Dive Brief:
- Johnson Controls exceeded expectations in its third fiscal quarter, increasing its backlog to record levels and offloading multiple businesses as it works to pivot toward a “pure-play provider of comprehensive solutions for commercial buildings,” chairman and CEO George Oliver said Wednesday.
- The company’s building solutions backlog in North America grew 14% year over year to $9 billion, with a 17% year-over-year increase in the backlog for systems orders offsetting a 1% decrease in service orders backlog in its third fiscal quarter, Johnson Controls reported in an earnings presentation released Wednesday. Johnson Controls’ agreements to sell its light commercial and residential HVAC and Air Distribution Technologies businesses will further enable the company to “deliver more consistent, predictable results,” CFO Marc Vandiepenbeeck said on the call.
- “Taken together, these two transactions represent significant milestones in our portfolio transformation,” Oliver, who announced plans to step down from the role Wednesday, said on the earnings call. “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.”
Dive Insight:
Johnson Controls’s building solutions North America segment organically grew sales 8% year over year to $2.9 billion in its third fiscal quarter, led by a 9% increase in systems sales and a 6% increase in service sales, per its earnings presentation.
The company’s agreements to divest its light commercial and residential HVAC business to Bosch Group and Air Distribution Technologies business to private equity firm Truelink Capital represent “roughly 20% of current sales,” Oliver said on the call.
Oliver noted that the sale of the Air Distribution Technologies business marks the elimination of nearly 30% of Johnson Controls’ manufacturing facilities, and that moving forward the company will be almost exclusively focused on its engineered solutions offerings. These include commercial HVAC, fire, controls, security and services, “forming the smart building trifecta of energy-efficient equipment, clean electrification and digitalization,” Oliver said.
“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,” Oliver added.
In June, the company also announced the creation of Global Data Center Solutions, a new data-center focused organization aimed at operationalizing Johnson Controls’ scale to provide integrated solutions to data center customers. At the time, Oliver noted that the company had engaged almost 100% of data center operators and is partnering with them to understand how to deploy cooling technologies at the chip level and how these systems need to be configured to ensure technology investments are complemented with its go-to-market strategy.
Johnson Controls’ total building solutions backlog organically grew 10% year over year to $12.9 billion in the quarter, according to its earnings release. Oliver attributed this growth to demand for systems and services solutions. During the third fiscal quarter, Johnson Controls grew North America service orders 6% year over year and systems orders 5% year over year, according to its earnings presentation.
Providing system and service solutions that maximize opportunities around the lifecycle of assets, delivering outcomes that can help customers save energy and cut emissions, while improving overall occupant experience, according to Oliver. “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,” Oliver said.
“In fact, $1 of systems revenue has the potential to generate up to 10 times the revenue over the life cycle 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,” Oliver added.
The company’s applied business, which includes large commercial applied HVAC equipment, building management systems and controls and accounted for 40% of total fiscal year 2023 sales, grew by more than 20% in North America in the third fiscal quarter, the company said in its earnings presentation. Sales in its fire and security business, which made up 37% of fiscal year 2023 sales, declined by the low-single-digits in the region, the company reported.
Looking ahead, the company expects its organic revenue to grow approximately 7% year over year in its fourth fiscal quarter, and rise 3% for the full fiscal 2024 year, according to the earnings presentation.
Following its announcement of the company’s CEO succession plan, Johnson Controls appointed Patrick Decker to serve on its board of directors, effective immediately, Johnson Controls said in a separate news release Wednesday. Decker was previously president and CEO of water technology firm Xylem Inc. The board has now begun a comprehensive search for Johnson Controls’ next CEO, with Oliver planning to continue to serve as chairman and CEO until a successor is named. He will remain chair of the board once the new CEO is named to allow for a smooth management transition, the company said in a Wednesday release.
