Good morning, and welcome to the Johnson Controls Third Quarter 2024 Earnings Conference Call. Please note, 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 our conference call to discuss Johnson Controls fiscal third quarter 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 on the 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 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. Let’s begin with Slide 3. We were very pleased to deliver fiscal third quarter results that exceeded almost all of our targets. Organic sales growth was 3%, which was in line with our guidance of low single-digits. We delivered a robust 150 basis points of segment margin expansion to 17.9%, which exceeded our guidance of 17%. We are also proud of our free cash flow generation during the quarter, which was more than $500 million higher than the comparable period one year ago. Service led the way, once again, with 9% growth, which continues to validate our transformation efforts. It is encouraging as we continue to build momentum toward meeting our full year financial objectives. Orders grew 5% during the quarter. We expect some quarterly fluctuation in our order pattern, given the strong demand for our data center solutions. With the investments we have made over the last few years in technologies for data centers, the launch of a dedicated organization and our one-of-a-kind offerings, we remain well positioned in this fast-growing segment, with solutions that are clearly resonating with customers. We have built a leading position in data centers in North America, due to a unique and compelling customer value proposition. As our customers expand internationally to meet the rapidly growing demand for data centers, we grow alongside them as they choose to partner with Johnson Controls around the world. Our backlog grew 10% in the quarter, as we continue to see demand for our solutions, both systems and services. The growth in orders and backlog gives us increased confidence in our ability to continue delivering sustainable long-term growth. As part of our ongoing business transformation, we announced two divestitures: our Residential and Light Commercial HVAC business and our Air Distribution Technologies business. These two transactions represent roughly 20% of current sales. At the same time as our earnings results, we announced this morning that I informed the Board it is time to initiate our CEO succession plan. Following recent significant milestones in our portfolio transformation and as we move to the next phase of growth, I believe that now is the right time to begin the process of identifying the next leader of the new Johnson Controls. Accordingly, the Board has engaged a nationally recognized search firm and begun a comprehensive search for the company's next CEO. Once my successor has been named, I will remain Chair of the Board to help facilitate a smooth transition. I am confident in our position as Johnson Controls enters its next chapter, and I remain committed to supporting the full team as we work to ensure Johnson Controls realizes its full potential. Along with the initiation of the company's succession plan, we also announced that as part of our ongoing Board refreshment efforts and following constructive dialogue with Elliott Management, Patrick Decker has been appointed to our company's Board of Directors effective immediately. Patrick brings experience to our Board, having led a transformation of his prior company, and his appointment reflects our commitment to continuously refreshing our Board to ensure the skills and experiences of our directors appropriately reflect our ongoing transformation. Lastly, before moving to the next slide, we are tightening our full year adjusted EPS guidance to a range of $3.66 to $3.69 from a range of $3.60 to $3.75. Marc will give additional details later in the call. We have made tremendous progress on our business transformation into a simpler, higher-growth company, positioned to deliver more consistent, predictable results. Turning to Slide 4. We have made good progress on simplifying our portfolio. Most recently, on July 23, we reached an agreement to sell our Residential and Light Commercial HVAC business to the Bosch Group in an all-cash transaction. The transaction includes 100% of our North America Ducted business and our 60% interest in our Global Residential joint venture with Hitachi. The total transaction is valued at approximately $8.1 billion, which results in approximately $6.7 billion of consideration to Johnson Controls. We are expecting net proceeds of approximately $5 billion after tax and transaction expenses, the majority of which will be used to accelerate returning capital to shareholders and also address leverage. The Residential and Light Commercial HVAC transaction is expected to close in approximately 12 months, subject to required regulatory approvals and other customary closing conditions. We expect to report the operating results of the business in discontinued operations beginning in the fiscal fourth quarter of 2024. In addition, on June 18, we agreed to sell our Air Distribution Technologies business to Truelink Capital. The sale of Air Distribution Technologies is also an important step in simplifying our manufacturing footprint, with the elimination of nearly 30% of our manufacturing facilities. Taken together, these two transactions represent significant milestones in our portfolio transformation. We are now even better positioned going forward as a pure-play provider of comprehensive solutions for commercial buildings. Our efforts in turning into results and the value of our transformation is coming into focus. Slide 5 presents a pro forma look at the new Johnson Controls, representing the composition of our company going forward. Following completion of the two divestitures described earlier, we will be a simpler, higher-growth company focused almost exclusively on our engineered solutions offerings. These solutions include commercial HVAC, fire, controls, security, and services, forming the smart building trifecta of energy-efficient equipment, clean electrification, and digitalization. The benefits of our transformed portfolio include an enhanced margin profile, less complexity, and a more focused operating model. In addition, these divestitures further increase our exposure to the fast-growing data center vertical to nearly 10% of sales from 7% as of fiscal year 2023. We expect this percentage to further increase over time given the robust demand we are seeing in this key vertical. While we will continue to look at opportunities to further enhance the portfolio, we believe that the largest elements of the portfolio transformation are now complete. Turning to Slide 6 to discuss our focused business model and how we plan to deliver more consistent, predictable outcomes for our customers and maximize value for shareholders over the life cycle of buildings. Johnson Controls has a unique value proposition for our customers that directly translates to shareholder value creation. Our ability to serve our customers over the lifecycle of the building allows us to deliver safe, healthy, and sustainable buildings. As a simpler and more streamlined company, we are now better positioned to leverage our integrated domain expertise, coupled with our extensive branch network to significantly expand margins. Our journey with the customer provides system and service solutions that maximize the opportunities around the lifecycle of the asset, delivering outcomes to the customer that save energy, reduce emissions, and optimize building lifecycle costs, all while improving the overall occupant experience. Most importantly, our ability to drive direct outcomes ensures that we have long-term customers that use several of our services, which creates a compounded impact for the customer and for our shareholders. In fact, $1 of systems revenue has the potential to generate up to 10 times the revenue over the lifecycle of the solution. It all starts with our local teams supported by our centralized engineering teams to provide operational excellence throughout the construction of the new building, starting with the product and technology development through the installation of the new systems. This grows the installed base. Throughout system deployment, our teams are building customer intimacy and confidence to ensure we are creating a linkage with our service offering. We have redoubled our focus to build this initial relationship and greatly improved our operational execution over the past few years to drive an enhanced margin profile and grow service. Simply put, service and maintenance deliver recurring revenue for us, and this provides resilient revenue throughout economic cycles. Moving to Parts & Repairs. Our service organization is digitally enabled and unlocks additional value by collecting data from the connected equipment within the building. Leveraging this data lets us detect issues before they occur, leading to reduced downtime and cost savings for the customer. The last part of the cycle is the building retrofit, including the monetization and technology refresh of existing systems. We work closely with the building owner to discuss lifecycle planning and the prioritization of the building needs. We have found this to be the perfect opportunity for Johnson Controls to sell additional domains. By compounding the effects of this cycle, we are able to deliver solutions to our customers, leading to significant margin expansion. The ongoing transformation of our portfolio into a quality pure-play provider of comprehensive solutions for commercial buildings means that we can service these buildings to deliver outcomes that matter. Accordingly, we are extending our journey with our customers while capitalizing on attractive opportunities in the market. Together, this delivers value across our stakeholder base for customers, employees, and for our shareholders. With that, I'll turn it over to Marc.

Thanks, George, and good morning, everyone. Let me start with a summary on Slide 7. Total revenue of $7.2 billion grew 3% organically, as strong high-single-digit service growth more than offset continued weakness in China's System business. Segment margin expanded a robust 150 basis points to 17.9%, as we delivered another strong quarter of productivity and converted our higher-margin backlog. Adjusted EPS of $1.14 was up 11% year-over-year and exceeded the high end of our guidance range by $0.04. Operations contributed $0.18 of the growth in the quarter, as improved productivity and the conversion of higher-margin backlog more than offset higher corporate costs related to additional IT investments, cybersecurity enhancement costs, and increased centralization of functional costs. Below the line, we saw favorability from a lower share count. As we continue to build a more consistent and predictable business, we are pleased with the strong adjusted EPS performance in the quarter. On the balance sheet, we ended up the third quarter with approximately $900 million in available cash and net debt decreased to 2.3 times, which is within our long-term target range of 2 to 2.5 times. Year-to-date, adjusted free cash flow improved approximately $700 million year-over-year to $1.3 billion. We remain on the path to driving higher free cash flow conversion more consistently. Let's now discuss our segment results in more detail on Slides 8 through 10. Beginning on Slide 8. Organic sales in our Global Products business grew 3% year-over-year, with price offsetting a modest volume decline. Commercial HVAC remained a bright spot for the business, growing mid-single digits against a tough comp of mid-teens growth a year ago. Fire & Security declined low single-digits, as a decline in fire suppression more than offset growth in fire detection and security video surveillance. Industrial Refrigeration grew approximately 20%, with strong double-digit growth in both North America and EMEA/LA. Overall, Global Residential grew mid-single digits in the quarter. Global Ducted Residential grew low single-digits as strong double-digit growth in APAC more than offset continued declines in Europe. In conjunction with improvement in the North America residential market, our Global Ducted Residential business grew 10%, with strong double-digit growth in both North America and EMEA/LA. Adjusted segment EBITDA margin expanded 240 basis points to 24.5%, as positive price-cost and improved productivity more than offset mix headwinds from ongoing weakness in China. Now moving to Slide 9 to discuss our Building Solutions performance. Order momentum remained healthy with 5% growth in the quarter. Overall, service orders grew 12%, with broad-based growth across the region. Systems orders grew 2%. North America offset the decline in APAC. Organic sales increased 4% in the quarter, led by service growth of 9%. Systems revenue grew 1% as the decline in APAC more than offset growth in North America and EMEA/LA. Building Solutions backlog continues to remain at record levels, growing 10% to $12.9 billion. Service backlog grew 7% and system backlog grew 10% year-over-year. Let's discuss the Building Solutions performance by region on Slide 10. Orders in North America increased 5% in the quarter, with mid-single-digit growth in both systems and services. As a reminder, our quarterly order growth can fluctuate based on the timing of certain large projects, particularly in the data center vertical. We remain confident in our competitive position in the data center and our pipeline remains quite robust. Sales in North America were up 8% organically, with continued strength across HVAC & Controls, up over 20% year-over-year. Overall, our system business grew 9%, while service grew 6%. Segment margin expanded 150 basis points year-over-year to 15.9%, driven by the continued execution of higher-margin backlog, improved productivity, and solid service contribution. Total backlog ended the quarter at $9 billion, up 14% year-over-year. In EMEA/LA, orders were up 11%, with over 25% growth in service. Systems, although, were flat as we continue to remain focused on driving higher quality growth with higher margin and improved cash flow conversion. Across the portfolio, we saw strong double-digit growth in controls, fire, and security. Sales in EMEA/LA grew 8% organically, with broad-based growth across the portfolio. Momentum continues to build within our service business, up 15% year-over-year, driven by strong double-digit growth from both our recurring and shorter cycle transactional businesses. Our system business grew low-single digits, led by strength in controls. Segment EBITDA margin expanded 170 basis points to 10.3%, driven by the positive mix from the growth in service and the conversion of higher-margin system backlog. We've made tremendous progress in improving the profitability in EMEA/LA as well as mix of higher-margin service. A more disciplined funnel in systems gives us further confidence in continued momentum in margin improvement. Backlog was up 12% year-over-year to $2.5 billion. In Asia Pacific, orders declined 2%, as we have focused on deploying resources to the most attractive part of the market and remain selective on the jobs we court and ultimately book. Given our strong installed base in the region and our continued focus, we saw high single-digit growth in service. Sales in Asia Pacific declined 19% as the systems business continued to be impacted by ongoing weaknesses in China. Our service business grew 8% in the quarter, with strong double-digit growth in our recurring revenue contracts. Segment EBITDA margin declined 220 basis points to 11.7%, as weakness in China offset positive mix from our service business. Backlog of $1.4 billion declined 12% year-over-year. Now let's discuss our fourth quarter and fiscal year 2024 guidance on Slide 11. We entered the fourth quarter with solid momentum, led by our resilient service business and continued demand in our North America system business. Our margin-rich backlog remains at a historical level, and our Global Products book-to-bill business has stabilized and returned to growth. We are introducing fourth quarter sales guidance of approximately 7% growth, as strong demand in North America and EMEA/LA is somewhat muted by one more quarter of slower recovery in the system business in China. Global Products momentum is expected to continue as our book-to-bill orders remain positive throughout the third quarter and the tough comparison in the China base. For the fourth quarter, we expect segment EBITDA margin to be approximately 19% and adjusted EPS to be in the range of $1.23 to $1.26. For the full year, we are tightening adjusted EPS guidance to a range of $3.66 and $3.69. We now expect organic sales to grow approximately 3% and segment EBITDA margin to expand approximately 110 basis points. Our working capital metrics continue to improve, and our free cash flow performance year-to-date has been strong. We continue to invest capital in attractive areas, including data center manufacturing expansion and ongoing ERP consolidation. While this will be a slight headwind, we expect adjusted free cash flow conversion of approximately 85% or better for the full year. With our recent announced planned divestiture, I want to highlight some financial details and future reporting on Slide 12. As George mentioned at the beginning of the call, we were extremely pleased with our announced sale of the Residential and Light Commercial HVAC business. This came just a few weeks after we announced that we intended to sell our Air Distribution Technologies business. Together, these two transactions represent, hopefully, 20% of the sale and the majority of the portfolio we have previously highlighted as non-core. We expect to report the Residential and Light Commercial business as discontinued operations with our fiscal fourth quarter results and will provide our official fiscal year 2025 guidance on a continuing operations basis. While the two transactions would be dilutive to EPS prior to any cost offset, we have actions in place to address stranded costs and we are working on accelerating some of these actions prior to closing. Through a combination of share repurchase, debt paydown, and restructuring, we have a plan in place to fully offset the stranded costs. We will provide more details when we report our fiscal fourth quarter results. Before we open up the lines for questions, I want to conclude with a summary of our recent transformation on Slide 13. We have spent the last few years transforming the company into a comprehensive solution provider for commercial buildings, and this continues to be a differentiator for Johnson Controls. We took a major step in simplifying the portfolio with our two recently announced divestitures, and we believe one operating model will enable us to deliver more consistent, predictable results. We operate in many attractive markets, which allows us to build our backlog with margin-rich jobs that have a service still throughout the lifecycle of the building. Our systems backlog, coupled with our resilient business, positions us for sustainable and continued margin expansion. As our margins continue to improve, coupled with our commitment to disciplined capital allocation, we would expect double-digit EPS growth. As George mentioned earlier, the result of our portfolio transformation is now a faster-growing, more profitable, less complex, and more operationally focused Johnson Controls, and we are excited for the next chapter. With that, operator, please open the lines for questions.

Today's first question comes from Scott Davis at Melius Research. Please go ahead.

Hi, good morning, George, Marc, and Jim. And congrats, George, on the announcement.

Thanks, Scott.

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 materiality of growth in that vertical? Thanks.

Yes, let me provide a framework, and then Marc can elaborate on how it's being developed in backlog and converted. A year ago, we mentioned we were around 7%. Currently, the business is approximately 10% of sales on a pro forma basis, and it remains very strong. We are collaborating with all the hyperscalers and colocation service providers. Our global team is ensuring that our leadership technology and all our domains are positioned to deliver optimal solutions worldwide. The pipeline continues to expand, and regarding our orders and backlog, this is likely to result in a higher proportion of backlog going forward. Often, it is a multiyear backlog. We evaluate our bookings based on the next 12 months, and as we consider growth, we anticipate strong double-digit growth in 2024. This year, we expect strong double-digit growth that will continue to accelerate in the coming years due to our ongoing efforts. Marc, would you like to discuss the mix further?

Yes. So Scott, if you look at that growth in backlog of 10%, almost $13 billion in backlog. The mix remains consistent year-over-year because a lot of those data centers, as George mentioned, are multiyear. There is clearly more data center work in that $12.9 billion. But that mix will continue to evolve more towards data centers 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.

Okay. That's helpful. And I'm just looking at this Slide 6 and the 10:1 numbers on service and digital versus the OE side. I don't remember seeing that before. Maybe you've put it up, and I just have missed it. But is this kind of a theoretical number? Or you actually have the expectation that these are achievable-type ratios going forward?

The algorithm we've been developing for several years as we build the service business relies on the installed base. This includes not only what we are adding to the installed base but also engaging with the existing customers. When we can establish connectivity right from the start, and provide that initial level of service, coupled with OpenBlue and data connectivity, we enhance the historical maintenance and break/fix model. Over the past few years, we have started to see a substantial increase in revenue potential as we reach that performance level consistently. This is based on actual data from customers with whom we've established connectivity. We have connected to the installed base, are utilizing data, and are now offering additional services, which is indeed tangible.

And that revenue multiplier evolves based on market vertical and product line. So we've tried to lay that out on that chart. HVAC is a multiplier that's a little lower than 10 times, while you go to Security Controls and then Fire provides a higher level of multiplier over the lifecycle of the product. So depending on the market vertical, depending on the product, that multiplier expands, but this is real experience data that we've looked through over the past few years, and we believe we can continue to deliver that through the operating model we've now implemented.

I believe it's crucial that we focus on outcomes rather than just offering a traditional drink service. By advancing our technology and products, particularly with OpenBlue and data, we are transforming the industry. Additionally, this approach significantly decreases attrition, which helps us grow our service base moving forward.

Thank you. And our next question today comes from Julian Mitchell at Barclays. Please go ahead.

Thanks. Good morning. Congrats, George, on a very good run.

Thanks, Julian.

I wanted to begin with the overall growth outlook and highlight two key points. First, the total company is expected to grow about 3% this year. When considering our go-forward business with a revenue base of roughly $22 billion, I want to know if that 3% growth rate is unusual, especially when examining our backlog and assuming no significant changes in interest rates or U.S. policy in the near future. Additionally, regarding the Fire & Security business, which you are familiar with, sales appear to be flat this year, and this segment will account for about 45% of our future revenue. What do you project for the medium-term growth of Fire & Security?

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 growth rate year-on-year. So I'll tell you for a longer-term algorithm, 3% is definitely not our expectation. It'd 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. And so those fundamentals driving a better mix overall are different depending on the different product line. And right now, HVAC is benefiting from a lot of tailwinds coming from decarbonization, data centers, 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 & Security this year. We are seeing, particularly in our book-and-bill business, some sign 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 the mid-digit target.

Thank you. And our next question today comes from Nigel Coe at Wolfe Research. Please go ahead.

Hi. Thanks, good morning. George, you had one hell of a career, so congratulations and good luck with your next steps. Yes. So just on that topic, do you have a time frame in mind for this succession? I know you obviously want to find the right person to do 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 to the Board? And I wonder if maybe he's under consideration for the next year?

The timing of this is significant. We've made considerable progress with our portfolio through our recent moves, and it’s evident that we have strong confidence in our strategy, which is beginning to yield results. We have also established a capable leadership team, and I am very optimistic about their efforts, which will enable the company to achieve continued success. Regarding succession plans, we have been developing these over time with the Board, and we are exploring both internal and external candidates. The Board is actively collaborating with a nationally recognized search firm and is committed to identifying and nurturing our internal candidates. While it's challenging to specify a timeline, we are progressing. Personally, I am fully committed and energized about our direction and ensuring a smooth transition to my successor, while I will continue to serve as Chairman of the Board. This is the current state of affairs, and we will keep you informed as we advance throughout the year.

Thank you. And our next question today comes from Steve Tusa with JPMorgan. Please go ahead.

Hi, good morning and congrats, George.

Thanks.

The free cash flow for the quarter was quite strong. How do you expect that to develop in the fourth quarter? I understand that an 85% conversion might indicate a slight decline in the fourth quarter. You are already very close to a 100% conversion on a trailing basis. I'm just wondering how sustainable this positive outcome is.

Great question, Steve. So you're right, we saw a 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 trend very positively. The work we've done on lowering inventory and improving our SOE 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 centers as we expand more lines in our factory in North America and elsewhere as well as continue to involve the investment in our ERP landscape. We do believe that the momentum allows us to probably do better than 85%, and structurally, in over the 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.

Regarding next year's guidance, could you provide any details about your strategy? There will likely be some challenges with the transition to disc operations and the timing of capital deployment. How do you intend to manage this in relation to earnings?

Yes, we'll start providing guidance next quarter on continuing operations. You're right, there's going to be a little bit of noise, but we are very comfortable that the overall algorithms we've committed to for next year will hold through as we navigate to that continued operation. As you know, some of that residential, light-commercial business had solid cash flow. But the momentum that we see in our core business, thanks to that singular operating model, is really providing strong tailwinds that will allow you to continue to improve on our free cash flow conversion and our overall free cash flow performance.

Thank you. And our next question today comes from Noah Kaye with Oppenheimer. Please go ahead.

Thanks. So in the release, there's a call out of the gain, the significant gain on some of the insurance recoveries from that AFF settlement. Can you just walk us through where your expectations are in terms of actual cash outflows relative to the $750 million settlement that was previously disclosed now that you've gotten some benefit from insurance and maybe talk through the timing of those outflows?

We reached a settlement with the plaintiffs regarding the PFAS liability, which has effectively addressed a considerable portion of our PFAS obligations. Additionally, as a reminder, we plan to stop the production and sale of our fluorinated firefighting foams by June 2024, which is already in progress. We have substantial insurance coverage from over 20 insurers that applies to these claims. Recently, we received $351 million from these insurers. Marc, could you now discuss our expectations moving forward?

Yes. So from a timeline, no, we took the charge in Q2 for $750 million. That's part of the settlement. And in the third quarter, we had received from the first few agreements with a venture of about $351 million. So we recovered almost half right off the bat. And those payments will go back to the water provider according to our agreement. There are more payments that are going to come and come in over the next few quarters, and we believe that we're well covered from an insurance standpoint, and the net effect overall will be de minimis. The timing between recoveries and we see in payments may slip from one quarter to the other. But overall, we think we're in good shape there.

Thank you. And our next question today comes from Joe Ritchie at Goldman Sachs. Please go ahead.

Thanks and good morning, everyone. Congratulations, George, on the succession announcement. Marc, I have a quick clarification regarding the fourth-quarter guidance. Is discontinued operations included in the fourth-quarter guidance? If it is excluded, what will the impact be? Looking ahead to fiscal year 2025, how should we evaluate gross profit margins at this point? You achieved impressive results this quarter, and I am trying to comprehend the various factors involved with the portfolio divestitures.

Sure. Thanks, Joe. The fourth quarter guide we just gave is for the full payment of the company. We'll start breaking it down at the next quarter. So that guide really holds together, with the perspective that we are going to continue to see sequential improvement, both for the business that we have contemplating to divest as well as the core of our businesses. Now if you look at the global product margin and if you reflect on the year, Global Products really has benefited from improved processes from an SOE S&OP process that really drove massive improvement in our material handling and our inventory. And that improved inventory management created massive absorption benefits as well as productivity and, net-net, better conversion costs. That means that any incremental volume you saw created good leverage and solid leverage in that business. Now that performance in Q3 that we see continuing improving in Q4, as you look into 2025, we'll go back to a more regular seasonality. Right? So you'll see that the first half of the year performance more in mid-teens, given the volume that businesses in the first six months of the year. And then I think we are now very comfortable seeing that business clocking in the 20s in the second half of the year as a natural seasonality and volume ramp-up in the second half.

Thank you. And our next question comes from Joe O'Dea with Wells Fargo. Please go ahead.

Hi, good morning. Congrats, George, and congrats to all of you on the portfolio announcements over the course of the quarter. Just curious if you can outline on ADT, the anticipated proceeds, as well as any revenue margin kind of EPS related to that exit. And then separately, just wanted any clarity on destock this year. What you saw during the quarter? Confidence that you think that's behind you? And any sizing of the overall headwind Global Products in 2024 from some of those destock pressures?

Yes. Let me start with ADT, and then I'll give some color on destock. But George, you can add more. So that business, we signed on June 18, we expect to close the transaction actually this quarter. We've not disclosed the financial terms of the business because it is a smaller transaction and really not that material. I think what's important to remember is this is really part of our simplification journey. We really eliminate, I'm sorry, about 30% of our manufacturing footprint, but we're also eliminating a whole series of SKUs and complexity. This is a very commodity business, and accessory business and it's evolved a lot over the past decade since we acquired that business. But it's an important step in our journey as a prepaid provider. And the net effect of that divestiture after we buy back some shares is immaterial to the overall company. On destocking...

Apologies. Please proceed.

On destocking, I think we see a stock level getting back hopefully to normalization. There are some pockets of the market that are still simplifying a little bit their stock level. But overall, I think that for the most part, that large destocking is behind us. And we feel very confident, particularly when products have been refreshed that we have a new norm and a new standard on our stock levels, and the distribution seems to be holding up pretty good.

Yes, being very familiar with these businesses, when you look at what we've done around, Marc mentioned it, as it related to productivity with material planning and the like, and then the work that our team has done really simplifying our SKU base, we've done a really nice job now, not only reducing the inventory but really decreasing our lead times. And so I think we're well positioned now from a commercial standpoint, to be able to pick up volume because of our short lead times while we're continuing to reduce inventory. So we're back to where we were prior to this ramp-up because of all of the disruption in the supply chain. And I feel confident that now on a run rate basis from a growth standpoint, we're starting to see the comeback and we're doing it with less inventory.

Thank you. And our next question today comes from Jeff Sprague at Vertical Research. Please go ahead.

Good morning, everyone. And George, good luck on whatever is next. Just want to come back to the portfolio changes. Obviously, you're not going to report Q4 or 2024 on the basis with which you guided given things going to discontinued ops. So maybe you could just actually share with us, given where your guidance stands today and what you're doing on stranded and other costs, what the reset 2024 base looks like on an equivalent basis relative to your current guide? And then when you do have the proceeds to deploy, should we expect you to kind of solve to your same leverage ratios that we see today kind of split between share repurchase and debt reduction to maintain the same leverage? Or will you do something different with how you structure the balance sheet? Thank you.

Got you, Jeff. Regarding discontinued operations, this does not alter our commitments, and we feel confident in our guidance for the full portfolio as well as the trajectory of our ongoing business. We anticipate the transaction will close within the next 12 months, and we plan to return most of the net proceeds to shareholders through a share repurchase program, similar to our approach a few years ago when we sold our Battery Power Solutions business. In terms of managing our leverage, it will largely depend on the timing of the closing. While we expect it to be around 12 months, it could vary by three months either way. This means we could either comfortably grow into our existing debt level without needing to make significant changes, or we might need to address some leverage more quickly if the transaction closes sooner than expected. Our objective is to uphold our investment-grade rating, and we'll collaborate with the agency based on the timeline to ensure we meet that commitment. I'll leave it at that.

Thank you. And our next question today comes from Andy Kaplowitz of Citigroup. Please go ahead.

Good morning, everyone. George, congratulations.

Thanks, Andy.

Could you update us on what you're thinking regarding the ability to start growing backlog in earnings in Asia Pac? And what your expectations are for Q4 bookings and backlog? Backlog was up slightly sequentially in Q3. And I know you've talked about expecting a bigger uptick by the end of year while telling us that China is still muted. So do you still see bookings beginning to accelerate in Q4? And do you still see recovery in that region in FY 2025?

No. Great question. And you partially answered it. Yes, we continue to see sequential improvement. There is a slower recovery than we had initially anticipated. So one of the reasons we tightened the guide for the year and why you see revenue growth a little lower than we anticipated, but that momentum has continued to build. And the order intake we saw in Q3 was sequentially a good improvement from Q2, and we see that sequential improvement continue in Q4. While we expect one more challenging quarter in the fourth quarter here, we're still probably declining revenue year-on-year in the low single digits. That of the momentum is going to turn positive positioning as well as we enter 2025. So we absolutely see that business recovering in 2025, particularly on a year-on-year compare. The comps are going to become easier given the challenging year we just went through. The backlog, as you mentioned, has been sequentially improving over the last few quarters, and we continue to redeploy the resource in this most attractive part of the market, but we continue to remain very disciplined in the type of job and counterparty we deal with in the market in China as that market continues to be pretty challenging.

Thank you. And our next question comes from Andrew Obin with Bank of America. Please go ahead.

Yes, good morning and George, congratulations.

Thanks, Andrew.

Just a question, just maybe a little bit more detail. You highlighted a more disciplined approach in EMEA/LA systems. What did you do? And what's your ability to apply this approach elsewhere in the portfolio?

Great question. So the discipline that we've put in place is really part of our overall operating model. And the operating model really started as we refined it in North America a couple of years back. And you can see North America really benefiting from that discipline over time and that focus. There's really two things that are happening. We centralize more the decision-making process as which vertical and which markets we really approach. And we really focus that commercial organization towards those parts of the market where we see very much attractive margins as we can sell value and we have customers that are interested in our product and see value over that cycle, but also parts of the market where you see a stronger service attach. And when you do that, you're able to actually drive modest growth in the system business but a much larger growth in our service business as that service attach yields better outcomes overall. So that operating system has been really fully deployed in North America. That's probably where the maturity is at the highest. EMEA/LA is still going through that. I see EMEA/LA closing the gap with its regional peers. Asia had a strong operating model. I think the market moved on us very fast, and we are repivoting as quickly as we can. But you'll see, as I mentioned on the prior question, you'll see APAC repivoting very quickly, and that operating model maturing across the board outside of North America, including in EMEA/LA.

Thank you. And our next question today comes from Deane Dray at RBC Capital Markets. Please go ahead.

Thank you. Good morning, everyone, and add my congrats to George.

Thanks, Deane.

I don't think you've given much detail here, but could you share us with any of the economics of the divestiture of air distribution technologies?

Yes. As I mentioned, Deane, while this is a critical step in our simplification journey, the financial terms are not disclosed because it's really a smaller transaction and not very material for the overall value of the enterprise. We struck what we feel is a very attractive deal for the enterprise with Truelink Capital. We're hoping to close that business very, very quickly and hopefully within the next few weeks.

Got it. Thank you. And then the second question, George, there's been a lot of interest in your peers regarding not just data centers but liquid cooling technologies and data centers. You've seen your peers make direct investments in technologies and businesses. Is this something that you all are looking at as well? You've got certainly components that are part of these technologies, but there's a big developing opportunity, high growth, and it seems like it would be a good fit.

We are very well positioned with our hyperscaler and colocation customer base. From a research and development perspective, we are focused on understanding their next generation needs and leveraging our leadership portfolio that includes a lot of intellectual property. As we move towards liquid cooling, particularly with the cooling distribution unit, we recognize that it will still require significant cooling technology that we implement to ensure we are capable of producing those units or partnering to fulfill the complete solution for our hyperscalers and colos. We see this as a tremendous opportunity, and we have been investing in both our core technology and its application in liquid cooling.

Thank you. And our next question today comes from Gautam Khanna with TD Cowen. Please go ahead.

Hi, thanks. Good morning, and congrats, George.

Thanks. Good morning, Gautam.

I wanted to ask about the CEO search. From your perspective, George, what kind of attributes are you looking for in your successor? What do you think they need to bring?

Well, I mean, as we think about the company and the simplification of the company, it's important that we bring a lot of domain expertise and industrial expertise. We're a company that is a product technology company. We're a service company and how we deploy that technology. Certainly, we're solutions in how we actually go to market. So there's a lot of experiences there that we'd be looking for to complement. As we did the Board refreshment with Patrick, just to talk to that a little bit, we are constantly looking for qualified board candidates and how we think about refresh and succession. And Patrick is a fantastic addition, a world-class executive with experience transforming Xylem, and similar experience going from an industrial products company into an advanced technology service solution enterprise. So as we think about CEO succession and the like, obviously, strong operating experience, strong domain experience, and the ability to take the incredible foundation that we've built here to the next level, leading the new Johnson Controls.

Thank you. And our next question today comes from Nicole DeBlase with Deutsche Bank. Please go ahead.

Yes. Thanks. Good morning, guys. And I'll add my congrats to George on the announcement today. Just wanted to ask about orders. So you guys mentioned lumpiness around data center may be contributing to the 5% organic growth this quarter. I guess how do you think about the potential opportunity for order acceleration from here based on what you're seeing in the pipeline today as we try to calibrate expectations for the next few quarters? Thanks.

As you know, we try to shy away from providing guidance on all those. But what I can tell you is you're absolutely right. We see lumpiness in the orders, particularly coming from the data center vertical. That also means that there's going to be a quarter where you're going to see very large orders, and we continue to see an increased pipeline in that particular vertical. That gives us confidence that you will see a pretty large order quarters over the next few coming quarters. This particular last quarter, we had a tough compare year-on-year. We had very solid orders, particularly in the data center vertical third quarter of last year. But again, that pipeline remains solid, and that lumpiness will probably not go away anytime soon.

And I think just to add on to that, when you look at the value proposition that we bring to data centers with our portfolio of multi-technologies, in the way that we've been building out capacity to serve our customers as they achieve their growth, these become multiyear agreements. And so as we're positioning, you can get very large orders multiyear. And that's what we're seeing as we're partnering and ensuring that we're positioned to get more than our fair share bringing our technologies and capabilities with the full solution to our customers globally.

Thank you. And our final question today comes from Brett Linzey with Mizuho. Please go ahead.

Hi, good morning and congrats to George. Just wanted to come back to the fourth quarter guide. So 19% EBITDA margin, I wanted to understand your level of visibility there. Is this something that you're converting out of backlog and you have line of sight to? Just any color towards that 60% incremental margin.

We absolutely have strong visibility to it. And if you look year-on-year, for sure that 19% looks pretty heavy with 250 to 300 basis points year-on-year improvement. But now if you look at it sequentially, when we went from Q2 to Q3 and Q3 to Q4, jumping from almost 18% to 19% is absolutely part of that sequential run rate. The same fundamentals we saw from Q2 to Q3 having a strong backlog, having really our book-to-bill business both in the field and our Global Products continuing to drive more volume. And the comments I've made on Global Products and the incredible work that's been done there to take care of the base cost and conversion costs, allowing us to really drive a lot of bottom-line benefit for small volume increments, gives us very strong confidence that we can achieve that margin rate in the fourth quarter.

Thank you. And this concludes our question-and-answer session. I'd like to turn the conference back over to George Oliver for any closing remarks.

Thank you, operator, and I'd like to thank the entire Johnson Controls team for their incredibly hard work and dedication in getting us to where we are today. Our transformation into a pure-play provider of comprehensive solutions for commercial buildings is substantially complete, and we're well positioned to now deliver long-term sustainable value for our shareholders as a simpler, higher-growth company. We know we're on the right path as our strategy is already delivering results, and we are looking forward to this next chapter for our company. I am proud of the growth Johnson Controls has been able to achieve and couldn't be more excited about where we go next. So with that, operator, that concludes our call today.

Thank you, sir. Ladies and gentlemen, this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful rest of the day.