Johnson Controls International plc — 2024 Q2

Yes. So in terms of push from Q1 to Q2, we had some orders that did slip due to the cyber incident and the recovery in the momentum. I wouldn't say it's material in terms of what pushed from 1 to 2. There was some smaller ones. But the strength of our orders in Q2 is really coming from the fundamental positive trend we're seeing in our data center business and some other core businesses.

Yes. So as I said in my prepared remarks, Steve, we are making good progress. As we've said, these businesses are outside the core and represent roughly about 25% of our sales. While they are noncore, they are good businesses that are adding value. So we're remaining focused on maximizing shareholder value. And like I said, pretty much across the board, making good progress. And we'll keep you updated as we continue through with these businesses.

So let me start first with the Global Product quality issue, which is really not a warranty issue, it really is a quality issue. The reserve really relates to an anticipated remediation action we need to address in a very recently identified firmware issue within some of our legacy products that are sitting in the field. We are currently testing that firmware update within those device, and we are developing a remediation plan for this particular issue, and we'll announce when we are done with the full remediation.

We see closer to higher single-digit growth for the balance, to be honest with you. That's improved.

Yes. So I don't think we're going to change our approach on JC Capital. This is really a tool we have to strengthen our ability to provide value and attach a service and deepen our relationship with customers as we provide like the full suite with the system, the service and then the financing that wraps around that.

No. As we're looking at what we're deploying from a solution standpoint, we're looking at each of the domains and then how we differentiate and how we go to market, being able to capture what we see to be the secular trends around data centers in some of these key end markets. And so it's really just based on the backlog that we've had, how it's converting. And then as we're getting more integrated solutions, you'll see where we get more of a broad-based pickup in all of the domains.

Yes. So let me frame up data centers because it has been obviously a key area for us as we've been deploying our resources, investing over the last few years because we saw this coming. I'd say that we are well positioned with the cooling technologies and solutions and a lot of that is working directly with each of the key hyperscalers and colos.

It was a fourth quarter comment, just to clarify. On the quality, we're early in the process. These, again, are very unusual. At this stage, we don't expect anything additional, but we are still reviewing how we are going to develop and deploy that firmware fix. And generally, we're able to resolve those issues fairly quickly within a couple of quarters. So it's not something that's going to drag along for years on because it's critical for us to fix those pretty quickly.

I would say across our applied, I mean, when you look at I mean both whether it be direct or indirect, and we have a much higher mix as we're differentiating our solutions, our Commercial Solutions business. When you look at the overall applied volume on a 2-year stack, we're up over 20%. And the pipeline right now that we're building is extremely strong because of the secular trends that we're addressing, which is the data center expansion and a lot of the industrial expansion as well as a focus on sustainability. So we've been positioning our technologies globally, regionally to be able to get more than our fair share. And I think we're positioned to continue to see that trend.

Yes. So first on the second half and you're directionally correct on Q4 segments. Again, our expectation there and where that margin comes from is really driven by 3 things: the improvement in our mix associated with the growth in our service business. As you know, the service business is much, much more profitable than our system business. It's the volume increase we are seeing both in our residential business as well as our book build business, where orders have been progressing well throughout the second quarter and as we enter the third quarter.

So I mean when we look at the $2 billion, that's -- that was the 2023, as you said. And then we're obviously seeing a significant pickup on that this year. So as we said, for the first half, we're already at the level that we were all of last year. Now a significant amount of that is being driven by the cooling technologies across our not only our air cool, water cool but also the application of Silent-Aire. So we've got a good pick up there.

Well, what we need to see is where we were. I mean we were pacing high single digits pretty consistently in the last couple of years when the cyber incident hit in the first quarter, that really set us back -- set the momentum back because it hit a number of our systems that ultimately execute not only from orders, but ultimately, how we fulfill service. So we are regaining the momentum as we said.

Yes. So that 50% was around HVAC applied as well as control for North America, North America in terms of orders this quarter. So a very, very strong momentum. A lot of it came from that data center, some of the key colos and key hyperscale are accelerating their orders. But what's also incredible to see is the pipeline continued to grow even after a lot of orders are coming in. So we think that momentum is going to continue building, and we are very comfortable about achieving those targets.

No. Good question, Andy. So first, I want to start by saying we are pleased with the performance in EMEA/LA in the second quarter. While it's not yet at par with the regional peers, the rapid progress we made both on backlog growth and margin in such a short period of time is a testament to the transformation and the application of that one end-to-end operating model George was talking about. I'm very proud of what the regional and functional teams have been able to achieve by leveraging further that integrated global business solutions operating model.

Yes. So a year ago, as we were rebuilding up to the second wave of cyber, there was a hole, and we were rebuilding our volume there and rebuilding inventory. And if you look at year-on-year in Q1 and Q2, there was a ramp last year. And obviously, we have a tough compare to that. What I would tell you is we are broad-based. So we're not just in the commercial resi, but it's we're in broad-based all of the end markets. What I would tell you, market back, we know where the opportunities are, how we're positioning, how we're deploying each of our technologies and differentiating the solutions we go to market. We're back really building, so building not only a very strong pipeline, but we're converting at historical rates as far as how we're converting to orders.

On the product, Joe, that's in our fire detection business. It's a sensor that ultimately, as Marc said, firmware in a sensor that the legacy product as far as when we look at all the products that's being produced today, it's totally compliant. So it's making sure based on what we've seen with a couple of failures, making sure that we're addressing that in the legacy product. And as Marc talked about, that's how we kind of estimated what that potential could be. And we're going to be disciplined in how we actually go about remediating that.

On the factoring and the finance charges, yes, the unwind of the factoring will provide some benefit in the balance of the year. What's offsetting part of that is the PFAS settlement. As you know, we are going to settle $750 million for the half, as well as slightly higher interest rate environment than we had originally anticipated. But I think the factoring and the cost benefit that it provides gives us confidence that our guidance is at the right level.

When you look at Global Products historically, when you're in a more stable environment year-on-year, I mean, last year, we had a tough year because as we were really working down backlog and have built up with all of the supply chain disruption. And then when lead times went back to normal, obviously, we were a shortfall of orders and orders coming in through the year. As Marc said, we're back to normal flow of orders to fulfillment. We've got our lead times down back to where they were. And so we're seeing good flow, right, from market demand, orders, building backlog and then converting.

And then I would add on mix. What you saw in the quarter, that negative mix of $80 million Global Products really came from the volume challenge we saw in APAC, that really led to an under absorption Global Products. Outside of that, the general mix of the product is neutral to the margin Global Products. What you get is really the lift, George just talked about.

I mean I would think of Q4 in the teens, 10% of the growth. And I think you're right, there's a step function change between Q3 and Q4 from a growth standpoint. But I don't think it's that challenge if you see the momentum we see in orders.

High single digit to attain the midpoint of where we are guiding. To get to the high end, you would need that 10% growth rate in Q4.

That goodwill relates to an impairment charge we took on our subscriber business. That subscriber business sits within our EMEA/LA segment. And it came really from a combination of small actual result delta versus an internal forecast we had but it was mostly associated over time the effect that the Argentinian peso had in the mix of results of that particular business. Then I'll remind you that, that impairment is noncash in terms of what the charge relate to. And it has absolutely no impact on our ability to deliver free cash flow for the balance of the year.

Yes. The PFAS settlement will be in 2 tranche. The first tranche coming shortly and the second tranche later in the year. I do not want to speculate on the timing of the recovery of the cash from the insurance. I would tell you we have significant insurance with about 20 insurers. We are doing everything we can to recover as much as we can. We have a line of sight of recovering a very material portion of the settlement. But at this stage, I'm not being able to pin down an exact time line on that recovery.

I mean I don't want to overspeculate on exactly where we stand. What I'll tell you is that there's different combination of divestiture structure that we are looking at, and we are simply trying to optimize shareholder value and our ability to return a very large portion of that, the proceeds associated with the divestiture back to shareholders. The divestiture will require like any material divesture for us to take action around our base cost and our central cost of operating. We have good line of sight to action that. We've already started planning around it.

At this stage, it would be very hard for me to pin ourselves down on the timing. We're doing everything to accelerate the process. Depending on how we structure the divestiture, the tax effect will be very different. So at this stage, that's giving you a very wide range of the different options that are being considered from a divestiture of structure, I don't think would be helpful. But again, we're doing everything to maximize shareholder value here.

Yes, I would say it's about -- it's in the range where about 2/3 would be chillers, and the others would be -- air handling would be crawls, would be fire and security, all of the other systems that ultimately support the deployment of the cooling technologies.

It's absolutely part of the offering and those very complex solutions. We are really set up with our engineering and our product offering to really leverage that market. And that's where we see the pipeline continuously growing as the complexity and the structure of those data center continue to increase.

And Deane, I think it's important to note also from a service standpoint, when you go to one of these sites and you see the installations and all of the equipment, both across the domains, what is really strong is our footprint, providing the service. And so how our teams then are positioned to support all of these large facilities that are being put up. And so that's where we see significant opportunity to be able to deploy our system so that then from a life cycle standpoint, we have the domain and expertise deployed to be able to support these large operations.

I think we're still early stage. As you mentioned, we are looking at next year and where we're going to deploy our resources from a growth standpoint. I think as we close Q4, we'll probably be able to give you a strong view on where we are going to land for next year as well as our long-term algo. But I don't think we'll shy away from the comment I made last time that 85% to 90% free cash flow conversion plus, although the long term is really where we should be thinking.

No. What I would say is when we went through that high inflationary period, obviously, that exposed a lot of our weakness because we were in a low-inflationary period for so long. We've built very robust pricing and costing pricing, and then from a selling standpoint, focusing on value. And so as we plan long term now, we're factoring in. We're, from a costing standpoint, anticipating higher than level -- higher than the kind of the market forecast on inflation.

I mean what I would say it's broad based. When you look at our applied business, right from -- and we have the full portfolio of technology, whether it be water-cooled chillers, air-cooled chillers which obviously is focused on data centers. The Silent-Aire packaged cooling solutions that we deploy.

Commercially, Europe, I made a comment in the opening remarks around industrial refrigeration growing really fast. There's multiple pockets of the market that are growing, probably not as fast as what we're seeing in data center, which is really unprecedented and continue to see that pipeline growing, but we see pipeline growth across the board.

Across the board. And then what we've learned is technology wins. And so we've been investing multiyear in our technology differentiation. And as we're applying that into the key verticals, that's what ultimately is delivering the value.

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

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