Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Johnson Controls International PLC (JCI, Financial) exceeded almost all of its fiscal third-quarter 2024 targets, with organic sales growth of 3% and a robust 150 basis points of segment margin expansion to 17.9%.
- Free cash flow generation during the quarter was more than $500 million higher than the comparable period one year ago.
- Orders grew 5% during the quarter, and the backlog grew 10%, indicating strong demand for JCI's solutions.
- The company announced two significant divestitures, simplifying its portfolio and focusing on higher growth areas, including the sale of its Residential and Light Commercial HVAC business and Air Distribution Technologies business.
- JCI tightened its full-year adjusted EPS guidance to a range of $3.66 to $3.69, reflecting confidence in its financial performance and ongoing transformation efforts.
Negative Points
- The company experienced continued weakness in its China system business, which impacted overall performance.
- Fire & Security segment declined low single digits, with a decline in fire suppression offsetting growth in fire detection and security video surveillance.
- Asia-Pacific sales declined 19% due to ongoing weaknesses in China, affecting the overall segment EBITDA margin.
- The divestitures of the Residential and Light Commercial HVAC business and Air Distribution Technologies business, representing roughly 20% of current sales, may lead to short-term revenue and EPS dilution.
- The CEO succession plan announcement may create uncertainty among investors and stakeholders until a new leader is appointed and the transition is complete.
Q & A Highlights
Q: I wanted just to dig in on the data center kind of impact on backlog a bit. I would assume that a big chunk of that backlog growth is data center, but maybe you could give us some color on the impact materiality of that growth in that vertical. Thanks.
A: Yes. Let me give you a framework and then Marc can talk a little bit more about how it is being built in backlog and converting. We're already now, we said in the prepared remarks that we're about 7% a year ago. When we look at the business today, it's about 10% of sales on a pro forma basis and continues to be very strong. We are working across all of the hyperscalers and colos. We've got a global team now making sure that our leadership technology in all of our domains is positioned to provide the best solutions globally. So that pipeline continues to build. And I think as we think about our orders and backlog, certainly this is going to be a higher mix of backlog playing out. In many cases, it is multi-year backlog. And for us, we look at the next 12 months as far as how we book the backlog. And then as we think about the growth, Scott, going forward, this is going to be strong double-digit growth in '24. It's going to be, for this year, strong double digits and continuing to accelerate over the next few years given the work that we're doing.
Marc Vandiepenbeeck: Yes. So, Scott, if you look at that growth in backlog of 10% to almost $13 billion in backlog, the mix remains consistent year-over-year because a lot of those data center projects, as George mentioned, are multi-year. There is clearly more data center work in that $12.9 billion. But that mix will continue to evolve more towards the data center as we churn that backlog. We will maintain our definition of backlog as what we see in revenue for the next 12 months. And with that consistency, you'll see a change over time more tilted towards the higher growing segments of the market.
Q: I wanted to ask about the overall kind of top-line growth outlook and sort of two elements of that. I think one is the total company this year is growing about 3%. When we look at the sort of the go-forward business, the $22 billion revenue base or so, is that sort of 3% rate abnormal in any respect when you're looking at the backlog and assuming no big changes in interest rates or US policy kind of as we're looking ahead? And related to that, the Fire & Security business is something that you've known for a long time. It looks like sales are flat there this year and that will be about 45% of the go-forward revenue, I think. What do you think Fire and Security can grow at sort of medium term?
A: Great question. So let's start first with the 3% for the full year. Really, we had a lot of cyber headwind in the first quarter that if you did somewhat that overall growth rate year-on-year. So I'll tell you for a longer-term algorithm, 3% is absolutely not what our expectation would be. It would be closer to mid-single digits and that's really on the basis of a mid to high single-digit growth in our service business and a mid single-digit growth into our Systems business overall. So those fundamentals driving a better mix of roll out different depending on the different product line. And right now, HVAC is benefiting from a lot of tailwind coming from decarbonization, data center and other market verticals that have really propped up the growth there. And you're right. We've seen a little bit of softness overall in the market on Fire and Security this year. We are seeing particularly in a book-and-bill business, some signs of recovery, and we think we can maintain that mid single-digit growth over time for that business as the service and recurring component aspect of that business will continue to be higher than mid-single digit target.
Q: Do you have a timeframe in mind for this succession? I know you obviously want to find the right person there is for the search? But any timeline? And then maybe just touch on Patrick's appointment to the Board obviously, you know, Patrick very well. What sort of skills kind of made him the right person for the Board? And I wonder if maybe he's under consideration for next year?
A: The timing of this. I mean, we've made great progress on our portfolio with the moves we've recently made. I think it's clear. We have a lot of confidence now in the strategy playing out. We're starting to see the results from that. And we've also put a strong leadership and team, and I'm very confident of their capabilities and the work that they're doing that's going to position the company to continue to be successful. Now the Board, working with the Board, we've had succession plans that we've been building over time. So that's well underway and now we're looking at both internal and external candidates. The Board is engaged directly with the national recognized search firm and making sure we're also looking and developing at our internal candidates. So it's hard to define the timeline, but we are moving forward. And as far as myself, I couldn't be more committed and more passionate and energized relative to where we are. Committed to make sure that we see through a very smooth transition to my successor and then I'll continue on as our Chairman of the Board. So that's kind of where we are. We'll keep you up-to-date as we make progress through the year and through the remainder of the year and keep you updated.
Q: The free cash flow in the quarter was pretty good. How do you see that playing out in the fourth, I know 85% conversion would suggest, I think somewhat of a step down in the fourth, and you're already on a trailing basis, you've got, you're already very close to 100% conversion. So just curious as to how sustainable this good result is?
A: Well, great question, Steve. So you're right. We saw really solid improvement year-on-year and the momentum year-to-date has been quite strong. We're seeing working capital fundamentals continuously improving and continue to trending very positively. The work we've done on lowering inventory and improving our S&OP process have allowed us to really drive overall more predictability to the working capital. As far as that 85%-plus conversion for the year. We continue to invest aggressively in parts of the market that are attractive to us, particularly increasing the capacity in our data center as we expand more lines in our factory in North America and elsewhere as well as continued involve the investment in our ERP landscape. We do believe that the momentum allows us to probably do better than 85%, and structurally in long term, we'll be able to continue to improve on that. But as of today, I'll tell you 85%-plus is where we're comfortable.
Q: In the release, there's a cloud of the gain, the significant gain on us on the insurance recover
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
