Q3 2024 Summary
Published Jan 10, 2025, 5:10 PM UTC- • Strong Confidence in Margin Expansion:* Johnson Controls expects to achieve an EBITA margin of approximately 19% in Q4, reflecting a sequential increase from almost 18% in Q3. The company has strong visibility into this target due to a solid backlog and continued productivity improvements.
- • Robust Free Cash Flow and Working Capital Improvements:* The company has seen a significant improvement in free cash flow generation year-over-year, with working capital metrics continuously improving through actions like lowering inventory and enhancing S&OP processes. Johnson Controls is confident in achieving adjusted free cash flow conversion of approximately 85% or better for the full year.
- • Strong Position and Growth Prospects in Data Center Market:* Johnson Controls has a solid pipeline and is well-positioned in the fast-growing data center vertical, expecting large orders in the coming quarters. The company's comprehensive value proposition and capacity expansion are leading to multi-year agreements with customers.
- The company is experiencing growth challenges, with organic sales expected to grow only approximately 3% for the full year, which is lower than anticipated, partly due to softness in the Fire & Security business, which has had flat sales and represents about 45% of the go-forward revenue.
- There is uncertainty surrounding the CEO succession plan as the current CEO, George Oliver, is stepping down, and the company has initiated a search for a new CEO, which could lead to potential disruption or strategic shifts during the transition period. ,
- The company's Asia-Pacific business, particularly in China, continues to face headwinds, with a slower recovery than initially anticipated, leading to expectations of declining revenue in the region for the upcoming quarter, which could negatively impact overall growth prospects.
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Growth Outlook and Guidance Amid Divestitures
Q: Is the current 3% growth rate normal, and what's the growth outlook, especially amid divestitures?
A: The 3% growth this year is not our long-term expectation. We faced cyber headwinds in Q1 affecting year-over-year growth. Going forward, we expect mid-single-digit growth, driven by mid- to high single-digit growth in our service business and mid-single-digit growth in systems. Despite divestitures, we're comfortable with our guidance and commitments for both the full portfolio and continued operations. We'll provide guidance on continued operations next quarter. -
PFAS Settlement and Insurance Recoveries
Q: What's the expected cash outflow for the $750 million PFAS settlement now that insurance recoveries have begun?
A: We took a $750 million charge in Q2 for the settlement. In Q3, we received $351 million from insurers, recovering almost half immediately. More payments from insurers are expected over the next few quarters. We believe we're well covered by insurance, and the net effect will be de minimis. -
Data Center Growth and Backlog Impact
Q: What's the impact of data centers on your backlog growth, and do you expect order acceleration?
A: Data centers now represent about 10% of sales, up from 7% a year ago. The data center pipeline is building, with multiyear backlogs included in the almost $13 billion total backlog, which grew 10%. We expect strong double-digit growth in data centers in 2024. While orders can be lumpy in this sector, the increased pipeline gives us confidence in large orders in upcoming quarters. -
Free Cash Flow Conversion and Margins
Q: How sustainable is the strong free cash flow conversion, and what's your visibility into achieving the 19% EBITA margin guidance for Q4?
A: We saw solid year-over-year improvement in free cash flow, driven by improving working capital and lower inventory due to better S&OP processes. While we project an 85%+ conversion for the year, momentum may allow us to do better. For Q4, we have strong visibility and confidence in achieving the 19% EBITA margin, a sequential increase from almost 18% in Q3. Fundamentals like strong backlog and productivity gains contribute to this confidence. -
Asia Pacific Recovery and China
Q: Do you expect bookings to accelerate in Q4 in Asia Pacific, and will we see recovery in FY '25?
A: We continue to see sequential improvement in orders, but the recovery is slower than anticipated. In Q3, order intake improved from Q2, and we expect this to continue in Q4. We anticipate one more challenging quarter in Q4 with low single-digit year-over-year revenue decline. However, we expect the business to recover in FY '25, with positive momentum as we enter the year. -
Divestitures and Use of Proceeds
Q: With portfolio changes, what's the reset 2024 base relative to the current guide? How will you manage leverage and use proceeds from divestitures?
A: Discontinued operations don't change our commitments; we're comfortable with our guidance for both the full portfolio and continued operations. We expect the transaction to close in the next 12 months and plan to return most of the net proceeds to shareholders via share repurchases, similar to past transactions. Addressing leverage will depend on the timing; we aim to maintain our investment-grade rating. -
CEO Succession and Attributes
Q: What's the timeline for CEO succession, and what attributes are you seeking in your successor?
A: We've been building succession plans over time, looking at both internal and external candidates, engaging a nationally recognized search firm. There's no set timeline, but we're moving forward and will keep you updated. We seek someone with strong operating and domain expertise in our industry. The successor should be able to build on our foundation and lead Johnson Controls to the next level. -
Fire & Security Growth Prospects
Q: Fire & Security sales are flat; what growth can we expect in the medium term?
A: We've seen some softness in the Fire & Security market this year. However, we're seeing signs of recovery, particularly in our book-and-bill business. We expect to maintain mid-single-digit growth over time, especially as the service and recurring components of the business grow. -
Service Revenue Multipliers
Q: Are the 10:1 service revenue multipliers achievable going forward?
A: Yes, we believe these multipliers are real and achievable. The multiplier varies by product line; HVAC has a lower multiple, while Security Controls and Fire provide higher levels over the product life cycle. This is based on real data from customers where we've added connectivity and additional services using OpenBlue, significantly reducing attrition and building our service base. -
Disciplined Approach in EMEALA Systems
Q: What is your more disciplined approach in EMEALA systems, and can it be applied elsewhere?
A: We've implemented an operating model focusing on centralized decision-making regarding which verticals and markets to approach. We concentrate on markets with attractive margins and strong service attach rates. This has driven modest growth in systems but larger growth in service. This model has been fully deployed in North America and is being applied in EMEALA and Asia Pacific.