Johnson Controls International plc

Hello everyone and welcome to the Johnson Controls Q3 2025 earnings conference call. My name is Nadia and I'll be coordinating the call today. If you would like to ask a question at the end of the presentation, please press star, fill it by one, or telephone keypad. I will now hand the call over to Jim Lucas, Vice President Investor Relations, to begin. Jim, please go ahead.

Good morning and thank you for joining our conference call to discuss Johnson Controls fiscal third quarter 2025 results. Joining me on the call today are Johnson Controls Chief Executive Officer Joachim White-Amenes and Mark Van Diepenbeck, our Chief Financial Officer. Before we begin, let me remind you that during our presentation today, we will make four looking statements that reflect our current views about our future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Please refer to our SEC filings for a list of these important risk factors that could cause actual results to differ from our predictions. We will also reference certain non-GAAP measures throughout today's presentation. Reconciliation of these non-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 Joachim.

Thanks Jim and good morning everyone. Thank you for joining us on today's call. This morning we announced strong third quarter results, continuing the momentum we've sustained throughout the year. Organic sales grew 6%, segment margins expanded 20 basis points to 17.6%, and adjusted EPS grew 11% and exceeded our guidance. Year to date, adjusted free cash flow has nearly doubled to $1.8 billion and we are on track to deliver over 100% free cash flow conversion for the year. Orders grew 2%, led by strength in the Americas and offset by ongoing softness in China. Our backlog grew 11% to $14.6 billion and remains at record levels. We continue to see strength in demand for both our systems and service solutions. We are now building an even stronger foundation for long-term success by developing a business system focused on simplifying operations, accelerating growth, and scaling our impact. This includes sharpening our focus on what matters most to customers and deploying lean principles to tackle barriers to growth. We're raising our full year guidance and Mark will give more details later in the call. I now have my first quarter under my belt and tomorrow is my 140th day at a company celebrating 140 years of leadership. That is 140 years of winning with customers, driving innovation and supporting the advancement of human society with solutions for smart, productive, safe, and sustainable buildings. After all, the advancement of science, education, healthcare, and manufacturing occur in buildings. As we celebrate and reflect upon our history, we believe our best days are still ahead of us. Unlocking our potential depends on placing even greater emphasis on the customer. Our goal is to deliver consistent, predictable results over time and outperform our competition, enabling strong capital allocation and enhancing value for shareholders. Since joining Johnson Controls, I've had the opportunity to travel the globe, visiting our largest factories and spending time in the field with our customers and teams. I have visited well over 100 customers, all of our major innovation centers, and walked more than 30 plants. I met with hundreds of our frontline colleagues in sales, service, R&D, and manufacturing. These travels produced insights that will inform our future success as a company. First, we need to sharpen our focus on our customers while also staying ahead of the competition. Customer centricity will fuel accelerated growth by enabling us to win and retain customers more effectively through differentiated offerings and how we serve them. Second, it's essential that we enhance our investment in R&D to accelerate innovation. Our IP portfolio is strong, with 8,200 patents and more on the way. Our products and solutions deliver results that resonate with our customers. While we possess considerable strengths, there remain opportunities to accelerate growth within our core domains by addressing gaps in our product portfolio. Third, our field position of 40,000 frontline colleagues has been and continues to be a competitive advantage. We see clear opportunities to better equip and support them, making it easier for them to deliver for our customers. By doing so, we can get more leverage from our team and expand capacity and productivity to drive stronger results. Given the importance of this effort, we recently appointed Chris Scalia as Executive Vice President and Chief Human Resources Officer. Chris brings a unique combination of people and culture strategy, operational excellence, and a deep commitment to building high-performing teams. We're excited for Chris to hit the ground running as we continue to transform Johnson Controls into a growth-focused, customer-centric powerhouse and a magnet for talent. As we look ahead to our ongoing transformation, developing a business system and embedding it in our cultural foundation is a critical step in driving long-term success, one that requires dedicated effort, discipline, and patience. My deep experience with proven business systems, combined with spending meaningful time at Gamba, has helped us shape a clear vision for what this could look like at Johnson Controls. This business system is how we will win and run the company. It will be anchored in proven methodologies like 80-20 and Lean and augmented by digitization and AI. First, 80-20 is a powerful operating model that sharpens our focus, cutting through complexity, so we can concentrate our energy on what matters most to our customers. We simplify. Then, adopting principles of Lean, we convert this focus into action with a strong orientation of what matters most to our customers. We eliminate waste, streamline workflows, and accelerate processes to drive speed and efficiency across the organization to better serve customers and increase our competitiveness. We accelerate. And throughout the process, we embed digitization and AI as core enablers in our process improvement. This augments our focus and speed with smarter systems and the ability to scale impact for our customers and our people. We scale. So, simplify, accelerate, scale. While we've made progress over the last several quarters, we know that with a strong business system in place, we can accelerate and improve our results over time. We will solve customer problems faster and more effectively by empowering our people. It will become our way of life at Johnson Controls. Our efforts are already underway. Since the last earnings call, we have identified a number of growth blockers, and we are actively addressing them. In general, the growth blockers center around the speed of execution and more effectively and efficiently leveraging our existing capabilities in the field and beyond. To ensure speed in decision making and implementation, it is important to identify the root cause of these growth blockers and develop countermeasures that we can then implement into consistent, repeatable processes. We have started with a narrow focus to deliver results quickly, and then we will scale more broadly. I can give you two early examples of progress. The first example is in our conventional HVAC business, where we're creating value for our customers and our frontline colleagues who serve them. Our objective is to substantially increase the amount of time our sales teams can dedicate to engaging with customers by streamlining internal processes and eliminating waste that does not contribute direct value to the customer experience. Over the last four weeks, this team has identified specific countermeasures to double time with customers for our sellers. This will unlock opportunities to better leverage our enviable field position. Another focus area is improving lead times for our key chillers in North America, where we continue to see dynamic growth in the fast expanding data center vertical. We have an opportunity to cut lead times in half, which will both improve our competitiveness and create additional manufacturing capacity. As we deliver substantial improvements around the growth blockers we have identified, we can replicate these successes and deploy across our global portfolio. With momentum building, our executive team has been trained on the core foundations of our future business system, and each of them have participated in at least one Kaizen. After countless Kaizens throughout my career, I participated in my first Johnson Controls Kaizen a couple of weeks ago. Over the next few months, we will train our top 200 leaders and ensure their participation in Kaizens and our program overall. As we begin to see tangible results from these early initiatives, we will expand engagement and training across the organization. While we have many opportunities to drive growth through operational improvement and ultimately more consistent predictable results, we're also continuously evaluating and refining our strategy. This has started with a fresh objective view of all our business lines and solutions. Looking ahead, we will evaluate our portfolio and make strategic decisions to ensure sustainable growth through targeted acquisitions or thoughtful exits. As we move forward, our focus will progress to a comprehensive review of our operations, including our manufacturing and back office networks, to further unlock productivity and capacity. In summary, we believe there are clear opportunities to optimize our portfolio, footprint, cost structure, and the way we work going forward. This is an ongoing process with continued focus on delivering shareholder value. It has been a productive four months since I started at Johnson Controls. My excitement continues to build as we become more intensely focused on the customer, the people on future business system. I look forward to the journey ahead as we work together to deliver even greater value for our customers, team members, and shareholders. With that, I will now turn it over to Marc.

Thanks, Joachim, and good morning, everyone. Turning to slide six, we deliver strong results in the fiscal third quarter. While the broader environment remains uncertain, our execution continues to drive meaningful results. Our focus on operational efficiency is helping us to deliver for our customer and reinforce our competitive edge. Our team is committed to generating consistent long-term value for our shareholders. In the quarter, organic revenue grew 6 percent and segment margin expanded 20 basis points to 17.6 percent as we proactively mitigated the impact of tariff through strategic sourcing and cost management initiatives. Adjusted EPS of $1.05 was up 11 percent year over year and exceeded the high end of our guidance range. On the balance sheet, we ended the third quarter with approximately $700 million in available cash. Compared to last year, net debt declined to 2.5 times, which is within our long-term target range of two to two and a half times. Year to date, adjusted free cash flow improved approximately $900 million year over year to $1.8 billion. This strong performance, driven by improved cash conversion, reflect our disciplined financial management and consistent operational execution. Let's now discuss our segment results in more detail on slides seven and eight. Orders in the quarter grew 2 percent as growth in Americas was muted by softness in China. Customer engagement remains strong and we continue to see healthy activity across our pipeline. Additionally, the mix of order is shifting toward higher margin solutions, reinforcing our larger growth and profitability outlook. Geographically, orders in Americas increased 5 percent with -single-digit growth in systems. In EMEA, orders were up 2 percent against a tough comp with 6 percent growth in service offsetting a 1 percent decline in systems. In AIPAC, orders were down 8 percent as a decline in system more than offset double-digit growth in service. At an enterprise level, organic sales growth was led by solid -single-digit growth in both system and service. Sales in Americas were up 7 percent organically with continuous strength in both HVAC and controls. In EMEA, organic sales grew 4 percent led by 8 percent growth in service. In AIPAC, sales grew 6 percent organically with strong double-digit growth from our resilient service business. We continue to maintain healthy margin through disciplined cost management and strategic pricing, ensuring profitability even in a dynamic market environment. Operationally, we have driven greater efficiency across our core processes while improvement in our service mix have allowed us to prioritize higher value offering that enhance customer satisfaction and support long-term profitable growth. By region, EMEA-adjusted segment EBITDA margin expanded 100 basis points to 14.1 percent driven by improved productivity and a positive mix of service growth. In AIPAC, adjusted margins expanded 70 basis points to 19.4 percent as productivity continued to improve. In America, adjusted margin improved 10 basis points to 18.5 percent as system growth outpaced service growth. Our backlog remains at record levels, growing 11 percent to $14.6 billion. System backlog grew 11 percent and service backlog grew 8 percent. Let's now discuss our fiscal fourth quarter and full-year guidance on slide 9. As we enter the fourth quarter, we are building on strong momentum driven by enhanced operational efficiencies and a backlog that remains at historical high levels. We anticipate organic sales growth of low single digits, adjusted segment EBITDA margin of 18.6 percent and adjusted EPA and CID range of $1.14 to $1.17. As a reminder, we have a challenging comparison due to a large one-time project we successfully executed last year. Based on strong execution and consistent performance, we are reaffirming our full-year guidance for -single-digit organic sales growth and approximately 90 basis points of adjusted segment EBITDA margin expansion. Additionally, we are raising our outlook for adjusted EPS and free cash flow conversion. We now expect adjusted EPS in the range of $3.65 to $3.68 per share, representing 14 to 15 percent growth. Building on our strengthened working capital position, -to-date free cash flow performance reflects solid execution and financial discipline. As a result, we now anticipate achieving free cash flow conversion of greater than 100 percent for the full year. We continue to target returning 100 percent of our free cash flow to shareholders through dividends and share repurchases. Finally, we expect the sale of our residential and light commercial HVAC business to Bosch to close in our fiscal fourth quarter. While we anticipate returning the majority of the net proceeds to our shareholders through share repurchases, the impact on this year's share count is expected to be minimal, with the benefits primarily accruing in the next fiscal year. Operator, we are now ready for questions.

We will now begin the question and answer session. If you would like to ask a question, please press star, followed by one on your telephone keypad. If you would like to remove your question, please press star, followed by two. When preparing to ask your question, please ensure your phone is muted locally. We ask you please admit yourselves to one question and one follow-up. The first question goes to Amit Marotra of UBS. Amit, please go ahead.

Thanks, morning. Yocum, I guess as you approach five months on the job, I know that's not a lot of time or a long time, but I guess it would just be helpful nonetheless to understand your initial observation. What are some of the KPIs you're focused on to kind of make sure the global organization is moving in the right direction? Importantly, how quickly you think we can see some of the tangible progress on the return profile of the business?

Yeah, good morning, Amit. I hope you're doing well. Four months in, as you heard here in the prepared commentary, I visited a lot of places around the world, more than 100 customers, walked more than 30 plants and sat with colleagues in all of our innovation centers. I think I've gotten a really good grasp of the opportunity here. And you've heard me talk about before, number one is we need to sharpen our focus on the customer at every level and every function of our company. And that's such a foundational point. And I'll come back to that. And I also see opportunities to continue to drive growth through innovation, through increased investments in R&D. I'll come back to how we're going to fund that. And I see that we have really this enviable field position, 40,000 colleagues in the field, a capability that's been built over decades, difficult to replicate. But we have to find ways to unlock faster improvement in the company, that improvement that is valued by customers and gives us room to continue to invest in, for example, innovation. And that's why I spoke about a new business system that is in formation, that we have started to deploy. And you heard a little bit about on the prepared remarks that is anchored in 80-20 simplification and lean, which is about acceleration, speed in many ways is the ultimate competitive advantage. And augmented by digitization and AI to scale. So simplify, accelerate, and scale. And the notion here is that speed is one of the largest competitive advantages. And you can't go too broad too quickly because you also want to get the buy-in from your organization while you deliver value early. So we've started already. And we're going deep. And as you heard, I gave two examples, one commercial example, which is more growth-oriented, and one operational example, which is both cost and growth-oriented. So the commercial example. And these examples are examples, capabilities that we're building that we're going to deploy much broader over time. But you want to start narrow so you can really understand the root causes of why we're not able to perform better. And so that you can go after the countermeasures and then build new processes and capabilities. And then inspire other people in other parts of the company to do the same. So the two examples were in our HVAC conventional business in North America, in one part of the country, we have a team working on in their fourth Kaizen now, actually. And where we have a path to basically doubling the selling time that our sellers have in that part of the business by improving and removing waste from processes and improving the processes that we have. So I'm very excited about the potential of that more broadly over time. And then on the operations side, I gave you an example of where we're working on cutting the lead time in half. And we're in our third Kaizen on that one. I was in one of those Kaizens myself, actually, the other week. And cutting lead time in half is what you do to achieve that is basically the same thing similar things you would do to reduce cost and capital tied up working capital that is. So that effort will generate efforts beyond reducing lead time. And of course, reducing lead time makes us more competitive. And in that case, the product lines we've started with are oriented towards the data center market where demand is still very high and being able to deliver faster than others is an important part of our competitive advantage. Anyway, so we're starting narrow, exciting the organization, training the organization, and then we're going to deploy this more widely over time. And we have lots of opportunities here on these kinds of themes. I'm very excited about that.

Thank you. Moving on to the next question from Scott Davis of Mellius Research. Scott, please go ahead.

Hey, good morning, guys. Good morning, Scott. And appreciate the color on that question. I'm kind of going to go a slightly different direction. You've had 140 days. Maybe that's not enough time to answer this, perhaps. But do you have a better sense, Yocum, now of how you can accelerate growth in fire and security and how that business really, how HVAC and fire and security can really lever off of each other? I think historically, it's always been a question mark of whether they fit or not. But I think investors at this point are pretty open-minded on hearing your view.

Yeah. Yeah, thanks for that question, Scott. These are, as we spoke about last time with all of you, I mean, I see these are fundamentally different businesses serving a similar customer base, but different personas at different points in time. And so we're calling it as it is. That doesn't mean that they aren't businesses that don't have potential. They have potential as well. And many of the examples I gave on the new business system here are focused on HVAC and controls because we think that those markets inherently have higher levels of growth. But there's growth in fire and security as well. And so the approaches that I described, we are gradually going to deploy into those businesses. And we think there's good potential to improve the performance there as well over time. And then, like I said, we are taking a dispassionate view at the portfolio. And we are two plus months into a deeper strategic review of our businesses where we're at today and looking at the future and who we would like to be. And we'll keep, and the board, of course, I'm working very closely with the board. And obviously, these are not things you conclude in sort of one cycle, one board meeting. So over the next couple of months, together with the board, we're going to start to draw conclusions on what the portfolio will look like here going forward.

Thank you. The next question goes to Jeff Frege of Vertical Research Partners. Jeff, please go ahead.

Thank you. Good morning, everyone. Wondering if we could shift to free cash flow. Mark, nice to see the bump here this morning. Maybe could you address and certainly, Jochem, your thoughts on this also, but where the most significant opportunities are on the free cash flow side, should we view this 100% plus sort of a catch up on low-hanging fruit or is your confidence level that the company can kind of consistently be in that 100% zip code rising here?

For sure. Well, Jeff, thanks for the comments. We had a strong start of the year in cash flow and we've continued that momentum. I think the progress we've made this year has a lot to do with our accounts receivable, our collection management, and everything goes from managing order and managing customer through that experience. That has allowed us to really continuously improve the conversion throughout the year and has allowed us to get to that 100% plus conversion. Almost a billion dollar of improvement year on year is a good feat, but it doesn't mean that we're done and that's all of the benefit we are going to see. We still have those fundamental structural headwinds we've talked about, the effective tax rate being slightly different than the cash tax rate, we still have slightly elevated capex, but those two things over time will die down. There's a lot of opportunities that are going to come from our lean efforts and lean transformation and I think if you think about when we start that flywheel around that lean transformation, the need for facilities will reduce over time, which will reduce capex, which will reduce inventory, our ability to increase cycle time and improve customer centricity will also drive ultimately better outputs from an inventory standpoint. We think that's where moving forward the larger opportunity is, but there's still progress to be made on every aspect of the fundamental of our free cash flow conversion.

I'll second that. The lead time reduction example I gave in principle, that means that we'll be able to get a lot more output from that facility without adding additional physical asset space. That means that we're going to decouple versus historical trends, the capex that we need for our growth. That's really what that is about. We're also going to, by the same token, because with the approaches we're applying there, decouple the addition of inventory dollars for the growth dollars that we have. That's really what that lead time reduction initiative is about. Like I said, we've started narrow and we'll go broader over time. Then on the commercial side as well, we have a workstream. I think we're in our second kaizen now, where we're looking at how we're performing on billing and how fast do we bill, how accurate is our billing, and therefore what is the first pass yield on customers paying invoices. No company in this world is perfect on invoicing. Sometimes you miss a few. If you have a couple of percent of invoicing errors that you need to redo versus less than one percent, not only impacts customer satisfaction but also your cash flow. We've seen some good opportunities in that area too. Those themes give me confidence that we're going to be able to maintain the cash conversion that we've seen so far this year.

The next question goes to Nigel Ko of Wolf Research. Nigel, please go ahead.

Thanks. Good morning. I just want to follow up on that last point. I don't want to sound greedy, but with the intangible amazation, is there a pathway to maybe being above 100 percent free cash conversion based on the current reporting structure? Then maybe if we could maybe go back to the portfolio, very clear messaging there. Are we still in the zone of 5 to 10 percent of the current portfolio being, I guess with a question mark over its strategic importance?

Yeah, Nigel, I understand the question on above 100. I think it's a little early for us to commit. What I can tell you is that historically we've said the algorithm was 85, 90 plus percent. I think we are comfortable that we'll be able to deliver solidly in the 90s in terms of conversion. Over time, as we see the improvement on the lean transformation yielding the result, we could raise from there, but at this stage it's a little bit too early. On the portfolio, I would say the immediate actions we're taking on some of the assets that we believe are non-core, it's still within that 10, 15 percent range. Now, there's a broader amount of work that's being done. Joachim alluded to that earlier. That could be greater than that 10 percent over time as we validate our strategic vision with the board and decide where we can focus and orient the company to be successful and grow faster.

The next question goes to Steve Tusa of JP Morgan. Steve, please go ahead.

Hi, good morning. Good morning, Steve.

Can you maybe just, the order number at low single digit was maybe a little bit lighter than I was expecting. How do you guys feel about that trending into the fourth quarter? And then secondarily, what's the timeline for when you guys provide perhaps a bit more of a longer term outlook around what all this action is going to turn into financially?

Very good. Yes. So orders in America was strong. EMEA, in my view, was better than perhaps what the number appears to be because of a compare. And then clearly, there's ongoing softness in China. And so, as you would expect, we've continued to dig deep into leading indicators, our pipelines, and my conclusion is that our core vertical markets remain healthy. And it's not just our healthcare verticals and our data center verticals, but overall, there's no change. So I feel good about our pipelines. And then on China, which we've talked about before as bouncing around the bottom, I guess we've called it, we continue to be very disciplined there around going after higher margin systems orders and then prioritizing our service business there. And so we had healthy growth on the service side. And China is maybe a longer discussion, but I was there recently. And maybe the one tidbit is that that market is gradually turning into a more mature market in the sense that the retrofit part of the market continues to steadily increase, which is different than a number of years ago when it was sort of a new construction, new build market. So it's starting to look a little bit more like some of our Western markets. But near term, short term, yes, new builds in China, as has been talked about by many players, is a challenging space to be. So we need to be very diligent about what we choose to go after there and protect the manager margins.

The next question goes to Joe Ritchie of Goldman Sachs. Joe, please go ahead.

Hey, good morning, guys. Good

morning. So

with the quarter ending with record backlog, Yokum, I'm curious whether there's a way for you to maybe just give us an initial framework for 2026 and then maybe just go back to Steve's question on the long term targets. Just wondering whether you're planning an investor day next year as well.

Yeah, so I appreciate, Steve, I apologize if we didn't answer your question. So I will make a note and make sure that we do that next time. We are working on 2026 as we speak. I'm 140 days in, so of course I want to make sure I do a really detailed job together with Mark there. But maybe Mark, you could share a few words on where we're at.

Yeah, and we are on the finalization of our internal plan for 2026. It's a bit early for us to comment on this, but I think overall the long term algorithm we've been talking about was as a reminder, mid single digit top line growth, looking for well over 25% incrementals and then double digit EPS growth remain the basis for now. But as we implement the new business system, as we continue to do our strategic review, it's hard to imagine not having better incrementals, for example, over time and understanding how that will influence the ultimate long term algorithm. I think we'll be better positioned to give you a view on that as we close the year, release the fourth quarter and start working guidance for 2026 and give you a better view. As far as Investor Day, we really want to go through that deep understanding of our strategic orientation before we take people deeper into what the new JCI may look like and what it would mean long term from an investment thesis. So give us a little bit of time there to get through that and sharpen our pencil on the strategic view.

And on the guide, the two examples I've mentioned that we're working on is vehicles to implement our new business system. Just to reinforce what Mark said, you know, the commercial example I gave you with increasing the amount of selling time available for our sellers, that's really about decoupling the needed investment in the field personnel to drive growth, decouple versus how that algorithm has worked in the past. And then the operations example I gave is really about decoupling both capex inventory and cost, quite frankly, to also drive the kind of growth that we aspire to here from the cost.

– The next question goes to Nicole deBlaise of Deutsche Bank. Nicole, please go ahead.

–

Yeah, thanks. Good morning,

guys.

– Good morning, Nicole.

– Just wanted to ask something about short-term in nature. I think typically if we look at EPS seasonality throughout the year, you historically tend to see like a low team's increase in 4Q relative to 3Q. The guidance this year implies something a bit lower than that. So just want to understand, Mark, if you could kind of help with any major puts and takes between 3Q and 4Q that we should be considering. Thank you.

– Yeah, nothing in particular. There's two kind of dynamics that are happening at the same time. There's a bit of uncertainty on what tariff will do full-full on the bottom line. So far we've executed very well, but we've taken some conservative view into the 4Q. And then you got to remember with the extraction of our residential and light commercial business, which was more transactional, shorter cycle business, we are now a little bit of a longer cycle company. And therefore the variation you see quarter over quarter is a little bit less seasonal. Now transparently the fourth quarter, particularly in our HVAC and controls business, is very healthy quarter, generally from a growth and therefore absorption of our field team simply because of the weather in the northern hemisphere. And so it will naturally provide better tailwinds overall, but nothing vastly different if you look at the enterprise from a continued basis standpoint.

– The next question goes to Joe Odea of Wells Fargo. Joe, please go ahead.

– Hi, good morning. In reference to your comment around the – hi – just the comment around the algorithm and well over 25% incrementals, can you touch on restructuring in the program that was announced last fall of the $500 million, what savings you anticipate achieving this year, just kind of broad strokes, what the setup would be for what you can achieve next year. And then separately and with some of the legislative developments, just anything on tax, I think you've previously outlined that that could be up four or 500 bips year over year to go into next year, but not sure of any recent developments there.

– No. So on restructuring, Joe, so $400 million of restructuring costs, we've probably spent just a little over that, and we think we've gotten probably dollar for dollar restructuring saving. That's really part of the margin improvement story as we eliminate a lot of the stranded costs associated with the residential and light commercial throughout the year even before the close on the transaction. And so we believe we are going to continue to drive towards that $400 million to get the full run rate for $100 million benefit at the exit of 26. I can tell you that the early efforts around our lean journey and transformation, we'll probably have to think about how we position the restructuring, the balance of the restructuring program, and if we should further extend it and potentially gain even more benefit from a return on those restructuring efforts. From a tax standpoint, there are some small changes at the fringe that will require kind of differentiated planning on our side, but net-net, the rate headwind I've been talking about 4 to 500 basis points on as a reminder 12% base effective tax rate in 25 will remain enforced. It's really around that global minimum tax and how that drives the pressure on the rate. If you recall, the interesting component there is that from a cash tax rate, it doesn't materially change the math for 426, which is, by the way, a little bit of a tailwind from a free cash flow conversion as our cash tax rate will remain in the low 20s, high teens, potentially depending on different action we take.

The next question goes to Andrew Obin of Bank of America.

Andrew, Hey, just a question going back to America's orders. Could you by any chance disaggregate the orders between fire and security, commercial, HVAC, and specifically what are you seeing on data centers because you have such a strong market share globally in the market, given the overall strength? I would echo the sentiment I would have expected a little bit more growth, but maybe just give us a sense of what's happening. Are there any specific push-outs, but by verticals? Thank you. Thanks,

Andrew. Data centers continue to be very healthy. It's about 10% of our sales today, growing very nicely. There's, of course, a reason why we decided to deploy the initial stages of system focused on the operations manufacturing side of things to help cut lead times for a data center product line. We see that continuing here over time. We're doing well with both hyperscalers and colas. Perhaps we can have a more detailed discussion at another point in time. That's that side of our business in general is doing very well. The example I gave on commercial, where we're deploying the business system, is in HVAC and applied outside of data centers. We're already growing at a very healthy rate there. Fire and security, we're growing, but at a lower rate than HVAC. That's more in low single digits. We see, those are shorter cycle businesses, by the way, as well. I think you know that. We see plenty of opportunity to apply the principles of what we're doing on the HVAC sales side in those businesses as well, but we chose to start HVAC because in short term, we just think there's a bigger opportunity there. Applied HVAC and data center heavy is the story here, but those other businesses are still growing at low single digits.

The next question goes to Chris Snyder of Morgan Stanley. Chris, please go ahead.

Thank you. If we look at JCI service business, it's had really good top line growth over the long term. But if we look back at history, is there any color you could talk about or provide as to how margins have expanded or the business has kind of driven operating leverage over the last few to several years?

I think the answer to that is not enough operating leverage. That is now an opportunity for us. I think there are from my travels two reasons for that. I think just like the example I gave on the HVAC sales, by applying lean principles, we're able to remove waste in our internal processes and help accelerate the sales process just in general. I think we have the same opportunity in service so that we can gradually break the back off of connection between service growth and adding service cost. I see good opportunity in that. That's a body of work that we're going to be launching over the next quarter here. There's an operational side to the story. Then I think in a couple of our businesses, the way we productize services, I think there is an opportunity to add more differentiated products to our portfolio. Perhaps I can come back to that at some point in time in the future. When I spoke about in the prepared commentary about wanting to increase investments in innovation, I'm not only talking about investments in systems but also in service products. Some service products might require a few tweaks and changes in additions to our systems on the install base as well as new products. There's also innovation opportunities on, for example, how you digitize services to be able to deliver, if I could call them more, outcome-oriented service products to customers versus more -fix-oriented services. I see good opportunities both operationally as well as from a product and differentiation point of view in being able to both continue the service growth and then, like I said, break the back off of the growth and the costs so that the margin can improve over time.

The next question goes to Julian Mitchell of Barclays. Julian, please go ahead.

Hi, good morning. Thank you very much. Just wanted to ask about operating margins and a couple of different questions on it. I think first off, the OMX is fairly muted year on year in the second half of this fiscal year. I understand tariffs are weighing, but is the sort of construct that those related headwinds last through the first half of next fiscal year and then you get a larger sort of jump in the back half on margins as that tariff headwind eases. Beyond the next 12 months, I guess I was intrigued, Joachim, about you sound sort of relatively muted on the margin potential in fire and security, perhaps the growth outlook as well. I just wondered if that's around JCI's positioning, something around market share because certainly there are some peers out there like Honeywell or Allegian, say this past quarter or two, who are putting out pretty decent numbers in various parts of F&S. Thank you.

Yeah, thanks. Well, I'll let Mark take the first half of the question and then I'll add on.

Yeah, so on the OMX, you're right, but part of it on the rate standpoint is clearly the tariff. We've been able to recover the vast majority of that headwind, not always being able to consistently drive margin on that recovery. Some markets, we have more pricing power and we have been able to recover with margin. Some other markets, given the size of the tariff impact, it was a little bit more difficult to justify to the end customer that we ought to receive margin on that. And then you got to remember there's a lot of stranded cost in our SG&A associated with the continued discontinued operation, the residential light commercial. There is a lot of work on the way and progress being made to actually take that cost out. But that's muted a little bit our ability to expand margin beyond the expectation. But I think moving forward, we have opportunity. I'll pass it on to Joachim on the fire and security margin opportunity.

Yeah, so if we start with fire, and since you from what I understand, a very nice job on the product portfolio over many, many years. So when I talked about us having some product gaps in our portfolio, I was thinking about fire detection as one example. So we play a little bit more on the, let's call it the premium or the more sophisticated system side of the market. We have some opportunities to go beyond that over time. And on the security side, it's a market that consists of many, many different kinds of solutions. So you need to be careful with the apples to apples or apples versus oranges. You may recall that I used to be on the board of ASSA Abloy, Allegiant's biggest competitor. So I've seen that from many angles. So on the security side, like fire detection, there are some product gaps that we have opportunities around. Now on the service side of things, to talk about margins, as I mentioned here previously, I think there's good opportunities to do work to again, break the back off of the service growth and the service margins based on applying lean principles and how we operate in the field on providing the services. And I also think there are some opportunities in productization of services that could drive greater differentiation. So I see those opportunities. Now, again, we do see that the opportunity in HVAC and controls as being one of having higher growth over time and probably a little bit of a higher margin opportunity over time as well. It doesn't mean the other two are bad businesses. I think we can operate those better than over time versus how we haven't in the past. And like I said, we're working away at the strategic review of the portfolio diligently, thoughtfully. And once we have a conclusion, we will certainly let you know.

The next question goes to Andy Kapowicz of Citigroup. Andy, please go ahead. Hey, good morning, everyone.

Hey, Andy. Hey, Andy.

Just wanted to follow up on that line of conversation a little bit. You've had recently strong margin improvement, I think, in your other segments outside of the Americas. So if we think about the Americas going into 26, obviously, you have a mixed component. We've talked about tariffs and you just talked about service. Can you improve the margin there as you go into 26? Is there anything in the competitive environment that may be holding you back? Because I know you've shown good improvement in Europe pretty quickly. So can you do that in the Americas as well?

Maybe I can start with a little bit of a long-term view that we discussed a little bit more on our previous call or a quarter ago. So based on, and I still have the same view as when we spoke last, which is I really see no reason for why, from a margin point of view, we should be below our direct competitors over time. It's not a one-year thing. It's not a five-year thing either. And I think over time, we can aspire beyond that. And how do we get there? I gave you some examples today in the prepared remarks of how we're going to apply and deploy a business system to do that. Both, I gave you a commercial example and an operational example. And the two I gave happened to be North America-oriented examples, but they over time, we will deploy that in other regions as well. So yes, I believe we have continued opportunity in all regions on margins.

Yeah. And in the short term, Andy, you have system that continues to a paid service. And so that, our service business being overall a higher margin business, that will taper a little bit the mixed headwind you were talking about. This quarter, we had -on-year M&A headwind about 20 basis points that didn't help. But from a growth and productivity, if you exclude tariff, we had solid improvement in that margin line. And so I think it's more muted in the short term. And as we get through those tariff changes and we get the M&A behind us, and the mix balances out to a more balanced 50-50 between service and system, I think in addition to the opportunity, you have some tailwind here in the Americas from a margin standpoint.

The next question goes to Deanne Dre of RBC Capital Markets. Deanne, please go ahead.

Thank you. Good morning, everyone.

Hey, Deanne.

Hey, I wanted to circle back on free cash flow, if we could. And it really wasn't very long ago where JCI was struggling at that 80% conversion with tempered expectations on where and how it would be improved. And it really does feel like you've turned a corner here. Can you give us a sense of the sustainability above to be in and around 100%? And just remind me, did the sale of REZI provide any kind of structural lift to the cash conversion cycle?

Let me start with that last one. REZI was actually a headwind. It was a higher cash flow converter because of the JV structure we had within that business. So that put about 5% to 10% headwind to our overall enterprise conversion. In terms of sustainability, and to kind of give you a sense of the two different, we've fundamentally changed a lot of processes internally. How we bill, how we convert supplier, how we manage our inventory. And we've been a little bit more maniacal around where we deploy CAPEX and the pace at which we deploy those capital expenditure. And you combine all of that together, it provides a solid foundation to at least perform in the 90s or 95 plus, I would say from a free cash flow conversion. I don't think any of those fundamental at our risk of going backward, quite the opposite. As we are in a process of improving, they provide short term tailwind. And I'm very confident that we're going to be able to hit that 95 plus percentage. And then over time, as the progress on lean, as I mentioned earlier, on the lean transformation that flywheels providing additional tailwind, I think we'll be more comfortable talking about 100 or 100 plus, but at this stage, I'll stick to 95.

Yeah. And we're early in the journey on inventory improvement. So over time, we're going to go make some progress there.

This concludes our Q&A session. I will now hand the call back over to Joachim at any closing comments.

Well, thank you all for your questions. We have an exciting future ahead of us here at Johnson Controls. We have a lot of work underway, as you heard, and many opportunities to unlock. With a culture centered around a growth business system, I'm confident that our increased focus on our customers will allow us to continue to win with them. I'd like to take a moment to thank our 100,000 team members around the world. You are the foundation of our company, and I'm confident for what the future has in store. I look forward to continue my conversations with all of our stakeholders. Thank you. Thank you all.

This now concludes today's call. Thank you all for joining. You may now disconnect your lines.