Q1 2024 Johnson Controls International PLC Earnings Call

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Speaker Change: Good morning, and welcome to the Johnson controls first quarter 2024 earnings conference call.

Speaker Change: All participants will be in listen only mode.

Speaker Change: Should you need assistance. Please signal a conference specialist by pressing the star followed by zero.

Speaker Change: After today's presentation there'll be an opportunity to ask questions.

Speaker Change: Ask a question you May press Star then one on your telephone keypad to.

Speaker Change: To withdraw your question. Please press Star then two.

Speaker Change: Please note today's event is being recorded.

Speaker Change: 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 first quarter of fiscal 2024 results. The press release and related tables that were issued earlier this morning as well as the conference call slide presentation can be found on the investor relation.

Speaker Change: A portion of our website at Johnson controls Dot com joining.

Jim Lucas: Joining me on the call today are Johnson controls Chairman and Chief Executive Officer, George Oliver Chief Financial Officer, Olivier Leonetti, our newly appointed Chief Financial Officer, Mark been deepen back.

Jim Lucas: Before we begin let me remind you that during our presentation today, we will make forward looking statements actual results may differ materially from those indicated by forward looking statements due to a variety of risks and uncertainties. Please note that we assume no obligation to update these forward looking statements, even if actual results or future expectations change materially please refer to.

Jim Lucas: Our SEC filings for detailed discussions of these risks and uncertainties. In addition to the inherent limitations of such forward looking statements.

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 controls website, I will now I'll turn the call over to George.

George R. Oliver: Tim and good morning, everyone. Thank you for joining us on the call today.

George R. Oliver: Now, let's begin with slide three we are gaining momentum as we exited the first quarter. Our team has been unbelievable and managing through the recent cyber disruption which occurred early in the quarter.

George R. Oliver: While it is challenging to comprehensively quantified the overall business impact as we recovered from the incident, we are back on track.

George R. Oliver: In fact over the course of the last 120 days since the cyber incident, we have connected with many of our key customers solidifying already strong relationships and strengthening their trust and confidence in Johnson controls.

George R. Oliver: It is clear from their feedback that our value proposition continues to resonate and customers believe in our products and services.

George R. Oliver: As we enter the new calendar year, we are seeing positive signs.

George R. Oliver: During the quarter, we delivered solid first quarter results generally in line with our forecast.

George R. Oliver: The fundamentals of our business are strong as we met expectations for sales margins and adjusted EPS in the face of headwinds from the cyber disruption ongoing weakness in global residential HVAC and significant slowing in China.

Olivier will discuss the details of our financials more specifically later in the call.

Looking forward, we expect fiscal 'twenty 'twenty four to return to more normalized seasonality in our businesses and the operating environment to be more in line with what we saw prior to the pandemic and recent supply chain disruptions.

Our position and building a leading digital building solutions platform continues to be core to our strategy and we are pleased with the strength of our applied HVAC business, especially as we serve the fast growing data center market.

George R. Oliver: We are updating our fiscal 2024 guidance today, reducing the full year adjusted EPS range by five cents, reflecting growing headwinds in China.

Our commercially focused portfolio and long cycle backlog driven businesses. In addition to our record backlog gives us more clarity of improvement as fiscal 'twenty 'twenty four progresses.

Speaker Change: Before we continue I would like to take the time to thank Olivier for his partnership over the last few years and wish him. The best of luck in the next chapter of his career.

When Olivier informed me that he was taking a role outside the company we implemented our internal succession plan and I am very pleased that mark been deep MB is assuming the role of CFO.

Speaker Change: Mark has been with Johnson controls for nearly 20 years with increasing responsibility in finance roles, including CFO of building solutions North America.

Speaker Change: Last year, we moved mark into a an operating role as president of our mainland.

Speaker Change: Mark brings deep financial expertise and understanding of our customers' global markets and operational knowledge.

Speaker Change: I am confident that we will continue to build on the foundations already in place and I look forward to partnering with Mark in his new role.

Speaker Change: Now turning to slide four I'd like to highlight the strong foundation of operational excellence at Johnson controls and our value creation framework.

Speaker Change: We are capturing the secular trends across sustainable and healthy buildings, we have the right strategy and operating system in place to create value for our shareholders and as part of our commitment to disciplined capital allocation, we remain focused on deploying resources to the right opportunities.

Speaker Change: Our team has made great progress the last two years, creating a digital services model and our investments have been a key enabler.

The addition of FM systems gave us increased capabilities to serve our customers as they improve their workplace environment.

Speaker Change: Digital is a strong enabler to creating recurring revenue retaining customers is supporting higher sustainable service growth rates.

Within service, we are changing the game from deploying a mechanical contractor to creating multiple options for our customers.

We are increasing job size, improving margins and creating scalable solutions.

In addition, we are maximizing value creation through digitally enabled offerings and accelerating our lifecycle solutions entitlements across all of our domains. Our team's model as a strong foundation and we will continue to accelerate the pace of change.

Speaker Change: At the same time, we have successfully removed many layers of cost across the organization, but we know there is more work to be done.

Speaker Change: We serve an incredible market and it is on us to capitalize on the opportunities in front of us.

Speaker Change: We will continue to simplify and standardize across our portfolio.

Speaker Change: Yeah.

As we continue to focus on simplifying the company, we're always assessing opportunities to advance our transformation into a comprehensive solutions provider for commercial buildings.

Speaker Change: As part of the continuous evaluation of our portfolio. We are in the early stages of pursuing strategic alternatives for our non commercial product lines in line with our objective to maximize value to our shareholders.

Speaker Change: We are very excited about our future and are confident we are on the right path to simplify our portfolio drive margin expansion delivered consistent cash flow, while serving our customers in the best possible way.

Speaker Change: I will now turn the call over to Olivier to go through the financial details of the quarter.

Olivier.

Olivier Leonetti: Thanks, George and good morning, everyone. Let me start with the summary on slide five as John discussed at the beginning of the call. Our team did an incredible job responding to the cyber incident the.

Olivier Leonetti: The disruptions we experienced during the quarter were factored into the guidance, we provided last month.

So we're kind of hoping you off six fund $1 billion was flat year over year, while organic sales went down 1%.

Olivier Leonetti: Continued decline in global residential HVAC and accelerated weakness in China and start business more than offset mid single digit growth in service and continued growth in applied HVAC.

Olivier Leonetti: Segment margin declined 90 basis points to 12, 8% impacted by tough comps in our short cycle global products business, coupled with ongoing weakness in China macro environment.

Olivier Leonetti: Adjusted EPS of <unk> 51 exceeded our guidance of 48 to 50 cents as we would tend to more normalized seasonality.

Olivier Leonetti: The quarter was impacted by lost momentum from the cyber incident accelerated weakness in China and tough comps in our global products business.

Olivier Leonetti: No. The line, we saw headwinds from net financing charges due to higher interest rates and increased debt levels in line with Easter Easter we called trends.

On the balance sheet. We ended the first quarter was approximately one $8 billion in available cash and net debt increased to two two times, which is within our long term target range of two to two and a half times.

Olivier Leonetti: Elevated cash position was a direct result of course keep action to mitigate the potential impact of the cyber incident on cash flow.

Olivier Leonetti: Adjusted free cash flow improved $180 million year over year, and we anticipate further improvement as we progress through the fiscal year.

Speaker Change: Let's now discuss our segment results in more detail.

Speaker Change: Slide six through eight.

Beginning on slide six organ itself in our global products business declined 1% year over year with volume declines offsetting price.

Global products saw continued strength in commercial HVAC, which grew low single digits after growing low double digits in the comparable period, one year ago.

We have been investing in our applied HVAC business for the last couple of years deploying resources to align to more attractive opportunities, resulting in further share gains in calendar 2023.

Speaker Change: Fire and security declined low single digits, we believe that the majority of the tough year over year comparisons in the short term I call indirect business bottomed out and we should see a return to growth in calendar 'twenty 'twenty four.

Speaker Change: Industry cogeneration, another strong quarter growing over 35% driven by email.

Speaker Change: Global residential declined high single digits, driven by a greater than 20% decline in North America, which more than offset low single digit growth in rest of world.

Speaker Change: North America continues to face market softness and we believe we have one more quarter with these challenges before the industry begins to see growth in the second half of the yet.

Speaker Change: We're improving our North America market share and see momentum building.

Speaker Change: Despite ongoing weaknesses in the European heat them market rest of world benefited from strong growth in Japan.

Speaker Change: Our book to Bill business continues to normalize with improved lead times and our global products third party backlog decreased 10% from the prior year to $2 $3 billion.

Speaker Change: Adjusted segment.

Speaker Change: Margins declined 240 basis points to 17, 9% as we benefited from insurance proceeds from a warehouse fire in the comparable period last year.

We're beginning to see better cost absorption in our factory and expect global products margins to improve throughout the rest of the fiscal yet.

Speaker Change: Moving to slide seven to discuss building solutions performance.

Speaker Change: All of those increased 1% as mid single digit order growth in North America and E. Miller was more than offset by greater than 30% decline in APAC, which was primarily the result of further deterioration.

Speaker Change: The China installed business.

Speaker Change: As the China real estate market continues to weaken and you have to look remains mixed we have begun to optimize our go to market strategy and have become more selective in the business we pursue.

Speaker Change: Organic sales were flat in the quarter against a tough comparison of low double digit growth in the prior year quarter.

In store declined mid single digits and more than upset mid single digit growth in service.

Speaker Change: Segment margins declined 10 basis points as accelerated weakness in China, offset pushed deep mix in the quarter.

Speaker Change: Vertical solutions backlog remains at record levels growing 7% to $12 $1 billion Sam.

Speaker Change: Service backlog is flat and then start backlog grew 8% year over year.

Speaker Change: Let's discuss the building solutions performance by region on slide eight.

Speaker Change: Orders in North America increased 6% as we continued to see strong demand across our HVAC and controls platform growing high single digits. Following high teen growth in the comparable chief pay you a year ago, while the horn.

Speaker Change: There was broad based demand in our <unk> CAD data center government and education sectors.

Speaker Change: Instead orders increased eight 9% year over year, and we started growth in both new construction and the head of it.

Speaker Change: Sales in North America were up 4% organically with strong growth across our HVAC and controls platform up low teens year over year.

Speaker Change: Oh installed business grew 4% with continued momentum in new construction up over 25% year over year.

Speaker Change: Organic sales in service grew 4% in the quarter benefiting from high single digit growth in our recurring revenue contracts.

Speaker Change: Segment margins expanded 20 basis points year over year to 11, 5% driven by the continued execution of higher margin backlog and strength in our higher margin service business.

Total backlog ended the quarter at $8 $4 billion up 11% year over year.

Speaker Change: In EMEA orders were up 5% with continued strength in service up 12%.

Demand in institutional gained momentum in the quarter growing 50% year over year, driven by big projects in Europe.

Speaker Change: Industry already language in Asian, another strong quarter with greater than 45% growth.

Speaker Change: Saturday and email are grew 2% organically led by high single digit growth in service with high single digit growth from our recurring contracts and strong double digit growth in our shorter cycle transactional business.

Speaker Change: The bride commercial HVAC and fire <unk> security grew low single digits within the quarter.

Speaker Change: Segment EBITDA margins of seven 7% remained flat as the growth in service was upset by the conversion of lower margin installed backlog when she paid strong margin expansion eat in E. Miller.

Speaker Change: Through the remainder of the fiscal year.

Speaker Change: Club was up 10% year over year to $2 $4 billion.

In Asia Pacific as I mentioned earlier orders declined 31% due to further deterioration of the China installed business and we're being more strategy in the deals we select of a heart APAC seven orders grew low single digits driven by high single.

Speaker Change: Growth in our shorter term transactional business.

Speaker Change: Saturday in the Asia Pacific declined 21%.

Speaker Change: As the installation business was impacted primarily by accelerated weakness in China.

Speaker Change: All of a service business grew 5% in the quarter.

Speaker Change: The weakness in China is installed business was broad based across the overall portfolio with HVAC and controls, Don I teens, and fire and security down 20%.

Operator: Good morning, and welcome to the Johnson Controls first quarter 2024 earnings conference call. All participants will be in listen-only mode.

Segment, EBIT margins declined 140 basis points to nine 1% as weakness in China offset positive mix in our service business.

Operator: Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then 2.

Backlog of $1 $3 billion declined 21% year over year.

I would now like to turn the call over to Mark to discuss our second quarter and fiscal year 2024 guidance Mark.

Mark Devenney: Thank you Olivier and good morning, everyone before I discuss our guidance on slide nine I want to show excited I am for the opportunity to partner with George as we simplify and transform Johnson controls into a comprehensive solution provider for commercial buildings.

Operator: Please note, today's event is being recorded. I would now like to turn the conference over to Jim Lucas, Vice President, Investor Relations. Please go ahead.

Jim Lucas: Good morning, and thank you for joining our conference call to discuss Johnson Control's first quarter fiscal 2024 results. The press release and related tables that were issued earlier this morning, as well as the conference call slide presentation, can be found on the Investor Relations portion of our website at www.johnsoncontrols.com. Joining me on the call today are Johnson Controls' Chairman and Chief Executive Officer, George Oliver, Chief Financial Officer, Olivier Leonetti, and newly appointed Chief Financial Officer, Mark Van Diepenbach. Before we begin, let me remind you that during our presentation today, we will make forward-looking statements. Actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks and uncertainties.

Mark Devenney: We exited the first quarter was a cyber risk behind us and the momentum we lost at the start of the Eos we covered.

Mark Devenney: We enter the second quarter with a backlog that remains at historical levels, a healthy pipeline of opportunities and strong momentum you know industry, leading service business.

Mark Devenney: We are introducing second quarter sales guidance of approximately flat year on year, which assumes continued weakness in China and global residential HVAC.

Mark Devenney: We expect strong contribution from North America enemy law that once again by our resilient service business.

Jim Lucas: Please note that we assume no obligation to update these forward-looking statements, even if the actual results or future expectations change materially. Please refer to our SEC filings for detailed discussions of these risks and uncertainties, in addition to the inherent limitations of such forward-looking statements. 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 in the Investor Relations section of Johnson Controls' website. I will now turn the call over to George. Thanks, Chairman. Good morning, everyone.

Mark Devenney: That's really turned to society more in line with historical patterns global product as one more challenging quarter before stabilizing in the second half.

Mark Devenney: For the second quarter, we expect segment EBIT margin to be approximately 14% and adjusted EPS to be in the range of 74 to 78 cents.

Mark Devenney: For the full year, we continue to expect the topline growth of mid single digits led by stronger performance in North America further improvement in Mueller stabilization in global products and a cautious outlook on China.

Mark Devenney: We expect segment EBITA margin to expand approximately 50 to 75 basis points for the full year.

George R. Oliver: Thank you for joining us on the call today. Now, let's begin with slide three. We are gaining momentum as we exit the first quarter. Our team has been unbelievable in managing through the recent cyber disruption, which occurred early in the quarter. While it is challenging to comprehensively quantify the overall business impact as we recover from the incident, we are back on track. In fact, over the course of the last 120 days since the cyber incident, we have connected with many of our key customers, solidifying already strong relationships and strengthening their trust and confidence in Johnson Control. It is clear from their feedback that our value proposition continues to resonate, and customers believe in our products and services.

Price cost remain positive and mix continued to improve throughout the year.

Mark Devenney: As George mentioned earlier and the coal given the weakening macro outlook in China, we are updating our adjusted EPS guidance range to approximately $3 60 to $3 75.

Mark Devenney: The overall guide assume a return to normal seasonality second half stabilization of global products and a conversion of higher margin backlog in building solutions.

Mark Devenney: We continue to expect adjusted free cash flow conversion of approximately 85% for the full year <unk>.

Mark Devenney: The improvement we saw in cash flow for the start of the year demonstrate that our working capital improvement of gaining momentum.

George R. Oliver: As we enter the new calendar year, we are seeing positive signs. During the quarter, we delivered solid first quarter results, generally in line with our forecast. The fundamentals of our business are strong, as we met expectations for sales, margins, and adjusted EPS in the face of headwinds from the cyber disruption, ongoing weakness in global residential HVAC, and significant slowing in China. Olivier will discuss the details of our financials more specifically later in the call. Looking forward, we expect fiscal 2024 to return to more normalized seasonality in our businesses, and the operating environment to be more in line with what we saw prior to the pandemic and recent supply chain disruption. Our position of building a leading digital building solutions platform continues to be core to our strategy, and we are pleased with the strength of our applied HVAC business, especially as we serve the fast-growing data center market.

Speaker Change: With that operator, please open up the lines for questions.

Speaker Change: Thank you we will now begin the question and answer session.

Youre asking a question you May press Star then one on your phone.

Speaker Change: If you are using a speakerphone please pick up your handset before pressing the seas.

Speaker Change: To withdraw your question. Please press Star then two.

Speaker Change: In respect of time, we ask you.

Speaker Change: Limit yourself to one question and one follow up question.

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

Speaker Change: And today's first question comes from Scott Davis with Melius Research. Please go ahead.

Scott Reed Davis: Hey, good morning, Hey, good morning, guys.

Scott Reed Davis: Yeah.

Scott Reed Davis: Oh can you hear me okay hopefully.

Scott Reed Davis: Good morning, Scott.

Yeah fine. Thanks, George I think you know it's been a tough couple of quarters, maybe if we take a step backwards.

George R. Oliver: We are updating our fiscal 2024 guidance today, reducing the full year adjusted EPS range by five cents, reflecting growing headwinds in China. Our commercially-focused portfolio and long-cycle, backlog-driven businesses, in addition to our record backlog, give us more clarity of improvement as fiscal 2024 progresses. Before we continue, I would like to take the time to thank Olivier for his partnership over the last few years and wish him the best of luck in the next chapter of his career.

Scott Reed Davis: What do you think long term.

Scott Reed Davis: This portfolio the growth rate and margin levels and the cash generation, what what is kind of your your you know I don't want to call. It dare to dream, but what is the vision of where you think you can get.

George R. Oliver: You know 234 years down the road when you know in a more normalized environment.

Speaker Change: Yes, So let me start Scott, but just saying that are you know as you know we've been through a significant transformation here into becoming a comprehensive solutions provider for commercial buildings.

Speaker Change: And then as part of that continuing to focus on how do we how does.

We transformed the business model and how we bring our differentiated solutions to our customers in the commercial space.

George R. Oliver: When Olivier informed me that he was taking a role outside the company, we implemented our internal succession plan, and I am very pleased that Mark Van Diepenbeek is assuming the role of CFO. Mark has been with Johnson Controls for nearly 20 years with increasing responsibility in finance roles, including CFO of Building Solutions North America. Last year, we moved Mark into an operating role as president of a mailer.

Speaker Change: And so as you look at what we've been doing we are well positioned to invest in lead and the overall building solution space capitalizing on significant secular trends sustainable buildings smart healthy buildings, I mean, we've been allocating our resources and building out the capabilities.

Speaker Change: And when you look at the content of how we differentiate our solutions is not only through the leadership of the product be applied product and continued investment that we're making in product, but also now deploying those products with the leadership platform with open Blue that we believe is going to now lead the industry and that always converting into how we change the outcome.

George R. Oliver: Mark brings deep finance expertise and understanding of our customers, global markets, and operational knowledge. I am confident that we will continue to build on the foundations already in place, and I look forward to partnering with Mark in his new role.

Speaker Change: <unk> for the customers that we serve and that's through our engineered commercial solutions and converting what we do within building solutions to a digitally enabled service. So when you look at the margin structure.

Speaker Change: We go forward not only are we getting a more focused approach to the differentiation with the value proposition right from engineering through install to then ultimately getting the lifecycle services. When you project. The overall performance going forward, we believe that from a growth standpoint will be well above market and capitalizing on the site.

George R. Oliver: I'd like to highlight the strong foundation of operational excellence that Johnson controls in our value creation framework. We are capturing the secular trends across sustainable and healthy buildings. We have the right strategy and operating system in place to create value for our shareholders. And as part of our commitment to disciplined capital allocation, we remain focused on deploying resources to the right opportunities.

Speaker Change: The trends with the differentiation there from a margin profile will have a much higher recurring revenue within our services demanding a much higher margin with the content of the software enabled services and then from a from an overall return when you look at the conversion to cash.

Speaker Change: We're getting now for the value proposition, we bring we're getting a bunch more cash upfront relative to that value proposition and ultimately being able to deliver very strong free cash flow. So I would say well above market growth continued expansion of margins to what we believe is is kind of mid to higher teens, and then very predictable cash flow.

George R. Oliver: Our team has made great progress in the last two years creating a digital services model, and our investments have been a key enabler. The addition of FM systems gives us increased capabilities to serve our customers as they improve their workplace environment. Digital is a strong enabler for creating recurring revenue, retaining customers, and supporting higher sustainable service growth rates. Within service, we are changing the game from deploying a mechanical contractor to creating multiple options for our customers. We are increasing job size, improving margins, and creating scalable solutions. In addition, we are maximizing value creation through digitally enabled offerings and accelerating our lifecycle solution entitlements across all of our domains. Our team's model has a strong foundation, and we will continue to accelerate the pace of change.

Speaker Change: So with the mix of the content of what we do for our customers.

That's helpful George.

Speaker Change: When you think about asset sales you know and there's some nuance here clearly, but is it more a function of simplifying the portfolio. So you can execute on those those kpis that you just mentioned or is it.

Speaker Change: Or does the asset sales themselves kind of changed the growth and margin profile.

Speaker Change: The.

Speaker Change: Any.

Speaker Change: No let me reflect on the transformation that we've been going through we've been continuously evaluating the portfolio kind of where we are with the transplant transformation of a of a comprehensive solutions provider in commercial buildings, and then making sure that our resources are being deployed to the highest priorities. When you look at the the non commercial product lines.

They are excellent businesses, but they do not necessarily are they consistent with the go forward strategy over the longer term and that's why as we are now pursuing the alternatives here. Because these are good businesses and there's an opportunity with these businesses now to be able to create even more value for shareholders as we look at the alternative.

Olivier Leonetti: At the same time, we have successfully removed many layers of cost across the organization, but we know there is more work to be done. We serve an incredible market, and it is on us to capitalize on the opportunities in front of us. We will continue to simplify and standardize across our portfolio. As we continue to focus on simplifying the company, we are always assessing opportunities to advance our transformation into a comprehensive solutions provider for commercial buildings. As part of the continuous evaluation of our portfolio, we are in the early stages of pursuing strategic alternatives for our non-commercial product lines in line with our objective to maximize value for our shareholders. We are very excited about our future and are confident we are on the right path to simplify our portfolio, drive margin expansion, and deliver consistent cash flow while serving our customers in the best possible way. I will now turn the call over to Olivier to go through the financial details of the quarter. Olivier?

Speaker Change: Yes.

Speaker Change: We're very excited about the future with the prospects that we have and the opportunities that we're driving towards we believe that we're on the right path now to simplify the portfolio.

Speaker Change: Continue to drive margin expansion deliver much more consistent cash flow.

Speaker Change: Most important is really differentiating the value proposition that we can bring with it bring to our customers, which is going to be fundamental to the growth.

Speaker Change: Thank you and our next one.

Speaker Change: And today comes from Steve Tusa with Jpmorgan. Please go ahead.

Hi, good morning.

Good morning, Good morning, Steve.

Stephen Tusa: It would be great if a market and answer this question, but for the second quarter could you just talk about the various segments and how you get to this.

14, 5% operating margin target, maybe on a year over year and sequential basis, and what do you expect out of them and I have a follow up thanks, yeah. Thanks, Steve So.

Speaker Change: So first I want to address the changing guidance rates since we issued our guidance in December.

Speaker Change: Impact of the economic environment in China on our business has deteriorated and we have factored a we generally have a fairly cautious outlook in China.

Olivier Leonetti: Thanks, George, and good morning, everyone. Let me start with the summary on slide five. As George discussed at the beginning of the call, our team did an incredible job responding to the cyber and security challenges. The challenges we experienced during the quarter were factored into the guidance we provided last month. Total revenue of $6.1 billion was flat year-over-year, while organic sales were down 1% as continued declines in global residential HVAC and accelerated weakness in China's installed business more than offset mid-single-digit growth in service and continued growth in applied HVAC. Segment margins declined 90 basis points to 12.8%, impacted by tough comps in our shorter cycle global products business coupled with ongoing weakness in China's macro environment.

The initial guide however that outlook is further worsen.

Speaker Change: We refocused the organization going through that tumultuous environment in China.

And we see a path of recovery to that volume.

Speaker Change: Recovery of the backlog as well in the second half of the year, but that you'd start to bottom out in Q2.

Speaker Change: We have more clarity on some of the actions we've taken around productivity and cost structure and that should put that recovery in that backlog now focusing on Q2 on the different business. If you look at our field base business building solutions.

Speaker Change: <unk> disruption is really behind us and the loss of momentum that we had in Q1 is now is now recovering and supporting the shorter cycle businesses, particularly all of service mix. If you look at North America, and EMEA, particularly the margin we have put in the backlog over the last six months, but particularly during the.

Olivier Leonetti: Adjusted EPS of $0.51 exceeded our guidance of $0.48 to $0.50 as we return to more normalized seasonality. The quarter was impacted by lost momentum from the cyber incident, accelerated weakness in China, and tough comps in our global products business. Below the line, we saw headwinds from net financing charges due to high interest rates and increased debt levels in line with historical trends.

Speaker Change: First quarter gives us confidence that we're going to be able to deliver on the margin rates for those businesses.

Speaker Change: There was a lot of benefit of cost actions, we've taken early on in the year and later last year.

But there was also more he turned to seasonality in our global products business as we see the volume.

Speaker Change: Providing marching Liffey in those operation should combine all of that I think we see with confidence that margin being a stated policy.

Speaker Change: Okay, and then just a GA for you I guess.

Olivier Leonetti: On the balance sheet, we ended the first quarter with approximately $1.8 billion in available cash, and net debt increased to 2.2 times, which is within our long-term target range of 2 to 2.5 times. The elevated cash position was a direct result of proactive action to mitigate the potential impacts of the cyber incident on cash flow. Adjusted free cash flow improved $180 million year over year, and we anticipate further improvement as we progress through the fiscal year. Let's now discuss our segment results in more detail on slides 6 through 8. Beginning on slide 6, organic sales in our global product business declined 1% year-over-year with volume declines offsetting price.

Speaker Change:

Speaker Change: It's kind of hard to Ah.

Speaker Change: To reconcile the commentary on momentum and your strategy with <unk>.

Speaker Change: You know basically a negative organic growth this quarter.

Do you do you consider that you know positive momentum and then secondly, what what was the what drove the timing on this announcement of evaluating strategic alternatives I mean, it's not like you have anything really lined up here.

Speaker Change: Two announce.

Speaker Change: So why are we kind of just throwing this out there today versus maybe.

Speaker Change: You know over the last couple of years, where you've been kind of pursuing the same strategy.

Speaker Change:

Speaker Change: Just curious on kind of a straightforward answer on both of those we don't we don't need a lot of verbal. Thank you.

Speaker Change: So let me just comment on the on the quarter as far as momentum and we did have a significant disruption as mark said.

Olivier Leonetti: Global products saw continued strength in commercial HVAC, which grew low single digits after growing low double digits in the comparable period one year ago. We have been investing in our applied HVAC business for the last couple of years, deploying resources to align to more attractive opportunities, resulting in further share gains in calendar 2023. Client security declined low single digits.

For about six weeks of the first quarter and part of that did have an impact on our momentum and our ability to be able to convert and the like and so that's that was more of a short term impact in Q1 and in addition to the year on year adjustments that we've had in global products as far as the timing.

Speaker Change: I'm sure you can appreciate Steve the board and the management team, we've had a very thoughtful approach to the strategy, we assess all avenues that will deliver value to our shareholders.

Speaker Change: Our strategy our transformation has been focused on really leveraging all of our combined strengths and our differentiated product or our digital platform and then from a go to market standpoint, the depth and expertise that we have from an engineering standpoint to ultimately be a comprehensive solutions provider and our ability to be able to take the value.

Olivier Leonetti: We believe that the majority of the tough year-over-year comparisons in the shorter cycle and direct business are bottomed out, and we should see a return to growth in calendar 2024, with industrial refrigeration having another strong quarter going over 35 percent driven by EMILA. Global residential declined in high single digits, driven by a greater than 20% decline in North America, which more than upsets low single-digit growth in the rest of the world. North America continues to face market softness, and we believe we have one more quarter with these challenges before the industry begins to see growth in the second half of the year. We're improving our North American market share, and we see momentum building. Despite ongoing weaknesses in the European heat pump market, the rest of the world benefited from strong growth in Japan. Our book to build business continues to normalize with improved lead times, and our global products third party backlog decreased 10% from the prior year to $2.3 billion. Adjusted segment ABA margins declined 240 basis points to 17.9% as we benefited from insurance proceeds from a warehouse fire in the comparable period last year.

Speaker Change: And be able to convert that to recurring revenue through services, we're seeing that momentum, which is beginning to convert them and as we look at the difference in the business models within the businesses. When we talked about the noncommercial businesses. There is a different business model relative to how we we serve the market and I think this along.

Speaker Change: How's us to be able to position those businesses for continued stroke growth, while we're creating value. While we're focused on really now accelerating the progress we've made within our building solutions business.

Speaker Change: Thank you and our next question today comes from Jeff Sprague with vertical research. Please go ahead.

Jeff Sprague: Hey, Thanks, good morning, everyone.

Jeff Sprague: Wonder if we could just drill a little bit more George and into kind of the portfolio review and specifically as you know a lot of the business is complex.

Day to day for you're running it it's even more complex from for us on the outside looking in so can you just size for us what we're talking and non commercial assets.

Jeff Sprague: Put an estimate out there I don't know if I'm in the ballpark or not but just give us some sense of.

The total revenues that were talking about that are under review and consideration and.

Olivier Leonetti: We're beginning to see better cost absorption in our factory and expect global product margins to improve throughout the rest of the fiscal year. Moving to slide 7 to discuss building solutions performance. Orders increased 1% as mid-single-digit order growth in North America and E-MILA was more than offset by a greater than 30% decline in APAC, which was primarily the result of further deterioration of the China-installed business. As the Chinese real estate market continues to weaken and the outlook remains mixed, we have begun to optimize our go-to-market strategy and have become more selective in the business we pursue. Organic sales were flat in the quarter against a tougher comparison of low double-digit growth in the prior year quarter, installed the client meet single digits, and more than upset meet single digit growth in service. Segment margins declined 10 basis points as accelerated weakness in China offset positive mix in the quarter. Burlington Solutions' backlog remains at record levels, growing 7% to $12.1 billion.

Jeff Sprague: Maybe kind of the <unk>.

Average profitability across that basket.

Speaker Change: Yeah. When you look at the overall revenues of these businesses would be less than 25% of the portfolio.

Speaker Change: And how does the margin stack up versus the average of GCI.

Speaker Change: Overall when you when you look at the mix of the margins.

Speaker Change: It would be in line with the overall GCI.

Speaker Change: Okay.

Speaker Change:

Speaker Change: And then just kind of kind of coming back to maybe a more granular point on this then.

Speaker Change: You know even preceding you I think as you well know there was always this debate about you know can you extract rajeev from kind of legacy you know.

Your the rest of your life commercial applied are tied together.

Speaker Change: Maybe it undermines your larger commercial effort.

Speaker Change: Do you know if you exit that business I mean, maybe you found a way to separate Rosie.

Speaker Change: Commercial or do you think you can but can you provide any you know any.

Additional context on that and.

How are the light commercial business in particular might factor into your strategic thoughts on where the business goes from here sure.

Olivier Leonetti: Service backlog is flat, and installed backlog grew 8% year over year. Let's discuss the building solutions performance by region on slide 8. Orders in North America increased 6% as we continue to see strong demand across our HVAC and controls platform, growing in high single digits, following heightened growth in the comparative period a year ago. There was broad-based demand in our healthcare, data center, government, and education sectors. Install orders increased 9% year over year, with solid growth in both new construction and retrofit.

Speaker Change: Sure.

So if you look at rugby light commercial.

Speaker Change: The business is now are really back on track I mean, we've had a really nice quarter here picking up share both <unk> as well as like commercial.

Speaker Change: Our business in North America was up.

Speaker Change: Double double digit, which was supported with 40% growth in commercial and with <unk> being down about 7%. So the business is now are performing on our positioning.

Speaker Change: To perform going forward on the doctors on the ductless side. When you look at the <unk>, where we had strengthen in Japan offsetting some of the weakness we saw in Europe.

Olivier Leonetti: Sales in North America were up 4% organically, with strong growth across our HVAC and controls platform, up low-teens year over year. Our installed business grew 4% with continued momentum in new construction, up over 25% year over year. Organic sales in service grew 4% in a quarter, benefiting from high single-digit growth in our recurring revenue contract. Segment margins expanded 20 basis points year over year to 11.5%, driven by the continued execution of higher margin backlog and strength in our higher margin service. Total backlog ended the quarter at $8.4 billion, up 11% year-over-year.

Speaker Change: And in India. So when you look at the go to market I think it's important to understand that these noncommercial product lines are excellent businesses, but when you look at the go to market that are not consistent with what we're doing as we build out our building solutions over the long term and so we believe.

Speaker Change: That when you look at the value proposition that we bring with our customers.

Speaker Change: Although there is an overlap with with some of the applied rooftops that can be managed on would be you know with.

Speaker Change: With the structure that we put into place going forward and so I think when you look at the it does not erode any value proposition and our comprehensive.

Speaker Change: Commercial solutions, but also position the business to be able to take an incredible asset and create more value through growth.

Olivier Leonetti: In EMILA, orders were up 5% with continuous strengthening service up 12%. Demand for institutional gained momentum in a quarter, growing 50% year over year, driven by public projects in Europe. Industrial refrigeration had another strong quarter with greater than 45 percent growth. Sales in Imila grew 2% organically, led by high single-digit growth in service with high single-digit growth from our recurring contracts and strong double-digit growth in our shorter cycle transactional business. Applied Commercial HVAC and Fire and Security grew low single digits within the quarter. Segment EBITDA margins of 7.7% remained flat as the growth in service was upset by the conversion of lower margin installs back.

Speaker Change: Alright ill leave it there thanks.

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

Thanks, Good morning.

Nigel Coe: So another another question on the <unk> on the portfolio review.

The the press release on Friday, you know highlighted staci, but also it talked about residential like commercial for York.

Nigel Coe: And so I just wanted to make it very clear that we're talking here about just the U S residential assets.

Nigel Coe: But there's also a mention of the ADT business as well so any more color in terms of the noncommercial ounces because it does feel like there are some commercial businesses here and then on the on the Hitachi side subsea fatality set out 40% of that business how much flexibility do you have to think options for your majority control of the asset.

Olivier Leonetti: We anticipate strong margin expansion in E-MILA for the remainder of the fiscal year. Our club was up 10% last year to $2.4 billion. In Asia-Pacific, as I mentioned earlier, orders declined 31% due to further deterioration of the China-installed business, and we're being more strategic in the deals we select. Overall, APAC-7 orders grew low single digits, driven by high single-digit growth in our shorter-term transactional business. Sales in the Asia-Pacific declined 21 percent, as the installation business was impacted primarily by accelerated weakness in China.

Speaker Change: I think you'd appreciate Nigel at this stage, though with the ongoing transformation I would caution against making any assumptions.

At this stage and how we will affect it.

Speaker Change: I think the communication here today is that where we were in a where you are pursuing.

Speaker Change: Strategic alternatives, so we're going to continue to simplify and standardize across the portfolio.

Speaker Change: Well, we are we're in the early stages and at this stage I'm not going to comment relative to any one of the the <unk>.

Speaker Change: Potential assets that we would look to to create value with.

Speaker Change: Okay worth a try.

Speaker Change: That wasn't them.

Speaker Change: But if we do a theme that's executes on some form of strategic.

Speaker Change: Realignment of the portfolio. If you had let's say $5 billion of cash come in till today, you know how how would you look to deploy that children.

Olivier Leonetti: Our service business grew 5% in a quarter. The weakness in China's installed business was broad-based across the overhaul portfolio with HVAC and controls down 18% and fire and security down 20%. Segment EBIT A margins declined 140 basis points to 9.1% as weakness in China offset positive mix in our service business. Backlog of $1.3 billion declined 21% year over year. I would now like to turn the call over to Mark to discuss our second quarter and fiscal year 2024 guidance. Mark.

Speaker Change: As we look at I mean, we're again speculating on on Oh, you know what.

Speaker Change: What would happen I think as we look at what we do within our comprehensive commercial solutions business. We have been doing bolt ons will continue to to be able to do bolt ons and supporting the technology and our go to market as we strengthen that across the globe and our intent would be to make it accretive as far as whether it be through through a bolt.

Speaker Change: Nausea indoor deployment back to our shareholders to offset the dilution that that any divestiture might help.

Speaker Change: Okay I'll leave it at that thanks.

Speaker Change: And our next question today comes from Noah Kaye with Oppenheimer. Please go ahead.

Noah Kaye: Okay, great. So first a shorter term one you didn't mention signs of bottoming out in fire and security on the short cycle can you just give us some more indicators in comp in there.

Mark: Thank you, Olivier, and good morning, everyone. Before I discuss our guidance on slide 9, I want to say how excited I am for the opportunity to partner with George as we simplify and transform Johnson Controls into a comprehensive solution provider for commercial buildings. We exited our first quarter with a cyber incident behind us, and the momentum we lost at the start of the year has recovered. We enter the second quarter with a backlog that remains at the historical level.

Noah Kaye: Yes, when you look at you know the.

Noah Kaye: The business, whether it be at the product level or in the field that as far as the the demand signals are coming through strong we've gone through some adjustment relative to backlog as well as is in the product business. The book to Bill business. We see this really differentiating our overall commercial solutions and how we're utilizing the.

Noah Kaye: These businesses and differentiating our solutions on a go forward basis, we have when you look at our our pipeline of opportunities is pretty robust and we're working to continue now to execute that into backlog and ultimately then conversion.

Revenues going forward so.

Mark: A healthy pipeline of opportunities and strong momentum in our industry-leading service business. We are introducing second quarter sales guidance of approximately flat year-on-year, which assumes continued weakness in China and global residential age values. We expect strong contribution from North American EMILA, led once again by our resilient service business. As we return to seasonality more in line with historical patterns, global product has one more challenging quarter before stabilizing in the second half. For the second quarter, we expect the segment EBITDA margin to be approximately 14.5%, and adjusted EPS to be in the range of $0.74 to $0.78.

Noah Kaye: I think it's more short term based on what we've seen here.

Noah Kaye: With some of the adjustments in the market, but we're confident that with the pipeline. We have we're going to be positioned to be able to continue to support the growth that we're committing to.

Speaker Change: Okay, Thanks, and I think I'd like to return to the why now question that was asked earlier and maybe frame it slightly differently.

Obviously, the U S market went through a tough year last year with.

Speaker Change: Volume trends, but certainly there's some some secular tailwind as we look out over the next couple of years of refrigerant transition you know ongoing price mix benefits easy.

Speaker Change: Easier comps and then you have the transition both in North America and globally towards heat pumps.

Speaker Change: Theres there seem to be some positive prospects are you now.

North American globally for residential and at the same time, you know, there's I think overarching concern for many investors around you know.

Non non res right commercial weakness and so.

Speaker Change: I guess in that context, you know why now is particularly acute question.

Because I think from a cycle perspective.

Mark: For the full year, we continue to expect top-line growth of mid-single-digit, led by stronger performance in North America, further improvement in EMILA, stabilization in global products, and a cautious outlook on China. We expect the segmented EBITDA margin to expand approximately 50 to 75 basis points for the full year, as price costs remain positive, and mix continues to improve throughout the year. As George mentioned earlier in the call, given the weakening macro outlook in China, we are updating our adjusted EPS guidance range to approximately $3.60 to $3.75. The overall guidance assumes a return to normal seasonality, second-half stabilization of global products, and a conversion of higher margin backlog in building solutions. We continue to expect an adjusted free cash flow conversion of approximately 85% for the full year.

Speaker Change: The market doesn't necessarily see the same trends ahead that we can't pinpoint this decision. So if he can.

Speaker Change: Talk to us about why this makes sense for you and why now.

Speaker Change: Yeah. So.

Speaker Change: As I said earlier, we've come through a very disruptive period and there's been significant progress that has been made across these businesses and these businesses are positioned to perform and so as I said earlier as you can appreciate we're constantly reviewing the portfolio and understanding how we manage the assets to be able to deliver value for our shareholders.

Speaker Change: Taken a very thoughtful approach to this strategy and this has been continuous and making sure that we're assessing all avenues on how we ultimately deliver value to our shareholders and so that would that's what's been playing out.

Speaker Change: And I think tied to.

Speaker Change: You know as we think about our our acceleration of becoming the leading comprehensive commercial solutions provider within commercial buildings. This is part of that path forward and in line with.

Speaker Change: Assistant with how we continue to update our shareholders will continue to provide those updates.

Operator: The improvements we saw in cash flow for the start of the year demonstrate that our working capital improvements are gaining momentum. With that, operator, please open up the lines for questions. Thank you. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the key.

Speaker Change: As we continue to make progress with these.

Speaker Change: With these potential divestitures.

Speaker Change: Okay I appreciate it that's helpful answer thanks, Josh.

Speaker Change: And our next question today comes from Joe Ritchie with Goldman Sachs. Please go ahead.

Joe Ritchie: Thanks, Good morning, Congratulations Mark and Olivier will see on the other side.

Joe Ritchie: D D.

Joe Ritchie: Let me, let me just start with Asia, because you referenced China.

Scott Reed Davis: To withdraw your question, please press star then 2. In respect of time, we ask that you limit yourself to one question and one follow-up question. At this time, we will pause momentarily to assemble our roster. And today's first question comes from Scott Davis with Melius Research. Please go ahead.

Joe Ritchie: A few times on your prepared comments I'm, just trying to understand like how much is that the weakness that you saw this quarter was just the market deteriorating versus your own selectivity and then as you kind of think about the next few quarters should we be expecting material order declines to continue.

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

I'll I'll take that Joe last year, when you look at where we were last year, we're working to recover our backlog from the second wave of Covid shutdowns in China.

George R. Oliver: Hopefully, Yeah, good morning, Scott. Can you hear me?

Scott Reed Davis: Yeah, fine, thanks. George, I think, you know, it's been a tough couple of quarters. Maybe if we take a step backwards, you know, what do you think long term? This portfolio, the growth rate, and margin levels, and the cash generation. What is your, you know, I don't want to call it dare to dream, but what is your vision of where you think you can get?

As the economic environment in China has slowed we continue to make sure that were streamlined with our organization and aligning our resources onto the market to be able to maximize what we believe is our.

Joe Ritchie: Our entitlement and then make sure that we're executing with discipline to achieve.

Joe Ritchie: What we see to be very strong lifecycle value creation with our services.

Joe Ritchie: This is what we played out in North America, which has been very successful first.

Joe Ritchie: We do have a very healthy pipeline as we assess the market.

George R. Oliver: Yeah, so let me start, Scott, by just saying that, as you know, we've been through a significant transformation here into becoming a comprehensive solutions provider for commercial buildings. And then, as part of that, continuing to focus on how do we, how do we transform the business model, and how do we bring our differentiated solutions to our customers in the commercial space. And so as you look at what we've been doing, we're well-positioned to invest in and lead in the overall building solutions space, capitalizing on significant secular trends such as sustainable buildings, smart, healthy buildings. We've been allocating our resources and building out capabilities. When you look at the content of how we differentiate the solutions, it's not only through the leadership of the product, the applied product, and continued investment that we're making in the product, but also now deploying those products with a leadership platform with Open Blue that we believe is going to now lead the industry. And that all is converting into how we change the outcomes for the customers that we serve. And that's through our engineered commercial solutions and converting what we do within building solutions to a digitally enabled service.

Which we are converting them, we are anticipating a slower recovery of the backlog.

Joe Ritchie: And ultimately the projected revenue, which now has been pushed to the right.

Joe Ritchie: And so those are the factors really updating our guidance there Joe but are confident that we you know we have incredible product for the market, making sure. We have the right go to market structure, and then ultimately being able to execute on what we see is still to be a very attractive market.

Joe Ritchie: Okay, Thanks, George and I and I know that you don't want to provide a ton of specificity on what noncommercial means just maybe for my own edification and remembering that the old Tyco assets I mean, they can still had so.

Residential ADT international assets as well to just correct me if I'm wrong. If you don't and then and then also just disappointed clarification.

Joe Ritchie: The light commercial business.

Joe Ritchie: At roughly 6% of sales I think the last several quarters, we've been saying it closer to 9% did you guys shift portion of the light commercial sales until apply because just want to understand that a little bit too.

Joe Ritchie: Now when you look at the mix within our Dr business, which is mainly what drives our light commercial is where were up 40% and like I said and in our Dr. Business. When you look at resi being down slightly and then commercial being very strong our whole Dr business was up 10% and so this has been the.

Joe Ritchie: Differentiated product that we've been bringing into the market I'm getting we've increased share Joe by it's been roughly about 300 basis points over the last year with the with the recovery of the commercial market and we've invested in the capacity to be able to do so so as far as.

George R. Oliver: So when you look at the margin structure as we go forward, not only are we getting a more focused approach to the differentiation with the value proposition, right from engineering through installation to then ultimately getting the life cycle services. When you project the overall performance going forward, we believe that from a growth standpoint, we'll be well above market, capitalizing on the secular trends with differentiation, and from a margin profile, we'll have a much higher recurring revenue within our services, demanding a much higher margin on the content of the software-enabled services. And then from an overall return, you know, when you look at the conversion to cash we're getting now for the value proposition we bring, we're getting much more cash upfront relative to that value proposition, and ultimately, we are able to deliver very strong free cash. So I would say well above market growth, continued expansion of margins to what we believe is kind of mid to higher teens, and then very predictable cashflow with the mix of the content of what we do for our customers. It's very helpful, George.

Joe Ritchie: That is the core of our like light commercial business and we've been performing extremely well.

Joe Ritchie: So was there a request because it's selling like that business is lower as a percentage of your as your total sales and it was didn't last few quarters. It takes into account the V. R. F well, Joe the differences that are 9% of our fiscal 'twenty two sales in the prior year versus when we move forward is now off.

Joe Ritchie: 'twenty three now that that year is fine.

Joe Ritchie: It's just a.

Joe Ritchie: Exercise.

Yeah actually that that math doesn't really tie well, but I can follow up.

Speaker Change: Offline. Thank you.

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

Andrew Kaplowitz: Hey, good morning, everyone.

Andrew Kaplowitz: Good morning.

Andrew Kaplowitz: Can you give us a little more color regarding your order cadence within building solutions and what Youre seeing obviously most of the slowdown in orders as you said in Q1 was because of the slowdown in China, but did you see a dip in orders because of the cyber incident, and then improvement I think you changed your incentive comp structure for some of your salespeople as well as in the quarter. So a lot going on how are you thinking about order isn't bad.

George R. Oliver: And when you think about asset sales, you know, and there's some nuance here, clearly, but is it more a function of simplifying the portfolio so you can execute on those KPIs that you just mentioned? Or is it, or did the asset sales themselves kind of change the growth and margin profile of the portfolio? Now, let me reflect on the transformation that we've been going through. We've been continuously evaluating the portfolio, kind of where we are with the transformation of a comprehensive solutions provider in commercial buildings, and then making sure that our resources are being deployed to the highest priorities. When you look at the non-commercial product lines, they're excellent businesses, but they do not necessarily, are they consistent with the go-forward strategy over the longer term?

Andrew Kaplowitz: Like from here.

Speaker Change: Yeah, So you know as.

Speaker Change: As we talked about we did lose some momentum because of the cyber incident and so when you look at the sales conversion cycle. It did lengthen in the first quarter Bye bye.

Speaker Change: About a week, a little bit better than a week.

So when you look at our pipeline continues to expand and it does support the acceleration of orders in Q2 and through the remainder of the year.

Speaker Change: In line with what we were projecting prior to having the impact that we had so we're very confident that with the pipeline with the generation pipeline generation and then our ability to be able to convert with the cycle times, we convert with went back to where we were and then that also being combined with our success in services.

Speaker Change: Being able to continue to build strong pipelines for services convert to PSA is building backlog and then ultimately.

Speaker Change: Supporting our ability to get services deliver high single digit services for the year.

George R. Oliver: And that's why, as we are now pursuing the alternatives here, because these are good businesses, and there's an opportunity with these businesses now to be able to create even more value for our shareholders as we look at the alternatives. We're very excited about the future with the prospects that we have and the opportunities that we're driving towards. We believe that we're on the right path now to simplify the portfolio, continue to drive margin expansion, deliver a much more consistent cash flow, and, most importantly, really differentiate the value proposition that we can bring to our customers, which is going to be fundamental to growth. Thank you. And our next question today comes from Steve Tusa with J.P. Morgan. Please go ahead.

Market: Thanks for that George and this question might be for market. I know you ran in building solutions and meal out at least for a little while so I haven't seen those margins have continued to be challenging can you give us more color into what is holding down that segment.

Market: You know projects, ending there and maybe better margin coming and going forward and then talk about the changes you began to institute and when they might have more impact on that segment.

Market: Great question so.

Market: Right away when I took the role last year, we started to work on implementing or enterprise field operating model.

That's very similar to what we did in North America, a few years ago you know.

Market: Johnson controls operates in markets that are very sizable and complex, but that provides ample opportunity for us to grow.

Market: But when you face labs market, it's important to remain focused and disciplined on the sub segments of that markets that provide the right level of product capabilities and leverage our engineering talent and all in all.

Stephen Tusa: Hi, good morning. Good morning. Good morning, Steve.

Stephen Tusa: It would be great if Mark could answer this question. But for the second quarter, could you just talk about the various segments and how you get to this, you know, 14.5% operating margin target, maybe on a year-over-year and sequential basis, and what you expect out of them? And I have a follow-up. Thanks.

Market: Solutions and we are looking for those sub segments of the market that provide the most value for both our customers and the company.

As we continue to simplify standardize and I would say rationalize that business.

Market: The operating model becomes easier to adopt in the field in the regions and the benefits of that model get amplified we get a lot of leverage and that's really what we've been focused on over the last.

Mark: Yeah, thanks, Steve. So first, I want to address the change in guidance, right? Since we issued our guidance in December, the impact of the economic environment in China on our business has deteriorated.

Market: Six to eight months, there's still work to be done, but I see great improvement you know.

Market: Margin and as we start seeing the benefit of.

Mark: And we had originally factored in a fairly cautious outlook in China in the initial guide. However, that outlook has further worsened. We refocused the organization going through that tumultuous environment in China, and we see a path of recovery to that volume and recovery of the backlog as well in the second half of the year. But it starts to bottom out in Q2. We have more clarity on some of the actions we've taken around productivity and cost structure, and that should drive the recovery in that backlog. Now, focusing on Q2 in the different businesses, if you look at our field-based business building solutions, the cyber disruption is really behind us, and the lost momentum that we had in Q1 is now recovering and supporting the shorter cycle businesses, particularly our service mix.

Market: That model and the actions we've taken some I'm very confident that the MLR will get to them.

Market: <unk> profit level.

Market: The other field segment.

<unk>.

I appreciate the color guys.

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

Julian Mitchell: Hi, Good morning, and you know thanks, Olivier and congrats to Mark maybe just on slide nine the guidance for the sort of existing portfolio I'm sorry.

So you're looking at sort of 4% organic sales growth, let's say for the year.

Speaker Change: So the second half as implied up.

Speaker Change: <unk>.

Speaker Change: How should we think about that plus eight splitting between global products and then building solutions.

Speaker Change: And just trying to confirm does that second half gross sky is plus eight include growth in both U S. Resi HVAC and also China building solutions. Thank you.

Mark: If you look at North America and Emila, in particular, the margin we have put in the backlog over the last six months, but particularly during the first quarter, gives us confidence that we're going to be able to deliver on the margin rate for those businesses. There's a lot of benefit from cost actions we took early on in the year and later last year.

Speaker Change: Yeah. So thank you.

Speaker Change: So as you look at the breakdown between our business solution.

Speaker Change: Segments and global products.

Speaker Change: We see a recovery in growth you know Asia Pac in the second half of the year. So that will turn positive and as we continue to see the auto segment <unk> in North America and any Miller.

Speaker Change: Continuing to cloud get mid single digit you can see the balance of those two.

Mark: But there's also more return to seasonality in our global products business as we see the volume providing margin levy in those operations. If you combine all of that, I think we can confidently say that margin is at a, George, for you, I guess, you know, it's kind of hard to reconcile the commentary on momentum in your strategy with, you know, basically, negative organic growth this quarter. Do you consider that, you know, positive momentum? And then secondly, what was the factor that drove the timing of this announcement of evaluating strategic alternatives? I mean, it's not like you have anything really lined up here, you know, official to announce.

Speaker Change: Setting and getting very strong a single digits all the way to almost double digits in the second half of the year that support to the growth you are seeing on the slide when it comes to global products. We continue to see an improvement in all of those as we said we believe that Q2 is really the bottoming out in.

Speaker Change: The stabilization of that business and we see quite.

Speaker Change: Quite good momentum in the recovery into Q3 and accelerating into Q4 supporting that.

That number you see on the slide.

Speaker Change: Got it so both GP and building solutions grow at a similar rate in the second half to each other that's right.

Speaker Change: Thanks, and then just a second question.

Understand you cant talk too much about the portfolio so maybe.

Speaker Change: Thinking about some other items I'm just wanted to mark on the perspectives on sort of receivables factoring from here and what the approach will be in in terms of does that factor in get unwound now because lead times are going back to normal.

George R. Oliver: So why are we kind of just throwing this out there today versus maybe, you know, over the last couple of years where you've been kind of pursuing the same strategy? You know, just curious on a kind of straightforward answer on both of those. We don't we don't need a lot of verbiage. Thank you. So let me just comment on the quarter as far as momentum is concerned. I mean, we did have a significant disruption, as Mark said, for about six weeks of the first quarter, and part of that did have an impact on our momentum and our ability to be able to convert, and the like.

Speaker Change: And you know pillar two has come in so should we think about the medium term tax rate moving up to the high teens. Thank you.

Speaker Change: Yes, so starting on that last question on tax rate, obviously, there is some.

Speaker Change: Headwinds there.

Speaker Change: Changes in the rates, we are continuously assessing it and we'll continue to look at it but you are right. There there is a headwind longer term on on the rates when it comes to factoring we always look at different methods to finance the company.

Speaker Change: And as you said when lead times got difficult when inventory a little bit more elevated than than traditionally.

George R. Oliver: And so that was more of a short-term impact in Q1, in addition to the year-on-year adjustment that we've had in global products. As far as the timing is concerned, I'm sure you can appreciate, Steve, that the board and the management team have had a very thoughtful approach to the strategy. We assess all avenues that will deliver value to our shareholders.

Speaker Change: Factory became a logical avenue.

We will continue to review the most economical ways to to finance the company and we will make sure that we take appropriate action against that program.

Speaker Change: Align it with the financial commitments, we've made to you both in terms of profitability and free cash flow conversion.

Speaker Change: Thank you and our next question today comes from bottom corner with Cowen. Please go ahead.

George R. Oliver: Our strategy and our transformation has been focused on really leveraging all of our combined strengths in our differentiated product, our digital platform, and then from a go-to-market standpoint, the depth and expertise that we have from an engineering standpoint to ultimately be a comprehensive solutions provider and our ability to be able to take the value proposition and be able to convert that to recurring revenue through services. We're seeing that momentum, which is beginning to change. And as we look at the difference in the business models within the businesses, when we talk about the non-commercial businesses, there is a different business model relative to how we serve the market.

Cowen: Hey, good morning, guys.

Cowen: Good morning.

Cowen: But wondering if you could comment on pricing in the various verticals, what you're seeing with respect to pricing power.

And then I have a follow up.

Yes, as part of that simplification of our business model one benefit that comes in and we have more clarity on our cost accumulation and our ability to drive price focusing the businesses, particularly a business solutions segments towards better vertical and better product lines at Solutia.

Cowen: When we are able to drive more price through the market and we have been historically chasing less.

George R. Oliver: And I think this allows us to be able to position those businesses for continued growth while we're creating value, while we're focused on really now accelerating the progress we've made within our building solutions business. Thank you. And our next question today comes from Jeff Sprague with Vertical Research. Please go ahead. Hey, thanks. Good morning, everyone.

Cowen: Uh huh.

Cowen: The segments of the markets, where competitiveness, but also value is half to.

To sell to the end customer so as part of or building solutions.

Operating system, you can see great improvement both on the price we can command in the market both sort of price realization.

Jeff Sprague: I wonder if we could just drill a little bit more, George, into kind of the portfolio review. And specifically, as you know, the business is complex, day to day for you running it. It's even more complex for us on the outside looking in.

See in our backlog and you know executed maltreat.

Cowen: When it comes to global products, we've always tried to shy away from the more commoditized parts of the market for.

For the parks, where we actually have differentiated product, we see tremendous momentum both on pricing, but as well as the margin that comes on the back end of that.

George R. Oliver: So can you just size for us what we're talking about in terms of non-commercial assets? I think, you know, I put an estimate out there. I don't know if I'm in the ballpark or not, but just give us some sense of the, you know, the total revenues that we're talking about that are under review and consideration and, you know, maybe kind of the average profitability across that basket. Yeah, when you look at the overall revenues of these businesses, it would be less than 25% of the portfolio. And how did the margins stack up versus the average or JCI?

Cowen: I'm, particularly thinking about or applied HVAC businesses that had been operating at a very strong March in November last few months and continue to see a quite good momentum.

Cowen: Price cost standpoint.

Cowen: And could you expand that commentary on the resin market as well or are you still.

Able to get prices or any pushback or have you seen any.

Cowen: Evidence of trade downs or movement.

Cowen: Repair versus replace and alike.

Cowen: No.

As we've said previously we've continued to lead on pricing.

George R. Oliver: Overall, when you look at the mix of the margins, it would be in line with the overall JCI. Okay. And then just kind of coming back to maybe a more granular point on this, then, preceding you, I think, as you well know, there was always this debate about, can you extract Res-E from kind of legacy York? The Res-E and the commercial applied are tied together, and maybe it undermines your larger commercial effort if you exit that business. I mean, maybe you've found a way to separate Res-E and light commercial, or you think you can, but can you provide any additional context on that and how the light commercial business, in particular, might factor into your strategic thoughts on where the business goes from here? Sure.

Cowen: I'm sure that with all of the Reinvestments that are being made to support these regulatory changes that were positioned to be able to get.

The proper price and that continues.

Cowen: And so in spite of US being you know maybe not one of the top players we've been very disciplined relative to how we're creating the value proposition and ultimately how we're pricing in the market.

Cowen: Okay.

Speaker Change: Thank you.

Speaker Change: Yes.

Speaker Change: Thank you and our next question today comes from Chris Snyder of UBS. Please go ahead.

Chris Snyder: Thank you so the port revenue.

Chris Snyder: Guys are guiding March up about 10% sequentially, which is a good deal stronger than the typical mid single digit ramp that we've seen most of the years.

Chris Snyder: Maybe can you just talk about the drivers of this are the.

Sharp increase into the March quarter, and I understand there's a couple of points of cyber security catch up but it sounds like G. P. Maybe has yet to stabilize I think you said a trough in the March quarter. So I'd expect some headwinds there still remain thank you.

George R. Oliver: So if you look at Res-E and light commercial, the businesses are now really back on track. I mean, we've had a really nice quarter here, picking up share both in Res-E as well as light commercial. The business in North America was up double digits, which was supported by 40% growth in commercial and with Res-E being down about 7%. So the businesses are now performing, and they are positioned to perform going forward. On the ductless side, when you look at JCH, we have strength in Japan, offsetting some of the weakness we saw in Europe and in India.

Speaker Change: Yeah, it's coming and I think you mentioned it in your question there.

There's some return to normal seasonality versus the prior year as we were flowing through the backlog you can see that seasonality picking up and thats lifting us a couple of points, but you're absolutely right the cyber disruption and the loss of momentum at that created in the quarter. There were very few overdose deaths.

Speaker Change: But the cycle time of our commercial team expanded as we were going through the quarter and that created challenging the first quarter that now provides tailwind from a growth standpoint in the second quarter.

Speaker Change: And was it one I know you guys called out one point in the December quarter. If I remember correct was at one point again from Ciber in the March quarter.

George R. Oliver: So when you look at the go-to-market, I think it's important to understand that these non-commercial product lines are excellent businesses, but when you look at the go-to-market, they're not consistent with what we're doing as we build out our building solutions over the long term. And so we believe that when you look at the value proposition that we bring to our customers, that although there's an overlap with some of the applied rooftops, that can be managed with the structure that we put into place going forward. And so I think when you look at it, it does not erode any value proposition in our comprehensive commercial solutions but also positions the business to be able to take an incredible asset and create more value through growth. All right, I'll leave it there.

Speaker Change: I don't believe you have that prescriptive to be honest with you. It's really hard to measure we with precision how much was a cyber versus the markets are at the time, but I think if you look at the momentum we built in Q2 I would tell you we'd say, it's a few points of benefit that we're seeing.

Speaker Change: Oh got it. Thank you and then for my follow up on global products.

You guys talked about seeing stabilization can you maybe talk about their respective product lines within that but being raised the light commercial and fire and security or are they all showing stabilization or any leading any lagging on that normalcy. Thank you.

And when you look at our you know the the global products and more of that transactional business.

Jeff Sprague: Thanks. Thank you. And our next question today comes from Nigel Coe with Wolf Research. Please go ahead.

Speaker Change: <unk> book to Bill we went through a significant inventory adjustment last year and in the channel.

Speaker Change: You look at our order rates now coming in and now what we're projecting a revenue we're seeing we're seeing that positive across the board.

Nigel Coe: Thanks, good morning. So, another question on the portfolio review. The press release on Friday, you know, highlighted Tatachi, but also talked about residential as commercial for York. And I just want to make it very, very clear that we're talking here about just the US residential assets.

Speaker Change: Again in the in the Dr business Rajeev still is down and you know it was still down about 20% with price were down single digits that'll continue to improve as we go through the year, but beyond that across the board. We're seeing very strong orders in line with what we're projecting for revenue.

George R. Oliver: But there's also a mention of the ADT business as well. So, any more color in terms of the non-commercial assets, because it does feel like there are some commercial businesses here? And then on the Tatachi side, obviously, if Tatachi sells us 40% of that business, how much flexibility do you have to seek options for your majority control of the assets?

Speaker Change: As we go forward.

Speaker Change: Thank you.

Speaker Change: Thank you and our next question.

Speaker Change: Some comes from Nicole <unk>.

Nicole: Please go ahead.

Yeah. Thanks, good morning, guys.

Nicole: Paul.

Nicole: And so we've covered a lot of ground here I guess the last thing I just wanted to ask about it. So I'll just keep it to one question is you guys gave guidance and report earnings obviously pretty late in the fourth quarter with only a couple of weeks ago. So how did China take you by such a surprise, where we're only a month later and we have to cut.

George R. Oliver: I think you'll appreciate, Nigel, at this stage, with the ongoing transformation, I would caution against making any assumptions at this stage and how we will affect it. I think the message here today is that we are pursuing strategic alternatives. We're going to continue to simplify and standardize across the portfolio. But we're in the early stages, and at this stage, I'm not going to comment relative to any one of the potential assets that we would look to create value with. Okay, it was worth a try there, wasn't it?

Speaker Change: <unk>. Thank you.

Speaker Change: Yeah.

Speaker Change: The disruption that came from the cyber incidents also slow down the pace at which data flows through flows through the organization and as I mentioned in the opening remarks.

Speaker Change: We have factored a fairly cautious outlook on China.

Speaker Change: But our ability to really pin down exactly the impact it was actually going to have in the in the quarter.

Speaker Change: The current quarter and following quarter.

Speaker Change: As we all know about six week smarter and more educated about the challenge in that outlook as well.

Nigel Coe: But if we do assume that you executed on some form of strategic, you know, realignment to the portfolio, if you had, let's say, $5 billion of cash coming in the door today, you know, how would you look to deploy that, George? As we look at, I mean, we're again speculating on, you know, what would happen. I think, as we look at what we do within our comprehensive commercial solutions business, we have been doing bolt-ons; we'll continue to be able to do bolt-ons and support the technology and our go-to-market as we strengthen that across the globe. And our intent would be to make it accretive, as far as whether it be through bolt-ons or deployment back to our shareholders to offset the dilution that any divestiture might have. Okay, I'll leave it there. And our next question today comes from Noah Kaye with Oppenheimer. Please go ahead. Great First, a shorter term one.

Speaker Change: Both of them further.

Speaker Change: We discussed it a part of your question, it's a combination of the market condition and us being more selective in the type of deal and the type of transaction, we decided to we decided to pursue.

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

Joe Ritchie: Hi, good morning.

Joe Ritchie: And your reference to simplifying and standardizing costs across the portfolio I think you've been on some kind of notable cost out as it relates to both Cogs and SG&A.

Joe Ritchie: Is this sort of setting up for for the next chapter or can you talk a little bit about where where you see the biggest opportunities on simplifying some of the cost structure and any sizing of those opportunities.

Speaker Change: So let me let me reflect.

Speaker Change: Flicked on that I mean, we've been through a major transformation taking.

Speaker Change: Set of businesses that were you know a lot of.

Speaker Change: A lot of variation in the fundamentals within there the operating system. We now have to standardize that across the board that has allowed us to become much more efficient reducing layers and and ultimately the cost that is required to support the business. As we continue now so it's a twofold not only standardizing the processes.

George R. Oliver: You know, you did mention signs of bottoming out in fire and security on the short cycle. Can you just give us some more indicators and confidence there? Yeah, when you look at the business, whether it be at the product level or in the field, as far as the demand signals are coming through strong, we've gone through some adjustment relative to backlog, as well as, as in the product business, the book to build business, we see this, you know, really differentiating our overall commercial solutions and how we're utilizing these businesses and differentiating our solutions. On a go forward basis, we have And we're working to continue now to execute that into backlog, and ultimately, then conversion, you know, revenues going forward. So I think it's more short-term based on what we've seen here, with some of the adjustments in the market, but we're confident that with the pipeline we have, we're going to be positioned to be able to continue to support the growth that we're committing to. Okay, thanks.

Speaker Change: But then with automation and in.

Speaker Change: Supporting those processes with good data.

Speaker Change: Is it all accelerated within the company, which has allowed us to be able to now capitalize on more simplification.

Speaker Change:

Speaker Change: That's one element and then from a from a selling standpoint as we then standardize our operating system around commercial we've also been able to align our commercial resources in line with the market with the segmentation that we're driving to be able to drive our growth and we're seeing.

Speaker Change: Significant pick up there also so it's really across the board on all of our cost elements in line with being much more simple I'm much more standard more agile in how we now pursue growth.

Speaker Change: And then could you talk about service order trends by region. When we look at EMEA a lot the last couple of quarters for looking at.

Speaker Change: Low double digit mid teens type of growth in service orders in each of those quarters, whereas in North America, we've been seeing low single digit so what what youre seeing in terms of sort of differences in terms of those those growth rates demand trends on on the service side and field.

Speaker Change: Yeah, Let me let me just touch upon the fundamentals of Mark can talk a little bit about the orders the fundamentals here, we're increasing our attach rates in our up to mid to upper <unk>.

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

Speaker Change: Percentiles, where getting them more a higher percentage of our installed base served with this year, we're gonna be able to expand our connected assets by well over 10000, we're going to be able to get PSA growth longer term services up over 20%.

Speaker Change: And then when you look at the way that we're connecting our services, we're getting much lower attrition rates that all now it's playing out and positioning us for for a strong high single digit service growth again this year.

Speaker Change: On the order rates as we look at any one of those elements, we're consistently driving that strategy across all three regions, but mark maybe you want to comment yeah, commenting on the three of June So North America is our largest service business and was also unfortunately, the most impacted by the cyber disruption. So that's why you see a little bit of softness in.

In Q1.

A very transactional business day to day business that has a lot of automation and reliance on our system to be able to all.

Mark Devenney: All the book all deals and execute that for the new revenue rapidly the fundamentals of that business hasn't changed and I think the recovery is coming in the balance of the year and we are seeing now in the second quarter.

Really strong pickup in.

Mark Devenney: In that business.

Mark Devenney: If you look at and.

Miller and in Asia.

George R. Oliver: Yeah, so as I said earlier, you know, we've come through a very disruptive period, and there's been significant progress that has been made across these businesses, and these businesses are positioned to perform. And so, as I said earlier, as you can appreciate, we're constantly reviewing the portfolio and understanding how we manage the assets to be able to deliver value for our shareholders. We've taken a very thoughtful approach to the strategy.

Mark Devenney: On EMEA first dose.

Mark Devenney: Uh huh.

Mature businesses, but at a different part of the cycle when it comes to growth there's enormous amount of opportunity.

Mark Devenney: In getting after our installed base and continuously maturing our business model. Similarly to what we've done in North America to really drive long term double digit growth in those in those service business in Asia Pacific, particularly in China possible, we focus on on the on the market is really focusing on.

George R. Oliver: And this has been continuous, making sure that we're assessing all avenues of how we ultimately deliver value to our shareholders. And so that's what's been playing out. And I think tied to, you know, as we think about our acceleration of becoming the leading comprehensive commercial solutions provider within commercial buildings, this is part of that path forward. And in line with, you know, just as we continue to update our shareholders, we'll continue to provide those updates as we continue to make progress with these potential divestitures. I appreciate that thoughtful answer. Thanks, George. And our next question today comes from Joe Ritchie with Goldman Sachs. Please go ahead.

Mark Devenney: Those sub segment of the market, where we see a strong long term.

Mark Devenney: <unk> profile for our business.

Mark Devenney: Is to really maximize the whole lifecycle of those opportunities.

Speaker Change: Thank you.

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

Good morning, everyone. Just a quick question from me please regarding.

Deane Dray: Regarding the potential or expected divestitures of separation of Ramsey what would that do to remain co in terms of free cash flow potential just yeah. It maybe down to the level of working capital just does that change your ability to hit this target of 100% free cash flow conversion.

Deane Dray: Yes.

Deane Dray: We're all doing I mean, we've been working on our free cash flow in the fundamentals of that across both the building solutions to be able to get more and more billing upfront and more in line with revenue and then in our global products business.

Joe Ritchie: Thanks. Good morning. Congratulations, Mark and Olivier.

Deane Dray: Significantly improved you know not all.

Only the inventory, but also our ability to be able to collect so as far as our the commitment to our free cash flow target, we're gonna be well positioned to be able to deliver on that target.

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

Speaker Change: Thank you ladies and gentlemen, this concludes our question and answer session.

Speaker Change: Turn the conference back over to George Oliver for any closing remarks.

George R. Oliver: Just to wrap up as we've discussed here today, we've been on a transformation journey for a number of years and have made incredible progress and have had many successes. While we're building strong fundamentals were also better leveraging our people and portfolio and ultimately serving our customers in a better way.

George R. Oliver: Last year, when you look at where we were last year, we were working to recover our backlog from the second wave of COVID shutdowns in China. You know, as the economic environment in China has slowed, we continue to make sure that we're streamlined with our organization and aligning our resources to the market to be able to maximize what we believe is our entitlement and then make sure that we're executing with discipline to achieve what we see to be very strong lifecycle value creation through our services. This is what, you know, we played out in North America, which has been very successful for us.

George R. Oliver: We're very confident we've built a very robust operating system across the portfolio.

Speaker Change: To be well positioned to deliver for our shareholders and I do look forward to updating all of you as we continue to make make progress so with that operator that concludes our call.

Speaker Change: Thank you Sir This concludes today's conference call.

Thank you all for attending today's presentation.

Speaker Change: May now disconnect your lines and have a wonderful day.

Speaker Change: Okay.

Speaker Change: [music].

George R. Oliver: You know, we do have a very healthy pipeline as we assess the market, which we are converting. We are anticipating a slower recovery of the backlog and ultimately the projected revenue, which has now been pushed to the right, and so those are the factors really updating our guns there Joe but confident that we have an incredible product for the market, making sure we have the right go-to-market structure, and then ultimately being able to execute on what we see still to be a very attractive market. Okay, thanks, George. And I know that you don't want to provide a ton of specificity on what non-commercial means, just maybe for my own edification and for remembering the old Tyco assets. I mean, I think you still had some residential ADT international assets as well. So just correct me if I'm wrong if you don't understand.

Yeah.

Speaker Change: [music].

Joe Ritchie: And then, and then also, just just a point of clarification. The light commercial business is showing it at roughly 6% of sales. I think the last several quarters, we've been seeing it closer to 9%. Did you guys shift a portion of the light commercial sales into applied? Just just want to understand that a little bit too.

George R. Oliver: When you look at the mix within our ducted business, which is mainly what drives our light commercial, we're up 40%. And like I said, in our ducted business, when you look at Resi being down slightly and then commercial being very strong, our whole ducted business was up 10%. And so this has been the differentiated product that we've been bringing into the market.

George R. Oliver: Getting We've we've increased share Joe by roughly about 300 basis points over the last year with the recovery of the commercial market, and we've invested in the capacity to be able to do so. So as far as, That is the core of our light commercial business, and we've been performing extremely well. So was there a reclass?

Speaker Change:

Speaker Change:

Joe Ritchie: Because it's showing that business is lower as total sales than it was in the last few quarters. It takes into account the VRF. No, Joe, the difference is that the 9% was off fiscal 22 sales in the prior year versus when we moved forward. It's now off fiscal 23 now that that year is final. It's just a math exercise. Yeah, actually, that math doesn't really tie in well, but I can follow up offline.

Andrew Kaplowitz: Thank you. And our next question today comes from Andy Kaplowitz with Citigroup. Please go ahead.

George R. Oliver: Hey, good morning, everyone. Good morning. Good morning. Could you give us a little more color regarding your order cadence within Building Solutions and what you're seeing? Obviously, most of the slowdown in orders, as you said in Q1, was because of the slowdown in China. But did you see a dip in orders because of the cyber incident and then improvement? I think you changed your incentive compensation structure for some of your salespeople this quarter as well.

George R. Oliver: So, there's a lot going on. How are you thinking about orders and backlog from here? Yeah, so, as we talked about, we did lose some momentum because of the cyber incident. And so when you look at the sales conversion cycle, it did lengthen in the first quarter by, you know, by about a week. A little bit better than a week.

Speaker Change: Okay.

[music].

George R. Oliver: And so when you look at our pipeline, which continues to expand and does support the acceleration of orders in Q2 and through the remainder of the year, in line with what we were projecting prior to having the impact that we had, so we're very confident that with the pipeline, with the generation, pipeline generation, and then our ability to be able to convert with the cycle times we convert with, we're back to where we were. And then that also being combined with our success in services and being able to continue to build strong pipelines for services, convert to PSAs, build backlog, and then ultimately, supporting our ability to get services, deliver high single-digit services for the year. Thanks for that, George. And this question might be for Mark. I know you ran Building Solutions in Mula, at least for a little while.

Speaker Change: Yeah.

Speaker Change: Okay.

Speaker Change: Yeah.

Speaker Change: [music].

Speaker Change: Uh huh.

Speaker Change: [music].

Mark: So obviously, those margins have continued to be challenging. Can you give us more color into, you know, what is holding down that segment? You know, projects ending there and maybe better margin coming going forward? And then talk about the changes you began to institute and when they might have more impact on that? No, great question.

Speaker Change: Okay.

Speaker Change: Okay.

Speaker Change: Okay.

Speaker Change: Uh huh.

Speaker Change: Uh huh.

Speaker Change: [music].

Mark: So right away, when I took the role last year, we started to work on implementing our enterprise field operating model. That's very similar to what we did in North America a few years ago. You know, Johnson Controls operates in markets that are very sizable and complex, but that provide ample opportunity for us to grow. But when you face large markets, it's important to remain focused and disciplined on the sub-segments of that market that provide the right level of product capabilities, leverage of engineering talents, and our solutions. And we are looking for those sub-segments of the market that provide the most value for both our customers and the company. As we continue to simplify, standardize, and, I would say, rationalize that business, the operating model becomes easier to adopt in the field, in the regions, and the benefits of that model get amplified. We get a lot of leverage.

Speaker Change: Yeah.

Speaker Change: Yeah.

Speaker Change: [music].

Mark: And that's really what we've been focused on over the last six to eight months. There's still work to be done, but I see great improvement in our book margin. And as we start seeing the benefit of that model and the actions we've taken, I'm very confident that Emila will return to a comparable profit level that the other field segments are seeing. Appreciate the color, guys.

Andrew Kaplowitz: And our next question today comes from Julian Mitchell with Barclays. Please go ahead. Hi, good morning. And, you know, thanks, Olivier. And congratulations to Mark. Maybe just on slide 9, the guidance for the sort of existing portfolio. So you're looking at sort of 4% organic sales growth, let's say for the year. So the second half is implied.

Julian Mitchell: 8. How should we think about that plus 8, splitting between global products and then building solutions? And just trying to confirm, does that second half growth guide of plus 8 include growth in both US Resi HVAC and also Chinese building solutions? Yeah, so thank you. So as you look at the breakdown between our business solution segments and global products, we see a recovery in growth in our Asia pack in the second half of the year, so that will turn positive.

Mark: And as we continue to see the other segment, BSNA and North America, and EMILA continuing to clog at mid-single digit, you can see the balance of those two offsetting and getting very strong single digit all the way to almost double digit in the second half of the year. That's consistent with the growth you're seeing on the slide. When it comes to global products, we continue to see an improvement in orders. As we said, we believe that Q2 was really the bottoming out and the stabilization of that business, and we see quite good momentum in the recovery into Q3 and accelerated into Q4, supporting that number you see on the slide. Got it, so both GP and Building Solutions grow at a similar rate in the second half next to each other. That's right.

Speaker Change: Okay.

Speaker Change: [music].

Julian Mitchell: Thanks. And then there is just one second question. I understand you can't talk too much about the portfolio, so maybe I can think about some other items. Just wanted to give you an idea of the perspectives on sort of receivables factoring from here and what the approach will be in terms of does that factoring get unwound now because lead times are going back to normal? And pillar two has come in, so should we think about the medium-term tax rate moving up to the high teens?

Mark: Yes, so starting on that last question on the tax rate, obviously, there's some headwinds there with the good changes in the rate. We are continually assessing it and will continue to look at it. But you're right, there is a headwind longer term on the rate. When it comes to factoring, we always look at different methods to finance the company.

Speaker Change:

Speaker Change: Yeah.

Mark: And as you said, when lead times got difficult, when inventory was a little bit more elevated than traditionally, the factory became a logical avenue. We will continue to review the most economical ways to finance the company, and we'll make sure that we take appropriate action against that program to align it with the financial commitment we've made to you, both in terms of profitability and free cash flow. Thank you. And our next question today comes from Gautam Khanna with T.D. Cowan

[music].

Speaker Change:

Gautam Khanna: Please go ahead. Hey, good morning, guys. Good morning. Well, I was wondering if you could comment on pricing in the various verticals, what you're seeing with respect to pricing power, and then I have a follow-up. Yeah, as part of that simplification of our business model, one benefit that comes in is that we have more clarity on our cost accumulation and our ability to drive price. Focusing the businesses, particularly our business solution segments, towards better verticals and better product lines and solutions, we are able to drive more price to the market than we have been historically, chasing less the segments of the market where competitiveness but also value is hard to sell to the end customer. So as part When it comes to global products, we've always tried to shy away from the more commoditized part of the market.

Mark: For the parts where we actually have differentiated products, we see tremendous momentum both on pricing but also in the margin that comes on the back end of that. I'm particularly thinking about our applied HVAC businesses, which have been operating at a very strong margin over the last few months and continue to see quite good momentum from a price-cost standpoint. And could you expand that commentary on the resi market as well? Are you still?

George R. Oliver: Are you able to get prices or any pushback? Are you seeing any? evidence of trade downs or movement. Repair Versus Replace, for watching. As we've said previously, we've continued to lead pricing, making sure that with all of the reinvestments that are being made to support these regulatory changes, we're positioned to be able to get the proper price. And that continues. And so, in spite of us being, you know, maybe not one of the top players, we've been very disciplined relative to how we're creating the value proposition and ultimately how we're pricing in the market. Thank you. Thank you. And our next question today comes from Chris Snyder at UBS. Please go ahead.

Chris Snyder: Thank you. So, for revenue, you guys are guiding March up about 10% sequentially, which is a good deal stronger than the typical mid-single-digit ramp that we see most years. Maybe can you just talk about the drivers of this, you know, the sharp increase into the March quarter? I understand there's a couple points of cybersecurity catch-up, but it sounds like GP maybe has yet to stabilize.

Mark: I think you said it troughs in the March quarter, so I'd expect some headwinds there still remain. Thank you. Yeah, it's coming.

Mark: And I think you mentioned it in your question, that there's some return to normal seasonality versus the prior year. As we were flowing through the backlog, you can see that seasonality picking up, and that's lifting us a couple points. But you're absolutely right, the cyber disruption and the loss of momentum it created in the quarter. There were very few orders that were lost, but the cycle time of our commercial team extended as we were going through the quarter. And that created a challenge in the first quarter that now provides a still win from a growth standpoint in the second quarter. And, and was it one, I know you guys called out one point in the December quarter, and if I remember correctly, was it one point again from cyber in the March quarter? I don't believe we were that prescriptive, to be honest with you.

Mark: It's really hard to measure with precision how much cyber was versus the markets at the time, but I think if you look at the momentum we've built now in Q2, I would tell you it's a few points of benefit that we're.

Chris Snyder: Thank you. And then for my follow-up on global products, you know, you guys talked about seeing stabilization. Can you maybe talk about their respective product lines within that, but being Resi like commercial, fire, and security? Are they all showing stabilization?

George R. Oliver: Or any leading any lagging on that normalcy? Thank you. When you look at global products and more of the transactional businesses, book to bill, we went through a significant inventory adjustment last year in the channel. When you look at our order rates now coming in, and now what we're projecting in revenue, we're seeing that positive across the board. Again, in the deductive business, residency is still down about 20%.

George R. Oliver: With price, we're down single digits. That'll continue to improve as we go through the year. But beyond that, across the board, we're seeing very strong orders in line with what we're projecting for revenue as we go forward. Thank you. Thank you. And our next question comes from Nicole DeBlaise with Deutsche Bank. Please go ahead.

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

Mark: Thank you. Yeah, you know, the disruption that came from the cyber incidents also slowed down the pace at which data flows through the organization. And as I mentioned in the opening remarks, we had factored a fairly cautious outlook on China, but our ability to really pin down exactly the impact it was actually going to have on the in the quarter, current quarter, and following quarter.

Mark: And as we all know, about six weeks, smarter and more educated about the challenge and that outlook as well as further, we discussed it in a previous question. It's a combination of the market conditions and us being more selective in the type of deal and the type of transaction we decide to do. Thank you. And our next question comes from Joe O'Day with Wells Fargo. Please go ahead.

Hi, good morning. In your reference to simplifying and standardizing costs across the portfolio, I think, you know, you've been on some kind of notable cost out as it relates to both COGS and SG&A. You know, is this sort of setting up for the next chapter?

George R. Oliver: Or can you talk a little bit about where you see the biggest opportunities for simplifying some of the cost structure and any sizing of those opportunities? So, let me, let me reflect on that. I mean, we've been through a major transformation, taking a set of businesses that were, you know, had a lot of variation in the fundamentals within the operating system. We now have standardized that across the board. That has allowed us to become much more efficient, reducing layers and ultimately the cost that is required to support the business. As we continue now, so it's twofold, not only standardizing the processes, but then with automation and IT supporting those processes with good data, that has all accelerated within the company, which has allowed us to be able to now capitalize on more simplification.

George R. Oliver: That's one element, and then from a selling standpoint, as we then standardize our operating system around commercial, we've also been able to align our commercial resources in line with the market, with the segmentation that we're driving to be able to drive our growth, and we're seeing a significant pickup there also. It's really across the board on all of our cost elements in line with being much more simple, much more standard, and more agile in how we now pursue growth. And then could you talk about service order trends by region when we look at AMILA, the last couple of quarters we're looking at? Low double-digit mid-teens type of growth in service orders in each of those quarters, whereas in North America, we've been seeing low single-digit growth. So what you're seeing in terms of sort of differences in terms of those growth rates and demand trends on the service order side and the field. Yeah, let me just touch upon the fundamentals of Mark and talk a little bit about the orders.

George R. Oliver: The fundamentals here are increasing our catch rates. So now we're up to mid to upper 40 percentiles; we're getting a higher percentage of our installed base served. With this year, we're going to be able to expand our connected assets by well over 10,000. We're going to be able to get PSA growth, and longer-term services up over 20%. And then when you look at the way that we're connecting our services, we're getting much lower attrition rates. That all now is playing out and positioning us for strong, you know, high single-digit service growth again this year. On order rates, as we look at any one of those elements, we're consistently driving that strategy across all three regions. Mark, maybe you want to comment.

George R. Oliver: Yeah, commenting on the three agents. North America is our largest service business and was also, unfortunately, the most impacted by the cyber disruption. So that's why you see a little bit of softness in Q1.

Mark: It's a very transactional business, a day-to-day business that has a lot of automation and reliance on our system to be able to book orders and execute that revenue rapidly. The fundamentals of that business haven't changed, and I think the recovery is coming in the balance of the year, and we're seeing now in the second quarter a really strong pickup in that business. If you look at Emila and Asia, touching on Emila first, those are mature businesses but at a different part of the cycle when it comes to growth. There's an enormous amount of opportunity for getting after or installing this and continuously maturing our business model similarly to what we've done in North America to really drive long-term double-digit growth in those service businesses. In Asia-Pacific, particularly in China, part of our focus on the market is really focusing on those sub-segments of the market where we see a strong long-term service profile for our business in order for us to really maximize the whole life cycle of those operations.

Mark: Thank you. Thank you. And our next question today comes from Deane Dray at RBC Capital Markets. Please go ahead.

Deane Dray: Thank you. Good morning, everyone. Just a quick question from me, please. Regarding the potential or expected divestiture as a separation of resi, what would that do to RemainCo in terms of free cash flow potential, just, you know, maybe down to the level of working capital? Does that change your ability to hit this target of 100% free cash flow conversion? Yeah, not at all, Dean.

George R. Oliver: I mean, we've been working on our free cash flow and the fundamentals of that across both the building solutions business to be able to get more, more billing upfront, and more in line with revenue. And then in our global products business, we have significantly improved, not only the inventory, but also our ability to be able to collect. So as far as the commitment to our free cash flow target, we're going to be well positioned to be able to deliver on that target.

George R. Oliver: Thank you. And, ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to George Oliver for any closing remarks. Yeah, just to wrap up, as we've discussed here today, we've been on a transformation journey for a number of years and have made incredible progress and have had many successes. While we're building strong fundamentals, we're also better leveraging our people and portfolio and ultimately serving our customers in a better way. We're very confident. We've built a very robust operating system across the portfolio and are going to be well positioned to deliver for our shareholders. And I do look forward to updating all of you as we continue to make progress.

George R. Oliver: So with that, operator, that concludes our call. Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

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