Q2 2024 Johnson Controls International PLC Earnings Call

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

Speaker Change: Good morning, and welcome to the Johnson controls second quarter 3.4 earnings Conference call.

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

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 1 on your telephone keypad.

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

Speaker Change: After todays presentation, there will be an opportunity to ask questions.

Speaker Change: I'll ask a question you May press Star then one on your telephone keypad.

Speaker Change: The majority of questions. Please first started them to also note that in respect of time, we ask you limit yourself to one question and one follow up question.

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

Speaker Change: Horton.

Operator: To withdraw your question, please press star then two. Also, note that in respect of time, we ask that you limit yourself to one question and one follow-up question. Please also note that 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.

Speaker Change: I would now like to turn the conference over to Jim Lucas Vice President of Investor Relations. Please go ahead.

Jim Lucas: Good morning, and thank you for joining our conference call to discuss Johnson Controls' second quarter fiscal 2024 results. The press release and related tables that were issued earlier this morning, as well as the conference call slide presentation, can be found on the Investor Relations portion of our website at johnsoncontrols.com. Joining me on the call today are Johnson Controls Chairman and Chief Executive Officer George Oliver and Chief Financial Officer Marc Vandiepenbeeck. 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.

Jim Lucas: Morning, and thank you for joining our conference call to discuss Johnson controls second 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 Relations portion of our website at Johnson controls Dot com joining.

Speaker Change: Joining me on the call today are Johnson controls, Chairman and Chief Executive Officer, George Oliver and Chief Financial Officer, Mark then deepen B 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.

Jim Lucas: 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 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.

Speaker Change: Note that we assume no obligation to update these forward looking statements, even if actual results or future expectations change materially. Please.

Speaker Change: Refer to our SEC filings for a detailed discussion 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 turn the call over to George Thanks, Jim and good morning every.

George R. Oliver: Thanks, Jim, and good morning, everyone. Thank you for joining us on the call today. Let's begin with slide three.

George R. Oliver: Thank you for joining us on the call today.

George R. Oliver: Let's begin with slide three we were very pleased with our second quarter performance as our adjusted EPS came in at the high end of our guidance.

George R. Oliver: We were very pleased with our second quarter performance as our adjusted EPS came in at the high end of our guidance. Sales growth returned this quarter following the cyber disruption at the start of the fiscal year, and our team delivered strong margin expansion, this was driven by productivity and conversion of our higher margin backlog. Orders noticeably rebounded in the quarter, up 12% year over year.

Sales growth return this quarter following the cyber disruption at the start of the fiscal year and our team delivered strong margin expansion.

George R. Oliver: This was driven by productivity and conversion of our higher margin backlog.

George R. Oliver: Well it is noticeably rebounded in the quarter up 12% year over year. This was driven by continued strength in data centers, which I will talk about in an upcoming slide.

George R. Oliver: This was driven by continued strength in data centers, which I will talk about in an upcoming slide. Our backlog remained at record levels, growing 10% to $12.6 billion, and the quality of the backlog is strong, as I mentioned. Customers continue to come to Johnson Controls because of our ability to deliver attractive outcomes. The fact is, our focus on delivering engineered solutions for commercial buildings continues to serve as a differentiator for Johnson Controls, allowing us to deliver unparalleled value.

George R. Oliver: Our backlog remained at record levels growing 10% to $12 $6 billion and the quality of the backlog is strong as I mentioned.

George R. Oliver: Customers continue to come to Johnson controls because of our ability to deliver attractive outcomes.

George R. Oliver: The fact is our focus on delivering engineered solutions for commercial buildings continues to serve as a differentiator for Johnson controls, allowing us to deliver unparalleled value.

George R. Oliver: With the business performing at a high level free cash flow continues to improve and we are taking action to further strengthen our balance sheet.

George R. Oliver: With the business performing at a high level, free cash flow continues to improve, and we are taking action to further strengthen our balance sheet. Most recently, we reached a broad settlement with a nationwide class of public water systems related to our A-Tri-F product. Additionally, we announced that we have discontinued use of our receivable factoring program.

George R. Oliver: Most recently, we reached a broad settlement with a nationwide class a public water systems related to our <unk> Triple S product.

George R. Oliver: Additionally, we announced that we discontinued use of our receivable factoring programs.

George R. Oliver: Our efforts are turning into results and the value of our transformation is coming into focus.

George R. Oliver: Our efforts are turning into results, and the value of our transformation is coming into focus. Going forward, we remain active in pursuing strategic alternatives for certain non-core product lines that do not align with our focus on being a comprehensive solutions provider for commercial buildings. While we do not have any updates to provide at this time, we continue to make good progress on the exploration of alternatives for some of these apps.

George R. Oliver: Going forward, we remain active in pursuing strategic alternatives of certain noncore product lines that do not align with our focus on being a comprehensive solutions provider for commercial buildings.

George R. Oliver: While we do not have any update you can provide at this time, we continue to make good progress on the exploration of <unk>.

George R. Oliver: Alternatives for some of these assets.

George R. Oliver: The results from the quarter and the performance of our team give us confidence that we will continue to build momentum into the second half and we will be able to meet our financial objectives for the year.

George R. Oliver: The results from the quarter and the performance of our team give us confidence that we will continue to build momentum into the second half, and we will be able to meet our financial objectives for the year. Marc will discuss these in more detail later in the call. Please turn to the next slide.

George R. Oliver: Mark will discuss these in more detail later in the call.

Speaker Change: Please turn to the next slide.

Speaker Change: I want to take an opportunity to discuss how we see the composition of our company going forward.

George R. Oliver: I want to take an opportunity to discuss how we see the composition of our company going forward. The core of Johnson Controls is our engineered solutions offering. These solutions include commercial HVAC, controls, fire, security, and services; our solutions center around our domain expertise, forming the smart building trifecta of energy efficient equipment, clean electrification, and digitalization. We have created one end-to-end operating model that we now have deployed around the globe, which allows us to better serve our customers more efficiently with greater predictability.

Speaker Change: The core of Johnson controls is our engineered solutions offering.

Speaker Change: These solutions include commercial HVAC controls fire <unk> security and services.

Speaker Change: Our solution center around our domain expertise, forming the smart building private sector of energy efficient equipment clean electrification and digitalization.

Speaker Change: We have created one end to end operating model that we now have deployed around the globe, which allows us to better serve our customers more efficiently with greater predictability.

Our solutions include both systems and services and focus on maximizing the opportunities around the lifecycle of the equipment.

George R. Oliver: Our solutions include both systems and services that focus on maximizing opportunities around the life cycle of the equipment. These solutions are enhanced further by our digitally enabled offerings, which allow us to provide tailored outcomes for the customers which we serve. Our systems business begins at the engineering and design phase, and it is managed through installation of the project.

Speaker Change: These solutions are enhanced further by our digitally enabled offerings, which allow us to provide tailored outcomes for the customers, which we serve.

Speaker Change: Our systems business begins at the engineering and design phase. It is managed through installation of the project.

Speaker Change: The systems business is an important vehicle to capture a service event and we have created a scalable service model that is driving more consistent growth.

George R. Oliver: The systems business is an important vehicle to capture a service event, and we have created a scalable service model that is driving more consistent growth and that carries higher margins. The service business will continue to be a positive contributor to our long-term margin expansion. Our Solutions Operating Model is enabled by connected equipment throughout the building, allowing us to collect data that drives a consistent and enjoyable occupant experience with repeatable outcomes.

Speaker Change: That carries higher margins.

Speaker Change: The service business will continue to be a positive contributor to our long term margin expansion.

Speaker Change: Our solutions operating model is enabled by connected equipment throughout the building.

Speaker Change: Allowing us to collect data that drives a consistent and enjoyable occupant experience with repeatable outcomes.

Speaker Change: Yeah.

George R. Oliver: We create incredible value for our customers, which is clearly demonstrated by our results in the most recent quarter. The transformation of our portfolio into a pure play provider of comprehensive solutions for commercial buildings is an opportunity. Once complete, we will be able to flow additional resources to the most attractive opportunities. Part of our commitment to disciplined capital allocation remains ensuring that we are deploying resources to the right opportunities. Turning to the next slide.

Speaker Change: We create incredible value for our customers, which is clearly demonstrated by our results in the most recent quarter.

Speaker Change: The transformation of our portfolio into a pure play provider of comprehensive solutions for commercial buildings is an opportunity.

Speaker Change: Once complete we will be able to flow additional resources to the most attractive opportunities.

Speaker Change: Part of our commitment to disciplined capital allocation remains ensuring that we are deploying resources to the right opportunities.

Speaker Change: Turning to the next slide.

George R. Oliver: Johnson Controls plays an important role in serving the rapidly growing data center market. We provide cooling needs for the top hyperscale and co-location data center customers. Demand for data centers is accelerating globally, with the next generation of data centers projected to be designed for more than one gigawatt of power consumption.

Speaker Change: Johnson controls plays an important role in serving the rapidly growing data center market.

Speaker Change: We provide cooling needs for the top Hyperscale and Colocation data center customers.

Speaker Change: The demand for data centers is accelerating globally with the next generation of data center is projected to be designed for more than one gigawatt of power consumption.

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

George R. Oliver: We have intentionally positioned the company to benefit from this emerging trend due to our relentless innovation efforts and inherent strategic advantage. These include, one, creating leading technologies around a broad range of air-cooled and water-cooled chillers to support the exponential growth in cooling demand. Two, investing in R&D teams and world-class test laboratories to design, build, test, and demonstrate performance of equipment over the entire data center operating envelope. Speed is the key, so we are investing to accelerate the pace of innovation.

These include one creating leading technologies around a broad range of air cooled and water cooled chillers to support the exponential growth in cooling demand.

Speaker Change: Two investing in R&D teams and World Class Test laboratories to design build test and demonstrate performance of equipment over the entire data center operating envelope.

Speaker Change: Speed is the key so we are investing to accelerate the pace of innovation.

George R. Oliver: And three, creating leading domain expertise to provide complete package solutions that drive outcomes, such as high efficiency chiller plants, space cooling, critical environmental monitoring, security systems, and fire safety and asset protection systems, while providing service for the entire lifecycle of the asset. Underscoring these advantages is our core identity as a comprehensive solutions provider for commercial buildings. This enables us to fulfill more than cooling needs for our customers, which makes us a preferred partner that can expand with our customers across all geographies. In fiscal 2023, our sales to data centers were approximately $2 billion.

Speaker Change: And three creating leading domain expertise to provide complete package solutions that drive outcomes, such as high efficiency Chiller plant space cooling critical environmental monitoring.

Speaker Change: Security systems, and fire safety and asset protection systems, while providing service for the entire lifecycle of the asset.

Speaker Change: Underscoring these advantages is our core identity as a comprehensive solution provider for commercial buildings.

Speaker Change: This enables us to fulfill more than cooling needs for our customer, which makes us a preferred partner that can expand with our customers across all geographies.

Speaker Change: In fiscal 'twenty to 'twenty three are our sales to data centers were approximately $2 billion.

George R. Oliver: We continue to see solid demand for our solutions, which is evident in our orders. This is reinforced by the fact that our fiscal first half orders for data centers have already surpassed the orders we booked for all of fiscal 2023. With orders growing, we have been investing in capacity to be able to execute on our Accelerated Data Center backlog. Our strong presence in data centers starts with our advanced chiller technology. Given the amount of heat generated at data centers, our customers are looking for solutions that maintain constant temperatures in even the most extreme environments.

Speaker Change: We continue to see solid demand for our solutions, which is evident in our orders.

Speaker Change: This is reinforced by the fact that our fiscal first half orders for data centers have already surpassed the orders we booked for all of fiscal 2023.

Speaker Change: With orders growing we have been investing in capacity to be able to execute on our accelerated data center backlog.

Speaker Change: Our strong presence in data centers it starts with our advanced Chiller technology.

Speaker Change: Given the amount of heat generated at data centers or our customers are looking for solutions that maintain constant temperatures and even the most extreme environments.

Speaker Change: In addition to Chillers, we have extended our offerings with both air handling units and computer room Air handlers.

George R. Oliver: In addition to chillers, we have extended our offerings with both air handling units and computer room air handlers. Our cooling solutions continue to advance, and we are working on next-generation technologies to keep up with the growing needs of data centers. The case study on this slide was for a half gigawatt facility that is now being expanded to a full gigawatt. The project included the deployment of our chillers, air handlers, and, just as important, we have secured planned service agreements for all of the chillers.

Speaker Change: Our cooling solutions continued to advance and we are working on next generation technologies to keep up with the growing needs of data centers.

Speaker Change: The case study on this slide was for a half gigawatt facility that is being expanded now to a full gigawatt.

Speaker Change: The project included the deployment of our Chillers and air handlers and just as important we have secured planned service agreements for all of the children.

Speaker Change: Our pipeline for data centers remains very healthy and we are continuing to expand our capacity to meet the strong demand.

George R. Oliver: Our pipeline for data centers remains very healthy, and we are continuing to expand our capacity to meet this strong demand. We remain excited about the opportunities in this fast-growing vertical and look forward to updating you on our progress in the future. Before we turn the call over to Marc to go through the financial details, I want to say how proud I am of the Johnson Controls team. While we faced some challenges in the first fiscal quarter and will continue to navigate a dynamic environment, we delivered on our commitments to our customers to drive value for our shareholders. Now, with that, I'll turn it over to Marc. Thanks, George, and good morning, everyone. Let me start with a summary on slide 6. Total revenue of $6.7 billion was flat year over year.

Speaker Change: We remain excited about the opportunities in this fast growing vertical and look forward to updating you on our progress in the future.

Speaker Change: Before I turn the call over to Mark to go through the financial details I want to say, how proud I am of the Johnson controls team.

Mark: While we faced some challenges in the first fiscal quarter and will continue to navigate a dynamic environment, we delivered on our commitments to our customers to drive value for our shareholders.

Mark: Now with that I'll turn it over to Mark.

Mark: Thanks, George and good morning, everyone. Let me start with summary on slide six.

Marc Vandiepenbeeck: While organic sales grew 1%, a strong high single-digit service growth more than offset continued weakness in China's system business and declines in the global residential HVAC market. Segment margins expanded by 70 basis points to 14.5% as we deliver strong productivity and convert at higher margin backlog. Adjusted EPS of 78 cents was up 4% year over year and at the high end of our guidance range of 74 to 78 cents. Operations contributed six cents of the growth in the quarter, benefiting from recovery momentum following the cyber incident at the end of our last fiscal year, as well as improved productivity. However, below the line, we saw headwinds from net financing charges due to higher interest rates.

Mark: Total revenue of $6 7 billion was flat year over year, while organic sales grew 1% a strong high single digit service growth more than offset continued weakness in China system business and declines in the global presidential HVAC.

Mark: Segment margins expanded 70 basis points to 14, 5% as we delivered strong productivity and convert over the higher margin backlog.

Mark: Adjusted EPS of <unk> 78 cents was up 4% year over year and at the high end of our guidance range of 74 to 78 cents.

Mark: Operations contributed six tenths of the growth in the quarter.

Mark: Benefiting from recovery of momentum following the cyber incident at the end of our last fiscal year as well as improved productivity.

Mark: Below the line, we saw headwinds from net financing charges due to higher interest rates overall.

Marc Vandiepenbeeck: Overall, we are pleased with the strong adjusted EPS performance in the quarter. On the balance sheet, we ended the second quarter with approximately $800 million of available cash, and net debt increased to 2.4 times, which is within our long-term target range of 2 to 2.5 times. For the fiscal first half, excluding the impact of the receivable factoring on wine, adjusted free cash flow improved $166 million year-over-year.

Mark: Overall, we are pleased with the strong adjusted EPS performance in the quarter.

On the balance sheet. We ended the second quarter was approximately $800 million all the available cash and net debt increased to two point full times, which is within our long term target range of two two tuna einsteins.

Mark: For the fiscal first half excluding the impacts of the receivable factoring unwind adjusted free cash flow improved a 166 million yield a year.

Marc Vandiepenbeeck: As we end the use of factoring, we will continue to focus on further improvements in our core billings and collection capability, leading to continued improvement in our cash performance over time. We've also made tremendous progress in reducing our inventory levels, and we expect further improvements in the second half. Let's now discuss our segment results in more detail on slides 7 through 9. Beginning on slide 7, organic sales in our global product business declined 1% year-over-year with volume declines of setting price.

Mark: As we and the use of factoring we will continue to focus on further improvements on our billings and collection capability.

Mark: Leading to continued improvement in our cash performance overtime.

Mark: We've also made tremendous progress in reducing our inventory level and expect further improvements in the second half.

Marc Vandiepenbeeck: We saw low single-digit growth in commercial HVAC, highlighted by Mid-Teen Growth in Light Commercial. I apply the HVAC decline to a tough year-on-year comp. Fire and security declined low single-digit against tougher coms as a decline in fire suppression more than offset growth in fire detection and security videos. Industrial refrigeration grew over 25% with another strong quarter in Emila. Global residential HVAC declined low single-digit, driven by a low single-digit decline in global ductless residential, primarily in Europe. Global Doctored Residential Business declined mid-single digits with a mid-single digit decline in North America offsetting strength in Latin America.

Mark: Let's now discuss our segment results in more details on slides seven through nine.

Mark: Beginning on slide seven organic sales global product business declined 1% year over year.

These volume declines offsetting price.

Mark: So low single digit growth in commercial HVAC highlighted by mid teen growth in light commercial.

Mark: I applied HVAC declined mid single digits against the tough year on year comp.

Mark: Fire and security declined low single digits against tougher comps as declining <unk> pressure and more than offset growth in fire detection and security video surveillance.

Industrial refrigeration grew over 25% is another strong quarter in EMEA.

Mark: Global residential HVAC declined low single digits, driven by low single digit decline in global Ductless residential primarily in Europe.

Our global Dr. Residential business declined mid single digits with a mid single digit decline in North America offsetting strength in Latin America.

Mark: Dealer growth is high.

Marc Vandiepenbeeck: Dealer growth is a high double-digit, with channel inventory normalizing and distributor sales continuing to increase. We see momentum building in our North America market. Adjustment segment EVA margins expanded 30 basis points to 18.9% as positive price costs and improved productivity more than offset mix headwinds.

Mark: High double digit with channel inventory normalizing and distributor sell through continuing to increase we see momentum building in our North America markets.

Mark: Adjustment segment, EBITDA margins expanded 30 basis points to 18, 9% as positive price cost and improved productivity more than offset mix headwinds.

Marc Vandiepenbeeck: Moving now to slide 8 to discuss our building solutions platform, all those regain momentum with strong 12% growth in the quarter. Overall service orders grew 13% with broad-based growth across the region. Systems orders grew 12% as North America offset declines in the Milan impact. Organic sales increased 2% in the quarter, led by service growth of 8%.

Mark: Moving now to slide eight to discuss our building solutions performance.

Mark: Although as we gain momentum with strong 12% growth in the quarter.

Mark: Overall service, although grew 13% with broad based growth across the regions.

Mark: Systems all of those grew 12% as North America, offset declines in EMEA and APAC.

Mark: Organic sales increased 2% in the quarter led by service growth of 8%.

Marc Vandiepenbeeck: Systems revenue was down 2% as declines in APAC and EMILA more than offset high single-digit growth in North America. Building solution backlog remains at a record level, growing 10% to $12.6 billion. Service backlog grew 3%, and systems backlog grew 11% year-on-year. Let's discuss the building solutions performance by region on slide 9. Holders in North America increased 19% in the quarter, driven by 26% growth in systems

Mark: Systems revenue was down 2% as declines in APAC and EMEA more than offset high single digit growth in North America.

Mark: Building solutions backlog remains at a record level growing 10% to $12 6 billion.

Mark: Service backlog grew 3% and our systems backlog grew 11% year on year.

Mark: Let's discuss the building solutions performance by region on slide nine.

All those in North America increased 19% in the quarter driven by 26% growth in systems. We continued to experience strong demand in data centers, which led to nearly 50% growth across all age vac controls platform.

Marc Vandiepenbeeck: We continue to experience strong demand in data centers, which led to nearly 50% growth across our HVAC controls platform; fire and security orders grew low single digits. Sales in North America were up 8% organically, with strong growth across our HVAC and controls platform, up mid-teens year over year. Overall, our system business grew 9% while service grew 6%. Segment margins expanded 110 basis points year over year to 13.6%, driven by the continued execution of higher margin backlog and strength in a higher margin service business. Total backlog ended the quarter at $8.9 billion, up 15% year-over-year.

Mark: Security all those grew low single digits.

Mark: Sales in North America were up 8% organically with strong growth across our HVAC and controls platform.

Mid teens year over year overall system business grew 9% while services grew 6%.

Segment margins expanded 110 basis points year over year to 13, 6%.

Mark: Driven by the continued execution of higher margin backlog and shrink you know higher margin service business.

Mark: Total backlog ended the quarter of $8 9 billion up 15% year over year.

In the Miller all of those were up 8% with strong double digit growth in service offset by a decline in system drove strong year over year compare.

Marc Vandiepenbeeck: In Emila, orders were at 8%, with strong double-digit growth in service offset by a declining system due to a strong year-over-year comparison. Consistent with our strategy, there is an increased focus to drive higher margin into our backlog, and controls at a strong order intake with solid growth in Europe and Latin America. Sales in Emila grew 4% organically, with low teen service growth offsetting a decline in our system business, predominantly driven by Latin America and the Middle East HVAC businesses. Service business benefited from strong double-digit growth from both a recurring and shorter cycle transactional business.

Mark: Consistent with all Stretchy Gee, there is an increased focus to drive higher margin into our backlog.

Mark: Controls at a stronger order intake with solid growth in Europe, and Latin America.

Mark: Sales in EMEA grew 4% organically with low teens service growth offsetting a decline in off system business.

Mark: Monopoly driven by Latin America, and Middle East HVAC businesses.

Mark: Our service business benefited from strong double digit growth from both our recurring and shorter cycled transactional businesses.

Marc Vandiepenbeeck: Industrial Refrigeration, another solid quarter with low team growth here over the years. Segment EB-DA Margin expanded 170 basis points to 8.4%, driven by improved productivity, positive mix from the growth in service, and by the conversion of higher margin systems backlog. Backlog was up 10% year-over-year to 2.4 billion. In Asia-Pacific, orders declined 9% as we remain selective of the jobs we book into the China system backlog. Overall, APAC service order growth was high single digits, driven by high single digit growth in our recurring contracts. Sales in Asia-Pacific declined 23% as the system business was impacted primarily by the continued weakness in China.

Mark: <unk> refrigeration I don't have a solid quarter with low teen growth year over year.

Mark: Segment, EBITDA margin expanded 170 basis points to eight 4% driven by improved productivity logistic mix from the growth in service and by the conversion of our higher margin systems backlog.

Mark: Backlog was up 10% year over year to $2 4 billion.

Mark: In Asia Pacific orders declined 9%. It was really meant selective of the jumps we book into the Chinese system backlog.

Mark: Overall APAC service, although grew high single digits, driven by high single digit growth in our recurring contracts.

Sales in Asia Pacific declined 23%, that's the system business was impacted primarily by the continued weakness in China.

Marc Vandiepenbeeck: Our service business grew 7% in the quarter with strong growth in our shorter cycle transactional business. Sigmund Ibida-Maljean's decline, 80 bips, to 11% as weakness in China impacted the positive mix from all services; backlog of 1.3 billion declined 18% year over year. Now let's discuss our third quarter and fiscal year 24 guidance on slide 10. We enter our seasonal strong third quarter with good momentum, evident by a robust order book and resilient service. Our margin-rich backlog remains at historical levels, and our global product book-to-bill business has stabilized.

Mark: Our service business grew 7% in the quarter with strong growth sholto cycled transactional business.

Mark: Segment, EBITDA margins declined 80 basis.

Mark: 11% as weakness in China opposite positive mix from our service business.

Mark: Backlog of $1 3 billion declined 18% year over year.

Mark: Now, let's discuss our third quarter and fiscal year of 24 guidance on slide 10.

Mark: We enter our seasonally strong third quarter with good momentum.

Mark: Have you done by a hoagie soda and resilient service or margin rich backlog remains at historical levels and our global product book to Bill business have stabilized.

Marc Vandiepenbeeck: We are introducing third-quarter sales guidance of approximately low single-digit growth, which assumes one more quarter of top-line pressure in our system business in China. We expect strong contribution from North America and EMILA, especially from the regained momentum in our service business. Global product is expected to return to growth as our book-to-bill orders remain positive through the second quarter. For the third quarter, we expect segmented margin to be approximately 17% and adjusted EPS to be in the range of $1.05 to $1.10. We are maintaining a full-year guide.

Mark: We are introducing third quarter sales guidance of approximately low single digit growth, which I assume is one more quarter of top line pressure in the system business in China.

Mark: We expect strong contribution from North America, and EMEA, though, especially from the regain momentum service business.

Mark: Global product is expected to return to growth as our book to Bill old deals remain positive through the second quarter.

Mark: For the third quarter, we expect the segment EBITDA margin to be approximately 17% and adjusted EPS to be in the range of one dollar and five.

Mark: To one dollar and 10 cents.

Mark: We are maintaining our full year guide, we expect sales growth of approximately mid single digit led by continued momentum in our service business.

Marc Vandiepenbeeck: We expect sales growth of approximately mid-single digits, led by continued momentum in our service business, stabilization in our global products, and a cautious second-half outlook for China. Segment margins are expected to expand approximately 50 to 75 basis points due to Productivity Improvement, Positive Mix from the Service Business, and Conversion of a Higher Margin Backlog. Our adjusted EPS guidance range is unchanged and is expected to be approximately $3.60 to $3

Mark: Stabilization in our global products and a cautious second half outlook for China.

Mark: Segment margins are expected to expand approximately 50 to 75 basis points through productivity improvement and positive mix from the service business and conversion of Ohio margin backdrop.

Mark: Our adjusted EPS guidance range is unchanged and is expected to be approximately $3 60 to $3 75.

Mark: High end of the guide assumes accelerated recovery in China normalized channel inventory levels in North America, Crazy and service excellent nation.

Mark: Excluding the impact of unwinding the receivable factoring we continue to expect adjusted free cash flow conversion of approximately 85% for the full year.

Mark: Our working capital metrics continued to improve through posted by our first half performance.

Speaker Change: In summary, we remain confident in our ability to deliver on our financial and operational commitments with that operator. Please open the lines for questions.

Marc Vandiepenbeeck: The high-end of the guide assumes accelerated recovery in China, normalized Chinese inventory levels in North America Resi, and service acceleration. Excluding the impact of unwinding the receivable factoring, we continue to expect adjusted free cash flow conversion of approximately 85% for the full year. Our working capital metrics continue to improve, supported by our first half performance. In summary, we remain confident in our ability to deliver on our financial and operational commitments. With that, operator, please open the lines for questions. Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your TouchTown phone.

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

Speaker Change: To ask a question you May Press Star then one on your Touchtone phone.

Operator: If you are using a speakerphone, we ask that you please pick up your handset before pressing the key. To withdraw your question, please press star then 2. In respect of time, we ask that you limit yourselves to one question and one follow-up question. At this time, we'll pause for just a moment to assemble our roster. And today's first question comes from Steve Tusa with J.P. Morgan. Please go ahead.

Mark: If you are using a speaker phone.

Mark: Please pickup your handset before pressing the keys.

Mark: To withdraw your question. Please press Star then two.

Mark: Irrespective of time, we ask you limit yourself to one question and one follow up question.

Mark: At this time, we'll pause for just a moment to assemble our roster.

Mark: And today's first question comes from Steve Tusa with Jpmorgan. Please go ahead.

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

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

George R. Oliver: Can you just maybe talk about, was there anything that was, you know, pushed from 1Q into 2Q and then, I guess, looking at the guidance, the fourth quarter definitely looks like a step up here, even more so than before. What gives you the confidence, even at the lower midpoint, to see that kind of ramp from 2 to 3 to 4 at this stage? Yeah. So, in terms of pushing from Q1 to Q2, we had some orders that did slip due to the cyber incident and the recovery in momentum. I wouldn't say it's material in terms of what pushed from 1 to 2, but there were some smaller ones.

Steve Tusa: Can can you just maybe talk about was there anything that was you know.

Steve Tusa: Pushed from <unk> into <unk>, and then I guess looking at the the guidance.

Steve Tusa: Fourth quarter definitely looks like a step up here, even more so than than before.

Steve Tusa: What gives you the confidence even at the low or mid point to see that kind of ramp from two.

Steve Tusa: Two to three to four at this stage.

Steve Tusa: Yeah.

Speaker Change: So in terms of push.

Speaker Change: From Q1 to Q2, we had some orders that didnt sleep.

Steve Tusa: Due to the cyber incident and the recovery in the momentum I wouldn't say, it's material in terms of what pushed from a one to two.

Steve Tusa: There was some some smaller one the strength of all of those in Q2 is really coming from the fundamental.

Marc Vandiepenbeeck: So, the strength of our orders in Q2 is really coming from the fundamental positive trend we're seeing in our data center business and some other core businesses. Now, in terms of the guide for the balance of the year, and maybe first address the third quarter, if you look at the third quarter bridge we provided of a buck and five cents to a dollar and ten cents, we feel very strong about QE. We've regained momentum during the second quarter, and that gives us strong confidence, especially as we enter the third quarter.

Steve Tusa: The positive trend we are seeing you know in our data center business and some other coal coal businesses.

Steve Tusa: In terms of a of the.

Steve Tusa: Guide for the balance of the year and maybe address it.

Steve Tusa: If you look at the third quarter guidance, we provided of a Buck eh and.

Steve Tusa: And five cents to adult all in that sense, we feel very strong about about Q3, and we regained momentum during the second quarter and that gives us a strong confidence.

Steve Tusa: Especially when we enter the third quarter all of the short cycle businesses, we've been talking about it seemed very strong older during the second quarter.

George R. Oliver: All of the short cycle businesses we've been talking about have seen very strong orders during the second quarter and continue to see that momentum building as we enter the third quarter. That gives us the confidence that we are booked to build global product businesses, our Resi business, and, of course, our business solution service business will achieve the targets we've set for them. You know that China is still facing one more quarter of revenue pressure in Q3, but the order of momentum there remains very, very strong, and we're really expecting a very strong sequential performance in both the Midland and North America.

Steve Tusa: Can you do to see that momentum building as we enter the third quarter and that gives us the confidence that our book to Bill global product businesses.

Steve Tusa: <unk> business and of course, so a business solution services business will achieve the targets we've set for them.

Steve Tusa: You know that Chinese to fishing, one more quarter of revenue pressure in Q3, but the Aldo smoke momentum there remains very very strong.

Steve Tusa: And we are really expecting a very strong sequential performance in both EMEA and North America.

Marc Vandiepenbeeck: And so, if you think about the guidance for the balance of the year, we're still showing the same range as we did for the prior quarter, even though we printed a pretty strong second quarter at the high end of the guide we had provided. And if we look at the second half and the balance of the year, what you need to see and what we're expecting to see from a guidance standpoint is that the China business will have to accelerate its momentum, both on orders and on revenue.

Steve Tusa: And so if you think about the guidance about the balance of the year and we are still showing the same range as we did through the quarter, even though we printed a pretty strong second quarter and at the high end of the guide we have provided and if we look at the second half and the balance of the year.

Steve Tusa: What you would need to see and what we are expecting to see from a guidance standpoint is the China business will we will have to accelerate its momentum both on order and on revenue.

Marc Vandiepenbeeck: We would also need to see the resi business with sequential quarter-over-quarter growth increase. And you know that business is facing some additional variability associated with the fact that we are switching refrigerants as part of the market. And finally, to achieve the very high end of that guidance, we would have to achieve improved service growth between where we close the second quarter and where we see the third quarter landing. So, and Steve, I would also remind you that looking comparatively into the second half, we have a much easier ride than we did in the first. And then lastly, just any updates on the deal timing.

Steve Tusa: We would also need to see to the resi business with a sequential quarter over quarter growth to increase and you know that business is facing some additional variability associated with the fact that we are switching refrigerants as part of the market changed.

Steve Tusa: And finally to achieve the very high end of that guidance, we would have to achieve improve service growth from where we closed a single quarter and where we see the second quarter lending so.

Speaker Change: And Steve I would also remind you that that's looking comparatively into the second half we have much easier comps than we did in the first half.

Steve Tusa: Okay.

Speaker Change: And then lastly, just any updates on deal timing.

Steve Tusa: Yeah. So as I said in my prepared remarks, Steve we are making good progress.

George R. Oliver: Yeah, so as I said in my prepared remarks, Steve, we are making good progress. You know, as we've said, these businesses are outside the core and represent roughly about 25% of our sales. While they are not core, they are good businesses that are adding value.

Steve Tusa: As we as we've said these businesses are outside the corn represent roughly about 25% of our sales while.

Steve Tusa: Well they are non core they are good businesses that are adding value. So we're remaining focused on maximizing shareholder value and like I said I'm pretty much across the board, making good progress and we'll keep you updated as we as we continue through with these with these businesses.

Nigel Edward Coe: So we're remaining focused on maximizing shareholder value, and like I said, pretty much across the board, making good progress, and we'll keep you updated as we continue through with these businesses. Thank you. And our next question today comes from Nigel Coe with Wolf Research. Please go ahead. Thanks. Good morning, everyone.

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

Nigel Edward Coe: Thanks, Good morning, everyone. Good.

Nigel Edward Coe: Good morning.

Nigel Edward Coe: Yeah, Hey, Hey, guys I just stopped marquee I think you just alluded to the to the warranty at backend Galena Park, maybe just could.

Marc Vandiepenbeeck: Good morning. Yeah. Hey, guys. Marc, I think you just alluded to the warrant you added back in Google products. Maybe just... Could you maybe just flesh that out a little bit, you know, why that wasn't considered operating, you know, why that's a discrete item?

Nigel Edward Coe: Could you maybe just flesh that out a little bit you know why that wasn't considered operating you know why that is.

Nigel Edward Coe: The discrete item and then on the on the fourth quarter Guy.

Marc Vandiepenbeeck: And then on the fourth quarter guidance, I mean, I think the implication is, like, low double-digit organic growth in the fourth quarter to get to that mid-single digits, even the low end of the mid-single digits for the full year. So is that the intention? Do you actually see a pathway to low double-digit organic growth, even though it's... Egypt Comps is still quite a tough boss. So let me start first with the global product quality issue, which is really not a warranty issue?

Nigel Edward Coe: I mean, I think the implication is like low double digit organic growth.

Nigel Edward Coe: In the fourth quarter to get to that mid single digits, even the low end of mid single digits for the full year. So it is that the intention do you actually see a pathway to a low double digit organic growth even though it's.

Nigel Edward Coe: Easy comps, there's still quite a tough bar.

Nigel Edward Coe: So let me start first with the global product quality issue, which is really not a warranty issue. It really is a quality issue.

Marc Vandiepenbeeck: It really is a quality. The reserve really relates to an anticipated remediation action we need to address a recently identified firmware issue within some of our legacy products that are sitting in the field. We are currently testing that firmware update within those devices, and we are developing a remediation plan for this particular issue and will announce when we are done with the full remediation. There have been no reports of any injuries or damage related issues with this issue. These kinds of problems are very unusual, and fairly rare, particularly for field devices like this.

Nigel Edward Coe: The reserve really relates to an anticipated remediation action, we need to address in a very decency identify somewhere issue within some of our legacy products that are sitting in the field.

Nigel Edward Coe: We are currently testing that firmware updates within those devices and we are developing a remediation plan for this particular issue and we'll announce when we are done.

Nigel Edward Coe: The full remediation.

Nigel Edward Coe: You know theres been no reports of any injuries or damage related issue with that.

Nigel Edward Coe: The issue is these kind of problems are a very unusual failure rate.

Nigel Edward Coe: Particularly for field devices like this.

Marc Vandiepenbeeck: Now, when it comes to the second part of your question, I'm sorry, I forgot what you asked. Yeah, the low double-digit implied organic sales growth in the fourth quarter. But we see closer to higher single-digit growth for the balance, to be honest. That's, that's, okay, it's good, yeah. Okay. And then my follow-up question is on the factoring change.

Speaker Change: Now when it comes to the second part of your question I'm sorry.

Speaker Change: I forgot what you what you ask.

Nigel Edward Coe: Yeah, the low double digit implied organic sales growth.

Nigel Edward Coe: In the fourth quarter.

Nigel Edward Coe: Oh, we see closer to higher single digits of growth.

Nigel Edward Coe: For the balance to be honest with you.

Speaker Change: That's okay.

Nigel Edward Coe: Yeah.

Marc Vandiepenbeeck: Obviously, I think most of us agree that it's good news to try and clean up the kind of cash generation. Just wondering, you know, what other measures you're considering to improve the quality of the free cash flow? And, in particular, is there any change in the way that you're sort of approaching the market via JC Capital? Yes, so I don't think we're going to change our approach to JC Capital.

Nigel Edward Coe: Okay.

Nigel Edward Coe: And then my fourth question is on the AR on the factoring change, let's see I think most of US agree that are getting used to to try and clean up the the kind of cash generation. Just I'm. Just wondering you know what other measures you're considering two to improve the quality of the free cash flow and in particular is there any change in the way that you're sort of approaching them.

Nigel Edward Coe: Market J C capital.

James C. Lucas: Yes, so I don't think were going to change our approach on J C capital.

Marc Vandiepenbeeck: This is really a tool we have to strengthen our ability to provide value and add service and deepen our relationship with customers as we provide the full suite with the system, the service, and then the financing that wraps around that. When it comes to our trade working capital, I mean, we had a very strong start of the year. We've improved pretty much every single fundamental there in terms of both receivable management, I would say, as well as our ability to manage our inventory.

James C. Lucas: This is really a tool we have to strengthen <unk> ability to provide value and and attach and service and deepen.

James C. Lucas: Our relationship with customers as we provide like the full suite with the system to service and then the financing that that wraps around that.

James C. Lucas: When it comes to all of them trade working capital I mean, we had a very strong start of the year within.

James C. Lucas: We've improved pretty much every single fundamental data in terms of both receivable management I would see as well as our ability to manage our inventory.

Marc Vandiepenbeeck: If you look at our cash collection cycle overall, and if you exclude the impact of the unwinding of factoring, we improved that cash collection cycle by about five days, and we are very happy with that outcome.

James C. Lucas: If you look at Oh.

James C. Lucas: Oh cash collection cycle overall, and if you exclude the impact of the unwinding of factoring we improved our cash collection cycle by about five days, which.

Speaker Change: We are very happy with that outcome.

James C. Lucas: If you look at the guidance, we've given for the year on free cash flow conversion, we are maintaining the 85%.

Marc Vandiepenbeeck: If you look at the guidance we've given for the year on free cash flow conversion, we are maintaining the 85% despite very strong performance in the first half, and we see continuous improvement in our working capital metrics. But you need to understand we continue to invest in attractive organic growth opportunities, particularly as we increase capacity to meet the very high demand we see in data centers. We're going to be able to make those investments and maintain that 85% conversion, but we want to capitalize on that growth we see in demand.

James C. Lucas: Despite very strong performance in the first half and we see the continuous improvements in our working capital metrics.

James C. Lucas: You need to understand we continue to invest in our most attractive organic growth opportunities.

James C. Lucas: Clearly as we increase capacity to meet the very high demand, we see in our in data center.

James C. Lucas: We're going to be able to make those investments and maintained at 85% conversion.

James C. Lucas: But we want to we want to capitalize on that growth we see in the market.

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

Marc Vandiepenbeeck: Thank you. And our next question today comes from Scott Davis at Melius Research. Please go ahead. Hey, good, good morning, guys. I'm just, uh... I'm looking at the APAC numbers and, you know, applied obviously down a fair amount, fire more flattish, and fire and security more flattish. To me, it's...

Scott Reed Davis: Hey, good morning, guys.

James C. Lucas: So.

James C. Lucas:

James C. Lucas: Just.

Scott Reed Davis: I'm looking at the APAC numbers and.

James C. Lucas: Applied obviously down a fair amount, but fire.

James C. Lucas: More flattish and fire and security more flattish I'm just to me it's.

Scott Reed Davis: I would have expected those to be a little bit more correlated, so was there more project selectivity on the applied side? Was that what you were saying, George?

James C. Lucas: I would have expected those to be a little bit more correlated so.

James C. Lucas: Was there more project selectivity on the applied side was that what you were saying George.

George R. Oliver: I kind of lost... I lost the train of thought there for a sec when you were talking. As we're looking at what we're deploying from a solution standpoint, we're looking at each of the domains and then how we differentiate and how we go to market, being able to capture what we see to be the secular trends around data centers and some of these key end markets. And so it's really just based on the backlog that we've had, and how it's converting.

James C. Lucas: Last.

Speaker Change: I lost the train of thought there for a second when you were talking about it.

George R. Oliver: We're looking at what we're deploying from a solution standpoint, we're looking at each of the domains and then how we differentiate and how we go to market being able to capture what we see to be the secular trends around data centers and some of these key end markets and so it's really just based on the backlog the backlog that we've had how it's converting and then as we're getting more.

George R. Oliver: And then as we're getting more integrated solutions, you'll see where we get more of a broad-based pickup in all of the domains. The application is specifically where, in the construction market, as Marc said, we have a big base of business in China.

James C. Lucas: Our integrated solutions, you'll see where we get more of a broad based pickup in all of the domains. The applied as was just specifically where in the construction market as Marc said, we have a big base of business in China, we have the market leading position and we we've probably seen more of a decline on the commercial side.

George R. Oliver: We have a market-leading position, and we've probably seen more of a decline on the commercial side, more of the commercial retail side. And so as we have adjusted inventories and as we've been working to now make sure that our resources are allocated more broadly across some of the other verticals, we're starting to see a really strong pipeline develop, and we're closing that pipeline. So, as Marc said, in the second half, we'll get back to positive orders as well as positive revenue by the end of the year.

James C. Lucas: Commercial are more of the commercial Rosie side.

James C. Lucas: So as we have adjusted inventories I mean, as we've been working to now make sure that our resources are allocated.

James C. Lucas: More broadly across some of the other verticals, we're starting to see a real strong pipeline develop and we're converting that pipeline. So as Mark said are true.

James C. Lucas: Through the second half, we'll get back to positive.

James C. Lucas: Positive orders as well as positive revenue by the end of the year. So we're confident that we're going to recover that and then that's got in general just making sure that we're with the differentiated solutions that we are deploying not only are we getting.

George R. Oliver: So we're confident that we're going to recover that. And then, Scott, in general, just making sure that we have the differentiated solutions that we are deploying, not only are we getting the share, Okay, that's actually really helpful. And then, switching over to the data center side, I mean, where... You know, understand your traditional capabilities and then silent error gave you, I think it was error handling.

James C. Lucas: The share, but then from a service standpoint, getting the attach service also.

Speaker Change: Okay. That's actually really helpful. And then switching over to data center side, I mean, where.

Speaker Change: You know I understand your traditional capabilities and then Simon Ara gave you I think it was air handling capabilities at a higher level.

James C. Lucas: Where are you as far as capabilities at a chip level cooling and is there anything.

George R. Oliver: and anything, any partnerships that you are forming to address liquid cooling. So, let me frame up data centers because it has been obviously a key area for us as we've been deploying our resources, investing over the last few years because we saw this coming. I'd say that we are well positioned with the cooling technologies and solutions. And a lot of that is working directly with each of the key hyperscalers in COLO. Now, we are partnering with them, understanding, you know, from a technology deployment perspective, how does that cooling technology then get deployed at the chip, and depending on how these are going to be configured.

James C. Lucas: And anything any partnerships that you have are forming to address liquid cooling.

Speaker Change: Yes, So let me let me frame up data centers because it has been obviously a key area for us as we've been deploying our resources investing over the last few years, because we saw this coming.

Speaker Change: I'd say that we are well positioned with the cooling technologies and solutions and a lot of that is working directly with each of the key hyperscale is in co Los.

James C. Lucas: Now we are partnering with them understanding you know from a technology deployment, how does that cooling technology. Then gets deployed you know at the chip and depending on on how these are going to be configured. So we're making sure not only with our not only with our innovation and investment.

George R. Oliver: So, we're making sure that not only with our innovation and investment, but also with what we do and how we go to market to serve their needs. So, we've got the right capacity to meet the increased demand. And like we said earlier, we're providing more than just chillers. So, as we go in with our customers, we've got strong capabilities across air handlers, as well as crates, and now we're including the full solution, including controls, building controls, fire, and security.

James C. Lucas: It's complemented with what we're doing and how we go to market to serve their needs. So we've got the right capacity to meet the increased demand.

James C. Lucas: Like like we said earlier, we're providing more than just children. So as we go in with our customers. We've got strong capabilities across air handlers as well as cross in and now we're including the full solution, including controls building controls fire and security.

George R. Oliver: Now as you look at how these data centers are being designed for the future, they're going to be over a gigawatt of power consumption, they're going to need a wide range of air-cooled and water-cooled to support the exponential growth to support, as well as how it's deployed from a liquid cooling standpoint.

James C. Lucas: Now as you look at the how these data centers are being designed for the future they're going to be over a gigawatt of power consumption, they're going to need a wide range of air cooled and water cooled to support the exponential growth to support as well as then how it's deployed from a liquid cooling standpoint, so not only are we innovating with hyper.

George R. Oliver: So not only are we innovating with hyperscalers and COLOs, but making sure that we are partnering with the right application of our cooling technology that ultimately delivers the most amount of efficiency. And I would say, Scott, that the investments we've made with R&D and with the world-class laboratories that when we design, build, test, and demonstrate performance of the equipment over the entire data center operating envelope, we've engaged almost 100% of the data center operators and working very closely with them, not only with how we differentiate the solution, but as important, as Marc said, we've been investing in making sure we've got the right capacity with the right technology to ultimately be able to support the demand.

James C. Lucas: Scale is an colo on making sure that we are partnering with the right application of our cooling technology that ultimately delivers the most amount of efficiency and I would say Scott that the investments we've made with R&D and with the World Class Laboratory that we design build test and demonstrate performance of the equipment over the entire data.

James C. Lucas: Center operating envelope, we've engaged almost 100% of the data center operators and working very closely with them not only with how we differentiate our solution.

James C. Lucas: As important as Mark said, we've been investing in making sure. We've got the right capacity with the right technology to ultimately be able to support the demand we're projecting right now when I said our orders in the first half exceeded all of fiscal year 2023 orders for data centers and we have a pipeline that continues to support that.

George R. Oliver: We're projecting right now, and I said our orders in the first half exceeded all of fiscal year 2023 orders for data centers. And we have a pipeline that continues to support that type of growth. So we've been adding capacity to meet this demand, and I believe we are positioned, and you see some of these forecasts that project potentially 50-plus percent growth over the next few years, and we're positioned to be able to serve that.

James C. Lucas: A growth so we've been adding capacity to meet this demand and I believe we are positioned to you see some of these forecast that projects potentially 50 plus percent growth over the next few years and we're positioning to be able to serve that.

George R. Oliver: And so I think that is what gives us confidence as we get through the year, we see continued strength in orders, and then as we set up for 23, good visibility into, I mean, 25, good visibility in our ability to be able to continue that trend. Thank you. And our next question today comes from Joe O'Day with Wells Fargo. Please go ahead. Hi, good morning.

James C. Lucas: So I think that is what gives us confidence as we get through the year. We see continued strength in orders and then as we set up for 'twenty three a good visibility into 25, good visibility in our ability to be able to continue that trend.

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

Joseph Alfred Ritchie: Thanks for taking my questions. Marc, just just a couple clarifications to start. First, in terms of the quality issue and confidence that there are not any kind of additional reserves going forward, anything from a timeline to remedy. And then secondly, just related to your answer to Nigel's question, when you're saying high single-digit implied growth, was that a back half of 24 common, or was that a fourth quarter common? It was a false quarter comment, just to clarify. On quality, we're early in the process. These, again, are very unusual.

Joe: Hi, good morning, Thanks for taking my questions.

Joe: Mark just a couple of clarifications to start.

Joe: First in terms of the quality issue and confidence that they are not kind of additional reserves going forward anything from a from a timeline to remediate and then secondly, just related to your answer to Nigel as question when you're saying high single digit implied growth was was that a back half of 'twenty four comment or was that.

Joe: A fourth quarter comment.

Speaker Change: It was a fourth quarter comment just just to clarify on the quality we have early in the process.

Joe: These again are very unusual.

Marc Vandiepenbeeck: At this stage, we don't expect anything additional, but we are still reviewing how we are going to develop and deploy that firmware fix. And generally, we're able to resolve those issues fairly quickly within a couple quarters. So it's not something that's going to drag along for years because it's critical for us to fix these pretty quickly. And then I wanted to ask on global products and applied organic down mid-single digits, and light commercial up mid-teens. And when we look kind of a year ago, both had pretty challenging comps.

Joe: At this stage, we don't expect anything additional but we are still reviewing how we are going to develop and deploy the exome we fix it.

Joe: And generally we're able to.

Joe: To resolve those issue fairly quickly within a couple of quarters. So it's not something that's going to drag along for yields on because it's critical for us to.

Joe: Two fixed dose pretty quickly.

Joe: Yeah.

Speaker Change: Got it and then I wanted to ask on on global products and the applied organic down mid single digits like commercial up mid teens and when we look kind of year ago, both had pretty challenging comps and so just any additional color on the difference in those organic trends in the quarter.

Marc Vandiepenbeeck: And so just any additional color on the difference in those organic trends in the quarter, regional or other? Oh, I would say across our applied, I mean, when you look at, I mean, both, whether it be direct or indirect, and we have a much higher mix, as we're differentiating our solutions, our commercial solutions business, when you look at the overall applied volume on a two-year stack, we're up over 20%. And the pipeline right now that we're building is extremely strong because of the secular trends that we're, you know, addressing, which are the data center expansion and a lot of industrial expansion, as well as the focus on sustainability.

Speaker Change: Regional or otherwise.

Speaker Change: So what I would say across our applied I mean, when you look at I mean, both whether it be direct or indirect and we have a much higher mix side as we're differentiating our solutions our commercial solutions business. When you look at the overall applied volume on a two year stack were up over 20% in the pipeline right now that we're building is.

Speaker Change: <unk> strong because of the secular trends that we're you know, we're addressing which is the data center expansion and a lot of the industrial expansion.

Speaker Change: As well as a focus on sustainability. So we've been positioning our technologies globally regionally to be able to get more than our fair share and I think we're positioned to continue to see that trend.

Marc Vandiepenbeeck: So we've been positioning our technologies globally and regionally to be able to get more than our fair share. And I think we're positioned to continue to see that trend. Thank you. And our next question comes from Julian Mitchell with Barclays. Please go ahead.

Speaker Change: Yeah.

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

Julian C.H. Mitchell: Sorry to be a bore, but just to sort of try and circle back to the second half assumptions for a second. So I think the segment margin is guided around sort of 17.5% in Q4, and you just did 14.5%. So maybe help us understand. You know, that's 300 bps uplift.

Julian C.H. Mitchell: Hi, good morning.

Julian C.H. Mitchell: Sorry to be a bold, but just to sort of trying to circle back to the second half assumptions for a second so I think the segment margin is guided around sort of 17 and a half a cent in Q4 and you just did 14 and a half so maybe help us understand.

Marc Vandiepenbeeck: Is there anything by segment that stands out, or are they all up a healthy amount? And just, you know, there's a bunch of questions on China and APAC. So just to understand for the year as a whole, what's the APAC building solutions revenue expected to be down? I think it was down 22% in the first half.

Julian C.H. Mitchell: You know that 300 bps uplift is there anything by segment that stands out or are they all up a healthy amount and just you know there's a bunch of questions on China and APAC. So just to understand for the year as a whole what's the APAC building solutions revenue expected to.

Julian C.H. Mitchell: Down I think it was down 22% in the first half so what's the full year assumption for that APAC B S. A revenue change please.

Marc Vandiepenbeeck: So what's the full year assumption for that APAC BS revenue change? Yes, so first on the second half, and your direction is correct on the Q4 segments. Again, our expectation there and where that margin comes from are really driven by three things. The improvement in our mix associated with the growth in our service business. As you know, the service business is much, much more profitable than our system business. It's the volume increase we're seeing both in our residential business as well as our book build business, where all those have been progressing well throughout the second quarter.

Julian C.H. Mitchell: Yes, so so first on the on the second half in your direction correct on Q4.

Julian C.H. Mitchell: Segments.

Julian C.H. Mitchell: Again, our expectation there and where that margin comes from is really driven by by three things the improvement in our AR.

Julian C.H. Mitchell: Mix associated with the growth in our service business as you know the service business is much much more profitable than our.

Julian C.H. Mitchell: System business, it's the volume increase we have seen both in all residential.

Julian C.H. Mitchell: Business as well as our book build business, where <unk> has been progressing well throughout the second quarter as we enter the quarter.

Marc Vandiepenbeeck: And as we enter the quarter, that volume provides a benefit in terms of absorption and productivity within our manufacturing and provides good leverage and allows us to get there. And then we've addressed our base cost earlier in the year, and we set ourselves up for the ability to leverage the P&L a little bit better than we've been able to historically, and that's why we're comfortable with where we are. Now, for the full year on AsiaPAC, I would say if you look at where we've guided, we're assuming a mid-team negative growth for the full year, and the sequential growth, as you can see, will therefore be positive in the fourth quarter in order to obtain that weighted average performance for the full fiscal year. That's a very clear answer.

Julian C.H. Mitchell: <unk> volume provides a benefit in terms of absorption and productivity within our manufacturing and provides good leverage and allows us to get there and then we've addressed all of discussed earlier in the year and we settle self up for us the ability to leverage the P&L, a little bit better than we could be nave.

Julian C.H. Mitchell: <unk> historically and Thats why we are comfortable with where we where we are.

Speaker Change: Now for the full year on the on Asia Pac I would say if you.

Speaker Change: If you look at where we guided we have assuming a mid teen negative growth.

Speaker Change: For the full year.

Speaker Change: The sequential growth that you can will therefore will therefore be positive in the fourth quarter in order to obtain that weighted average performance fall for the full fiscal year 'twenty four.

Speaker Change: That's a very clear answer. Thank you for that and then just my second question just to understand that datacenter exposure in this little bit better I think George you gave a very clear explanation of the products and the focus points for J C. I, but I mean in terms of sort of revenue.

George R. Oliver: Thank you for that. And then just my second question, just to understand that data center exposure a little bit better. I think, George, you gave a very clear explanation of the products and the focus points for JCI. But in terms of sort of revenue, the two billion in sales you mentioned, George, I think that that's a 2023 number, isn't it? And just to understand maybe any sense of how those sales split across kind of HVAC, you know, BMS, and fire and security.

Speaker Change: The 2 billion of sales you mentioned, George I think that that's a 2023 number is it and just to understand maybe.

Speaker Change: Any sense of how those sales split across kind of HVAC, you know BMS in fire and security.

Speaker Change: So I mean, when we look at the $2 billion that's a.

George R. Oliver: So, I mean, when we look at the two billion, that's, you know, that was for 2023, as you said, and then we're obviously seeing a significant pickup on that this year. So, as we said, for the first half, we're already at the level that we were all last year. Now, a significant amount of that is being driven by the cooling technologies across our, you know, not only our air-cooled and water-cooled but also the application of silent air.

George R. Oliver: That was for 2023 as you said and then we're obviously seeing a significant pickup on that this year. So as we said for the first half we were already at the level that we were all of last year.

Speaker Change: Amount of that is being driven by by the cooling technologies across our.

Speaker Change: Not only are air cooled water cool, but also the application of silent there. So we've got good pick up there what we're doing is making sure that as we're working with the Hyperscale is in co loads that we're now going to market. It in more of a integrated solution that ultimately creates a lot more value and how that that solution is put into.

George R. Oliver: So, we've got good pickup there. What we're doing is making sure that as we work with the hyperscalers and COLOs, that we're now going to market in more of an integrated solution that ultimately creates a lot more value in how that solution is put into service. So, you can imagine with all of the technology integration that we've been having with these providers, it is really differentiating what we're actually doing. And so, and we've already seen a big pickup in air handling and cross-border, and now we're seeing a pickup in building controls, and then more recently, fire.

Speaker Change: Into service. So you can imagine with all of the technology integration that we've been having with these providers.

Speaker Change: It is really differentiating what we're actually doing and so and we've we've already seen a big pick up in the air handling and cross and now we're seeing the pick up and building controls.

Speaker Change: And then more recently now fire, so you're going to start to see.

George R. Oliver: So you're going to start to see a more broad portfolio that is ultimately going to be delivered through those solutions. And then what's important is that we're getting all of that connected and ultimately put into service. The ability to be able to then provide service throughout the life cycle.

Speaker Change: More broad portfolio that ultimately is going to be delivered through those solutions and then what's important is that we're getting.

Speaker Change: All of that connected and ultimately put into service. So the ability to be able to then provide service through the lifecycle. So we're making really good progress there Julien.

George R. Oliver: So we're making really good progress there, Julian. Thank you. And our next question today comes from Noah Kaye with Oppenheimer. Please go ahead.

Speaker Change: Thank you and our next question.

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

Noah Duke Kaye: Thanks. You mentioned needing to see services growth acceleration in the back as part of the key to getting the high-end of guidance, up 13%, right, in terms of orders and 2Q. What kind of acceleration do we need to see, and what's your visibility?

Noah Duke Kaye: Thanks, you mentioned needing to see services growth acceleration in the back half as part of the key to getting the high end of guidance I mean it was.

Noah Duke Kaye: A 13% right in terms of orders until Q, what kind of acceleration do we need to see and whats your visibility to that.

Speaker Change: Well, we need to see is where we were I mean, we were we were.

George R. Oliver: Well, what we need to see is where we were. I mean, we were, you know, pacing high single digits pretty consistently the last couple years. But when the cyber incident hit in the first quarter, that really set us back, set the momentum back, because it hit a number of our systems that ultimately execute not only from orders but ultimately how we fulfill service. So we are regaining the momentum, as we said, across the globe. I would say we're executing well on that strategy, recovering from that lost momentum.

Speaker Change: Pacing up high single digits pretty consistently last couple of years when the cyber incident, a hit in the first quarter that really set us back at the momentum back because it hit a number of our systems that ultimately execute not only from orders, but ultimately how we fulfill service. So we are regaining the momentum as we said.

Noah Duke Kaye: The globe I would say, where we're executing well on that strategy are recovering from that that lost momentum.

George R. Oliver: Obviously, the focus that we have in becoming a commercial solution, building solutions provider is now being able to leverage our entire installed base, being able to differentiate the outcomes that we can deliver on maximizing the value over the lifecycle for our customers. And then the region where we, you know, were the most impacted was North America.

Noah Duke Kaye: Obviously, the focus so we havent, becoming a commercial solution building solutions provider is now being able to leverage our entire installed base being able to differentiate the outcomes that we can deliver on maximizing the value.

Noah Duke Kaye: Over the lifecycle for our customers and then but where we were the most impacted was North America and Thats, our largest geography. We did we did make progress in Q2, that's continuing and we're going to see that continue to accelerate Q3 and Q4 and then we get back to you know really strong.

Noah Duke Kaye: Sustained high single digit double digit service growth on a go forward basis you might.

Noah Duke Kaye: <unk> talked about this on in a mainland and APAC we've.

Noah Duke Kaye: We've already recovered we're already back seeing double digit orders and growth in a mailer and we see accelerating orders in Asia Pac. So it's a matter of just the timeline and our ability to be able to get that same momentum back in North America.

George R. Oliver: And that's our largest geography. We did, we did make progress in Q2. Thanks George. I think you mentioned in the remarks that Applied and Controls orders in North America were up 50%, nearly 50% of the total. Please confirm that. How concentrated was that in the data center, given the focus? Or was it somewhat more broad-based? Yeah, so that 50% was around HVAC applied, as well as control for North America, North America in terms of orders for this quarter, so a very, very strong momentum. A lot of it came from that data center. Some of the key colos and key hyperscalers are accelerating their orders.

Speaker Change: Thanks George.

Speaker Change: I think you mentioned in the remarks that.

Noah Duke Kaye: Applied.

George R. Oliver: And controls orders in North America were up 50% nearly 50%. So please confirm that how concentrated was that in data center given the focus or was it more broad based yes.

Speaker Change: So that 50% was a around HVAC applied as well as control for North America North America.

Speaker Change: Although this quarter, so very very strong momentum a lot of it came from that data center.

Speaker Change: Some of the key kudos and key IPO scalar.

Speaker Change: Accelerating their oil barrels, but what's also incredible to see the pipeline continued to grow even after a lot of all of those.

George R. Oliver: But what's also incredible to see is the pipeline continues to grow, even after a lot of orders are coming in. We think that momentum is going to continue building, and we're very comfortable about achieving those targets. Thank you. And our next question today comes from Andy Kaplowitz of Citigroup. Please go ahead. Good morning, everyone. Good morning, Andy.

Noah Duke Kaye: Coming in so.

Noah Duke Kaye: Seeing that momentum is going to continue building and we are very comfortable about achieving those targets.

Noah Duke Kaye: Okay.

Noah Duke Kaye: Thank you and our next question today comes from Andy Kaplowitz with Citigroup. Please go ahead.

Andrew Alec Kaplowitz: Morning, everyone.

Andrew Alec Kaplowitz: Good morning, Andy.

Andrew Alec Kaplowitz: George or Marc, can you update us on your progress in terms of improving your margin? And Mila, I know you've talked about all the changes you've made in terms of project selection. Would you say your progress is in line with what you expected, and what's your confidence level that margins should reach double digits by the end of the year? Now, Andy.

Andrew Alec Kaplowitz: George or Mike can you update us on your progress in terms of improving your margin and Emil I know you've talked about all the changes you've made in terms of project selection would you say your progress is in line with what you expected and what's your confidence level that margin should reach double digits by the end of the year.

Marc Vandiepenbeeck: So first, I want to start by saying we are pleased with the performance in EMILA in the second quarter. While it's not yet at par with the regional peers, the rapid progress we made both on backlog growth and margin in such a short period of time is a testament to the transformation and the application of that one end-to-end operating model George was talking about. I'm very proud of what the regional and functional teams have been able to achieve by leveraging further that integrated global business solutions operating model. As you look at the balance of the year, we have two strong tailwinds in EMILA.

Andrew Alec Kaplowitz: No.

Speaker Change: Good question, Andy So first I want to start by saying we are pleased with the performance in EMEA in the second quarter.

Emil: While it is not yet a ball with the regional appeals the rapid progress we've made both on backlog growth and margin in such a short period of time is a testament to the transformation and the application of that one end to end operating model George was talking about I'm very proud of what the regional and functional teams have been able to achieve.

Speaker Change: And by leveraging feel though that that integrated global business solutions operating model and as you look at the balance of the year and we have two strong deal wins in the first one is we.

Marc Vandiepenbeeck: The first one is we see a continuous strong mix that is provided by the obvious growth in service you saw in Q2. And the second one, we continue to improve the older margin rates that are coming in our backlog. And that's really coming from an improved go-to-market strategy we talked about, as well as better commercial discipline. These two factors, combined with the fact that we have the right size of base cost structure, provide us with great visibility to achieve double-digit segment margin and maintain it there towards the end of the year. Thanks for that, Marc.

Speaker Change: See a continued strong mix that is provided by the <unk> growth and so as you saw in Q2 and the second one and we continue to improve the margin rates that are coming into our backlog and that's really coming from an improved go to market strategy, we talked about as well as better outcome there.

Speaker Change: <unk> discipline.

Speaker Change: These two factors combined with the fact that we've right sized or base cost culture provides us with greater visibility to achieve double digit segment margin and it.

Speaker Change: And maintaining the towards the end of the year.

Speaker Change: Thanks for that Mark and then George I, just wanted to follow up on your commentary regarding your pipeline of opportunities in China. It seems like maybe you're undergoing more of a transformation from call. It traditional commercial markets there to to non traditional markets I don't know if that's a fair characterization, but maybe you could comment on that but you also sound confident regarding an order sales are covered by the end of the year.

George R. Oliver: And then, George, I just want to follow up on your commentary regarding your pipeline of opportunities in China. It seems like maybe you're undergoing more of a transformation from, call it, you know, traditional commercial markets there to non-traditional markets. I don't know if that's a fair characterization, but maybe you could comment on that.

George R. Oliver: But you also sound confident regarding an order of sales recovery by the end of the year. So maybe you could elaborate on the risk that the recovery could slip. Yeah, so a year ago, as we were rebuilding after the second wave of cyber attacks, there was a hole, and we were rebuilding our volume there and rebuilding inventory. And if you look at year-on-year in Q1 and Q2, there was a ramp last year, and obviously, we have a tough comparison to that.

Speaker Change: So maybe you could elaborate on the risk that the recovery could could slip.

George R. Oliver: Yeah, So a year ago as we were.

Speaker Change: Rebuilding after the second wave of cyber there was a whole we're rebuilding our volume there and rebuilding inventory and if you look at year on year in Q1 and Q2.

Speaker Change: There was a ramp last year and and obviously, we have a tough compare to that what I would tell you is we are broad base. So we're not just.

George R. Oliver: What I would tell you is we are broad-based, so we're not just in the commercial resi, but we're in all of the end markets. But I would tell you from a market-back perspective, we know where the opportunities are, how we're positioning, how we're deploying each of our technologies, and differentiating the solutions we go to market. We're back, you know, really building, so building not only a very strong pipeline, but we're converting at historical rates as far as how we're converting to orders.

Speaker Change: And the commercial recipe, but it's it's we're in broad based all of the end markets. What I would tell you market back we know where the opportunities are how we are positioning how we're deploying each of our technologies in differentiating the solutions. We go to market. We're back really building so building not only a very strong pipe.

Speaker Change: But we're converting and historical rates as far as how were converting to orders and so that is what gives us confidence that with the backlog. We're building. It's kind of you know is it converts here third and fourth quarter and then the revenue that really we get back to two are on a positive basis by the end of the year.

George R. Oliver: And so that is what gives us confidence that with the backlog we're building, it's going to, you know, as it converts here, in the third and fourth quarters, and then the revenue that we really get back to on a positive basis by the end of the year. We're very bullish on the business. We've got a great product. We've got a great facility there, and it's just making sure that as we reset, you know, with the inventory build that we had last year, that we're now reset to where the market's going to be and, ultimately, how we capitalize on more than our share. Thank you. And our next question today comes from Joe Ritchie with Goldman Sachs. Please go ahead.

Speaker Change: We're very bullish on the businesses, we've got a great. We've got a great product, we've got a great facility there.

Speaker Change: Just making sure that as we reset with the inventory build that we had last year that we're now reset to where the market is going to be in and ultimately how we capitalize on on more than our share.

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

Joseph Alfred Ritchie: Hey, good morning, guys.

Joseph Alfred Ritchie: Hey, good morning, guys. So I have a couple of quick clarifying questions. Just the $33 million product liability charge that you took this quarter, or the product quality charge you took this quarter. Like, what portion of your product portfolio is that actually touching? And just, again, I just want to get some comfort around ring fencing that number.

Joseph Alfred Ritchie: Uh huh.

Joseph Alfred Ritchie: So I have a couple of quick clarifying questions are just that the $33 million a product liability charge that you took this quarter I'm just I guess a product quality charge you took this quarter.

Joseph Alfred Ritchie: Like what portion of your product.

Joseph Alfred Ritchie: Product portfolio does that actually touching and it just I just again I just want to get some comfort around ring fencing that number and then also on the factoring program.

George R. Oliver: And also on the factoring program, you know, how should we be thinking about the impact of factoring through the remainder of the year? On the product, Joe, that's in our fire detection business. It's a sensor that, ultimately, as Marc said, has firmware and a sensor that's a legacy product.

Joseph Alfred Ritchie: Should we be thinking about the impact from factoring out the remainder of the year.

Joseph Alfred Ritchie: So on the on the product Joe that's in our fire detection business, it's a sensor that.

Joseph Alfred Ritchie: Ultimately with as Mark said firm, we're in a sensor that the legacy product.

Marc Vandiepenbeeck: As far as when we look at all the product that's being produced today, it's totally compliant. So it's making sure, based on what we've seen with a couple of failures, making sure that we're addressing that in the legacy product. And as Marc talked about, that's how we kind of estimated what that potential could be, and we're going to be disciplined in how we actually go about remediating that on the factoring and the finance charges.

Joseph Alfred Ritchie: As far as far as when we look at all the product that's being produced today it's.

Joseph Alfred Ritchie: It's totally compliant so it's making sure a based on what we've seen.

Joseph Alfred Ritchie: With a couple of failures, making sure that we're addressing that in the legacy product and and as Mark talked about that's how we kind of estimate of what that potential could be and we're gonna be disciplined in how we actually go about remediated Matt.

Joseph Alfred Ritchie: On the on the factoring in the finance charges.

Marc Vandiepenbeeck: Yeah, the unwind of the factoring will provide some benefit for the balance of the year. But what's an offsetting part of that is the PFAS settlement. As you know, we are going to settle for $750 million, as well as in a slightly higher interest rate environment than we had originally anticipated. But I think the factoring and the cost benefit that it provides gives us confidence that our guidance is at the right level. Got it, okay, that's both helpful clarifications.

Joseph Alfred Ritchie: As you unwind of the factoring will provide some some benefits in the balance of the year.

Joseph Alfred Ritchie: Whats offsetting part of that is the.

Joseph Alfred Ritchie:

Joseph Alfred Ritchie: The P five settlements.

Joseph Alfred Ritchie: No we are going to settle a $750 million.

Joseph Alfred Ritchie: As well as slightly higher interest rate environment than we had originally anticipated, but I think the factoring in the cost benefit that it provides gives us confidence that our guidance is that the right level.

Speaker Change: Got it okay. That's both helpful clarification. Thank you and then my other question was really just around the what's happening with global product mix going forward because it seems like the guidance is baking in.

George R. Oliver: Thank you, and then my other question was really just around what's happening with the global products mix going forward, because it seems like the guidance is baking in a pretty good improvement in global product margins. And I'm just curious, is global products expected to turn mixed positive in the second half? I know it was a headwind this quarter. Just any color on that would be helpful.

Joseph Alfred Ritchie: Pretty good improvement in our global products bargain and I'm just curious like.

Joseph Alfred Ritchie: It is global product it products expected to turn mixed positive in the second half I know it was a headwind this quarter just any color around that would be helpful.

Joseph Alfred Ritchie: You know when you look at global products historically, when you're in a more stable environment year on year, I mean last year, we had a tough year because as we were really working down backlog that had built up oh.

George R. Oliver: You know, when you look at global products historically, when you're in a more stable environment year on year, I mean, last year, we had a tough year because, as we were really working down the backlog that had built up, you know, with all of the supply chain disruption. And then when lead times went back to normal, you know, obviously, we had a shortfall of orders and orders coming in through the year.

Joseph Alfred Ritchie: All of the supply chain disruption and then when lead times went back to normal you know obviously, we were a shortfall of orders and orders coming in through the year.

George R. Oliver: As Marc said, we're back to the normal flow of orders to fulfillment. We've got our lead times down back to where they were. And so, we're seeing good flow right from market demand, orders, building backlog, and then converting. On the margin side, you can imagine when we were disrupted, there were significant costs associated with that disruption. And so, we have been significantly improving productivity as we've recovered. Now, with normal flow and stability, we're getting significant conversion cost productivity. And then with the continued volume increase on the conversion in the second half, that'll lever really nicely in the second half from a margin standpoint.

Joseph Alfred Ritchie: As Mark said, we're back to normal flow of orders to fulfillment.

Joseph Alfred Ritchie: We've got our lead times down back to where they were and so we're seeing good flow right from market demand order is building backlog and then converting on the margin side you can imagine when we were disrupted there was significant cost but that disruption.

Joseph Alfred Ritchie: And so we have been significantly improving the productivity as we've recovered now with normal flow and stability, we're getting significant conversion cost productivity and then with the continued volume increase on the conversion in the second half that will lever really nicely in the second half from a margin standpoint, and then what we've done.

George R. Oliver: And then what we've done across the company, as we went through this cycle, we've taken out significant, significant GNA. And so as we've addressed that across the board and gone to one operating system, we're gonna start to see much better leverage on our GNA structure. And then I would add on mix. What you saw in the quarter, that negative mix of $80 million global product really came from the volume challenge we saw in APAC that really led to an under-absorption global product. Outside of that, the general mix of the product is neutral to the margin global product. What you get is really the lift George just talked about.

Joseph Alfred Ritchie: Across the company as we went through this cycle, we've taken out significant significant G&A and so as we've as we've addressed that across the board and gone to one operating system, we're going to start to see much better leverage on our G&A structure.

Joseph Alfred Ritchie: And then I would add on mix, what you saw in the quarter that negative mix of 80 million. The last global product really came from the volume challenge we saw in APAC that really lead flow.

Joseph Alfred Ritchie: Led to an under absorption and global products.

Joseph Alfred Ritchie: Outside of that the general mix of the product is neutral to the margin global product, what you're getting is really the lift charges just talked about.

Speaker Change: Thank you.

Marc Vandiepenbeeck: Thank you. And our next question today comes from Jeff Sprague of Vertical Research. Please go ahead. Hey, thanks. Good morning, everyone.

Joseph Alfred Ritchie: Today comes from Jeff Sprague of vertical research. Please go ahead.

Jeffrey Todd Sprague: Hey, Thank you good morning, everyone.

Jeffrey Todd Sprague: Hey.

Jeffrey Todd Sprague: Couple of questions. Obviously on the Q4 guide and I know, there's kind of some squiggles around the growth rates and everything but it does seem to me that if Q3 is that low single digit organic growth in Q4 as high single digit eight or nine in the year is closer to three.

Jeffrey Todd Sprague: A couple of questions, obviously, on the Q4 guide, and I know there's kind of some squiggles around the growth rates and everything, but it does seem to me that if Q3 is at low single-digit organic growth and Q4 is high single-digit, eight or nine, then the year is closer to three. So, maybe just to address that, is that kind of what you're thinking? Are you kind of progressing towards the very, you know, low bound of what we might call mid-single-digit for the year?

Jeffrey Todd Sprague: So maybe just to address that is that kind of what you're thinking you're kind of progressing towards the very.

Jeffrey Todd Sprague: Low bound of what we might call mid single digit for the year.

Jeffrey Todd Sprague: I mean, I would think of Q4.

Jeffrey Todd Sprague: I mean, I would think of Q4, in the teens, you know, 10% of growth. And I think you're right, there's a step function change between Q3 and Q4, on the growth standpoint, but I don't think it's that challenging if you see the momentum we see in order. Okay, so just to clarify that, though: somebody asked you if it was low double digits, and then you said high single digits, but now you're saying low double digits.

Jeffrey Todd Sprague: In the in the teens.

Jeffrey Todd Sprague: 10% OXXO growth.

Speaker Change: And I think you're right that there was a step function change between Q3 and Q4 from a growth standpoint, but I don't think it's a E.

Speaker Change: <unk> challenge if you see the the momentum we've seen orders.

Speaker Change: Okay. So just to clarify that this is somebody ask if it was slow double digits and then you said high single digits, but now you're saying.

Speaker Change: Double digits.

Marc Vandiepenbeeck: High single digits to attain the midpoint of where we're guiding. To get to the high end, you would need that 10% growth rate in Q4. I see. Okay. And what was the nature of the goodwill charge in the quarter?

Speaker Change: I single digit to achieve to attain the midpoint of where we are guiding to get to the high end you would need you would need that.

Speaker Change: That 10% growth rate in Q4.

Speaker Change: I see okay, and what was the nature of the goodwill charge in the quarter.

Marc Vandiepenbeeck: That goodwill relates to an impairment charge we took on our subscriber business. That subscriber business sits within our Emilia segment, and it came really from a combination of a small actual result delta versus an internal forecast we had, but it was mostly associated over time with the effect that the Argentinian peso had on the mix of results for that particular business. Then I'll remind you that that impairment is non-cash in terms of what the charge relates to, and it has absolutely no impact on our ability to deliver free cash flow for the bank.

Speaker Change: That goodwill related to an.

Speaker Change: An impairment.

Speaker Change: Charles we took on.

Speaker Change: Subscriber business.

Charles: Subscriber business sits within the EMEA segments and it came really from a combination of a.

Speaker Change: Small actual result delta.

Speaker Change: This is an internal forecast we had but it was mostly associated over time the effect that the Argentinian peso had in the mix of results.

Speaker Change: That particular of that particular business.

Speaker Change: And I'll remind you that that impairment is noncash in terms of what the charges related to any does absolutely no impact on our ability to deliver free cash flow for the balance of the year.

Marc Vandiepenbeeck: And then just a really quick follow-up just on cash. So the PFAS settlement, you're expecting to go out the door here before the end of the year. And are you expecting any insurance recoveries against that in 2024? Or is that more of a kind of protracted negotiation with your insurers?

Speaker Change: And then just a really quick follow up just on cash so that the PFS settlement youre expecting to go out the door here before the end of the year.

Speaker Change: And are you expecting any insurance recoveries against that in 2024, or that's more of a kind of a protracted negotiation with your insurers.

Marc Vandiepenbeeck: Yeah, the PFAS settlement will be in two tranches, the first tranche coming shortly, and the second tranche later in the year. I do not want to speculate on the timing of the recovery of the cash from the insurance. I will tell you we have significant insurance with about 20 insurers. We are doing everything we can to recover as much as we can. We have a line of sight to recovering a very material portion of the settlement, but at this stage, I'm not able to pin down an exact timeline for that recovery. Thank you. And our next question today comes from Gautam Khanna on TV Challenge.

Speaker Change: Yes.

Speaker Change: The pizza sentiment will be two tranche of the FERC tranche coming coming shortly and the second tranche later in the year I do not want to speculate on the timing of the recovery.

Speaker Change: Of the cash from the on the insurance I would tell you. We have significant insurance was about 20 ensure we're doing everything we tend to recover as much as we can we we have a line of sight of the car being a very material portion.

Speaker Change: Of the of the settlements, but at this stage I'm not being able to to pin down an exact timeline on that recovery.

Speaker Change: Thank you next question comes from Gautam Khanna with Cowen. Please go ahead.

Gautam J. Khanna: Yes, thanks, good morning, guys.

Gautam J. Khanna: Please go ahead. Yeah, thanks. Good morning, guys. How are you?

Gautam J. Khanna: Good morning, how are you.

George R. Oliver: Doing well, thanks. Hey, I had a couple questions on the divestment. First, I was curious if you could characterize the level of interest from Potential Tutors, if you could talk about maybe the aggregate tax base, and if you could also speak to any potential dis-energy. If you have any quantification, that would be helpful.

Gautam J. Khanna: Well, Thanks, Hey, I had a couple of questions on <unk> first.

Gautam J. Khanna: First.

Gautam J. Khanna: I was curious if you could characterize the level of interest.

Gautam J. Khanna: Clinical cancer Peter.

Speaker Change: And if you could also speak to any potential synergies.

Speaker Change: If you have any quantification of that that would be helpful. Thank you.

Marc Vandiepenbeeck: Thank you. I mean, I don't want to over-speculate on exactly where we stand. What I'll tell you is that there are different combinations of divestiture structure that we're looking at, and we're simply trying to optimize shareholder value and our ability to return a very large portion of that, the proceeds associated with the divestiture, back to shareholders. The divestiture will require, like any material divestiture, for us to take action around our base cost and our central cost of operating.

Speaker Change: I don't want to speculate on exactly where we're at where we stand what what I would tell you is that deals different combination of.

Speaker Change: Divestiture ill talk show that we are looking at and we're simply trying to optimize shareholder value and our ability to meet on a very large portion of that.

Speaker Change: <unk> associated with the divestiture of Bos back to shareholders.

Speaker Change: The divestiture will require like any material divestiture.

Speaker Change: Just to take action around Oh based costs in all of central costs are abating, we have good line of sight to action that we've already started planning of Rollins.

Marc Vandiepenbeeck: We have a good line of sight to action that. We've already started planning around that. Can you speak to the timing or...

Speaker Change: Can you speak to the timing or.

Speaker Change: The cost basis of the.

Marc Vandiepenbeeck: The tax basis of the asset, so we can have a conversation. At this stage, it'd be very hard for me to pin ourselves down on the timing. We are doing everything to accelerate the process. Depending on how we structure the divestiture, the tax effect will be very different.

Speaker Change: The Apple.

Speaker Change: Okay.

Speaker Change: Okay.

Speaker Change: At this stage it would be very hard for me to pin ourselves down so on the timing we are doing everything to accelerate the process deeper.

Speaker Change: Depending on how we structure the divestiture of the tax effect will be very different. So at this stage that giving you a very wide range of the different options that are being considered from a from a divestiture of structure I don't think it would be helpful. But again, we're doing everything to maximize shareholder value here.

Marc Vandiepenbeeck: So at this stage, giving you a very wide range of the different options that are being considered in a divestiture structure wouldn't be helpful. But again, we're doing everything to maximize shareholder value. Thank you. And our next question today comes from Deane Dray at RBC Capital. Please go ahead.

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

Deane Michael Dray: Thank you and good morning, everyone.

Deane Michael Dray: Thank you. Good morning, everyone. Good morning, Deane.

Deane Michael Dray: Dean.

George R. Oliver: I just want to take another pass at this, the page five data center exhibit, which is terrific, and especially the pie chart at the bottom that shows all the different products and services that JCI offers. And it goes back to Julian's question; it would be really helpful if we could just really rough size some of these categories. So if I said cooling, and I grouped chiller, space, cooling, and monitoring as one bucket, and then fire and security as the other two, would the rough numbers be 60% cooling and then 20 each for fire and security? Would that be in the right neighborhood?

Deane Michael Dray: I just wanted to take another pass at this that page five data center exhibit which is terrific and especially the pie chart at the bottom that does show all the different products and services that <unk> offers.

Deane Michael Dray: And it goes back to Julians question it'd be really helpful. If we could just really rough size. Some of these categories. So if I said cooling and I grouped killer space cooling and monitoring as one bucket and then fire and security as the other two would.

Deane Michael Dray: Wood rough numbers be 60% cooling and then 'twenty each for fire and security would that be the right neighborhood.

George R. Oliver: Yeah, I would say it's about, it's in the range where about two-thirds would be chillers and the others would be air handling, craws, fire security, all of the other systems that ultimately support the deployment of the cooling technology. That's really helpful. And, you know, I think a lot of people think of the security side, just the three levels of access that most of these data centers have. But if you look at just about every row of these data center rooms, there are cameras and fire suppression on every row.

Speaker Change: Yeah, I would say its about its in the range, where about two thirds would be chillers and then the other is would be air handling would be cross would be fire security all of the other.

Deane Michael Dray: Systems that ultimately support the deployment of the cooling technologies.

George R. Oliver: So this is part of your offering, correct? It's absolutely part of the offering. And those very complex solutions, we are really set up with our engineering and our product offering to really leverage that market. And that's where we see the pipeline continuously growing as the complexity and the structure of those data centers continue to increase. Terrific, and just one last quick one for Marc, I know it's still early, but when would be the earliest we might hear some reset working capital metric targets? I think we're still early in the stage, as you mentioned.

Speaker Change: Great. That's really helpful and just I think a lot of people think of the security side, just the three levels of access that most of these data centers have but if you look at just about every row of these data set of rooms, there's a there are cameras and.

George R. Oliver: Fire suppression.

Speaker Change: On every row. So this is part of your offering correct. It's absolutely part of the offering in those very complex solutions.

Deane Michael Dray: We're really set up with our engineering and our product offering.

George R. Oliver: Really leverage that market and that's where we see the the pipeline continuously growing as the complexity and the structure of those data centers continued to decrease and Jane I think it's important to note also from a service standpoint. When you go to one of these sites I mean do you see the installations and all of the equipment.

George R. Oliver: Across the domains what is really strong is our footprint, providing the service and sort of how our teams and are positioned to support all of these large facilities that are being put up and so that's where we see significant opportunity to be able to deploy our systems. So that then from a lifecycle stands.

Jim Lucas: Point, we have the domain expertise deployed to be able to support. These you know these large operations.

Speaker Change: Terrific and just one last quick one for Mark I know, it's still early but when would be the earliest we might hear some reset working capital metric targets.

Marc Vandiepenbeeck: I think we're still early stage as you mentioned, we are looking at next year, and where we are going to deploy all our resources from a from a growth standpoint, I think as we as we closed Q4, we'll probably be able to give you a strong view on on the way we are going to landfill.

Marc Vandiepenbeeck: We are looking at next year and where we're going to deploy our resources from a growth standpoint. I think as we close Q4, we'll probably be able to give you a strong view on where we're going to land for next year, as well as our long-term algo. But I don't think we'll shy away from the comment I made last time that 85% to 90% free cash flow conversion, plus all of the long-term, is really where we should be. Thank you. And our next question today comes from Andrew Obin with Bank of America. Please go ahead.

Andrew Burris Obin: At year as well as a long term algo, but I don't think will shy away from the comments I made last time that the 85% to 90% of free cash flow conversion plus although the long term is really where we're where we should be thinking.

Deane Michael Dray: Okay.

Andrew Burris Obin: Thank you and the next question today comes from Andrew.

Andrew Burris Obin: Please go ahead.

Andrew Burris Obin: Hey, guys. Good morning, Thanks for fitting me in morning, Andrew Good morning, Andrew.

Andrew Burris Obin: Hey, guys. Good morning. Thanks for fitting me in. Morning, Andrew. Morning, Andrew.

George R. Oliver: Just a question. We're looking at macro data, and it seems that labor inflation is picking up again. How are you guys thinking about your contract structure, particularly on the installation side? In the face of inflation, are you sort of giving it any thought? You've clearly cleaned up the balance sheet. It was factoring. This is great. Are you guys giving any thought about sort of resetting the contract structure to maybe adjust for the fact that we're in a higher labor inflation environment for longer? I know it's a big, long question, but I would love to hear your thoughts.

Andrew Burris Obin: Just a question are we looking at macro data and it seems that labor inflation is picking up back again, how are you guys thinking about your contract structure, you know, particularly on the installation side in the face of inflation I use sort of giving any thought you know you've clearly cleaned up the balance sheet was.

Joseph Alfred Ritchie: Factoring. This is great are you guys, giving any thought about sort of resetting the contract structure to maybe adjust for the fact that we are in a higher inflation.

George R. Oliver: Inflation environment for longer.

George R. Oliver: I know its a big of a long question, but would love to hear your thoughts.

George R. Oliver: Thank you. No, what I would say is that when we went through that high inflationary period, obviously, that exposed a lot of our weakness because we had been in a low inflationary period for so long. We built very robust pricing and, you know, costing pricing, and then from a selling standpoint, focusing on value. And so, as we plan long term now, we're factoring in, you know, we're from a costing standpoint, anticipating higher than level prices, higher than the, you know, the kind of market forecast on inflation.

George R. Oliver: Well I would say is when we went through that the high inflationary period, obviously that exposed a lot of our weakness because we were in a low inflationary period for so long, we built very robust pricing and costing pricing and then from a selling standpoint, focusing on value and so on.

George R. Oliver: We plan long term now we're factoring in.

George R. Oliver: We're from a from a costing standpoint, anticipating higher than level higher than the.

George R. Oliver: The kind of a market forecasts on inflation. So we've been factoring that in and then making sure. We have contracts that ultimately gives us the opportunity to be able to to be able to recover longer term on some of the longer term contracts. So we have been and that's been deployed across the globe. What I would say we are very robust.

George R. Oliver: So, we've been factoring that in and then making sure we have contracts that ultimately give us the opportunity to be able to recover longer term on some of the longer term contracts. So, we have been, and that's been deployed across the globe. What I would say is that we have very robust, you know, pricing, costing as we do deal reviews, and making sure that we're going to be positioned to be able to achieve the margin rate that we're booking.

George R. Oliver: Pricing costing as we do deal reviews.

George R. Oliver: And in making sure that we're gonna be positioned to be able to achieve the margin rate that we're booking. So we're now in a situation where we're booking much higher margins and then we're executing at or above those margins on a go forward basis, and that's a big deal and Thats, a big part of our in our solutions business, our ability to be able to deliver.

George R. Oliver: So, we're now in a situation where we're booking much higher margins, and then we're executing at or above those margins on a go forward basis. And that's a big deal, and that's a big part of our ability in our solutions business to be able to deliver stronger margins going forward. Great. And then just a follow-up question. If we look at the bookings on data center, they clearly got a lot of attention, growing 50% plus. What's happening?

George R. Oliver: Stronger margins on going forward.

George R. Oliver: Great.

Speaker Change: Then just a follow up question if we look at the bookings on data center clearly got a lot of attention.

George R. Oliver: Growing 50% plus what's happening.

George R. Oliver: You guys have kind of provided a very nice pie chart of end market breakout can you just highlight what else is doing well and if there are any headwinds are within your key end market verticals on applied thank you.

George R. Oliver: You guys have kindly provided a very nice pie chart of your end market breakouts. Can you just highlight what else is doing well, and if there are any headwinds within your key end market verticals on applied? Thank you.

Speaker Change: Yeah, I mean, what I would say, it's broad based when you look at our applied business right from and we have the full portfolio of technology, whether it be water cooled chillers air cooled Chillers, which obviously is focused on data centers.

George R. Oliver: Yeah, I mean, what I would say it's broad-based when you look at our applied business, you know, right from and we have the full portfolio of technology, whether it be water-cooled chillers, air-cooled chillers, which are obviously focused on data centers, you know, the silent air packaged cooling solutions that we deploy. So when you look at what we see, it's not only data centers, but it's the industrial expansion that we see, you know, pretty much globally, education, it's been some, some government.

George R. Oliver: The filing they are packaged cooling solutions that we deploy.

George R. Oliver: When you look at what we see it's not only data centers, but it's the industrial expansion that we see pretty much globally.

George R. Oliver: Education, it's been some some government and more important as a broad based demand addressing some of the challenges that our customers are having achieving there.

George R. Oliver: And more important, there is broad-based demand addressing some of the challenges that our customers are having in achieving their sustainability goals. And so we can go in and ultimately package a solution. And then with that, be able to get significant savings that actually get, you know, in some cases, a decent payback.

George R. Oliver: Sustainability goals and so we can go in and ultimately packaged solution and then would that be able to get significant savings that actually then get in some cases get a decent payback and so it's broad based in our applied applied business across end market certainly data centers. This is a key driver.

George R. Oliver: And so it's broad-based, and our applied applied business across and market, certainly data centers, is, is a key driver commercially in Europe. I made a comment in the opening remarks about industrial refrigeration growing really fast. There are multiple pockets of the market that are growing, probably not as fast as what we're seeing in the data center, which is really unprecedented, and we continue to see that pipeline grow. But we see pipeline growth across the board. Across the board.

George R. Oliver: Commercially bump in Europe, I made a comment in your opening remarks around industrial refrigeration growing growing really fast there's multiple pockets of the market that are growing faster.

George R. Oliver: That's what we're seeing in data center, which is really unprecedented and continue to see that pipeline growing but we see pipeline growth across the board across the board and then you know what we've learned is technology wins and so we have been investing multi year and our technology differentiation and as we're applying that into the.

George R. Oliver: And then, you know, what we've learned is that technology wins. And so we've been investing for years in our technology differentiation. And as we're applying that to the key verticals, that's what ultimately is delivering the value. Thank you. And our next question today comes from Steve Volkman with Jeffreys. Please go ahead.

Stephen Edward Volkmann: A key verticals, that's what ultimately is delivering the value.

Stephen Edward Volkmann: Thank you and our next question today comes from Steve Volkmann with Jefferies. Please go ahead.

Stephen Edward Volkmann: Great. Thank you guys for fitting me in just a couple of real Big picture questions for me first one you talked about some investments.

Stephen Edward Volkmann: Great. Thank you guys for fitting me in. Just a couple of real big picture questions for me. First one, you talked about some investments in, I guess, product development, etc., but also some capacity. Is there any reason to think there'd be a step change in that as we go to next year? In other words, are there some projects that kind of get done, or is that a good run rate?

Stephen Edward Volkmann: I guess product development et cetera, but also some capacity is there any reason to think there'd be a step change in that as we go to next year in other words are there some projects that kind of get done or is that a good run rate.

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

Speaker Change: Well when you look at our reinvestment and we've been talking about this for multi years.

George R. Oliver: Applied when we look at our applied calling where significant leader in that space across the globe and we've been investing in multi multi generational technologies and if you were to go to our Technology Center in New York, Pennsylvania, Our Jadeite Center, you would see that so we've been significantly elevated reinvestment over the last number.

George R. Oliver: There are years, which is ultimately positioned us with the competitive advantage we have today.

George R. Oliver: So that's going to continue. And then on the capacity side, certainly, we've, you know, from an investment standpoint, we've been, we've got great factories across the globe. And then now we've been scaling those factories to be able to now support this data, you know, what's being driven by data centers, but data center demand. And so we saw it coming. We saw it coming two years ago, and we started that expansion. But obviously, that has accelerated over the last 12 months.

George R. Oliver: In data center, so that's going to continue and then.

George R. Oliver: On the capacity side, certainly we you know what.

George R. Oliver: But from a investment standpoint, we've been we've got great factories across the globe and then now we've been scaling those factories to be able to announce support this data, what's being driven by data centers, but the data center demand and so we saw it coming we saw it come in two years ago, when we started that expansion.

George R. Oliver: But obviously that has accelerated over the last 12 months.

George R. Oliver: And we're strategically engaged with each one of the hyperscalers and colos and understanding exactly what is going to be built here, you know, for many years. And we're positioning to make sure we have the right technologies with the right capacity to then be able to support their build. And so all of that has been factored in, you know, our current run rate of reinvestment.

George R. Oliver: And we're strategically engage with each one of the Hyperscale is in Colo and understanding exactly what is going to be built here multi years and we're positioning to make sure. We have the right as I said earlier, the right technologies with the right capacity to then be able to support their buildup and so all of that has been factored in.

George R. Oliver: Our current run rate of reinvestment.

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 closing remarks, let me wrap up I want to thank everyone for joining us today and I'd like to end the call by highlighting the strong foundation of operational excellence Johnson controls in our value creation.

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

George R. Oliver: <unk> I think we've demonstrated with the disruption in Q1, and then as we've now come back and created momentum in Q2 gives us a lot of confidence that we're beginning to see not only the results, but now more important the opportunity to be able to accelerate here as we go forward.

George R. Oliver: You know, our results demonstrate that we're both capturing the secular trends around sustainability and healthy buildings and that we do have the right strategy and operating system in place that ultimately not only meets our customers' needs as a preferred partner but certainly elevates the ability to return and create returns for our shareholders. So we are very excited about what is to come and what we see now playing out. We believe that we are poised to continue creating value for our shareholders, and we all look forward to continuing to engaging with all of you here over the next days and weeks as we continue to excel.

George R. Oliver: Our results demonstrate that we're both capturing the secular trends around sustainability and healthy buildings and that we do have the right strategy and operating system in place that ultimately not only meets our customers needs as a preferred partner, but certainly elevates the ability to be able to return.

George R. Oliver: Great returns for our shareholders. So we are very excited about what is to come and what we see now playing out we believe that we are poised to continue creating value for our shareholders and we all look forward to continuing engaging with all of you here over the next days and weeks.

Speaker Change: We continue to execute so with that operator that concludes our call.

George R. Oliver: So with that, operator, that concludes our call. Thank you, sir. You may now disconnect your lines and have a wonderful evening. Thank you.

Speaker Change: Thank you Sir.

George R. Oliver: You may now disconnect your lines and have a wonderful evening. Thank you.

George R. Oliver: [music].