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    Johnson Controls International PLC (JCI)

    Q1 2024 Summary

    Published Jan 10, 2025, 5:10 PM UTC
    Initial Price$52.94October 1, 2023
    Final Price$57.64December 31, 2023
    Price Change$4.70
    % Change+8.88%

    What went wrong

    • Accelerated weakness in China is impacting Johnson Controls' revenue growth, leading to a reduction in full-year adjusted EPS guidance by $0.05, with the expected recovery of backlog and projected revenue being delayed.
    • There is uncertainty surrounding the strategic review of noncommercial product lines, which account for less than 25% of the company's portfolio, potentially leading to disruptions and challenges in operations and impacting margins and revenues.
    • The Global Products business continues to face challenges, notably in the North American residential HVAC market, which is still down about 20%, and the company anticipates one more challenging quarter before stabilization occurs.

    Q&A Summary

    1. Portfolio Review and Potential Divestitures
      Q: Can you provide details on the potential divestitures and their impact?
      A: George Oliver stated that the noncommercial product lines under review represent less than 25% of the portfolio. While these are excellent businesses with margins in line with the overall company, they are not consistent with JCI's long-term strategy to become a comprehensive solutions provider for commercial buildings. The company is in early stages of pursuing strategic alternatives to simplify the portfolio and create more value for shareholders.

    2. Use of Proceeds from Potential Asset Sales
      Q: How would you deploy cash from potential asset sales?
      A: George Oliver indicated that JCI plans to use proceeds from any divestitures to make accretive bolt-on acquisitions that support technology and go-to-market strategies. Additionally, the company may return capital to shareholders to offset any dilution from the divestitures.

    3. China Sales and Guidance Impact
      Q: How did China's market conditions affect your guidance?
      A: Marc Vandiepenbeeck explained that the economic environment in China has deteriorated beyond initial cautious expectations, impacting the business. This has led to a guidance reduction of $0.05 due to a slower recovery of backlog and projected revenue now pushed to the right.

    4. Momentum Despite Negative Organic Growth
      Q: How do you reconcile momentum claims with negative organic growth?
      A: George Oliver acknowledged that a significant disruption from a cyber incident impacted momentum in Q1, causing short-term challenges. Despite this, he emphasized that the company's long-term strategy remains focused on leveraging combined strengths to deliver value to shareholders.

    5. Orders and Backlog Recovery Post-Cyber Incident
      Q: How are orders and backlog recovering after the cyber incident?
      A: George Oliver noted that the sales conversion cycle lengthened by about a week due to the cyber incident. However, the expanding pipeline supports acceleration of orders in Q2 and the remainder of the year, returning to previous projections.

    6. EMEALA Margins and Improvement Plans
      Q: What is being done to improve margins in EMEALA?
      A: Marc Vandiepenbeeck is implementing an enterprise field operating model in EMEALA, focusing on market subsegments that offer the most value. With actions taken to simplify and standardize the business, he expects EMEALA to return to profit levels comparable to other field segments.

    7. Second Half Growth Expectations
      Q: What are your growth expectations for the second half?
      A: The company expects second-half growth of around 8%, with both Global Products and Building Solutions contributing similarly. Recovery in Asia Pacific and stabilization in Global Products support this outlook.

    8. Pricing Power Across Verticals
      Q: What are you seeing regarding pricing power?
      A: Marc Vandiepenbeeck reported improved pricing due to simplification and focus on value in select market subsegments. In Global Products, avoiding commoditized markets has led to strong margins, particularly in Applied HVAC. George Oliver added that in the residential market, they continue to lead on pricing without significant pushback.

    9. Free Cash Flow Potential Post-Divestitures
      Q: Will divestitures affect your free cash flow targets?
      A: George Oliver affirmed that the commitment to achieving 100% free cash flow conversion remains unchanged. The company has improved fundamentals across Building Solutions and Global Products, enhancing billing practices and collections.

    10. Service Order Trends by Region
      Q: How are service order trends across regions?
      A: Service growth is strong globally. In North America, the service business is recovering from the cyber disruption. EMEALA is driving long-term double-digit growth by focusing on high-value market segments. In Asia Pacific, the focus is on subsegments with strong service profiles to maximize life cycle opportunities.

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