhat stabilizes going forward and that's on the resi in North America. When you your question around heat pumps.

Speaker Change #43: I think we believe across our portfolio.

Speaker Change #43: That creates an incredible opportunity for us we believe it's about a $100 billion market, that's growing mid single digits and today, we reassess our portfolio was about a third of our sales within HVAC are our heat pumps and I do believe although we've seen a pullback in Europe.

Speaker Change #43: And it's mainly around our G. C. H product that we were planning for a pretty significant pickup here 23, which ultimately didn't materialize that maybe that's just kind of pushed to the right a bit as some of the countries in Europe have a push forward the implementation date and the like and and then as a result, I think consumers pulled back.

Speaker Change #43: <unk> not ultimately capitalizing on the efficiency the heat pumps.

Speaker Change #43: Represent to them and so we're watching that closely but I do believe that over the next you know maybe it's 18 to 24 months that'll that'll come back and come back pretty strong and then on the commercial side pretty much globally, we do have a leading portfolio where understanding now with the focus on de carbonization and sustainability that we are uniquely positioned.

Speaker Change #44: And with low joked GW P refrigerants across our portfolio and we're positioned now capitalize on that being a significant strength as we're capitalizing on some of the key markets globally. So that's kind of an assessment as I think about where we are with heat pumps.

Speaker Change #44: Thank you and our next question today comes from Noah Kaye with Oppenheimer. Please go ahead.

Noah Kaye: Good morning, Thanks for taking the questions and its really actually building on one of nitriles earlier ones are around restructuring and more broadly productivity gains.

Speaker Change #44: You've got the 340 million of productivity savings for 2023.

Speaker Change #46: Is it time for kind of an updated medium term targets around productivity are you now and what do you see as the path forward to drive a stronger margin profile for the business and how much just productivity play into that.

Speaker Change #47: So we believe Noah that fundamentally we have the ability to be a 30% incremental company.

Speaker Change #47: We will achieve improvement in margin through two leavers one gross margin are as we improve our mix as us as we improve our operations and the second lever is going to be to Opex as we keep standardizing and centralizing our operations and our we have a as we see.

Speaker Change #47: Strong portfolio of ideas and projects to improve the profitability of awful entre price as I indicated earlier typically those projects of a below one yet payback.

Speaker Change #47: We don't think we need to update our today, our productivity programs I think you would see that being embedded in the guide in a while.

Speaker Change #47: No just a comment on that as we have been able to strengthen our operating system globally. It hasn't identified significant opportunities continuing so that we can capitalize on and ultimately continue to expand margins going forward to be able to to get Incrementals 30, 30% plus and so the payback that we're getting on the web.

Speaker Change #47: What we're doing is within the within a year.

Yep.

It maybe a little bit surprised positively I would say that our the cyber incident.

Speaker Change #48: More significantly impact the service business. One can you kind of explain why that was the case.

Speaker Change #48: And to just talk about how you know the service and install operations.

Speaker Change #48: You know performed during this challenging period for for it infrastructure for the company.

Speaker Change #48: Let me just comment on the cyber incident.

Speaker Change #48: Whole you know what we learned is we're not alone in this is more common a common phenomenon across companies.

Speaker Change #48: Companies like ours, certainly was unfortunate, but what I would tell you there was incredible remarkable work by our team and with our business continuity plans and so as we have.

Speaker Change #48: No were impacted our team has really responded well staying focused on customers continuing to have to work and maintain operations.

Speaker Change #48: Incredible speed and focus and so with that we were obviously very proactive in how we've communicated with our suppliers customers employees to maintain our operations. So that that is the foundation of what we were able to accomplish what I would say is is that.

Speaker Change #48: Really that we saw in the ability to be able to where we were when we did have some compromise be able to get the proper set of data and make sure that we're continuing to serve them across the board we were able to maintain that and stay focused on what matters, which is ultimately delivering for our customers. So.

Speaker Change #48: Even though we had a little bit of disruption in the in the month of October, which we talked a little bit about earlier I believe the work that we've done really has positioned us strong going forward and we've seen that momentum come back in November and December.

Joe <unk>: Thank you and our next question today comes from Joe <unk> with Wells Fargo. Please go ahead.

Hi, good morning.

For first question just wanted to ask on channel inventory trends I think that first emerged as a headwind in the third quarter. I believe you expect it to see a more meaningful headwind in the fourth quarter and so can you size. What you believe you saw in the fourth quarter and then within the guide and what type of headwind would be embedded.

Joe <unk>: Then sort of first quarter or even second quarter of 'twenty four.

Joe <unk>: And when you look at our our global product book to build businesses that really depend on channel.

Joe <unk>: Starting with the <unk> certainly we saw a pullback in resi and that that was obviously more so in the U S versus globally, but overall there was a decline within rosy. So we've been working to the offset obviously offset the inventory and get positioned for what we believe the new day.

And to be.

And I think as you look at the book to Bill is getting more normalized relative to you know on a go forward basis that we've seen the adjustment.

Joe <unk>: When we look when we track our inventories 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 and security controls.

Joe <unk>: Same holds true there. So we think that we're through most of the headwind with the adjustment of inventory in the channel and 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 to support that demand on a real time basis, which we are and as we go through.

Joe <unk>: 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 'twenty, Florida to continue to build build on the revenue base on a go forward basis. So I mean, we're somewhat optimistic and I feel that we have.

Joe <unk>: You know the the headwind that we saw in the in the <unk>.

Joe <unk>: Second third fourth quarter some of that snow is normalizing and we're back to seeing growth.

Speaker Change #50: And then just wanted to understand kind of project activity in the market I think 2023 would've seen still a lot of constraints as it relates to labor availability for projects supply chain availability, you know, what what youre seeing on that front kind of the the smoothness of operating of projects.

Speaker Change #50: At this point, whether labor still remains a constraint and then just just related I mean, you know office strength does come across as a bit of a surprise and so any additional color on kind of what youre seeing in North America office.

Anything that.

You're doing where you think you might be driving share gains there.

Speaker Change #51: Yeah, 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.

Speaker Change #51: As we look at where we are today, we're back to almost where we were and what we're believing now as are our operational.

Speaker Change #51: The operating system that we've deployed we can create now cycle time is a competitive advantage in 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.

Speaker Change #51: 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 and being able to recruit labor pretty much across the globe and have not been constrained by labor.

Speaker Change #51: 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 <unk>.

Speaker Change #51: It's ultimately going to be critical to delivering on our our capabilities. So.

Speaker Change #51: That feels very good as it relates to commercial buildings.

Even though there's.

I thought that maybe you're building is going to be a pullback. The work that we're doing within buildings is differentiate it and so as we go into a building now, especially with the focus on energy savings and de Carbonization Theres No company, that's consuming as much data as we are within the building and so because of that we can actually do upgrades in <unk>.

Speaker Change #51: <unk>, 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.

Speaker Change #51: In many jurisdictions not only here in North America, but across the globe, we believe that that really presents a big opportunity for us.

Speaker Change #51: In that space, especially with the focus on on energy and Decarbonization.

Speaker Change #52: Thank you and our next question comes from Deane Dray with RBC capital markets. Please go ahead.

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 'twenty four event and is that embedded in your guidance.

Speaker Change #54: The timing would be at 24 events some elements of our cost will actually be reimbursed. We believe in in Q1. That's the goal. So we depend when the costs are incurred and when we able to prepare.

Speaker Change #54: Our claims so some of it will come in Q in Q1, setting the gene in this yet.

Speaker Change #55: Okay, but if you get that in the first quarter, that's pretty fast so that's impressive.

And then.

Just a second question on China, just it was called out several times as being a source of weakness, especially in it and building solutions any color. There just in terms of at the margin.

What might be changing.

So.

They went through different phases of Covid, we saw a pick up last year and capitalize on that opportunity. We believed that we built a leading position in the higher end of the commercial market there.

Speaker Change #55: Have a very large installed base that we're capitalizing on to be able to build our service business. We are concern that the macro environment has continued to deteriorate leading to concerns of the overall slowdown now accelerating.

Speaker Change #55: I think when we look at these macro trends normally working against us, but our competitors.

Speaker Change #55: As we have now studied the market and looking at verticals are looking at the overall region, where we are planning.

Speaker Change #55: <unk> for continued pressure in China. So.

Speaker Change #55: We're a whole grew a bit wrong and maybe.

Speaker Change #55: It comes back a little bit stronger than we suspect right now, but thats really whats embedded in our in our guide.

Thank you.

And our next question today comes from Andrew O'brien.

Speaker Change #56: If America. Please go ahead.

Good morning.

Morning, Andrew.

Can I just think you know if Samsung J C I is facing.

Speaker Change #56: Look more growth more investment more inflation.

Speaker Change #56: So more capex more working capital so how do we think about this 100% cash conversion.

Speaker Change #56: Going forward that we are in a more growth and more inflationary environment right, how do you balance growth and growth opportunities and investment versus a cash conversion.

Speaker Change #56: So if you look at.

Speaker Change #56: What we said in our prepared remarks, we believe that the fundamentals to allow our company to be a 100 free cash flow company over time on that.

Speaker Change #56: Today to your point, we are investing in some parts of the business to support the strong growth in <unk> and HVAC.

Speaker Change #56: We believe that the level of Capex at this level would be what we need to support the growth we see in the coming.

Yes, Doug.

Big levers of improvement in free cash flow are going to be around our working capital I mentioned inventory just a day of inventory is worth about 50 million of cash and if you look at where we are at the end of FY 'twenty tree at about 54 days of inventory.

Speaker Change #56: Three we used to be at 45 days Bam entry you can do the math there was a big level of cash flow trapped in inventory. We are at it inventory are declining as we put in our prepared remarks, we see also the MTT to reduce the collection cycle as our lead times.

Speaker Change #56: Improving we're going to be able to collect faster and we are now because of the value proposition of our offering we're able also to demand. Some prepayments. So so so those are the levers I mentioned supply chain financing as well. So that's basically Andrew what is explaining the view.

Speaker Change #56: On free cash flow and a path to be over time, a 100% free cash flow conversion company.

Speaker Change #57: Gotcha and I, just just clarify if I got it wrong, I think I had $220 million in impairments and restructuring charges, whether incremental impairments in that number and if yes what were they.

Speaker Change #58: Go again, we had and impairment charges correct go again on the second part of your question.

Speaker Change #57: Or what else is to empower.

Speaker Change #57: So we add a festival some open blue assets associated with D. F N. A sistema acquisition. Some of those assets are part of DSM portfolio are there better. So we're going to discontinue what we I've been opened blue we add unimpaired.

Speaker Change #57: Associated with our business, we have in Argentina, our dis business is impacted by high inflation and also we had some restructuring charges those are the three key levers.

Speaker Change #59: Thank you and our next question today comes from Brett Linzey, whereas Mizuho Americas. Please go ahead.

Brett Linzey: Hey, good morning. Thanks, just wanted to come back to price cost you said positive for 24 could you just discuss the pricing component within that framework and how are you thinking about incremental price actions. This year I'm. Just curious did the cyber disruptions in any way limit your ability to capture price ask any any color there.

Sure.

So on price cost today, we see a price cost to be positive Ah. We believe we're going to be about two to keep.

Brett Linzey: The level of pricing, we saw in the second half of the year.

Brett Linzey: And when you project the full year, we see still see strong with the value propositions that we're bringing to our customers and in building solutions strong value propositions that we're pricing to and it was the differentiation that we bring with our digital content that really drives our margin and then on the product side, we continue.

Brett Linzey: New to have record launches of new product introductions, which ultimately we price to the value that we bring to the market. So we're still seeing strong pricing across our across the portfolio.

Speaker Change #61: Okay, great. Thanks for that and then just just a quick follow up on the capacity expansion are encouraging to hear I guess, maybe it's a little bit more context is it is it just simply targeted on data center or are there other geographies and then is there any way to size what that investment was.

Yes. It is.

Was there there was a big segment here is targeted on data centers because of the position that we have and the strength that we.

Speaker Change #61: Earned would be the products that we're bringing into that segment. So as I talked with Scott earlier, we see a significant demand here over the next multiple years that we're positioned now to capitalize on in line with the customer relationships that we have and so that's going to continue but when you look at applied when you look at our overall.

Speaker Change #61: <unk> HVAC business you know when we.

Speaker Change #61: What's happened is across the board with the secular trends around de carbonization sustainability efficiency.

Speaker Change #61: We are uniquely positioned with our technology and the way that we develop technology, we engineer and design right from the compressor to the end market, making sure that our equipment is optimized for the application that we provide as a result of that that has.

Speaker Change #61: Broad based positioned us to be able to know capitalize on these secular trends broad base not just within data centers, but across many of the other verticals and so.

Speaker Change #61: As we think about the work that we've done to reinvest over the last three or four years and the position that we have we have a very strong position across our applied portfolio that I believe beyond well above the economic growth that we're going to now be able to capitalize on because of that that increased demand. So it's pretty broad based.

Thank you.

Concludes our question and answer session.

Speaker Change #62: I'll turn the conference back over to George Oliver for any closing remarks.

George Oliver: Thank you all for your continued interest and support and Johnson controls as we stand here today, we are set up for success through our strong foundation as we continue to build on opportunities to enhance our business from our margin profile free cash flow generation and growth through the digitization of our service offering it is all about execution.

George Oliver: Fusion as we look ahead I am confident in our global team's ability to deliver value and results for our customers and shareholders as we enter fiscal year 2024, so with that operator that concludes our call today.

Thank you this concludes.

Today's conference call and we thank you all for attending today's presentation.

George Oliver: You may now disconnect your lines and have a wonderful day.

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