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spk08: Good morning and welcome to the Johnson Controls Third Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. 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. To withdraw your question, please press star, then 2. Please note, this event is being recorded. I would now like to turn the conference over to Jim Lucas, Vice President, Investor Relations. Please go ahead.
spk10: Good morning, and thank you for joining our conference call to discuss Johnson Control's third quarter fiscal 2023 results. The press release and all related tables 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 Control's Chairman and Chief Executive Officer, George Oliver, and Chief Financial Officer, Olivier Leonetti. Before we begin, let me remind you that during our presentation today, we will make forward-looking statements. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Johnson Controls. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risk factors and cautionary statements in our most recent Form 10-Q, Form 10-K, and today's release. We will also reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are contained in the schedules attached to our press release and in the appendix to this presentation, both of which can be found on the investor relations section of Johnson Controls' website. I will now turn the call over to George.
spk11: Thanks, Jim, and good morning, everyone. Thank you for joining us on the call today. Let's begin with slide three. Johnson Controls delivered another strong quarter that met the high end of our guidance. We delivered 9% organic sales growth, adjusted segment EBITDA margin expansion of 130 basis points, and 21% adjusted EPS growth. Our longer cycle building solutions business continued to show strength globally as service momentum accelerated, driven by our enhanced solutions and increased adoption of our digital offerings. Orders grew 8% overall with service orders leading the way with 12% growth. Our backlog ended the quarter up 8% to $12 billion across both install and service. We remain confident in the resiliency of our backlog and order momentum as our performance during the quarter solidifies our investments in building a world-class service organization. We continue to see a strong pipeline of opportunities, and the outlook for orders in our longer cycle businesses remains robust. In our shorter cycle global products business, our applied and rooftop businesses delivered another quarter of very strong double-digit growth and demand remained strong. We also continue to see strength in our commercial ducted and fire detection businesses. Consistent with trends in the industry, our ducted North American residential business remains soft. Overall, we are encouraged by the continued strength and good visibility across our building solution segments. As we look ahead for the remainder of the year with one quarter to go, we are narrowing our full year adjusted EPS guide to approximately $3.55, which represents the midpoint of the previous range. At Johnson Controls, we continue to expand on the solid foundation that we have built with strong order momentum and a record backlog driving consistent top line growth. We have made good progress enhancing profitability across our portfolio throughout the fiscal year, and we have significant actions underway that we believe will result in further margin expansion. Now turning to slide four, we have spent the past few years investing more strategically in our service business, and we are seeing strong returns from those investments. During the third quarter, service orders and sales both grew 12%. Our service business has transformed from a traditional break and fix business to helping customers proactively and more efficiently optimize management of all assets in the building. Digital is becoming an important enabler to driving more service opportunities and growth. We also accelerated sales of our higher margin parts business, which once again grew at a strong double digit pace in the quarter. Decarbonization is an area of focus across the entire Johnson Controls portfolio. This includes our sustainable infrastructure or SI business, as well as many products and solutions in our portfolio, such as heat pumps, energy efficient refrigerants, and digital solutions. In fact, nearly 55% of revenue comes from sustainable products and solutions. We continue to see strong demand in our SI business with orders growing 20% in the quarter. Heat pump sales were up mid-single digits globally with very strong double-digit growth and are applied in industrial refrigeration businesses. During the quarter, we acquired M&M Carnot, a leading provider of natural refrigerant solutions with ultra-low global warming potential, or GWP. M&M designs equipment and controls that use carbon dioxide, which has a GWP of 1. By contrast, traditional refrigerants can have GWPs in thousands, magnifying rather than solving global warming. We have spent the past few years defining our multi-phase digital strategy to transform environments to more effectively use data to drive outcomes for our customers, and we continue to gain momentum. In the quarter, we grew our connected revenue at a high single-digit rate, and we surpassed 16,000 connected chillers. We are now expanding OpenBlue into connecting controls and security to better optimize customer assets and improve outcomes in buildings, further differentiating our offering. Historically, buildings required standalone systems to manage each asset within the building. Today, connected buildings are creating a single digital dashboard optimized for energy, but still require multiple systems to manage the assets. We are making great progress in creating the digital thread throughout the building lifecycle, and connecting controls is the next step in the evolution of this journey. Moving on to slide five, we recently announced the acquisition of FM Systems, which is an important next step in adding critical capabilities to OpenBlue. FM Systems is a leader in the growing integrated workplace management system, or IWMS, sector. IWMS furthers our OpenBlue capabilities, allowing Johnson Controls to offer a one-stop solution that helps customers accelerate their digital transformation journey, improve building efficiency, and reduce operational costs. FM Systems advances OpenBlue's capabilities and brings a significant amount of data, including service, space utilization, and real estate portfolio management. The addition of FM's capabilities into OpenBlue enhances Johnson Control's relationship with customers by providing a full suite of integrated outcome-based solutions. Turning to slide six. Extreme temperatures are increasingly straining buildings, putting at risk the ability to deliver comfortable and healthy indoor environments. Our OpenBlue digital solutions help optimize indoor air quality, comfort, and energy consumption while monitoring outdoor air conditions, ensuring our customers can meet their operating objectives even in the most extreme conditions. When paired with our open blue digital services, we are uniquely positioned to help our customers deliver healthy indoor environments while optimizing costs, reducing emissions, and ensuring HVAC equipment is operating at peak performance, ready for any condition. We spoke earlier to the progress we are making expanding margins, and we are not done. Supply chains are improving, which have normalized lead times, allowing us to create better operating leverage in our manufacturing facilities. We continue to make progress in improving our SG&A structure and have additional actions underway to further optimize our performance. On capital allocation, we have established a track record of being prudent and disciplined. In fiscal 2023, we have returned $1.3 billion to shareholders via share repurchases and dividends, in addition to investing in several strategic acquisitions. Climate change is the defining theme of this century. with nearly 40% of emissions coming from buildings, we have the technology and the people to turn buildings from one of the greatest challenges into one of the biggest and best solutions. I will now turn the call over to Olivier to go through the financial details of the quarter.
spk09: Olivier. Thanks, George, and good morning, everyone. Let me start with the summary on slide seven. Total sales grew 8% while organic sales increased 9% with strong double-digit growth in our service business. FX was a 2% headwind in the quarter. Adjusted segment EBITDA increased 17% with margins expanding 130 basis points to 16.4%. Price cost was positive and we delivered strong productivity savings. Turning to our EPS bridge on slide eight. Adjusted EPS of $1.03 was at the end of our guidance and increased 21% year over year. Operations contributed 23 cents of the growth in the quarter, benefiting from positive price cost and our ongoing SG&A and COGS actions. Below the line, we saw headwinds from net financing costs, FX, and non-controlling interest. Overall, we were pleased with the strong adjusted EPS performance in the third quarter. Let's now discuss our segment results in more detail on slides 9 through 12. Beginning on slide 9, organic sales in our shorter cycle global products business increased 6% in a quarter with 8% of price offsetting a slight volume decline. Global products continues to see strength in the applied business where our rooftop business in North America has nearly doubled this year. Fire insecurity grew, losing energy with continued momentum within our fire detection products. Industrial refrigeration had another strong quarter, growing over 20% driven by North America. Our global products third-party backlog increased 8% from the prior year to $2.5 billion. Adjusted segment EBITDA margins declined 10 basis points against a tough comparison to 22.1% as continued weakness in the residential North American market offset positive price cost and productivity savings. Moving to slide 11 to discuss our building solutions performance. Orders increased 8% organically as demand remained strong and we continue to convert our healthy pipeline. For the third consecutive quarter, service orders grew low double digits with 12% growth in the quarter as our focus strategy on transforming services into a more predictable, consistent business is paying dividends. We saw install orders increase 6% against a tougher comparison led by double-digit orders in North America in the prior year. Total sales grew 10% with organic sales increasing 11%. We saw strong double-digit growth in both service and install, growing 12% and 10% respectively. Adjusted segment EBITDA increased 35% with margins expanding 240 basis points as we continue to execute higher margin backlog and recognize savings from our productivity initiatives. Building solutions backlog remains at record levels, going 8% to $12 billion. Both service and install backlog increased 8% year over year. Let's discuss the building solutions performance by region on slide 12. Orders in North America increased 5% with continuous strength across our HVAC and control platforms, up I single digits year over year. Overall, there was robust demand in our office, data center, government, manufacturing, and education sectors. Service continues to perform well, increasing 8% year over year, driven by our shorter-term transactional business. Sales in North America were up 10% organically with broad-based growth across the portfolio. Our installed business grew 11% with over 20% growth in new construction. Our service business maintained its strong momentum with 9% growth. Sales across our HVAC and controls platform grew low teens year over year, while fire and security increased high single digits. Segment margins expanded an impressive 270 basis points year over year to 14.4% driven by ongoing productivity benefits and the continued execution of higher margin backlog. This resulted in a Strong price code performance. Total backlog ended the quarter at $8 billion, up 11% year over year. In Emila, orders were up 10%, driven by healthy growth in service, up 19% year over year. Industrial refrigeration and HVAC and controls had solid results in the quarter with each growing over 25% driven by the decarbonization efforts in the United Kingdom and Northern Europe. By region, we saw double-digit growth in the Middle East, Africa, and Latin America. We saw strong demand in both our government and industrial sectors. Sales in Mila grew 9% organically, led by meetings growth in service as our shorter cycle transactional business continues to have good momentum. Applied commercial HVAC grew high single digits, driven by healthy performance in Latin America. Finance security grew high single digits within the quarter. Segment EBITDA margins declined 10 basis points to 8.6%, but increased 190 basis points sequentially, driven by further improvement of higher margin backlog conversion. Backlog was up 6% year-over-year to $2.3 billion. In Asia-Pacific, orders grew 14% driven by double-digit growth in both service and in-store. By region, China grew 14% year-over-year with continued strength in data centers and manufacturing sectors. Northeast Asia had growth of 18% driven by controls. Sales in Asia-Pacific increased 16% with 19% growth in service and 14% growth in install. Overall, commercial HVAC and controls grew approximately 20%, driven by the install business within China, while finance security declined low single digits. China continued its momentum from Q2, reporting 25% growth in the quarter, which included double-digit growth in both service and install. Segment EBITDA margins expanded 110 basis points to 13.9%, driven by ongoing productivity savings and the execution of higher margin backlog, resulting in positive price costs. Backlog of $1.7 billion increased 2% year-over-year. Turning to our balance sheet and cash flow on slide 13, we ended the third quarter with $1.1 billion in available cash and net debt declined 2.1 times, which remains within our longer-term target of 2 to 2.5 times. Inventory turns improved sequentially, and free cash flow remains a major focus, with inventory being a key driver to further improvement in the fourth quarter. Now let's discuss our fourth quarter and fiscal year 23 guidance on slide 14. We are introducing fourth quarter sales guidance of approximately 4%. We expect building solutions momentum to continue While global products faces a tough year-over-year comparison driven by inventory reduction in residential HVAC and certain fire and security indirect channels, as lead time have materially improved. For the fourth quarter, we expect segment ABA margin to expand approximately 60 basis points and adjusted EPS to approximate $1.10, which represents 11% year-over-year growth. For the full year, we are narrowing our adjusted EPS guidance to approximate $3.55, which represents the midpoint of the prior range. This represents 18% year-over-year growth. We expect organic cells to grow high single digits and segment EBITDA margins to expand approximately 110 basis points. We expect free cash flow conversion to be roughly 70%, as we make good progress on inventory reduction while not at the level we were expecting, given some inventory reduction occurring in our indirect channels. We see good momentum continuing to build for fiscal 24. Our longer cycle building solutions segments continue to experience strong orders and backlog remains at record levels. Global product is benefiting from strength in the larger commercial HVAC space while residential HVAC comps should ease entering the new fiscal year. We have made good progress on expanding margins this year and we are not done. With that operator, please open up the lines for questions.
spk08: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. In respect of time, we ask you limit yourself to one question and one follow-up question. At this time, we will pause momentarily to assemble our roster. Our first question will come from Nigel Cole with Wolf Research. You may now go ahead.
spk13: Oh, thanks. Good morning, everyone. Thanks for the question. Maybe we could just unpack a little bit more, you know, the fourth quarter sales growth, especially within global products. So it sounds like you're still seeing, I don't know, high-single-digit growth in the solutions businesses, and it looks like products down mid-single digits or so. Is that correct? And maybe just talk about some of the headwinds. I mean, I think Resi HVAC we understand, but maybe just talk about the foreign security products headwinds maybe unpacked between geographies and then markets.
spk11: Yeah, good morning, Nigel. Let me start by saying our overall commercial business, both products and services, remains incredibly strong. And what I would say is across the board, hitting on all cylinders. We do continue to see strong bookings in our applied and in our rooftop, commercial rooftop businesses across the board. When you look at our building solutions, we've made great progress during the course of the year, improving the margins and the service momentum now is expected to continue. And When I look at our building solutions business, we've got a very strong backlog. And more important is within that backlog, the mix of services that are coming through with the momentum that we've been building and now adding FM systems is going to be a big add to that. Now, referencing the orders in Q4, in revenue in Q4, when you look at our residential and fire and security businesses, We have been experiencing some short-term pressure in our shorter cycle book-to-bill business, and it's in those two areas. The inventories in the channel are resetting as we've been able to improve lead times, and so therefore there are some short-term adjustments in the book-to-bill revenues. But what I would say is with those adjustments, we're continuing to execute with the deployment of our new products, and we're seeing good traction there. And as we project going forward, we still see that coming back and being very strong as we set up for 2024. So on the resi, I think it's in line with what you're seeing across the industry and on fire and security is mainly in our products business, which ultimately is a book-to-bill business, and therefore we're seeing that adjustment.
spk13: Okay, that's clear. We'll follow up offline. George, you mentioned 24, and obviously we're turning the calendar into FY24 very soon. So maybe just talk about how you're thinking about the setup for 24, I don't know, based on the backlog conversion or customer conversations. How should we think about the top-line environment for FY24?
spk11: Yeah, Nigel, what I'd say is that we're still building the 24 plan, but I'd touch upon some key items here that I think really set us up well for 24. When you look at the commercial markets, and as I talked a little bit earlier, that we see that are incredibly healthy and are playing to our strengths, especially with the secular trends that are underway within the commercial space. And so that, you know, we see with our orders up 8%, with our backlog up in our building solutions business at 12 billion, and even in our global products business, despite some of the inventory adjustments, we are up about 8% in our global products business also. And so when you look at that, that momentum is going to continue. Now, if you add the stimulus spending that we don't believe has really been materialized yet is in the background. And I believe with these secular trends and the combination of what we're doing in HVAC with our digital platform and now services are going to benefit really nicely from the investments that ultimately are going to be needed to drive sustainability. Then if you look at our backlog, we look at this very closely. It's very resilient and very strong with the idea that we believe that even through the next quarter, we've got an incredible pipeline that we're converting. We're working to develop the backlog so that when we plan and ultimately enter next year, we're going to have a nice backlog to work from. Then the last is really the acceleration of the transformation of our building solutions business to services. You know, that proposition is playing out. I would call it our flywheel, which has been accelerating, which is about creating installed base, getting that base connected with higher attach rates, with higher revenue per customer. That leads to lower attrition. And then all of that spins out additional business, like with our spare parts and upgrades and the like. You know, I feel that the current trends that we see and how we're being set up, we're going to set up for, you know, a nice 2024. But again, you know, we can't predict the environment, but the trends that are underway do play to our strengths.
spk09: An additional comment on the margin, Nigel. First of all, in gross margin, we see expansion gross margin. George mentioned it. Services is growing faster than install now. We are using install as a vehicle to drive service. So we should see gross margin expansion. And also we're working on further SG&A leverage as we standardize and leverage also functional excellence across the organization. So top line and margin, we believe we are well positioned for 24.
spk13: Okay, that's good detail. Thanks, guys.
spk09: Thank you, Nigel.
spk08: Next question will come from Steve Tusa with JP Morgan. You may now go ahead.
spk03: Hi, good morning. Morning, Steve. Can you just walk through a little bit the fourth quarter and this, you know, sales deceleration, as well as maybe some color on what you would expect for the margins by segment? The growth seems to be slowing pretty significantly here. Just wanted to see if that's concentrated in any particular business, maybe just some segment color for the fourth quarter?
spk09: So if you look at the top line today, in the building solution business, the top line is very strong. The order momentum is expected to continue in the fourth quarter. We have good visibility today based upon where we are today in the quarter. You have in the top line some inventory adjustments happening in the channel that is impacting our shorter cycle business, Resi and Fire Security. George mentioned that that would be an impact on global product, but we see that as being temporary. If you look at the margin, we believe that the field business, our business solution business margin will keep improving. In the global product business, we see the margin being slightly flat. What is happening in the global business, you have that in Q3, it's happening in Q4. So it's some absorption as we are ramping applied volumes to drive market chain lead time. We have had some absorption impact and also we have normalizing inventory. Inventory and finished goods went down by about 20 days. in about two quarters, that is impacting also absorption. So that's the story in terms of margin, Steve, and revenue.
spk03: Yeah, I guess for global products, what do you expect for revenue? Maybe either organic year over year or sequentially, however you think about it, because I think that's kind of where the hole is on revenue here, it seems like.
spk09: The revenue in global product would be growing low single digits to flat. And the margin would be expanding to flat for global products because of the two phenomenons I've mentioned, Steve.
spk03: Yeah. Okay. Then sorry, one last quick one. How much price did you get in the field business in the quarter?
spk09: We don't talk about price anymore for the building solution business because we sell a solution. It's difficult to differentiate price from volume anymore, and we have discussed about this. But, you know, overall, pricing and value proposition is resonating with our customers.
spk03: So I guess how do you calculate price? If you don't calculate price, how do you calculate price cost then in your slides on slide 12 for the solutions business?
spk09: It's mainly going to impact our global business and to an extent also the field.
spk11: Steve, just a comment on that. As we've discussed, we've been building models, robust models from a cost and value proposition standpoint, and it's calculated on based on the inflation that we've built into our long cycle businesses and then how that plays out to then the value proposition that we bring to our customers with the differentiated install, and then ultimately which then leads to our service growth. And that's what's in the overall equation there as far as price.
spk03: Great. Thank you.
spk11: Thank you, Steve.
spk08: Our next question will come from Joe Ritchie with Goldman Sachs. You may now go ahead.
spk02: Thanks. Good morning, everyone. Morning, George. Maybe just going back to the de-stocking comments in global products, I'm sure you guys have had conversations with your channel partners. There might be a little bit of uncertainty, but you did mention, Olivia, I guess, that you expect this to be temporary. What kind of sense do you get in terms of the timing of the stocking and how elevated their inventories are today? I'm just trying to get a sense for how quickly we should get back to normal demand patterns in that business.
spk11: Well, let me take that, Joe. On the resi side, I think in line with what everyone's seeing in the industry, we've seen a significant adjustment, and we've taken that in the first half and now through third quarter, a pretty significant adjustment. We believe we're now in line with the industry relative to our volumes and the like. Now, when you look at, we do believe there's some additional destocking in Q4, but I think through that, we'll set up here in the first quarter, first, second quarter of next year, I think will be pretty normalized. The other, on the firing security, when you look at those businesses, it is mainly a product of when we saw a significant ramp when lead times were extended, we developed significant backlog and we've been working down that backlog. The good news I see now is on the input side, as we're now moving forward, we're starting to see a pickup now of some of that backlog. And so our ability to be able to then take on the orders, create the backlog, and then be positioned from a supply chain to respond, we're in a much better position. And so we'll see some of that play out here in the fourth quarter as it relates to fire and security. But we do believe it's short term. And we do believe it's totally aligned with the lead times, the lead time adjustments that have been made. And I would tell you that when we look at some of the core products and new products that we're bringing into that segment, we're seeing some nice pickup on market share with some of the new products.
spk02: Okay, great. That's good to hear, George. I guess maybe my second question, just going back to 2024 and just thinking about, you know, the service growth that you've seen over the last three quarters, obviously that is going to be mixed, secretive to the business. How do you kind of think about the margin impact that's in the backlog right now and that we should see come through in 2024 in the building solutions business?
spk11: Well, as it relates to the overall growth, I mean, I think this is the first that we've seen where now our service growth on a sustained basis is outpacing our install. And so when you go back to the strategy of the company with our building solutions business was to make sure we use install very strategically and how we build our install base with our assets, with our equipment, and then with the digital assets and enable us to be able to extract, you know, over the life cycle, the services. And now with the digital content that we have, we're not only enhancing what historically we've done, but it's now given us the opportunity to add additional services with the customers that we're serving. And so we feel very good about continuing to sustain that growth rate with services. That'll be a natural mix, you know, with the revenues that turn within our building solutions business globally. And we're seeing it. The traction is in every one of the regions. I mean, this is not isolated into one vertical or one region. It's pretty much across the board. And so with that, that combined to what Olivier said around margins, we continue to drive strong productivity both in COGS as well as SG&A. So that combined with the mix of services is going to continue to accrete margins within our building solutions business.
spk02: Okay, great. Thank you.
spk08: Thanks, Gerald. Our next question will come from Noah K. with Oppenheimer. You may now go ahead.
spk14: Good morning. Thanks for taking the questions. First, it looks like a guide is now for higher amortization of intangibles, and that's driving about a 570 PS headwind versus the prior guide. Can you, A, confirm that math, and then, B, talk about the timing expectation for accretion on some of the acquisitions you've made? I assume those acquisitions are what's driving the higher amortization for the year.
spk09: No, you're right. I'm confirming the number. What we do probably at some stage, we need to think about how we treat amortization of intangible NOAA relative to what appears today. We're not guiding EPS in the same way. We look at this and we expect the accretion to start at the start of next fiscal year.
spk14: All right, that's helpful. And then, you know, just to better understand the free cash flow conversion dynamics, it sounds like you do expect some inventory reduction, you know, here in 4Q. But, you know, as we think about, you know, what needs to happen for you to kind of get back to close to that 100% free cash flow conversion as we set for 24, what are you going to be focused on?
spk09: Inventory, Noah, you mentioned it. We had a good progress in inventory reduction in Q3. We have good momentum, as I indicated. We have reduced our finished goods level inventories in days by about 20 days. So that's where the focus is. As lead time is improving, we have seen some inventory adjustments in the channel. And that is impacting on the short term our ability to dispose of the inventory at the speed we had anticipated. But we believe it's a short-term phenomenon, and we believe that we are absolutely going to return to a 100% free cash flow conversion next fiscal.
spk14: Appreciate that. Thank you.
spk08: Our next question will come from Jeff Sprague with Vertical Research. You may now go ahead.
spk04: Hey, thank you. Good morning, everyone. I just want to come back to service margins and kind of, George, and you addressed this to some degree in a prior question, but certainly the key KPI, in my view, in this quarter was the significant lift in North America margins in the quarter, and you delivered on that. Is service mix playing a really significant role in that performance in the quarter? Or are we actually just seeing more kind of COGS and SG&A programs and other things you're trying to do on productivity? And maybe you could just give us a little bit more color on how you would expect that North American margin to progress into the fourth quarter.
spk11: Yeah, let me reflect here, Jeff. If you go back to North America and what played out last year, you might recall that a lot of the backlog that was built up during 21 prior to the significant ramp up of inflation and the backlog that turned is really what caused the margin pressure last year. And then the work that we've done since then with our cost models and value proposition and pricing as a result on a go-forward basis, we've been building very strong margin and backlog across the board, not just North America, but across our building solutions business over the last 18 months. And so a significant piece of that is the margin we've been putting backlog after that ramp up of pricing and the accumulation of the inflationary costs that we took into consideration into our models. That being said, North America is starting to turn relative to service as a percent of revenue. And you're going to start to see that accretion on a go forward basis contributing. Now, you also on a margin rate, we have been with the value proposition that we've had with service, we've been able to throughout the inflationary cycle, we've been able to maintain very attractive margins. And so it has been through that cycle very strong. And now with the mix going forward, it's going to be continue to be accelerating the accretion and the benefit that we're going to get in the margin rate on a go forward basis.
spk09: I would add, Jeff, and they go together. We are now driving install to drive services. It wasn't the case before. So you will see margin expansion also because we are very selective on install. And to your point on SG&A, much more is to come in terms of SG&A leverage as we standardize our operations further and we're in the middle of this and leverage functional excellence. So, and we have said that, and our level of conviction is actually increasing. We believe we can deliver over the, you know, next year and forward 30% incremental for the company because of those two phenomena, margin and SG&A.
spk04: Right. And sounds like you're noodling on maybe moving to an X amortization EPS construct. I wonder if you'd opine a little further on that and Just the amortization that we see, how much of that is directly kind of deal-related amortization versus maybe amortization of software or other things that are running through the system?
spk09: It's quasi-exclusively relating to deals. And if you look at our peers today, we are the only one to have not adjusted for deal amortization in our EPS. So we are looking at that as a potential for next year, Jeff. But it's all deal related. And the Tyco Johnson Controls merger will be the lion's share of this amortization.
spk04: Great. Thank you.
spk08: Our next question will come from Julian Mitchell with Barclays. You may now go ahead.
spk07: Thanks very much. Maybe just wanted to start off with how you're thinking about that sort of slide seven and the profit drivers from price, cost, and productivity benefits. So you're running very strong on productivity benefits in 2023. Maybe just remind us what's the incremental saving into 2024 that's left under the cost-out program, and then how quickly should we expect that big price-cost tailwind to narrow towards parity next year? Thank you.
spk09: So on productivity, we are far from being done. Our program that we announced about two years ago is going to end. We're well on track. We'll deliver about 340 million for FY23 through SG&E and COGS. But much more is to come in terms of productivity, both impacting cells and DNA. Again, standardization and driving functional excellence are going to be the drivers for this. Price-to-cost, George mentioned it. We are very bullish about the value proposition of our offering, either through solutions and including services, but also through the product portfolio where we have a strong in commercial sustainability offering. So all of that should drive margin expansion through GNA, scaling, gross margin and price cost.
spk11: Julian, relative to just pure price when we're planning for 24, we see continued pricing now, certainly at a reduced level. But given the continued inflation and how we're booking that inflation into our backlog, we still see pricing playing out as we plan for 24.
spk07: That's helpful. Thank you. And then... Here's my second question on the top line. So looking at slide 12, you have the 4% install orders growth in North America and Emilia in the third quarter. Just wondered, you know, given the sort of the macro data out there, Dodge starts square footage and so on, and interest rates, do you think those install order numbers decelerate from that 4% in the two regions, or they can sort of hold the line when you look out?
spk11: So when you look at our go-to-market, and we look at this very closely on a weekly, monthly basis, when you look at our pipeline, our pipeline is continuing to grow. And so as we look at whether it be domain by domain or as we look at our building solutions now addressing these secular trends, we're building a very strong pipeline. And on a run rate basis, as we project Q4, we still see very strong order growth in Q4. And so. It is hard to dissect exactly, you know, from a vertical standpoint, because we see pretty broad strength across, whether it be industrial data centers. We talk about government. There's a lot of strength that we see here. And we're making sure that from a go-to-market standpoint, we're going to be positioned to be able to capitalize where the growth will occur. And then the value propositions that we have as it relates to these secular trends is, It really does tie to be able to create the most amount of value, and then our solutions business really builds an attractive service business from that. And so as I set up for 24, you know, it's going to be critical here as we pace through the fourth quarter with the order rates to really set up a backlog because our building solutions business, at least from an install standpoint, is pretty predictable over the next 12 months. And that backlog continues to build, and our pipeline and conversion right now in Q4 suggests that that's going to continue at a very strong rate.
spk07: Perfect. Thanks very much. Thank you, Julian.
spk08: Next question will come from Nicole de Blasio with Deutsche Bank. You may now go ahead.
spk01: Yeah, thanks. Good morning, guys.
spk09: Morning, Nicole.
spk01: Maybe just starting with the price-cost dynamics in e-mail us specifically. So I know that segment is kind of lagging a bit with respect to execution of higher price backlogs. Is the expectation that price cost turns positive, you know, could that happen in the fourth quarter? Is that more of like a 2024 event?
spk09: So Nicole, if you look at Mila, there is nothing fundamentally different with this business, which will prevent us to reach a strong level of segment everyday margin. What you have happening in Mila this quarter, and that's about 150 basis points of Edwin in margin, is two things. Pension costs and also FX in our business in Argentina. We have a strong business in Argentina in our subscriber business. So if you were to remove those, the margin in Mila would have increased by about 140 basis points in the quarter. You will have some of those impacts again in Q4 impacting Mila. But again, nothing structural in Mila.
spk11: And Nicole, when we look at all the work we've done on the price costs over the last couple of years, especially in this inflationary environment, when you look at the margins and backlog in our mailer business are very strong going forward. And so it's a matter of just the timing of the conversion.
spk01: Got it. That's clear. Thanks, guys. And then just thinking about the overhang that you're seeing with global products margins and very tough prior year comps. I guess, how do you think about fiscal 24 from that perspective? Like, do you see the potential to start expanding margins in this business again?
spk09: The answer is absolutely yes. If you go back to the quarter, We add because we have ramping the manufacturing of applied. We wanted to be very competitive in lead time. We have a very competitive set of products. So as we are ramping manufacturing of lead time, we had an impact in conversion cost. Again, as we have normalized for inventory, we have produced less. That is impacting conversion cost as well. The combined impact of those two elements is a bit more than a point in the quarter, Nico. And we believe that we will have some of that happening in Q4. But we see absolutely margin expansion happening in our global products business.
spk01: Thank you.
spk09: I'll pass it on. Unicorn.
spk08: Our next question will come from Chris Snyder with UBS. You may now go ahead.
spk12: Thank you. I wanted to follow up on the DSTOC headwinds on the indirect side for RESI fire and safety. Can you just maybe quantify what that headwind means for fiscal Q4 organic growth in the guide? Where would that 4% be if it wasn't for these headwinds? Thank you.
spk09: I would say that on the year, this impact is about one to one and a half. And you could do the math for also Q4. It's in the ballpark of one to one and a half of full impact on the year.
spk12: Thank you. I appreciate that. And it sounds like from some of the prior commentary that you guys would expect this headwind to alleviate in the early part of fiscal 24. So, Obviously, that's a tailwind to the 4% organic guide for the fiscal fourth quarter. Are there any sort of negative offsets there? Is anything kind of getting worse from here as we try to build the organic bridge into next year? Thank you.
spk11: So when you look at those businesses and the applied fire and security products we put through our building solutions business and we're starting to see that, you know, that's very strong and picking up and it's critical to our building solutions business as far as how we create value and ultimately create service. So that is coming back nicely. And then on the indirect channel where we see the pressure, the same has happened there relative to you know, the timing of orders based on the reduced lead times. And so our assessment based on, you know, with the intimacy that we have with our distributors and the pulse that we have across the globe, that that's going to come back, that we're starting to see, you know, sequential improvement and then getting, you know, baseline here that for 24, you know, assuming that Assuming the economic conditions are somewhat stable, we have been outperforming with our products and our new product launches and the like. So we're confident that we're going to, that's going to come back and we're going to be positioned to be able to pick that growth up as it adjusts.
spk12: Thank you.
spk08: Our next question will come from Gautam Khanna with TD Cohen. You may now go ahead.
spk05: Thanks. Good morning, guys.
spk08: Morning.
spk05: Wondering if you could comment on supply chain and your own lead times, manufacturing lead times, and whether you anticipate that will have any impact on orders just as lead times shrink. Is there a risk of kind of an order, less urgency to place orders that could show up in any given quarter? And if so, when would you expect that to be? a potential factor, if at all.
spk11: Well, Gotham, we've seen that. It's already been playing out here over the last, really the last couple of quarters as it relates to our global products business because everyone, you know, as supply chain began to improve and lead times reduced, It allows our customers to be able to back off what they have to carry and still be able to deliver on their commitments. So that has been playing out. We think that, you know, there's still a little bit left here with resi going forward. So a little bit more in the in the indirect fire and security. But, you know, we've already seen a lot of that impact on our book to build business in over the last couple of quarters. So. we're positioning here to get through that over the next quarter or two, and they'll be positioned to be able to build backlog and have conversion, you know, strong growth in 24.
spk05: Has there been any spillover effect to the direct channel?
spk11: No, on the direct channel, actually, because we ultimately, you know, from end to end, we're responsible for delivery to the customer. So whether it be even in our Even in our Resi direct stores, we saw a nice growth in our Resi direct stores because we ultimately own the channel and we saw a nice pickup there. On our building solutions business, as far as the predictability of our projects and how we're converting, we're very tight relative to what is going to be consumed and how we're going to deploy it to the field.
spk09: And George said that earlier, Gautam, the order rate for the building solution business is very strong in Q4.
spk05: Yeah, thank you very much, guys.
spk09: Take care.
spk08: Our last question will come from Andrew Obin with Bank of America. You may now go ahead. Hi, yes.
spk06: Yeah, good morning. Can you guys hear me? Yes, we can, Andrew. Yeah, so as we think about these, you know, semi fabs and the EV plans, you know, I think Eaton was kind enough to give us sort of range for average content per plant. Could you guys just sort of do something similar, you know, how big a unit goes on average into one of these, so we can just sort of size the opportunity and then the part two, when do you guys actually book these, uh, projects, uh, in your backlog formally? Right? At what stage? Is it a year into construction? Just trying to sort of, you know, follow up on your commentary, how, you know, you should start booking more equipment eventually, but just trying to size the timing and scope of this into 24. Thank you.
spk11: Let me talk about the, on the front end, the demand. And so what you've seen over the last couple of years, we have, been very aggressive, not only with the development of our product portfolio, but also our capacity to be able to serve the market. And if you look at our orders and applied, we have been getting more than our fair share. We believe that market share wise, we're up a number of points here on a year on year basis. We've been building backlog in our applied equipment And we can follow up and get you an average size. But right now, because of the expansion, we've more than doubled our capacity. And so, and we're pacing with full utilization of that capacity. So we're ultimately making sure that we're going to be positioned with the demand. And that, from a lead time standpoint, that's been very important to be able to then be able to, you know, respond and be able to create the value with our offering and then be able to then convert on time to be able to capitalize on the demand. Some of these projects are, you know, they are, they can be over a year long. but a lot of the there are now a lot of projects coming into the market that cycle time matters and you can create a lot of value because you have a shorter lead time when we have you know orders that we're taking on now that we're going to deliver next year um in 24 and so from a from a positioning in the market we have positioned ourselves to get a very strong order book in our applied business and that is a core strength of ours across the globe and it relates to to what you said, EV plants, data centers, you know, the chip manufacturing plants and the like. And so on the average size, you can imagine when you get these large data center customers, they have very large installations and have multiple, you know, pieces of equipment that are deployed to be able to support the capacity that they're building.
spk09: An additional caller, Andrew, we mentioned that earlier, the stimulus we have had in the US or in Europe, so the IRA or the equivalent stimulus in Europe have not impacted demand so far. So we believe that those trends we are starting to see are going to be maintained. And last one, we book an order when we received a signed firm contract. Andrew. Gotcha.
spk06: And okay, and just a follow up question on supply chain. Are you seeing any ability as you know, some companies are talking about this inflation or even deflation? Are you finally getting back ability to extract pricing concessions from your supply chain into 24?
spk11: Yeah, we've always had, when you look at our procurement organization, the work that they do, even through this period of time, you know, we've been strategically sourcing and making sure we're leveraging our scale and demand to drive productivity, drive savings, to try to offset, you know, some of the inflationary pressures on the commodities and the like. So our team has done a really nice job through this cycle to do that. And the answer is, of Of course, yes. I mean, we're now planning for, you know, continued strong productivity with our scale, with our buy, making sure that we're positioned at the lowest cost with the leverage of our, you know, overall volumes that gives us competitive advantage. You know, when you look at our product cost or all of our costs within our cost of goods.
spk06: Thanks so much.
spk11: So on that, I want to close the call. I want to thank everyone for joining us this morning and certainly your continued interest in Johns Controls. I do believe we're at the beginning of an era that will be defined by deep decarbonization and sustainability. And we are, as Johns Controls, well positioned to be an important contributor to empowering our customers in every industry to create healthy, safe spaces for people and the planet. And I think our strategy is clear. It's playing out. We have a strong portfolio. And now it's just about continued execution. So with that, operator, that concludes our call today.
spk08: Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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