Johnson Controls International plc

Good morning and welcome to the Johnson Control's third quarter 2024 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 one on your telephone keypad. To withdraw your question, please press star then two. Please note, today's event is being recorded. I would now like to turn the conference over to Jim Lucas, Vice President, Investor Relations. Please go ahead.

Good morning, and thank you for joining our conference call to discuss Johnson Control's fiscal third quarter 2024 results. The press release and related tables that were issued earlier this morning, as well as the conference call slide presentation, can be found on the Investor Relations portion of our website at johnsoncontrols.com. Joining me on the call today are Johnson Control's Chairman and Chief Executive Officer, George Oliver, and Chief Financial Officer, Mark Van Diepenbeek. Before we begin, let me remind you that during our presentation today, we will make forward-looking statements. Actual results may differ materially from those indicated by forward-looking statements due to a variety of risks and uncertainties. Please refer to our SEC filings for a detailed discussion of these risks and uncertainties, in addition to the inherent limitations of such forward-looking statements. We will also reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are contained in the schedules attached to our press release and in the appendix to this presentation, both of which can be found on the investor relations section of Johnson Control's website. I will now turn the call over to George.

George Borlasekis Thanks, Jim, and good morning, everyone. Thank you for joining us on the call today. Let's begin with slide three. We were very pleased to deliver fiscal third quarter results that exceeded almost all of our targets. Organic sales growth was 3%, which was in line with our guidance of low single digits. We delivered a robust 150 basis points of segment margin expansion to 17.9%, which exceeded our guidance of 17%. We are also proud of our free cash flow generation during the quarter, which was more than $500 million higher than the comparable period one year ago. Service led the way once again with 9 percent growth, which continues to validate our transformation efforts. It is encouraging as we continue to build momentum toward meeting our full-year financial objectives. Orders grew 5% during the quarter. We expect some quarterly fluctuation in our order pattern, given the strong demand for our data center solutions. With the investments we have made over the last few years in technologies for data centers, the launch of a dedicated organization, and our one-of-a-kind offerings, we remain well positioned in this fast-growing segment with solutions that are clearly resonating with customers. We have built a leading position in data centers in North America due to a unique and compelling customer value proposition. As our customers expand internationally to meet the rapidly growing demand for data centers, we grow alongside them as they choose to partner with Johnson Controls around the world. Our backlog grew 10% in the quarter as we continue to see demand for our solutions, both systems and services. The growth in orders and backlog give us increased confidence in our ability to continue delivering sustainable long-term growth. As part of our ongoing business transformation, we announced two divestitures, our residential and light commercial HVAC business and our air distribution technologies business. These two transactions represent roughly 20 percent of current sales. At the same time as our earnings results, we announced this morning that I informed the Board it is time to initiate our CEO succession plan. Following recent significant milestones in our portfolio transformation, and as we move to the next phase of growth, I believe that now is the right time to begin the process of identifying the next leader of the new Johnson Controls. Accordingly, the Board has engaged a nationally recognized search firm and begun a comprehensive search for the company's next CEO. Once my successor has been named, I will remain chair of the Board to help facilitate a smooth transition. I am confident in our position as Johnson Controls enters its next chapter, and I remain committed to supporting the full team as we work to ensure Johnson Controls realizes its full potential. Along with the initiation of the company's succession plan, we also announced that as part of our ongoing board refreshment efforts and following a constructive dialogue with Elliott Management, Patrick Decker has been appointed to our company's board of directors, effective immediately. Patrick brings experience to our board in having led a transformation of his prior company, and his appointment reflects our commitment to continuously refreshing our board to ensure the skills and experiences of our directors appropriately reflect our ongoing transformation. Lastly, before moving to the next slide, we are tightening our full-year adjusted EPS guidance to a range of $3.66 to $3.69, from a range of $3.60 to $3.75. Mark will give additional details later in the call. We have made tremendous progress on our business transformation into a simpler, higher-growth company positioned to deliver more consistent, predictable results. Turning to slide four, we have made good progress on simplifying our portfolio. Most recently, on July 23rd, we reached an agreement to sell our residential and light commercial HVAC business to the Bosch Group in an all-cash transaction. The transaction includes 100 percent of our North America ducted business and our 60 percent interest in our global residential joint venture with Hitachi. The total transaction is valued at approximately $8.1 billion, which results in approximately $6.7 billion of consideration to Johnson Controls. We are expecting net proceeds of approximately $5 billion after tax in transaction expenses, the majority of which will be used to accelerate returning capital to shareholders and also address leverage. The residential and light commercial HVAC transaction is expected to close in approximately 12 months, subject to required regulatory approvals and other customary closing conditions. We expect to report the operating results of the business in discontinued operations beginning in the fiscal fourth quarter of 2024. In addition, on June 18th, we agreed to sell our air distribution technologies business to TruLink Capital. The sale of air distribution technologies is also an important step in simplifying our manufacturing footprint, with the elimination of nearly 30 percent of our manufacturing facilities. Taken together, these two transactions represent significant milestones in our portfolio transformation. We are now in an even better position going forward as a pure-play provider of comprehensive solutions for commercial buildings. Our efforts are turning into results, and the value of our transformation is coming into focus. Slide 5 presents a pro forma look at the new Johnson Controls, representing the composition of our company going forward. Following completion of the two divestitures described earlier, we will be a simpler, higher-growth company focused almost exclusively on our engineered solutions offerings. These solutions include commercial HVAC, fire, controls, security, and services, forming the smart building trifecta of energy-efficient equipment, clean electrification, and digitalization. The benefits of our transformed portfolio include an enhanced margin profile, less complexity, and a more focused operating model. In addition, these divestitures further increase our exposure to the fast-growing data center vertical to nearly 10 percent of sales from 7 percent as of fiscal year 2023. We expect this percentage to further increase over time given the robust demand we are seeing in this key vertical. While we will continue to look at opportunities to further enhance the portfolio, we believe that the largest elements of the portfolio transformation are now complete. Turning to slide six to discuss our focused business model and how we plan to deliver more consistent, predictable outcomes for our customers and maximize value for shareholders over the lifecycle of buildings. Johnson Controls has a unique value proposition for our customers that directly translates to shareholder value creation. Our ability to serve our customers over the lifecycle of the building allows us to deliver safe, healthy, and sustainable buildings. As a simpler and more streamlined company, we are now better positioned to leverage our integrated domain expertise, coupled with our extensive branch network, to significantly expand margins. Our journey with the customer provides system and service solutions that maximize the opportunities around the lifecycle of the asset. delivering outcomes to the customer that save energy, reduce emissions, and optimize building lifecycle costs, all while improving the overall occupant experience. Most importantly, our ability to drive direct outcomes ensures that we have long-term customers that use several of our services, which creates a compounded impact for the customer and for our shareholders. In fact, a dollar of systems revenue has the potential to generate up to 10 times the revenue over the lifecycle of the solution. It all starts with our local teams supported by our centralized engineering teams to provide operational excellence throughout the construction of the new building, starting with the product and technology development through the installation of the new systems. This grows the installed base. Throughout system deployment, our teams are building customer intimacy and confidence in our team to ensure we are creating linkage with our service offering. We have redoubled our focus to build this initial relationship and greatly improved our operational execution over the past few years to drive an enhanced margin profile and grow service. Simply put, service and maintenance delivers recurring revenue for us, and this provides resilient revenue throughout economic cycles. Moving to parts and repairs, our service organization is digitally enabled and unlocks additional value by collecting data from the connected equipment within the building. Leveraging this data lets us detect issues before they occur, leading to reduced downtime and cost savings for the customers. The last part of the cycle is the building retrofit, including the modernization and technology refresh of existing systems. We work closely with the building owner to discuss lifecycle planning and the prioritization of the building needs. We have found this to be the perfect opportunity for Johnson Controls to sell additional domains. By compounding the effects of this cycle, we are able to deliver solutions to our customers, leading to significant margin expansion. The ongoing transformation of our portfolio into a quality, pure-play provider of comprehensive solutions for commercial buildings means that we can service these buildings to deliver outcomes that matter. Accordingly, we are extending our journey with our customers while capitalizing on attractive opportunities in the market. Together, this delivers value across our stakeholder base for customers, employees, and for our shareholders. With that, I'll turn it over to Mark.