江森自控 (JCI) 2024 Q4 法說會逐字稿

Good morning, and welcome to the Johnson Controls fourth-quarter 2024 earnings conference call.

(Operator Instructions)

Please note that 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 ourc conference call to discuss Johnson Controls fiscal fourth quarter of 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 at Investor Relations portion of our website at johnsoncontrols.com.

Joining me on the call today are Johnson Controls, Chairman and Chief Executive Officer, George Oliver; and Chief Financial Officer, Marc Vandiepenbeeck.

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 to 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 Controls website.

I will now turn the call over to George.

Thanks, Jim, and good morning, everyone.

Thank you for joining us on the call today.

I would like to start today's call by taking a moment to acknowledge and thank all of our employees for their contributions in delivering strong quarterly results.

We also made significant progress in our transformation to simplify our portfolio and become a pure play provider of comprehensive solutions for commercial buildings.

Today, we are a faster-growing, more profitable, simpler company.

Let's begin with slide 4.

We ended fiscal 2024 with momentum, delivering double digit organic revenue growth, robust margin expansion, and 96% adjusted free cash flow conversion.

Quarter growth of 7% in the year was led by data center demand and contributed to our record backlog, which ended the year at $13.1 billion.

Our differentiated solutions to enhance efficiency and sustainability in commercial buildings continue to resonate with our customers across the key verticals we serve.

For example, we extended our leading position in cooling for data centers with orders for the full year more than doubling the sales we delivered.

In fact, we are now seeing key customers placing multiyear orders in the hundreds of millions of dollars to provide cooling solutions.

Our pending sale of the residential and light commercial business to Bosch is progressing, and we expect the transaction to close in the fiscal fourth quarter.

Today, we are introducing our fiscal 2025 guidance from continuing operations of $3.40 to $3.50, which Marc will give more details on later in the call.

We believe we are well-positioned going forward to deliver long-term shareholder value.

Our business transformation is almost complete, and we are benefiting from more consistent, predictable performance.

Slide 5 presents a pro form look at the new Johnson Controls, representing the composition of our company going forward.

Today, Johnson Controls is a leader in building solutions dedicated to solving our customers' needs for energy efficiency, and clean electrification.

Our innovative approach and commitment to sustainability are driving us forward, ensuring we provide innovative solutions that meet the evolving demands of the market.

Johnson Controls, unique customer value proposition directly translates to shareholder value creation.

Our multi-domain presence enables us to serve our customers over the building lifecycle while also delivering safe, healthy, and sustainable solutions.

This means we can meet the needs of our customers all over the world and deliver cost savings and efficiencies for them.

We are confident we are well-positioned with the integrated domain expertise in an intensive branch network to deliver greater value to our customers.

In turn, we believe this will lead to sustained top line growth and significant margin expansion.

As part of our path towards simplification, we have now deployed one end-to-end operating model that we leveraged globally across all of our key verticals.

It is positioning us with a unique capability and serving buildings and leveraging our digital expertise to expand our connected services model.

We are improving productivity on behalf of our customers, helping them maximize outcomes for their buildings, whether it is the fast-growing data centers, expansion of campus, housing and labs in higher education, we're solving needs across health care from hospitals to outpatient facilities.

We deliver engineered solutions across all of our key verticals.

This enables us to realize the benefits of this model over the lifecycle of our solutions, ensuring sustained value creation.

Johnson Controls is better positioned than ever before to help customers create safer, more sustainable buildings while also maximizing the occupant experience.

Our strong finish to fiscal 2024, coupled with our record backlog, reinforces our confidence that Johnson Controls will continue to lead globally in building solutions.

With that, I'll turn it over to Marc.

Thanks, George, and good morning, everyone.

Please turn to slide 6.

Our performance in the fourth quarter highlights continued strong execution across the portfolio.

Our single end-to-end operating model provides the visibility needed to drive consistent and predictable results.

This was evident in our performance in the quarter as organic revenue grew 10%, and segment margin expanded a robust 260 basis points to 18.6%, led by substantial improvement in both [EMEALA] and global products.

We delivered another strong quarter of increased productivity while converting a higher margin backlog.

Adjusted EPS of $1.28 was up 22% year-over-year and exceeded the high end of our guidance range by $0.02. Operational efficiency contributed to the majority of the growth and more than offset additional corporate expenditures, primarily related to IT investments.

The strategic allocation of resource ensure we are well equipped to support our growth and safeguard our infrastructure.

Below the line, net finance charges were higher, our EPS benefited from a lower share count.

Overall, we achieved significant EPS growth, and we are pleased with these results.

On the balance sheet, we ended the first quarter with approximately $600 million in available cash and net debt decreased to two times, which is the lower end of our long-term target of 2 to 2.5 times.

Our adjusted free cash flow conversion of 96% was a strong improvement year-over-year and substantially exceeded our previous commitments.

This strength is reflecting our improved fundamental in working capital management.

Adjusted free cash flow of $2.4 billion improved nearly $800 million year-over-year.

For the full year, we hand down $2.2 billion to shareholders via dividends and share repurchases.

Let's now discuss our segment results in more detail on slides 7 through 9.

Beginning on slide 7.

Our global product business had a strong finish to the year.

Organic sales grew 8% as price remained positive, and we delivered five points of volume growth.

Low double-digit growth in HVAC, both commercial and residential, offset declines in Fire & Security and Industrial Refrigeration.

Strength was broad-based across the region, led by double-digit growth in North America.

Adjusted segment EBITDA margin expanded an impressive 700 basis points to 28%.

We have made tremendous progress over the past year in improving our operational efficiencies, leading to substantial margin improvement extending in the fiscal second half.

Turning to slide 8 and 9 to discuss our building solutions performance.

Building solutions deliver solid performance this quarter, underpinned by sustained order momentum, double digit revenue growth, and margin expansion.

Additionally, we increased our record backlog which remains at historical levels and underscores the strength of our business model.

Our outcome-driven solution offering continued to resonate with our customer across many of the attractive vertical we serve.

With strong growth in data center, government, healthcare, and High-Ed.

Orders grew 8% in the quarter, led by mid-teen service growth, while system order grew 5%, and against a double-digit comparison.

Orders in North America increased 7% in the quarter, with low-teen growth in service, led by strength in Fire & Security.

System order grew 3% against a

[tough comp].

In EMEALA, orders were up 14% with over 20% growth in service, while system orders grew 9%.

Across the portfolio, we saw strong double-digit growth in HVAC controls in industrial refrigeration.

In Asia Pacific, momentum is building as orders rebounded from the past few quarters of decline.

Overall, order grew 6% led by 9% growth in service.

Our pipeline of opportunities within building solutions remain healthy as we continue to build on the momentum of the past several quarters.

Our building solutions segment enter the quarter with record backlog, which provided a solid foundation, enabling us to capitalize on the high demand for solutions and services.

Organic sales increased 11%, led by double-digit growth across both systems and service.

Our sustained service growth sets us apart as we continue to deliver differentiated lifecycle solution for customers.

Sales in North America were up 16% organically, with continued strength across HVAC and controls.

In EMEALA, organic sales grew 10%, with docouble-digit growth in control security and industrial refrigeration.

In Asia Pacific, while sales declined 5%, we saw sequential improvement.

This improvement was driven by a stronger backlog and our resilient service business.

The margin profile within our building solutions segment continues to strengthen due to the enhanced productivity, favorable service mix and improve operational efficiencies while executing our higher margin backlog.

By region, EMEALA adjusted segment EBITDA margin expanded 370 basis points to 11.5%, driven by improved productivity and the positive mix from growth in service.

In APAC, adjusted margin expanded 70 basis points to 14.2% as positive mix from our service business offset the decline in systems business.

In North America, adjusted segment margin declined 40 basis points to 15% related to mix as systems grew faster than service.

Building solution backlog remains at record level, growing 7% to $13.1 billion.

Service backlog grew 12%, and system backlog grew 6% year over year.

Let's discuss our first quarter and fiscal 2025 guidance and the impact of discontinued operation on slide 10 and 11.

We are entering fiscal 2025 with momentum and our record backlog offers great visibility into the new year.

Our service business remains well positioned and provides a favorable mix to margins.

As we look to our guidance for fiscal 2025, we will be presenting both the first quarter and full year on a continuing operations basis.

After moving the residential and light commercial business to discontinued operation, our fiscal 2024 continuing operations adjusted EPS is $3.21 per share.

For the first quarter, we anticipate organic sales growth of mid-single digits, adjusted EBITDA margin expansion of over 100 basis points from approximately 14.5%, and adjusted EPS in the range of $0.57 to $0.60, representing 24% to 30% growth.

While the first quarter is again an easy comparison, the overall fundamentals are strong entering the year.

For the full year, we expect organic sales growth of mid-single digits, which is consistent with our long-term growth

[algorithm].

Adjusted segment [EBITDA] margin are expected to expand over 50 basis points, while adjusted EPS range of $3.40 to $3.50 per share represents 6% to 9% growth.

We expect free cash flow conversion of 85% or greater, consistent with the performance of fiscal 2024 on a continuing operations basis.

We continue to target returning 100% of our free cash flow to shareholders through dividends and share repurchases.

We expect the residential and light commercial divestiture to close during the fiscal fourth quarter.

Consequently, we have not included any capital deployment from sale proceeds in our fiscal 2025 outlook.

Additionally, we are committing to a multi-year restructuring plan to address trended cost and further right-side of global operations following our previously announced portfolio simplification actions.

We anticipate incurring roughly $400 million in expenses over the next 3 years, resulting in expected annual cost savings of approximately $500 million.

Similar to the timing of deploying capital from the closure of the residential and light coming divestiture, many aspects of this restructuring plan will depend on the timing of the close of the transaction.

We are confident this factor will drive sustained success and create long-term value to our stakeholders.

While fiscal 2024 was a year of significant portfolio transformation, we are better positioned as a faster-growing, more profitable, simplified company.

We look forward to updating you on our progress as we continue our strong momentum entering fiscal year '25.

With that, operator, please open the lines for questions.

Thank you, we will now begin the question-and-answer session.

(Operator Instructions).

Nigel Coe, Wolfe Research.

Good morning.

Sorry, as the mute button there.

Thanks for the question.

I think Marc, this question is for you.

The mid-single digit, how do you see that across the segments?

I’m assuming APAC probably is the best -- but just curious how you see mid-single-digits corporate segments and any color on 50 bps again across segments.

And I just want to verify, obviously, the restatement is happening with Angola products.

And it looks like the clean EBITDA margins in 23%, 24% were 25.7%, 27.1% ex-Hitachi and York.

So I just want to make sure that's the right numbers.

Yes, good morning, Nigel.

I'd love to cover there.

So first, on growth.

We had a very strong growth quarter and very happy with the results, but we are entering the new year with record backlog of about $13.1 billion.

And I think we continue to target that (technical difficulty) mid-single digit, granted we have a lot of confidence given the level of backlog we have.

As you know the timing of some of the larger project could impact quarter over quarter growth rate.

And I think we are seeing some very strong tailwind in the growth vertical.

Now if you think by segment, product growth rate in mid-single digits kind of break down, we think APAC is going to be slightly above that overall guide for the enterprise.

And really on an easier compare, and as we showed in the fourth quarter, we starting to see sequential order growth for that business.

And the rest of the businesses, North America, EMEALA, our global product will be at or just slightly below that overall guidance throughout the year.

Now when it comes to margin, and I hear you both on the total margin and the continued operation basis, global product margin, what we covered in the last quarter when we gave guidance for Q4 is, with the base cost and how we dealt with that base cost within that business, and a lot of the disruption from a supply chain standpoint being behind us, a little bit of volume was going to go a long way.

And you saw that in Q4.

So I think that's going to remain through as we enter fiscal year '25.

We've been driving significant operational efficiency that are structural and fundamental across both the manufacturing base and the supply chain.

And you can see that global product business has benefitted, and we continue to see benefit from an improved absorption.

And that leverage will continue to provide easier comp year on year.

Now that business has some seasonality to it.

So the first part of the year will be a little bit softer than the second part of the year.

But that margin we feel is very well set for fiscal year '25.

And just want to make sure I got that.

For the global product margins in fiscal '23, '24, any help there would be good.

But I was wondering, George, maybe if you could comment on the CEO succession, what process have been made, identifying the right person to replace you when you retire?

Yes, good morning, Nigel.

We understand there is significant interest in the ongoing CEO succession process.

At this time, we don't have any new updates to share but you can be rest assured that the Board is actively considering an impressive list of candidates, both internal and external.

And we do expect to have an update in the first half of calendar 2025.

Steve Tusa, JPMorgan.

Hi, good morning.

Morning, Steve.

Sorry, just wanted to better understand that the first quarter -- I'm not quite sure if the guide you just gave was for the year or the first quarter, buttoning with orders trending up (inaudible) with your organic being so strong this quarter and the comp not looking particularly hard.

What is the reason why first quarter is only up mid singles in organic, specifically?

Yes.

So if you think about the timing of some of those larger orders and how the revenue, particularly the big verticals that we are benefiting from, whether it's large decarbonization projects, or the data center projects, we had very strong performance in the fourth quarter in those particular vertical.

And that quarter being the busiest season for service business, we also had very strong performance there.

We reached double-digits service growth.

While that's probably sustainable over the long term, there's some quarter-to-quarter volatility to that.

And so a mid-single digit growth for Q1 granted on an easier compare versus last year is where we feel comfortable, really coming from (technical difficulty) places here.

North America will see some strong performance probably a little bit higher than that mid-single digit, but both EMEALA and APAC as well as global product will be right in line with that mid-single digit or slightly lower.

And I think that's where we feel comfortable with the growth going to come next quarter.

Okay.

And then can we just get for the refresh portfolio, what percentage of revenue now is data center do you expect in '25?

Consistent with what we've said (inaudible) give or take a little bit of data center exposure is about (technical difficulty) of all of our revenue and continues to grow faster than the rest of the portfolio with very solid, double-digit growth sequentially, at least for the foreseeable future.

Scott Davis, Melius Research.

Good morning, George, and Marc, and Jim.

Good morning, Scott.

(multiple speakers)

When you get a big data center order and you do an install, does it typically come with a similar kind of attachment -- service attachment rate in Open Blue that you'd have in the building or is it is there a different kind of attachment rate there?

Good question, Scott.

The service overall is slightly better than our than our portfolio from an attach rate standpoint.

And the digital services really depends on the type of customer.

You know that particular vertical is very sensitive to digital solution and is very cautious about how they deploy it.

And that some customers that have a little bit more cutting edge than other expecting to have full connections.

Some others would like to manage that on their own.

But the service attach rates for that business is very, very strong and better than the rest of the portfolio.

And it's changed a lot, I'll tell you over the last call of the 5 of 6 years.

That vertical probably 5 or 6 years ago was not very high service attached, where a lot of those key customers have taken the view that they wanted to self-serve some of that.

I think what they've learned with the complexity and also the quality of our capabilities, we are really able to differentiate our self and provide a full suite of service with guaranteed outcomes for those customers.

Scott, what I would tell you with the short-term trend is significantly up because as you look at these data center sites, we have hundreds of units deployed on these sites.

We have dozens of our technicians that are supporting these operations.

And we made the case that when we have connectivity, number one is not only are we more efficient in how we serve them, but we can be very proactive in making sure we're maintaining the overall operation.

So the trend is actually significantly up because of that.

That's helpful, guys.

And just -- now that you've had another quarter of seeing big orders come through and as such, how would you compare kind of the pricing power in that vertical to the traditional building segment?

Is it a little bit better because it's more complex?

Or is it more comparable because honestly, everything in applied isn't that easy?

There's some parts of applied that our slightly commoditize, but most of applied, these engineered solution that require kind of a strong partnership with the customer and allows us to deliver value to that customer and drive good pricing.

The way we've approached the data center vertical is, we really embedded our engineering resource with those customers to try and solve really high up the value chain, the problems they're trying to solve for when it comes to heating, cooling, as well as the way they control the fire and security of their building.

So across the board, if you compare probably the margin of those particular vertical businesses vis a vis the rest of the market is probably slightly more than what you see.

Now it's going to continue to improve as a market over the next few months and years.

We've developed differentiated solution from more deals that allows us to come in at a little bit more price, and we're expecting that to continue drive a better margin profile than the more traditional applied equipment business.

And I would add to that also on the product side, we've been ahead of the curve with our reinvestment in product.

And so as we've been differentiating our product and getting positioned for the next generation of data centers, I believe that we're positioned extremely well with that value proposition.

So we believe that the margin profile that we've been able to achieve with what we've done today is going to continue to improve going forward.

Julian Mitchell, Barclays.

Hi, good morning.

Maybe just wanted to understand first off on the restructuring announcement that you made, maybe help us understand the phasing of the $500 million of sort of cost-out savings, and how much of that is reflected in 2025 operating margin guide?

And similarly, on the I think 400 or so of costs for that program, how much is in the free cash flow guide for the current year?

Great question, and good morning, Julian.

So as with any significant change to a business portfolio like the divestiture of the residential light commercial, we've been pursuing opportunities to refine our business structure in our operating model that are -- to really facilitate how we deploy resource in a simpler, more clear and quicker to market.

And we have been driving many different aspects of that restructuring as we go through that.

As you know, we still have a business to run until the transaction close.

So some of the timing of that cost is going to be hard to predict because it's very attached to the timing of the closing of the transaction.

But as any restructuring, we expect the restructuring costs to come ahead of the restructuring benefits.

So the $400 million will come ahead of the $500 million, it's not a one to one perfectly timed structure.

As we looked at the free cash flow conversion guide for the year, we've included a substantial amount of that $400 million into our guide for fiscal year '25, which is kind of one of the large structural headwinds we have for the year alongside some CapEx investments and [additional] delta between effective tax rate and [CapEx] rate.

But there's a large portion of restructuring probably right about half of that, that is including in our guide for fiscal year '25.

Chris Snyder, Morgan Stanley.

Thank you.

I wanted to ask about North America building solutions margins.

Just kind of the outlook into '25.

So clearly, a lot of pressure on the segment in Q4 on that system mix.

But it sounds like that's supposed to kind of normalize into the first half of the year.

I guess that's through fiscal '25.

So can you kind of talk about what that can mean for building solutions margins as that mix headwind goes away?

And what's in the guide for that?

Thanks for the question, Chris.

Great question.

It is -- I wouldn't say it's material margin pressure, but you saw North America in the quarter, growing extremely rapidly on the backend of those of those larger projects.

And those larger systems project come at a margin that is slightly lower than what the service business is able to drive.

So even though the team was able to drive in North America a very solid service growth, it was not enough to compensate, if you like, for the mix effect of those larger data center in new energy projects and decarbonization project that the team completed in the quarter.

And so if you look forward, the valuation you were going to get quarter on quarter on those projects will remain.

But the headwind that it creates will tail off, especially as we move towards the year because the net effect of service in the service attachment rate, as although project come live, and we start, revenue in the service on this particular system project will start reporting an improved margin rate.

Joe Ritchie, Goldman Sachs.

Hey, guys, good morning.

Morning, Joe.

Hey, Marc, maybe just kind of focusing on global product for a second.

I think you guys said, a little volume goes a long way, but these are margin that candidly, like we haven't seen before.

So maybe just kind of dovetailing that question that Nigel had earlier as well.

Was there anything kind of one-off in the margins this quarter?

And then really just trying to understand what the right jumping off point is for 2025.

So what was like the pro forma global products margins for 2024 so that we have that locked-in as we think about next year.

Thank you.

Thanks for the question, Joe. So no, there's not really one-time or mix effects of any particular one deal that really help that margin.

It's really back to the structural work we did, and the team did at a global product over the past 12 months that really set up that business to be able to drive significant operation and efficiencies.

If you want to think about that business on a pro forma continued operation margin, I would say take the 20% margin rate, and I would say, the first half of the year will be on one side of that margin rate, and the second half of the year will drive well above that 20% margin rate.

And I think that business now that has been operating much more efficiently and much more focused as well, we'll be able to continuously perform at that level, if not better.

Vlad Bystricky, Citigroup.

Thank you.

Good morning, everyone.

Maybe just kind of a multi part question on some of the non-operating items here, so to speak.

First, just on corporate, it's kind of interesting that it's nominally roughly the same dollars, $430-ish million in both cases.

I thought the stranded friction would show up there, so maybe some color on that.

And also what's taking that tax rate down to 12?

And Marc, I think some of the global exchanges had you believe that your tax rate would actually be drifting up, and instead we're stepping down.

So maybe if you could give a little color on that.

But I just finally, the share count, it seems you just imply you're buying back stock kind of pay-as-you-go as the cash comes in the door over the balance of the year.

Is that correct?

Yes, I'll start with that last part.

The opportunity, right?

So first, I'd start with our guide, the $3.40 to $3.50. Our guide does not contemplate any deployment at all of proceeds associated with the sale of our residential business.

So it's just a regular pay-as-you-go, return to shareholder the 100% of our free cash flow.

Now on your couple of question, the corporate expenses, it's flat year on year.

You would have expected it to be a little higher.

We've done a lot of work to lower that cost, but we've made also a couple of substantial investments in a hardening of cyber security and IT infrastructure, as well as we are left with those stranded costs that while we want to take action on them, we need to pay some time some of those action with the timing of the divestiture of the residential and light commercial business.

We still have a business we got to take care of, and we need to continue to provide support for that business.

Now on your question on the continued -- the CO tax rate, on the continued operational tax rate, we are seeing a 100 basis points of pressure year on year.

So if you look at pure CO rates, we were at about 11% in fiscal year '24, it's stepping up to 12.

You're right, I had indicated that I felt we were probably going to see a little bit more pressure than that.

And as we were seeing the residential not commercial transaction happening, we started planning around that and prepare for that particular headwind.

And that allows us to manage a little bit better the rate for 2025.

Now, in all transparency, as you look at 2026 and beyond, we see quite a bit of pressure on that way because of global mean tax rates and the tax reform globally that have happened, we probably see 400 basis points to 500 basis points to that 12% for fiscal year '26, as the planning in the closing of that transaction on residential commercial will be behind us.

Andrew Obin, Bank of America.

Yes, good morning.

Morning, Andrew.

Just a question.

Can we just get more color on applied sales in North America by key verticals?

I know that focuses on data centers, but what are you seeing elsewhere?

What stands out positively or negatively?

There's 4 or 5 verticals that are really supportive.

Of course, data center is one of the critical one, but whether it's healthcare, hospitals, that where we're seeing a strong pickup, there's still a lot of activity associated with manufacturing and new energy.

And the re-onshoring of some of the battery manufacturing has been a great help to our business.

And then finally, overall, as the commercial real estate market is softer, but a lot of that portfolio is rebalancing as people repurpose some of the spaces associated with the post pandemic reallocation of how that office space, it creates opportunity across the domain, not just for applied to be able to drive new opportunities throughout the market.

Deane Dray, RBC Capital Markets.

Thank you.

Good morning, everyone.

Good Morning, Deane.

Questions about the free cash flow guide just for fiscal '25, kind of talk us through what the impact is of taking resi and light commercial out structurally, lower working capital.

But just how does that play out support the 85% conversion?

And then I noticed you put it in twice longer-term goal of 100% conversion, Marc, just structurally, what has changed to get you to that threshold?

Thank you.

Yeah, just to be clear.

What was in the prepared comment is 100% free cash flow return to shareholders, not a 100% free cash flow conversion.

No.

Longer term, I'm willing to tell you that we will be better than 85%.

But we have some structural headwind that we got to continuously deal with.

From a trade working capital, it's not a lower trade working capital.

So trade working capital is going to continue to be a tailwind and support an improvement in our free cash flow conversion.

However, there's two or three structural headwinds that become a little bit more weighted to our free cash flow conversion as we separate from the residential and light commercial business that had some structural benefits of -- were accretive, if you like, to free cash flow conversion if you look at the whole company.

As you know, we were owning about 60% of that joint venture with Hitachi that is now in discontinued operation.

That means we would add actually -- get 100% of the free cash flow versus where the earnings blended overall, and the timing of the dividends was not always aligned with the free cash flow generation of that business.

But outside of the discontinued operation, on a continued operation basis to get to 85, there's a couple of structural headwinds.

The first one is the restructuring we talked about earlier with Julian, as well as we continue to make substantial CapEx investments to continue to increase our data center capacity, with the goal to doubling it and maybe beyond, as we continue to see opportunities in the market.

And then finally, the delta in the effective tax rate between our cash tax rate and our effective tax rate is continuing to see at that 8% to 10% level.

I see that coming down as we see pressure on the effective tax rate.

But I don't see that much pressure actually on our cash tax rate.

But for '25, as we look at it, this will be a headwind.

So you see improvement in trade working capital with the headwind associated restructuring CapEx, and taxes overall.

Steve Tusa, JPMorgan.

Hey, sorry about that.

I just want to make sure my math is right on this global products margin.

I mean, we have about -- just backing out continuing ops, sales from what you guys reported this year, it's about $5 billion in revenues for that kind of Remain Co and key global products, is that right as the starting point?

The Remain Co global products probably going to be a little bit less than $5 billion, I would say.

Okay.

So then if I divide that by the one for whatever number that you gave as a continuing ops, or global products profits, I think that in the slides like that's a high-20s margin, not 20% that you're talking about.

Is that like -- am I missing something there?

No.

So I didn't say 20%, I said, the first half will probably be on one side of 20%, and the second half will be on the other side of 20%, but much, much higher than the 20%.

Okay so but 28 on a pro forma basis-ish, 27, 28, is the right kind of base in this year.

And there's nothing unusual about that.

So we should assume that you can leverage volume on that.

We can absolutely leverage volume on that.

And I think that's the right ballpark, yeah.

Okay.

And then lastly, targets on data center.

You broke up a little bit there.

Did you say 15% or 10% data center exposure?

10%.

Okay.

Nicole DeBlase, Deutsche Bank.

Good morning, guys.

So just a question on, I guess, on order growth and backlog.

When you guys put together your outlook for fiscal '25, is the expectation that backlog starts to come down from a (technical difficulty) or do you think you kind of remain consistent through the year?

Thank you.

Well, it's going to depend a little bit on the mix of jobs we are going to book in the year, and on how strong will be the data center vertical.

But assuming the trend line we have seen as well as the growth in the pipeline of opportunities we see in the market, we see that backlog continuing to improve and the margin continuing to solidify.

So I think that trend, it's going to be strong [with] growth in the backlog.

And that's why we are very comfortable with that mid-single digit revenue growth as we're going to be able to drive a lot of revenue out of that backlog.

Joe O'Dea, Wells Fargo.

Hi, good morning.

Just on slide 5, in the revenue mix looks like maybe 15% or so in direct, could you just talk about the end-market exposure within that?

How you think about that sit within the portfolio on a go-forward basis?

And then, Marc, just with the restructuring announcement today, and as you think about proceeds toward the end of the year, just any perspective on how you're thinking about kind of offsetting the exits dilution and sort of timing objectives around achieving that?

Yes.

So on the mixture, we view our operating model as an integrated operating model.

So for every market, every vertical, we segment the market by products, sometimes by brand even, and we make sure that we get to a full entitlement on market share standpoint.

And so for some markets where we see an ability to both sell value, create high service attach rates, and being able to drive the life cycle value of those products in the buildings we're in, we are always going to choose our direct channel, and all branches are going to do the vast majority of the work.

Now there's parts of the markets where maybe it's harder to sell value or that's not where the customer wants to meet us, or the life cycle value comes in a different profile, either because of the application of the building itself, the type of vertical it addresses, or just simply the complexity of that market, small commodity type market, more mid to low end of the market, and there we use and leverage highly of indirect channels for distribution and sales partner, where we are able to hit mostly the mid to lower end of the market and try and stay away from that more larger complex part of the market.

Now the second part of your question on capital and restructuring and our ability to offset dilution.

The capital deployment plan is going to be very similar to what we've done historically when we've had large divestiture, and you can see how we took that approach.

For example, in 2019, when we divested of our battery power solutions business, the goal is going to be able to return as quickly and as efficiently as possible the positives of the divestiture, as we see a clear line of sight of closing of the transaction.

The restructuring action, we are going to take them as early as possible.

We are not going to wait for the transaction to close.

Now there are certain action that are going to have to be taken at or after restructuring, so that's why the timing on some of that benefit and cost is a little bit difficult for us to commit to.

But we have a clear plan on how to deploy and continue to improve our operating model as we have throughout the past couple of years.

Noah Kaye, Oppenheimer.

Thanks.

A couple of questions.

First, I assume the free cash flow conversion guide doesn't include the tax payments on the divestitures.

Would you expect those to fall within the year?

Just for housekeeping purposes.

Second, and just to put a finer point on the answer to the earlier question, on the $500 million of benefit over time from restructuring, that's assumed to be immaterial to the '25 guide, I just want to confirm that.

But then I think more sustainably, can you just give us the broad strokes of what the cost out program entails and perhaps more qualitatively, how you may be changing the configuration of the business or your go-to market within that program?

So Noah, your first comment, you are correct.

So you're making the right assumption there.

In terms of detail exactly where we are going to focus on, it's around really simplifying and leveraging better of cost structure.

With the work we've done over the past 6 to 9 months to right-size our organization and really get a better grasp on where and how we deploy resources against the market opportunities, further driving that simplification, and provide better clarity.

And also at the end, improving the customer experience that most of our clients and customers are facing.

Now from an operating structure, as you see any significant change to our business portfolio, we've been pursuing opportunities to refine the business structure and the operating model to facilitate that simplicity and clarity we talked about.

So we'll keep you updated as we see changes needed in how we operate and present ourselves.

This concludes our question-and-answer session.

I would now like to turn the conference back over to Mr. George Oliver for any closing remarks.

Yeah.

I want to thank all of you for joining us today.

As we conclude fiscal 2024 and look to the future, I am confident Johnson Controls is heading in the right direction.

Our team has delivered important achievements this year and created momentum entering fiscal 2025.

Our customer value proposition is resonating, demonstrated by our sales and service growth in multiple consecutive quarters of building a record backlog.

We are well positioned to capitalize on the opportunities ahead provided by our leadership in building & solutions, and our end-to-end operating model.

So I want to thank you for your continued support and confidence in Johnson Controls.

And with that, operator, that concludes our call.

Thank you.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.