Q4 2024 Johnson Controls International PLC Earnings Call
Speaker Change: Good morning and welcome to the Johnson Controls 4th quarter, 2024 earnings conference call.
Speaker Change: Today, all participants will be an at-listen-only mode. Should you need assistance during today's call, please signal for a conference specialist by pressing the star key followed by zero.
Speaker Change: After today's presentation, there will be an opportunity to ask questions. To ask a question you may press star than one on your telephone keypad. To withdraw your question, please press star than two. Please note that today's event is being recorded.
Speaker Change: and we're not like to turn the conference over to Jim Lucas by President of the Investor Relations.
Jim Lucas: Please go ahead. Good morning, and thank you for joining our conference call to discuss Johnson Controls fiscal fourth quarter 2024 results
Jim Lucas: 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.
Jim Lucas: Before we begin, let me remind you that during our presentation today, we will make forward-looking statements. Actual results may differ materially from those indicated by forward-looking statements due to a variety of risks and uncertainties.
Jim Lucas: Please 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.
Jim Lucas: I will now turn the call over to George. Thanks, Jim, and good morning, everyone. Thank you for joining us on the call today. I would like to start today's call by taking a moment to acknowledge and thank all of our employees for their contributions in delivering strong quarterly results.
Jim Lucas: We also made significant progress in our transformation to simplify our portfolio and become a pure play provider of comprehensive solutions for commercial buildings.
Jim Lucas: Today, we are a faster-growing, more profitable, simpler company.
Jim Lucas: Let's begin with slide 4. We ended fiscal 2024 with momentum, delivering double-digit organic revenue growth, robust margin expansion, and 96% adjusted free cash flow conversion.
Jim Lucas: Order growth of 7% in the year was led by data center demand and contributed to our record backlog, which ended the year at $13.1 billion.
Jim Lucas: Our differentiated solutions to enhance efficiency and sustainability in commercial buildings continue to resonate with our customers across the key verticals we serve.
Jim Lucas: For example, we extended our leading position in cooling for data centers, with orders for the full year more than doubling the sales we delivered. In fact, we are now seeing key customers placing multi-year orders in the hundreds of millions of dollars to provide cooling solutions.
Jim Lucas: Our pending sale of the residential and light commercial business to Bosch is progressing, and we expect the transaction to close in the fiscal fourth quarter.
Jim Lucas: Today we are introducing our fiscal 2025 guidance from continuing operations of $3.40 to $3.50, which Marc will give more details on later in the call. We believe we are well positioned going forward to deliver long-term shareholder value.
Jim Lucas: Our business transformation is almost complete, and we are benefiting from more consistent, predictable performance.
Jim Lucas: Slide 5 presents a pro forma look at the new Johnson Controls, representing the composition of our company going forward.
Jim Lucas: Today, Johnson Controls is a leader in building solutions dedicated to solving our customers needs for energy efficiency and clean electrification.
Jim Lucas: Our innovative approach and commitment to sustainability are driving us forward, ensuring we provide cutting-edge solutions that meet the evolving demands of the market.
Jim Lucas: Johnson & Control's unique customer value proposition directly translates to shareholder value creation.
Jim Lucas: Our multi-domain presence enables us to serve our customers over the building life cycle while also delivering safe, healthy, and sustainable solutions.
Jim Lucas: This means we can meet the needs of our customers all over the world and deliver cost savings and efficiencies for them.
Jim Lucas: We are confident we are well positioned with the integrated domain expertise in an extensive branch network to deliver greater value to our customers. In turn, we believe this will lead to sustained top-line growth and significant margin expansion.
Jim Lucas: As part of our path towards simplification, we have now deployed one end-to-end operating model that we leverage globally across all of our key verticals.
Jim Lucas: This is positioning us with a unique capability in serving buildings and leveraging our digital expertise to expand our connected services model.
Jim Lucas: We are improving productivity on behalf of our customers, helping them maximize outcomes for their buildings.
Jim Lucas: Whether it is the fast-growing data centers, expansion of campus housing and labs in higher education, or solving needs across healthcare from hospitals to outpatient facilities, we deliver engineered solutions across all of our key verticals.
Jim Lucas: This enables us to realize the benefits of this model over the life cycle of our solutions, ensuring sustained value creation.
Jim Lucas: Johns Controls is better positioned than ever before to help customers create safer, more sustainable buildings, while also maximizing the occupant experience.
Jim Lucas: Our strong finish to fiscal 2024, coupled with a record backlog, reinforces our confidence that Jones Controls will continue to lead globally in building solutions.
Jim Lucas: With that, I'll turn it over to Marc. Thanks, George, and good morning, everyone. Please turn to slide 6.
Marc Vandiepenbeeck: Our performance in the fourth quarter highlights continuous strong execution across the portfolio.
Marc Vandiepenbeeck: Our single end-to-end operating model provides the visibility needed to drive consistent and predictable results.
Jim Lucas: This was evident in our performance in the quarter as organic revenue grew 10% and segment margin expanded a robust 260 basis points to 18.6%, led by substantial improvement in both EMILA and global products.
Jim Lucas: We delivered another strong quarter of increased productivity while converting our higher margin backlog.
Jim Lucas: Adjusted EPS of $1.28 was up 22% year-over-year and exceeded the high-end of our guidance range by two cents. Our operational efficiency contributed to the majority of the growth and more than offset additional corporate expenditure primarily related to IT investments.
Jim Lucas: The strategic allocation of resources ensures we are well equipped to support our growth and safeguard our infrastructure.
Jim Lucas: Below the line, net finance charges were higher, while EPS benefited from a lower share count. Overall, we achieved significant EPS growth and we are pleased with these results.
Jim Lucas: On the balance sheet, we ended the first quarter with approximately $600 million in available cash and net debt decreased to two times, which is the lower end of our long-term target of 2 to 2.5 times.
Jim Lucas: Our adjusted free cash flow conversion of 96% was a strong improvement year over year and substantially exceeded our previous commitments.
Jim Lucas: This trend is reflecting our improved fundamentals in working capital management.
Jim Lucas: Adjusted free cash flow of $2.4 billion improved nearly $800 million year-over-year. For the full year, we returned $2.2 billion to shareholders via dividends and share repurchases.
Speaker Change: Let's now discuss our segment results in more details on slides 7 through 9. Beginning on slide 7, our global product business has a strong finish to the year. Organic sales grew 8% as price remained positive and we delivered 5 points of volume growth.
Jim Lucas: Low double-digit growth in HVAC, both commercial and residential, offset declines in fire and security and industrial refrigeration.
Jim Lucas: Strength was broad-based across the region, led by double-digit growth in North America.
Jim Lucas: Adjusted segment EBITDA margin expanded in present 700 basis points to 28%. We have made tremendous progress over the past year in improving our operational efficiencies, leading to substantial margin improvement experienced in the fiscal second half.
Jim Lucas: Turning to slide 8 and 9 to discuss our building solutions performance.
Jim Lucas: Building solutions deliver a solid performance this quarter, underpinned by sustained order momentum, double-digit revenue growth, and margin expansion.
Jim Lucas: Additionally, we increased our record backlog, which remains at historical levels, and underscored the strength of our business model.
Jim Lucas: Our outcome-driven solution offerings continue to resonate with our customers across many of the attractive vertical reserves.
Jim Lucas: with strong growth in data center, government, healthcare, and higher ed.
Jim Lucas: Orders grew 8% in the quarter, led by mid-team service growth, while system order grew 5%, again a tough double-digit comparison.
Jim Lucas: Orders in North America increased 7% in the quarter, with low-teen growth in service, led by strength in fire and security.
Jim Lucas: System orders grew 3% against the tough comp. In Emila, orders were at 14%, with over 20% growth in service, while system orders grew 9%.
Jim Lucas: Across the portfolio, we saw strong double-digit growth in HVAC controls and industrial refrigeration.
Jim Lucas: In Asia-Pacific, momentum is building as orders rebounded from the past few quarters of decline. Overall, orders grew 6%, led by 9% growth in service.
Jim Lucas: Our pipeline of opportunities within building solutions remains healthy as we continue to build on the momentum of the past several quarters.
Jim Lucas: Our building solutions segment entered the quarter with a record backlog, which provided a solid foundation, enabling us to capitalize on high demand for solutions and services.
Jim Lucas: Organic sales increased 11% led by double-digit growth across both systems and service.
Jim Lucas: Our sustained service growth sets us apart as we continue to deliver differentiated life-cycle solutions for our customers.
Jim Lucas: Sales in North America were up 16% organically with continued strength across HVAC and controls.
Jim Lucas: In Emila, organic sales grew 10% with double-digit growth in control, security, and industrial refrigeration.
Jim Lucas: In Asia-Pacific, while sales declined 5%, we saw sequential improvements. This improvement was driven by a stronger backlog in our resilience service business.
Jim Lucas: The margin profile within our building solution segment continues to strengthen due to the enhanced productivity, favorable service mix, and the improved operational efficiencies while executing our higher margin backlog.
Jim Lucas: By region, a MILA-adjusted segment EBDA margin expanded 370 basis points to 11.5%, driven by improved productivity and a positive mix from growth in service.
Jim Lucas: In APAC, adjusted margin expanded 70 basis points to 14.2%, a positive mix from our service business offset a decline in systems business.
Jim Lucas: In North America, adjusted segment margin declined 40 basis points to 15% related to mix as systems grew faster than servers.
Jim Lucas: Building solution backlog remained at record level, growing 7% to 13.1 billion. Service backlog grew 12% and system backlog grew 6% year-over-year. Let's discuss our first quarter and fiscal 2025 guidance and the impact of this continued operation on slide 10 and 11.
Jim Lucas: We are entering fiscal 2025 with momentum and our record backlog offers great visibility into the new year. Our service business remains well positioned and provides a favorable mix to margins.
Jim Lucas: As we look to our guidance for fiscal 2025, we will be presenting both the first quarter and the full year on a continuing operations basis.
Jim Lucas: After moving the residential and light commercial business to discontinued operation, our Fiscal 2024 Continuing Operation Adjusted EPS is $3.21 per share.
Jim Lucas: For the first quarter, we anticipate organic sales growth of mid-single digits.
Jim Lucas: adjusted segment margin expansion of over a hundred basis points to approximately 14.5% and adjusted EPS in the range of 57 to 60 cents representing 24 to 30 percent growth
Jim Lucas: While the first quarter is against an easy comparison, the overall fundamentals are strong entering the year.
Jim Lucas: For the full year, we expect organic sales growth of mid-single digits, which is consistent with our long-term growth algorithm. At just a segment-day margin, I expect it to expand over 50 basis points.
Jim Lucas: Our adjusted EPS range of $3.40 to $3.50 per share represents 6% to 9% growth.
Jim Lucas: We expect free cash flow conversion of 85% or greater, consistent with the performance of fiscal 2024 on a continuing operations basis.
Jim Lucas: We continue to target returning 100% of our free cash flow to shareholders through dividend and share repurchases.
Jim Lucas: We expect the residential and light commercial divestiture to close during the fiscal fourth quarter.
Jim Lucas: Consequently, we have not included any capital deployment from sales proceeds in our fiscal 2025 outlook.
Jim Lucas: Additionally, we are committing to a multi-year restructuring plan to address trended costs and further right side of global operations.
Jim Lucas: following our previously announced portfolio simplification actions.
Jim Lucas: We anticipate incurring roughly $400 million in expenses over the next three years, resulting in expected annual cost savings of approximately $500 million.
Jim Lucas: Similar to the timing of deploying capital from the closure of the residential and light commercial divestiture, many aspects of this restructuring plan will depend on the timing of the close of the transaction.
Jim Lucas: We are confident this factor will drive sustained success and create long-term value to our stakeholders.
Jim Lucas: while fiscal 2024 was a year of significant portfolio transformation.
Jim Lucas: We are better positioned as a faster-growing, more profitable, simplified company.
Jim Lucas: We look forward to updating you on our progress as we continue our strong momentum entering fiscal year 25. With that, Operator, please open the lines for questions.
Speaker Change: Thank you. We will now begin the question and answer session. As a reminder, to ask a question, you may press star then 1 on your touch-tone phone.
Speaker Change: If you are using a speakerphone, please pick up your handset before pressing the keys.
Jim Lucas: If your question has been asked and you would like to withdraw it, please press star, then two. In respect of time, we ask that you limit yourself to one question and one follow-up question.
Jim Lucas: At this time, we will pause momentarily to assemble our roster.
Speaker Change: Thanks for watching!
Speaker Change: And today's first question comes from Nigel Coe with Wolf Research. Please proceed.
Jim Lucas: Thank you for watching!
Jim Lucas: Thank you for watching!
Jim Lucas: And Mr. Ko, your line is open, you may ask your question.
Nigel Coe: Oh, good morning. Sorry, I had the mute button there. Thanks for the question. So, I think, Marc, this question is for you. The mid-single digits...
Nigel Coe: How do you see that across the segments? I'm assuming APAC probably is a bit above that.
Nigel Coe: So just curious how you see missing letters across the segments and any color.
Nigel Coe: on 50Bips again across segments and I just want to verify obviously the restatements are happening within global products.
Nigel Coe: and it looks like the clean...
Nigel Coe: EBITDA margins in 2023-2024 were 25.7% and 27.1% ex-Hitachi and York, so I just want to make sure those are the right numbers.
Nigel Coe: Thanks for watching!
Speaker Change: Good morning, Nigel, I'd love to cover that. So first on growth.
Speaker Change: We had a very strong growth quarter and very happy with the results. But we're entering the new year with a record backlog of about $13.1 billion.
Nigel Coe: And I think we continue to target that full-performance single-digit. Granted, we have a lot of confidence given the level of backlog we are. As you know, the timing on some of the larger projects can impact quarter-over-quarter growth rates.
Nigel Coe: And I think we are seeing some very strong tailwinds in the core vertical.
Nigel Coe: Now if you think by segment how that growth rate in mid-single-digit is going to break down
Nigel Coe: We think APAC is going to be slightly above that overall guide for the enterprise.
Nigel Coe: really on an easier compare and as we showed in the fourth quarter we're starting to see sequential order growth for that business. And the rest of the businesses North America and Milan or global product will be at or just slightly below that that overall guide throughout throughout the year.
Speaker Change: Now, when it comes to margin, and I hear you both on the total margin and the continued operation basis, global product margin.
Nigel Coe: What we covered in the last quarter when we gave guidance for Q4 is
Nigel Coe: with the base cost and how we dealt with that base cost within that business.
Nigel Coe: and a lot of the disruption from a supply chain standpoint being behind us.
Nigel Coe: A little bit of volume was going to go a long way, and you saw that in Q4. And I think that's going to remain true as we enter fiscal year 25.
Nigel Coe: We've been driving significant operational efficiencies that are structural and fundamental across both the manufacturing base and the supply chain.
Nigel Coe: and you can see that global product business has benefited and we continue to see benefits.
Nigel Coe: from an improved absorption, and that leverage will continue to provide easier come year-on-year. Now that business has some seasonality to it, so the first part of the year will be a little bit softer than the second part of the year, but that margin, we feel, is very well set.
Nigel Coe: for Fiscal Year 25.
Speaker Change: And just want to make sure I've got the...
Nigel Coe: Yeah, for the global products margins and...
Nigel Coe: I'm just wondering, George, maybe if you could comment on the CEO succession, what progress has been made to identifying the right person to replace you when you retire?
Speaker Change: You know at this time we don't have any new updates to share. You can be rest assured that the board is actively considering an impressive list of candidates both internal and external and we do expect to have an update in the first half of calendar 2025.
Speaker Change: And today's next question comes from Steve Tussa with J.P. Morgan. Please proceed.
Speaker Change: Go to Beadaholique.com for all of your beading supply needs!
Steve Tussa: Hi, good morning. Morning, Steve.
Steve Tussa: Sorry, just wanted to better understand that the first quarter, I'm not quite sure if the guide you just gave was for the year or the first quarter, but I mean with orders.
Nigel Coe: Trending up eight with your organic being so strong this quarter and the comp not looking particularly hard What what is the reason why first quarter is only up mid singles in organic? specifically
Speaker Change: Yes, so if you think about the timing of some of those larger orders and how their revenue, particularly the big verticals that we're benefiting from, whether it's large decarbonization projects.
Nigel Coe: of the Data Center Project.
Nigel Coe: We had very strong performance in the fourth quarter in those particular verticals. And that quarter being the busiest season for service business, we also had very strong performance there with double digits.
Nigel Coe: service growth. While that's probably sustainable over the long term, there's some quarter-to-quarter volatility to that, and so a mid-single-digit growth for Q1, you know, granted on an easier compare versus last year, is where we feel comfortable really coming places here. North America will see some strong performance.
Nigel Coe: probably a little bit higher than that mid-single digit. But both SEMILA and APAC, as well as Global Product, will be right in line with that mid-single digit or slightly lower. And I think that's where we feel comfortable, where the growth is going to come next quarter.
Speaker Change: Okay and then can we just get for the for the refresh portfolio what percentage of revenue now is data center that you expect in 25?
Speaker Change: Consistent with what we said prior, give or take a little bit, our data center exposure is about 10% of our revenue and continues to grow faster than the rest of the portfolio, with very solid double-digit growth sequentially, at least for the foreseeable future.
Speaker Change: Okay, and then...
Speaker Change: Our next question comes from Scott Davis with Milius Research. Please proceed.
Scott Davis: Hey, good morning, George and Marc and Jim.
Speaker Change: Good night, guys.
Scott Davis: When you get a big data center order and you do an install, does it typically come with a similar kind of attachment, service attachment array in open blue that you would have in the building or is it, is there a different kind of?
Speaker Change: you know, attachment right there.
Speaker Change: Very good question, Scott. The service overall is slightly better than our portfolio from an attached rate standpoint.
Speaker Change: The digital services really depends on the type of customer. You know, that particular vertical is...
Speaker Change: is very, very strong and better than the rest of the portfolio. And it's changed a lot, I'll tell you, over the last probably five or six years, where that vertical probably five or six years ago was not very high service-attached.
Speaker Change: where a lot of those key customers have taken the view that they wanted to self-serve, some of that. I think what they've learned with the complexity and also the quality of our capabilities, we are really able to differentiate ourselves and provide a full suite of service with guaranteed outcomes for those customers. Scott, what I would tell you is the short term, the trend is significantly up because as you look at these data center sites,
Speaker Change: You know, we have hundreds of units deployed on these sites.
Speaker Change: and we have dozens of our technicians that are supporting these operations and we've made the case that when we have connectivity, number one is not only are we more efficient in how we serve them,
Speaker Change: But we can be very proactive in making sure we're maintaining the overall operation. So the trend is actually significantly up because of that.
Speaker Change: That's helpful, guys. And just...
Speaker Change: Now that you've had another quarter of seeing big orders come through and such, how would you compare kind of the pricing power in that vertical to the traditional building segment? Is it a little bit better because it's more complex or is it more comparable because honestly everything applied isn't that easy?
Speaker Change: drive good pricing. The way we've approached the data center vertical is we've really embedded our engineering resource with those customers.
Speaker Change: to try and solve really high up the value chain, the problems they're trying to solve for when it comes to heating, cooling, as well as the way they control and the fire and security of their buildings.
Speaker Change: So across the board, if you compare probably the margin of those particular vertical businesses vis-a-vis the rest of the market, it's probably slightly more than what you see. Now, it's going to continue to evolve as a market over the next few months and years. We've developed differentiated solutions from our peers that allow us to commend a little bit more price.
Speaker Change: and we're expecting that to continue to drive a better margin profile than the more traditional applied equipment business.
Speaker Change: And I would add to that also, on the product side, we've been ahead of the curve with our reinvestment in product.
Speaker Change: And so as we've been differentiating our product and getting position for the next generation of data centers, I believe that we're positioned extremely well with that value proposition. So we believe that the margin profile that we've been able to achieve with what we've done to date is going to continue to improve going forward.
Speaker Change: And today's next question comes from Julian Mitchell with Barclays. Please proceed.
Julian Mitchell: Hi, good morning.
Julian Mitchell: savings and how much of that is reflected in the 2025 operating margin guide and similarly on the I think 400 or so of costs for that program how much is in the free cash flow guide for the current year.
Speaker Change: Great question and good morning, Julian.
Speaker Change: So, as with any significant change to a business portfolio, like the diversity of the residential and commercial, we've been pursuing opportunities to refine our business structure and our operating model better.
Speaker Change: to really facilitate how we deploy resources in a simpler, more clear, and quicker to market.
Speaker Change: And we've been driving many different aspects of that restructuring as we go through that. As you know, we still have a business to run until the transaction closes. So some of the timing of that cost is going to be hard to predict because it's very attached to the timing of...
Speaker Change: the closing of the transaction, but, you know, as any restructuring, we expect the restructuring costs to come ahead of the restructuring benefits. So the $400 million will come ahead of the $500 million. It's not a one-to-one perfectly timed.
Speaker Change: structure. As we looked at the free cash flow conversion guide for the year, we've included a substantial amount.
Speaker Change: of that $400 million into our guide for fiscal year 2025, which is kind of one of the large structural headwinds we have for the year, alongside some, you know, capex reinvestments and our traditional delta between effective tax rates and cash tax rates.
Speaker Change: But there's a large portion of restructuring, probably right around half of that, that is including in our guide for fiscal year 25.
Speaker Change: and Jim Lucas. Thank you.
Speaker Change: Thank you. Bye. Bye. Bye.
Speaker Change: And today's next question comes from Chris Snyder with Morgan Stanley. Please proceed.
Chris Snyder: Thank you. I wanted to ask about North America building solution margins and kind of the outlook into 25. So, you know, clearly a lot of pressure on the segment in Q4 on that systems mix.
Speaker Change: It sounds like that's supposed to kind of normalize Into the first half of the year, I guess really through fiscal 25 So can you talk about what that can mean for building solution margins as that mixed headwind goes away and what's in the guide for that?
Speaker Change: Now, thanks for the question, Chris. Great question. Yeah, it is. I wouldn't say it's material and margin pressure, but you saw North America in the quarter growing extremely rapidly on the back end of those larger projects.
Speaker Change: of those large data center and new energy projects.
Speaker Change: and decarbonization project that the team completed in the quarter. And so if you look forward...
Speaker Change: The variation you're going to get quarter-on-quarter on this project will remain, but the headwind that it creates will tail off, especially as we move towards the year, because the net effect of service and the service attachment rate as all the projects come live and we start revenuing.
Speaker Change: the service on this particular system project will start supporting an improved margin rate.
Speaker Change: And today's next question comes from Joe Ritchie with Goldman Sachs. Please proceed.
Joe Ritchie: Hey guys, good morning. Morning, Joe.
Joe Ritchie: Hey Marc, maybe just kind of focusing on global products for a second. I think you guys said a little volume goes a long way but these are margins that candidly like we haven't seen before and so maybe just kind of dovetailing that question that that Nigel had earlier as well.
Speaker Change: Was there anything kind of one-off in the margins this quarter and then really just trying to understand what the right jumping off point is for 2025? So what was like the pro forma global products margins for 2024 so that we have we have that locked in as we think about next year? Thank you.
Speaker Change: Very fair question, Joe.
Speaker Change: No, there's no really one-timer or mixed effect of any particular one deal that really held that margin. It's really back to the structural work we did and the team did in a global product over the past 12 months that really set up that business to be able to drive significant operational efficiencies.
Speaker Change: If you want to think about that business from a pro-forma, continued operation margin, I would say...
Speaker Change: Take the 20% margin rate and I would say the first half of the year will be on one side of that margin rate and the second half of the year will drive
Speaker Change: well above that 20% margin rate. And I think that business now that has been operating much more efficiently and much more focused as well, will be able to continuously perform at that level, if not better.
Speaker Change: Thank you.
Speaker Change: And our next question comes from Vlad Bystrisky with Citigroup. Please proceed.
Speaker Change: Thank you. Bye. Bye.
Speaker Change: Hello, sir. Your line is open. You may ask your question.
Speaker Change: And Mr. Beistrisky, your line is open. You may ask your question.
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Speaker Change: And Mr. Sprague, your line is open. You may proceed and ask your question.
Speaker Change: Thank you, good morning everyone. Maybe this kind of a multi-part question on some of the non-operating items here, so to speak. First, just on corporate, it's kind of interesting that it's...
Speaker Change: You know nominally roughly the same dollars 430 million ish in both cases I thought the stranded friction would show up there some so maybe some color on on that And also what's what's taking the tax rate down to 12?
Speaker Change: And Marc, I think some of the...
Speaker Change: Global changes had you believing your tax rate would actually, you know, be drifting up and instead we're stepping down here So maybe you could give a little color on that and I just finally the share count Seems to just imply
Speaker Change: You're buying back stock, kind of pay as you go, as the cash comes in the door over the balance of the year. Is that correct?
Speaker Change: So it's just a regular pay-as-you-go, return-to-shareholder, 100% of our free cash flow.
Speaker Change: Now, on your couple of questions, the corporate expenses...
Speaker Change: It's flat here on the ear. You would have expected it to be a little higher. We've done a lot of work to lower that cost, but we've made also a couple of...
Speaker Change: substantial investment in hardening of cyber security and IT infrastructure, as well as we're left with those trended costs that while we want to take action on them, we need to pace and time some of those actions with the timing of the divestiture of the residential and like commercial business. We still have a
Speaker Change: A business we've got to take care of and we need to continue to provide support for that business.
Speaker Change: Now, on your question on the continued, on the CO tax rate, on the continued operation tax rate.
Speaker Change: We are seeing 100 basis points of pressure year-on-year. So if you look at pure CO rates, we were at about 11%.
Speaker Change: in fiscal year 24 and it's stepping up to 12. You're right, I have indicated that I felt we were probably going to see a little bit more pressure than that and as we were seeing the residential night commercial transaction happening we started planning around that and prepared for for that particular headwind and that allows us to manage a little bit better the rate for 2025. Now in all transparency as you look at 2026 and beyond
Speaker Change: We see quite a bit of pressure on that rate because of global mean tax rates and the tax reform globally that have happened. We probably see 400 to 500 basis points.
Speaker Change: to that 12% for fiscal year 26 as the planning and the closing of that transaction on residential commercial will be behind us.
Speaker Change: And the next question comes from Andrew Obin with Bank of America. Please proceed.
Andrew Obin: Yes, good morning. Good morning, Andrew. Good morning. Just a question. Can we just get more color on applied sales in North America by key verticals? I know the focus is on data centers, but what are you seeing elsewhere? What stands out positively or negatively?
Speaker Change: There's four or five verticals that are really supportive. Of course, data center is one of the critical ones.
Speaker Change: But whether it's healthcare, hospitals, where we're seeing a strong pick-up, there's still a lot of activity associated with manufacturing and new energy. The real showing of some of the battery manufacturing has been a great help to our business.
Speaker Change: some of the spaces associated with the post-pandemic reallocation of all that office space. It creates opportunity across the domain, not just for Appli to be able to drive new opportunities throughout the market.
Speaker Change: And the next question comes from Dean Dre with RBC Capital Markets. Please proceed.
Dean Dre: Thank you. Good morning, everyone.
Dean Dre: Questions about the free cash flow guide.
Dean Dre: Resi and like commercial out structurally lower working capital But just how does that play out and support the 85%? Conversion and then I noticed you put it in twice longer term goal of a hundred percent conversion
Speaker Change: Marc, just structurally, what has to change to get you to that threshold? Thank you.
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Speaker Change: Yeah, just to be clear, what was in the prepared comment is a 100% free cash flow return to shareholders, not a 100% free cash flow conversion. Now, longer term, I'm willing to tell you that we will be better than 85%, but we have some structural headwind that we've got to continuously...
Speaker Change: deal with. From a trade-working capital, it's not a lower trade-working capital, so trade-working capital is going to continue to be a tailwind and support an improvement in our free cash flow conversion. However, there's two or three structural headwinds.
Speaker Change: that become a little bit more weighted to our free cash flow conversion.
Speaker Change: as we separate from the residential and commercial business that had some structural benefits.
Speaker Change: were accretive, if you like, to free cash flow conversion.
Speaker Change: align with the pre-cash flow generation of that business.
Speaker Change: But outside of the discontinued operation, on a continued operation basis to get to 85, there's a couple of structural headwinds. The first one is the restructuring we talked about earlier with Julian, as well as we continue to make substantial capex investments.
Speaker Change: to continue to increase our data center capacity with the goal to doubling it and maybe beyond as we continue to see opportunities in the market. And then finally...
Speaker Change: The Delta in the effective tax rate, right, between our cash tax rate and our effective tax rate is continuing to stay at that, you know, 8 to 10% level. I see that coming down as we see pressure on the effective tax rate, but I don't see that much pressure actually on our cash tax rate, but 4.25, as we look at it, this will be a headwind.
Speaker Change: And the next question is a follow-up from Steve Tussa with JP Morgan. Please proceed.
Steve Tussa: Hey, sorry about that. No problem. I just wanted to make sure my math was right on this global products margin. I mean, we have about just backing out, you know, continuing ops, sales.
Steve Tussa: from, you know, what you guys reported this year is about five billion in revenues for that kind of Remainco and cheap and global products. Is that right as a starting point?
Speaker Change: The remainco of global product is probably going to be a little bit less than 5 billion dollars, I would say.
Speaker Change: Okay, so then if I divide that by the one for whatever number that you gave as a continuing ops for global products profits?
Speaker Change: I think that's in the slides. That's a high 20s margin, not 20% that you're talking about. Am I missing something there?
Speaker Change: No, so I didn't say 20%. I said the first half will probably be on one side of 20% and the second half will be on the other side of 20%, but much, much higher than the 20%.
Speaker Change: Okay, so but but the 28 on a pro forma basis ish 27 28 is the right kind of base
Speaker Change: in this year and there's nothing unusual about that so we should assume that you can leverage volume on that? We can absolutely leverage volume on that and I think that's the right ballpark, yeah.
Speaker Change: Okay, and then lastly, sorry, just on data center, you broke up a little bit there. Did you say 15% or 10% data center exposure? Ten.
Speaker Change: And our next question comes from Nicole DeBlaise with Deutsche Bank, please proceed
Nicole DeBlaise: Yeah, thanks. Good morning, guys.
Nicole DeBlaise: So just a question on, I guess, order growth and backlog. When you guys put together the outlook for fiscal 25, does the expectation that, you know, backlog starts to come down from these record levels, or do you think it kind of remains consistent through the year? Thank you.
Speaker Change: Well, it's going to depend a little bit on the mix of jobs we're going to book in the year and how strong will be the data center vertical, but assuming the trend line we're seeing as well as the growth in the pipeline of opportunities we see in the market.
Speaker Change: We see that backlog continuing to improve and the margin continuing to solidify. So I think the trend is going to be strong in growth in the backlog. That's why we are very comfortable with that mid-single-digit revenue growth as we're going to be able to drive a lot of revenue out of that backlog.
Speaker Change: And the next question comes from Joe O'Day with Wells Fargo. Please proceed.
Speaker Change: Thank you for watching. Please subscribe to my channel. I'm your host, Marc Vandiepenbeeck.
Joe O'Day: Hi, good morning. On slide 5 in the revenue mix, it looks like maybe 15% or so indirect. Could you just talk about the end market exposure within that, how you think about that fit within the portfolio on a go-forward basis?
Speaker Change: And then, Marc, just with the restructuring announcement today, and as you think about proceeds toward the end of the year, just any perspective on, you know, how you're thinking about kind of offsetting the exits dilution and sort of timing objectives around achieving that.
Joe O'Day: Yeah.
Speaker Change: So on the mixture
Speaker Change: All of it, all of it.
Speaker Change: We view a whole operating model as an integrated operating model, so for every market
Speaker Change: every vertical, we segment the market.
Speaker Change: byproducts, sometimes by brand even, and we make sure that we get to a full entitlement from a market share standpoint. And so for some markets where we see an ability to both sell value, create high service attach rates,
Speaker Change: and being able to drive the life cycle value of those products in the buildings we're in, we're always going to choose our direct channel and our branches are going to do the vast majority of the work. Now there's parts of the markets where maybe it's harder to sell value or that's not where the customer wants to meet us.
Speaker Change: All the life cycle value comes in a different profile either because of the application of the building itself, the type of vertical it addresses, or just simply the complexity of that market. It's a more commoditized part of the market.
Speaker Change: more mid to low end of the market, and there we use and leverage highly or indirect channels for distribution and sales partner where we're able to hit mostly the mid to lower end of the market and try and stay away from that more larger complex part of the market.
Speaker Change: Now the second part of your question on capital and restructuring and our ability to offset dilution.
Speaker Change: The capital deployment plan is going to be, you know, very similar to what we've done historically when we've had large divestiture. And you can see how we took that approach, for example, in 2019 when we divested of our battery power solutions business. The goal is going to be able to return as quickly and as efficiently as possible the proceeds of the divestiture. As we see a clear line of sight of closing of the transaction.
Speaker Change: The restructuring action, we are going to take them as early as possible. We are not going to wait for the transaction to close. Now, there are certain actions that are going to have to be taken at or after restructuring, so that's why the timing on some of that
Speaker Change: Benefit and cost is a little bit difficult for us to commit to, but we have a clear plan on how to deploy and continue to improve our operating model as we have throughout the past couple of years.
Speaker Change: And the next question comes from Noah K. Wiff-Oppenheimer. Please proceed.
Speaker Change: Thanks. A couple questions. First, I assume the pre-cash flow conversion guide doesn't include the tax payments on the divested shares. Would you expect those to fall?
Speaker Change: within the year, just for housekeeping purposes.
Speaker Change: Second, just to put a finer point on the answer to the earlier question, the 500 million of benefits over time from restructuring, that's
Speaker Change: that's assumed to be immaterial to the 25 guide. I just want to confirm that. But then I think more substantively, can you just give us the broad strokes of what the cost-out program entails and perhaps more qualitatively how you may be, you know...
Speaker Change: Changing the configuration of the business or your go-to-market within that program
Speaker Change: So Sona, your first two comments, you are correct, so you're making the right assumption there.
Speaker Change: In terms of, in all detail, exactly where we're going to focus on, it's around really simplifying and leveraging better our cost structure with the work we've done over the past six to nine months to right-size our organization and really get a better grasp around where and how we deploy resources against.
Speaker Change: that the market opportunities further driving that simplification and provide better clarity and also at the end improving the customer experience that most of our clients and customers are facing.
Speaker Change: Now, from an operating structure, as you see any significant change to a business portfolio,
Speaker Change: We've been pursuing opportunities to refine the business structure and the operating model to facilitate that simplicity and clarity we talked about. So we'll keep you updated as we see changes needed in how we operate and present ourselves.
Speaker Change: This concludes our question and answer session. I would now like to turn the conference back over to Mr. George Oliver for any closing remarks.
George Oliver: Yeah, I want to thank all of you for joining us today as we conclude fiscal 2024 and look to the future. I am confident Johnson Controls is heading in the right direction. Our team has delivered important achievements this year and created momentum entering fiscal 2025.
George Oliver: Our customer value proposition is resonating, demonstrated by our sales and service growth and multiple consecutive quarters of building a record backlog.
George Oliver: We are well positioned to capitalize on the opportunities ahead provided by our leadership in building solutions and our end-to-end operating model. So I want to thank you for your continued support and confidence in Johns Controls. And with that, operator, that concludes our call.
Speaker Change: Thank you. The conference is now concluded and thank you for attending today's presentation. You may now disconnect.
Speaker Change: [music]
Speaker Change: [music]
George Oliver: Hello, everyone and welcome back. I, your host George Oliver, will just be signing right through for you. It's lets me thank you so much for letting me be able to be here sometime in the middle of turning onokratop news. I so appreciate it. I love you guys. I love you too. I apologize for asking, folks if I całyed you about anything but I'll do my best for privacy. And curiously, I kind of saw I could
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George Oliver: [music]
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