Johnson Controls International plc

Hello everyone and welcome to the Johnson Controls Q1 2026 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 followed by one on your telephone or TV pad. I will now hand the call over to Mike Gates, Senior Director of Investor Relations to begin. Mike, please go ahead.

Good morning, and thank you for joining our conference call to discuss Jobs Control's fiscal first quarter of 2026 results. Joining me on the call today are Jobs Control's Chief Executive Officer, Joachim Lundemannis, and Marc van Diekenbeck, our Chief Financial Officer. Before we begin, let me remind you that during our presentation today, we will make forward-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 risk and uncertainty. 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. Reconciliations 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 Control's website. I'll turn the call over to Yodan.

Thanks, Mike. Good morning, everyone. Thank you for joining us on today's call. I'd like to begin by recognizing our 90,000 colleagues around the world for their commitment to our customers and for the contributions they've made to a strong start to the year. Let's begin with slide four. Johnson Controls enters 2026 with a solid foundation and more disciplined execution across the portfolio. Our first quarter performance reflects the progress we've been making with strong revenue growth, meaningful margin expansion, and broad-based strength across the enterprise. We are still in the early stages of this work, but I'm encouraged by the progress we've seen today. As we begin deploying our proprietary business system more broadly, leaders are displaying better candor and assessments regarding where we have opportunity and how we address those opportunities through our business system approaches. We're seeing this firsthand in Gemba Walks, in our manufacturing plants, in our field offices, in operating areas across the business, and even in corporate. Turning to the results. The quarter delivered ahead of expectation. I'm proud to share that orders increased nearly 40%, building on a very strong 16% last year compare. Revenue grew 6%. Adjusted EBIT margins expanded 190 basis points to 12.4%. and adjusted EPS was up nearly 40% and exceeded our guidance. A record backlog gives us strong visibility and reinforces the demand environment we're seeing. These results reflect the strength of our leading technology portfolio combined with more disciplined execution across the company. Given this strong start to the year and the momentum we're seeing across the business, we are raising our full year guidance. Mark will walk through the details in just a few minutes. This quarter marked an important step as we continued to provide much greater clarity on our direction and introduced our evolving enterprise strategy and priorities to leaders across the company. We cascaded and aligned goals across the organization to a focused set of enterprise-wide metrics. This gives every team a clear line of sight of their priorities aligned with our definition of winning, one that is rooted in winning more customers and better enabling our colleagues especially those on the front line. This alignment is essential to how we operationalize our strategy, where we focus our commercial resources, where we direct our R&D investment, and where we concentrate execution resources to create the most impact and win with customers. We are building a faster-growing, more profitable, and more disciplined company that is easier to run. We do that by focusing our efforts to parts of the market where our strengths in technology and field presence aligned with our passion to advance human society. You can see that impact clearly in the places where technology demonstrates its value today. Energy efficiency and decarbonization, where factories, large campuses, and buildings are some of the largest consumers of energy and amongst the biggest contributors to global emissions. In an increasingly energy-constrained world, where energy costs continue to rise, our customers are under pressure to manage energy more productively, reduce the carbon footprint, but also need strong operational returns. Turning to the next slide. This couldn't be more evident than in the fast-growing, most technology-intensive environments, such as data centers. As compute becomes more powerful, rack densities rise, hybrid architectures evolve, and control systems become more advanced, data centers now require increasingly energy efficient and precise operating conditions. Across AI and high-density compute environments, architectures will continue to change, but they all share the same fundamental requirement, significantly greater thermal and energy management supported by more sophisticated controls. Managing energy consumption while sustaining performance is essential, and that is exactly where our technologies remain critical. Against that backdrop, Our data center momentum reflects not only strong demand from existing customers, but also success in reaching new customers as our differentiated solutions gain traction. We continue to work closely with NVIDIA, applying our thermal management and controls expertise to support next-generation AI compute environments. Johnson Controls recently released a new reference guide that maps the full thermal chain and outlines scalable high-performance cooling architectures for an emerging class of AI factories. The guide outlines an integrated solution that leverages technology to accelerate data center deployment and increase their overall performance. Going beyond just supplying equipment, we are architecting the thermal backbone for the next generation of AI computing. It also reinforces the strength of our innovation roadmap, reflected in the products we introduced earlier this week. We announced two new chiller platforms that extend our leadership in high-density data center cooling. The YDAM delivers up to 3.5 megawatts of cooling in a compact footprint, providing approximately 20% higher capacity density than competing options and enabling warm water cooling for advanced GPUs. brings the industry's widest operating range and supports waterless heat reduction, which can eliminate up to 9 million gallons of cooling power water annually in typical deployments. Complementing these data center platforms, we also expanded our digital service capabilities with the introduction of the Smart Ready Chiller, which provides 10 times the insights over a standard remote-connected chiller. This gives us and our customers deeper insights from day one, allowing us to shift more customers into proactive, recurring service relationships that improve reliability, reduce unplanned downtime, and lower lifecycle costs. Together, these launches build on an already strong and comprehensive portfolio, making it even more capable and more differentiated for our customers. In addition to the data center, we see similar demands for energy efficiency, precision, and reliability across other mission-critical sectors. Advanced manufacturing. where, for example, next-generation pharmaceutical manufacturing relies on precise environmental conditions, meaning strict control of temperature, humidity, pressurization, and air purity, and large, complex research campuses and universities. But similar requirements exist as researchers discover new insights and translate science into real-world applications, and where students are learning, exploring, and preparing to make their own impact. Our customers have real unmet needs for technology innovation and service-based solutions that help them manage energy more efficiently and deliver outcomes in their mission-critical operating conditions. This is where our strengths set us apart and where we concentrate our investment and innovation. And this is exactly what gives me the confidence and the opportunity we have here at Johnson Controls and the ability to support our customers. When I went to Gamba, I saw breakthrough innovation happening at J-DEC, our Advanced Development Engineering Center in Pennsylvania. Work built on New York's 150-year legacy of pushing the boundaries of HVAC and thermal technology for today's data centers. And after also spending time with our field professionals, it became clear how much potential we can unlock by making their daily work easier and better leveraging their expertise and proximity to our customers. Turning to slide six. This is where our proprietary business system will help us unlock that opportunity. As a reminder, our business system is built on three pillars. Simplify, apply 80-20 principles to focus on what matters the most. Accelerate, use lead methodologies to remove waste to speed up execution, including productivity and reducing assets such as working capital tied up in the process. And amplify, leverage digital and AI approaches to amplify impact across the enterprise. I think of it as accelerate or lean helps us accomplish work in days and hours versus weeks and days. And Amplify for digital and AI enables us to take that same work and accomplish the same in hours and minutes. And it's anchored in a global cross-functional language and methodology for how we communicate, collaborate, and drive strong continuous improvement momentum to win. We're already seeing evidence of the business system in the way teams operate stronger alignment, clearer ownership, and greater process and tool consistency. And our talent system also plays an incredibly powerful role in this. We've brought in select external talent with deep business system expertise while also teaching and equipping our internal colleagues who lead in this new way of working and beginning to embed across our end-to-end talent processes. To date, we have hosted growth summits with hundreds of leaders diving deep into our enterprise strategy and hands-on teaching leaders, teaching leaders, our business system. This includes a global summit with our most senior leaders, and we're now spending time in each region to ensure a full understanding, clear expectation, and accountability for this new way of working, all focused on enabling our frontline colleagues to build more for our customers. As part of this, we started a new year in APAC with all the regional leaders. I spent significant time in that region in my professional life, and see great opportunity, particularly aligned with our strategy and where we have strength. To further accelerate our progress and strengthen global execution, we recently appointed Susan Hughes as our APAC president. Susan brings more than 20 years of deep experience in the region, and I'm excited for the impact she'll have as we align our teams and sharpen our execution. Let's now turn to slide seven to show how our business system is taking hold and the progress we're making across the company. By working together across teams and leveraging 80-20 and lean tools, we're seeing real measurable progress. Last quarter, I shared some examples that I'm proud to illustrate continued improvement. Our conventional HVAC sellers in one of our local markets went from 60% improvements in time spent with customers to 100% improvement. And as we bring AI into these workflows, we see the potential for another meaningful step change, one that simply wouldn't be achievable without AI. In one of our key manufacturing facilities for chillers, our factory on-time delivery went from 95% to now sustaining 95 to 100% for the past couple of months. This level of performance, combined with our now competitively advantaged lead time, is driving higher win rates for our customers, especially in beta centers, as we can reliably commit to help them meet their rapidly growing needs. These are just two examples where we go narrow and deep on an area of opportunity. Our teams are going deep and addressing other areas of opportunity, from cutting service repair time to improving quality and addressing billing disputes. The benefit only continues as we scale these learnings more broadly in the organization over time. I'm inspired by the energy, the urgency, and the enthusiasm with which our leaders and teams are embracing this new way of working. More than 1,000 colleagues have actively engaged across several priority areas Over 80 Kaizens have been completed, and 350 senior leaders have been trained in the new ways of working. And while many of our early focus areas started in the U.S., as we teach and equip our leaders, we have now activated efforts in both EMEA and APAC. This way of working gives us confidence in our ability to execute and deliver on our commitment. With that, Mark will lead you through the details.

Thanks, Joaquin, and good morning, everyone. We delivered a strong start to the year, reflecting continued momentum in the business. Our teams converted sustained customer demand into record orders while delivering solid operating performance. We are also seeing early benefits from the operating discipline we've been embedding across the company, which is helping us execute faster, improve consistency, and strengthen profitability. With this foundation, we are well-positioned to deliver on our priorities and achieve on our full-year commitments. Let's turn to slide eight to work through the financial highlights for the quarter. Organic revenue grew 6% with growth-based contribution across the portfolio, and we delivered solid margin expansion. Segment margins increased 70 basis points to 15.7%, and EBIT margin expanded 190 basis points to 12.4%, reflecting continued benefits from productivity, price realization, and improvement in our cost structure. Adjusted EPS of 89 cents increased nearly 40% year-over-year and exceeded our guide. Our ongoing work to simplify priority, strengthen alignment, and sharpen operational discipline is driving faster decision, stronger pricing, and tighter cost control, supporting both growth and margins. Let's now discuss our segment results in more detail on slide 9 and 10. All those grew nearly 40% in the quarter. a strong performance on top of a tough 16% compare. Remain was led by data center's project where customer are accelerating investment to support higher density workloads and AI-driven growth. Activity across our other key end markets remains stable, and customers continue to prioritize Johnson Control's differential mission-critical solutions. By region, this demand strength translated into solid order across all three segments. The Americas delivered 56% growth led by large-scale data center projects that continue to scale across the region. EMEA grew 8% with balanced high single-digit growth in both service and system. In APAC, orders increased 10% driven by double-digit growth in systems and high single-digit growth in service. At the enterprise level, organic sales growth was led by continued strength in service, which grew 9% year-over-year. In the Americas, sales were up 6% organically, with solid double-digit growth in service. EMEA grew 4% led by high single-digit growth in service. APAC delivered 8% growth led by strong system performance and steady demand in service. These results reflect strong execution across the portfolio, despite a challenging 10% year-over-year comparison. We delivered another quarter of steady margin expansion, reflecting disciplined execution across pricing, productivity, and project delivery. Our teams strengthened operating leverage in both service and systems through higher throughput, tighter cost control, and more consistent execution. These actions reinforce the continuous strengthening of our operating model and our ability to sustain meaningful margin progress. By region, adjusted segmentability margins in the Americas improved 20 basis points to 16.4%, supported by productivity gains and improved mix. In EMEA, margins expanded 120 basis points to 13%, deflecting favorable pricing and productivity gains. In APAC, margins expanded 290 basis points to 16.9% as volumes increased and factory absorption improved. Our record backlog grew 20% to $18 billion, highlighting the continued strength of our pipeline as revenue conversion accelerated this quarter. Turning to our balance sheet and cash flow on slide 11. On the balance sheet, we ended the quarter with approximately $600 million in available cash. Total liquidity remains strong, supported by our available credit facilities and disciplined working capital management. Net debt remains within our long-term target range, declining to 2.2 times. Our capital allocation priorities remain consistent, investing in the business, maintaining balance sheet strength, and returning capital to shareholders. Let's now discuss our fiscal second quarter and full year guide on slide 12. As we enter the second quarter, operational momentum remains solid, supported by disciplined execution and continued strength in our backlog. We anticipate organic sales growth of approximately 5%, operating leverage of approximately 45%, and adjusted EPS of approximately $1.11. For the full year, we are maintaining organic sales growth of mid-single digits, supported by solid execution and the visibility provided by our backlog. We continue to expect operating leverage of approximately 50%, which is above our long-term algorithm, as last year's trended cost savings materialize in this year's performance. With the strongest power through the year, we are raising our adjusted EPS guidance to approximately $4.70 per share, which is roughly 25% growth. With the increase in our EPS guidance, we continue to expect approximately 100% free cash flow conversion for the year, underscoring the quality of our earnings and the discipline of our working capital processes. Our guidance reflects the progress we've made across our operating priorities and provides a solid foundation for delivering strong results throughout the remainder of the year. Operator, we are now ready for questions.

Thank you. 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 unmuted locally. We ask you please think yourselves to one question and one follow-up. The first question goes to Nigel Coe of Wolf Research. Nigel, please go ahead.

Thanks. Good morning, everyone. Thanks for the question. Yeah, so I think a good place to start would be on the orders. I don't know if this is a record order, but I'm sure it's pretty darn close. Anything that you'd call out, because we've seen extraordinary strength in other places in data center, but this is another level higher. So just curious, are we seeing more kind of longer duration orders, multi-year orders, So anything to call out driving the strength in all that?

Hey, Nigel. We are seeing record orders, as you saw. We have a record backlog, and we'll try and keep it like that going forward, too, by the way. I'm super happy that it's not only data centers that's driving the strength of our order entry. We had a very healthy life triumph. order entry during the quarter, and that's not the first quarter that we see that strength. And that's really a result of, you know, all the effort being put into the innovation pipeline over the years, as well as the field coverage for what we call our mission-critical verticals, you know, where thermal management and the indoor operating conditions really matter for our customers. Now, data centers was very strong, and some very proud of the team, what they accomplished during the quarter. Pipelines remain healthy. And as a reminder, you know, we really play in three categories broadly in data centers, not just on the chiller side, but on the cross, the air handling units through our silent air franchise, which is the leading franchise in air handling. And as you know, a couple of quarters ago, we announced that we entered the CDU space where we're making some good progress. Very pleased overall with the order entry, but data centers is definitely not the only vertical that's showing really, really good strength here.

Great. Thanks, Joaquin. And then my follow-on is I believe the backlog reflects orders that are shippable for the next 12 months. So, obviously, the backlog increase, I think 20% was the number, if I'm not mistaken, versus the unchanged mid-single digits for this year. Just wondering how to think about that inflection and backlog versus non-inflection and organic growth. I'm just wondering if we're starting to see a line of sight towards, you know, high single-digit organic growth.

You know, I think the organic growth will continue to strengthen over time. You know, our guide currently reflects, you know, what we see for this year. Many of those larger orders that we're taking also in the life science field but in data centers, are not necessarily shippable, you know, within the next nine months or so. But we'll keep you updated on the guide here as we see opportunities to do better here potentially.

Thank you. The next question goes to Amit Malhotra of UBS. Amit, please go ahead.

Thanks. Good morning, everybody. I just wanted to follow up on the orders question, if I could, and just understand, you know, how much of this order strength is you know, the market coming to you as opposed to maybe how you're evolving, how you go to market. And I know, you know, last time we chatted, there was maybe some initiatives underway to kind of go after what you guys call the belly of the market. Is that indicative of the orders? And then just related to that, you know, any numbers you can provide around the non-data center growth just so we can understand a little bit how broad basis is?

Yeah. So I think the data center market is growing in many different parts of the world and in different applications as well. So our growth is pretty broad-based. So like I said, you know, we play in three different application categories, the chillers, the craws, the air handling units, and are now starting to grow nicely here on the CDU side as well. So historically, we had a good position with our hyperscalers. as well as many of the large in particular in the United States. But, you know, over the last couple of quarters, we're very happy to see the growth in Europe and Asia also start to become very meaningful for us. And like I said in my previous comment, you know, our orders strength in the quarter here is, of course, helped by data centers. But we're also very happy about, in particular, the life science oriented growth that we're seeing and just a little bit more color on that. You know, what's happening in the pharmaceutical industry is that with the rise of biologics-based therapies, you know, the manufacturing environments are materially different than the historical manufacturing environments. And that's why, you know, large pharmaceutical manufacturers are building new plants in many parts of the world. And the indoor operating conditions, that they require to be able to effectively, you know, manufacture these biologics-based drugs, you know, really require very strong thermal management, which is not just HVAC, but also controls. And because these are large campuses with thousands and thousands of employees moving in and out every day, and the value of what they manufacture is very high, it also requires other solutions in our portfolio, so. very encouraged by our continued progress in life sciences.

That makes sense. Thank you. And then just my follow-up, Mark, I wanted to ask about second half versus first half incremental margins. You know, obviously, you have a full year of 50% plus. You'll achieve or have achieved in the first quarter, second quarter, maybe about 40%, 45%. It does imply kind of this nice step up in the second half above 50. Can you just talk about that and maybe what are the drivers of that step up on the second half?

For sure. We can maintain the full year roughly 50% operating leverage outlook because the structural driver of our leverage built materially around the year and are supported by, of course, the backlog and the backlog margin, the visibility of that and the margin extension that comes, but also the work associated with the trend at cost and it's all inflecting in the second half of the year and that leverage continues to improve. You know, that 50% based on our mid-single-digit perspective on top-line growth, If we can accelerate that top line growth, not all of that incremental growth will come at the operating leverage in the 50s. It will probably come closer to our long-term algorithm, well above 30%, but maybe not at the 50% range.

Thank you. The next question goes to Steve Tusa of JPMorgan. Steve, please go ahead.

Hi, good morning.

Thanks, Steve. Please proceed with your question.

Hello? Can you hear me okay?

Yeah.

Hello? Can you hear me okay? Great. Thanks. Sorry. Just on the North America margin was just a little bit lighter. I hate to nitpick because there were really good results on special ed orders. The North America margin was a little bit lighter. There was a $15 million headwind from other Maybe that was something we were missing from the comp from last year or something like that. Maybe just touch on how you see North America margin trending in the next couple quarters and anything there from the quarter.

So if you look at the growth in North America, right, very strong system growth, strong service growth as well. That makes sense. you know, normally would be lifted by much, much better growth in the service thanks to the rate. And we saw some benefit associated to productivity. Overall, the opportunity in North America is accelerating our service growth and the margin rate that comes with that. You know that there was a few smaller headwinds in the quarter in North America, about $15 million as others. That has to do with some periodic small adjustments we do on product liability. Those are just reserves we adjust over time, not something material, not something recurring. We think North America margin potential continues to be strong and will probably come slightly better than what you saw in the quarter in the second half.

Great, thanks. And then just one on data center. Where do your lead times stand today?

Next question goes to Scott Davis of Mellius Research.

Scott, please go ahead.

Hey, guys. Steve's still on there? Yeah, we are. Operator, can we please ask you to take command here? Steve was asking his follow-up question, so let's allow Steve to do that, and then Scott, we'll go to you right after.

No worries, guys.

Thank you. Operator, can you please step in? Okay, Scott, if we have you on the line, please go ahead. I will act as the interim operator.

I could call Steve and ask him what his question is, but we'll move on. Go ahead, Scott. No, sorry about that, but look... Hey, I'm kind of curious, the entrance into CDUs, is the goal here to kind of bundle this into a total solution that, you know, I would imagine it's still a separate purchase order right now and perhaps even a separate process altogether. But what do you kind of see that market going for you guys?

Today it's a mix. There are certainly a lot of business that transacts, you know, CDUs only. But we do see plenty of opportunity for combined offers. And obviously, we have a number of very important key accounts. And so, you know, we work on more than one application together with them. You know, over time, as the thermal architecture for data centers evolve, as is normal, I think, complicated system like that, you might see some slight changes in the overall architecture. And so the roles that certain devices play today might evolve a little bit over time. And I think that's, of course, why we chose to add CDUs to our portfolio to be able to lead in that and be able to be a player that helps our data center customers with the most optimal and highest performing thermal architecture, not just for today, but in the future as well.

Okay, fair enough. And then, you mentioned that you were just in Asia Pac. I'm not sure. It's a big, broad region, so I'm not exactly sure where you were. But perhaps, since you were there recently, you could just tell us what you're seeing on the ground, because we're seeing a broad set of different results. You guys were a little better than most people this quarter.

Right. Yep. I'm not going to say I was all over the region, but I was in all the major markets in a number of countries. In our case, we are seeing continued stabilization in China. Part in our business and part of that, of course, is that we have worked hard on shifting a little bit on the mix of which verticals we focus on in China. I think we're in a better place now. Our commercial teams are more aligned with where there is still growth and, you know, our service business there, we have continued to invest in, and so we see that as a continued good opportunity. So we see stabilization in China, but unlikely that China is going to return to the kind of growth rates we saw in past years. But what's exciting is that, of course, it's no secret that there are some other major economies in the region that have continued to strengthen overall. And so we, I think we have, you know, a really strong, good team on the ground in a number of countries in Southeast Asia as well as India. And in some of these countries, of course, they're all looking at data centers and there are several emerging players in these markets. But in terms of, for example, you know, investments in healthcare hospitals and, you know, Pharmaceutical manufacturing, that's also a growth driver for us in a number of those countries there. So I'm super excited about our prospects here in Asia. So stabilization in China and then growth opportunities in major economies elsewhere.

Okay, helpful. Best of luck the rest of the year, guys. Thank you. Yeah, thank you.

Thank you. Moving back to Steve Tusa of J.P. Morgan. Steve, please go ahead.

Yeah, thanks. That's a quality move. Thank you for letting me back in. I appreciate that. Just the data center lead times, where are you now? And then, Mark, can you just give us a little bit of color on what BMS did in the quarter? We're trying to tease out kind of the like-for-like applied orders growth. You know, the BMS kind of orders would, I would think, be lower than what applied was. Maybe not, but maybe those two follow-ups. And thanks again for letting me back in.

Yeah, sure. Lead time, you know, I gave the example in the prepared remarks here. So we're making good progress on the on-time delivery, and that's on-time delivery as requested by customers, right? So by definition, that is them. being predictable within the lead times that the customers are asking for. We continue to sustain, and I talked in previous calls about how we've cut lead times in half for one of our product lines in a factory, and that work is now being cascaded out to the other product lines in that factory and other factories. He did hire a new VP of operations a couple months ago. And, you know, he and his team are now ramping, you know, very, very nicely. And I'm actually, and we were reviewing it just the other day. I'm really excited about what I'm seeing from our operations teams, not just in terms of short-term results, but the aspirations and where we think we can get to, you know, not next year, but this year. And so, you know, more to come on that. And I think in a little bit of a, you know, an environment like we have in the data center market right now, the ability to be able to deliver not as predictably, but fast is part of, you know, one of many things that contributes to our competitive advantage, so.

And then BMS, yeah.

BMS, go ahead, Max.

So the BMS growth in the quarter was, I would characterize, sorry, in the high single-digit rate. We feel very strong about the backlog of that business because it's continued to improve. The pipeline of opportunity is also accelerating. Aligned a little bit with the strategy we laid out at the beginning of the opening comments around our mission critical and how a strong BMS controls offering for those particular specific vertical is really resonating well with the customer and we think we can continue to improve that business nicely over the next few quarters.

Thank you. The next question goes to Jeff Sprague of Bird Cool Research. Jeff, please go ahead.

Hey, thank you. Good morning, everyone. I wanted to come back to the new products, Joachim. You know, it's just kind of interesting how sensitive this market is, right? You might argue your stock has been weak year to date because NVIDIA has scared people about warm water cooling. you know, and here you are with, you know, an offering, right? So, you know, clearly, you're in the loop on product development, you mentioned reference designs, maybe just for the benefit of all of us, just, you know, a little bit more detail on, you know, where you sit in sort of the technology path, the forward planning, understanding what's coming down the pike, and, you know, how you're, you know, we're not surprised by this, but in fact, we're prepared.

Yeah, so I can't, I won't comment on specific product launches in the future, but the reference design that, and there are two documents that we, guides that we issued to the market, and these reference designs, for those of you who don't know, they're really for the benefit of data center designers and operators as they're working on designing the next generation of data centers. And that kind of work, you know, we did a lot of work with NVIDIA, and so some of the guys that we publish here is in collaboration with NVIDIA. Of course, beyond those documents that we publish, an element of how we work in this industry is we essentially every other week have large engineering teams from our largest customers, colos and hackerscalers, who sit with us in our innovation center in JEDEC in Pennsylvania. to collaborate on, you know, what the next generation of designs should be based on the learnings so far. And that helps feed our innovation pipeline. And it's really an excellent way where we can combine our deep technological know-how and thermal management represented by, you know, our very talented people in that innovation center. where the people are actually using the product from our customers and then apply the technologies that we have in more and more competitive solutions. And so you saw a couple of launches here earlier this week. That's a big show that's ongoing as we speak here. And we have a significant roadmap behind that. And as you remember, we play in three categories in data centers when it comes to thermal management, chillers, and handling units mainly through our silent air franchise, but beyond that as well. And then we answered and then of course we're in the controls system as well. And so there's a lot more to come, Jeff, and we'll keep you posted as we launch these new products.

Great. Appreciate that. And then maybe just a different thread here. Just on the kind of the portfolio review, Joachim, I would assume that's still ongoing. But it also looks like the retail business did not close yet. I thought that was sort of pending and close to being done. Maybe the stuff that you've already publicly identified to go, where are we in those processes? And any other update would be appreciated.

Yeah. So we continue. I think I've commented on that in the past, that we have undertaken a a thorough strategic review of our entire portfolio. You know, we've worked with the board and calibrated and aligned on what we think is appropriate to do, and that includes both how we can execute better as well as potential alternative futures. And we've commented on a little bit how a big part of the portfolio that might entail. And, you know, the main driver here is to create shareholder value, and so we continue to, to work on both improving execution and on the portfolio move that we flagged in the past. We'll keep you posted as we make progress on that.

And I'm not going to comment on particular ongoing transaction. We have not announced anything particular on retail. We are very happy that we closed the disposition of one of our residential monitoring security systems as we continue to work away, if you'd like, from that particular subsegment of the market.

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

Thank you. I wanted to talk about the longer-term margin opportunity for the company. You know, I think when we look at the model, you know, we can see the SG&A as a percentage of sales is quite high compared to the competitors. So I think it's, you know, understandable, the opportunity there. But can you talk about the opportunity on gross margin? Just because the company is already running above the industry, it seems like, on the gross margin line. So, can you just kind of talk about entitlement there? What is the opportunity to kind of grow that into the coming years? Thank you.

Hey, how are you? Yes, that's a topic we've discussed in the past, and yes, our gross margins are running a little higher than some of our direct peers. I see opportunities there. I think we've discussed, at least with some of you and some of your events, the opportunity, for example, in footprint consolidation in our manufacturing setup. And there's also an opportunity to continue to drive better productivity in our field on the service side of things. You know, you should think of the example that we've talked about in the work we've done with the business system with our HVAC sellers where we've been able to more than double the amount of time they spend with customers and selling. And we have that kind of opportunity that we're already working on in a couple of our markets with our service team. So I still see healthy runway to improve our gross margin. And then on SG&A, maybe, you know, on the aid side of that, I mean, we are working away at just simply reducing our costs We are a smaller company than we were when we owned retail, and there continue to be cost reduction opportunities on the administrative costs of the SG&A. On the S side and the R&D spend within SG&A, on the S side, I'll refer to the example with the HVAC side, we think we can decouple the future growth from top line growth, from the growth of the S-cost by applying the business system and exactly the way we outlined in the example that we gave, basically help our sellers, help them do their job, double the amount of time they can spend with customers. Meanwhile, though, on the R&D cost, our ambition is to significantly, and we have already this year in our plan and it's embedded in the guides, started to ramp up our spend and R&D, and that's going to continue to increase at a very healthy rate here going forward. But we'll still be able to drive margin expansion because of the types of things that we're working on that I gave you examples of here. So still unchanged view versus what we've talked about in the past. I see no reason for us not being able to achieve the 70-bit margins that our best performing peers have. And I think over time, we should be able to even go beyond that. And obviously, they're not sitting still. We recognize that and they're extremely capable. So, we know that's a moving target. But our opportunities are plenty here.

Thank you. I really appreciate that. And then if I could maybe follow up on the labor availability. in the market and particularly how it impacts the service business. Obviously, labor seems like it's still tight out there. When we see these orders and growth numbers, it feels like it will continue to get tight. Has there been any change from your perspective in the ability to either recruit or retain service professionals? Is this becoming a growing competitive advantage for a company like JCI who already has, you know, such a big, you know, technician base compared to other smaller competitors or upstarts in the market? Thank you.

Sure. I think the availability of service labor has been a topic for the last 15 years. So that's hardly a new phenomenon. And that's why, you know, so many companies, including ours, you know, have been working on for several years, but now we've accelerated on looking at how we can make our teams that we already have in the field much more productive. And, again, you know, think the example of how we can double the amount of time the salespeople spend with customers. We can do the same thing, and we're working on a similar thing with our service team. And that's process work, but it's also, in a much better way, leveraging you know, the connected installed base that we have. And you reconfigure a little bit how work is done field versus the office. So there's plenty of opportunity, lots to go out there. Now, we do have, like you pointed out, a significantly larger field force than many of our peers. And that is an advantage. So we want to make sure that we make them more capable. more productive, but we're also wanting them to provide even more value to our customers. So over the next couple of quarters, you know, we're working on a number of service product offerings that we don't have today that we'll be launching to the market, and you'll hear more about that in the future. So we're happy to have that advantage to be able to leverage, but we have to leverage it in a much better way doing the kinds of things that I was talking about here.

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

Hi. Good morning. I just wanted to start off with slide 9 and 10 just to try and understand, I guess, the tie-in of the systems orders to the systems revenue because, again, with that very high order growth and your lead times of you've made good progress bringing those down, would have thought you'd get some translation of that into revenue this fiscal year. So is it the case that the customers are specifically placing orders that are very long dated? And I also wanted to understand what you used to call products. Is that still not in the order numbers on slide nine and anything to call out with what's happening with products?

Yeah, thanks, Julian. Yeah, the backlog strain is very encouraging. But the mix of that backlog and the timing of the broader portfolio dynamic today only supports the mid-single-digit guide we're providing. I would say we started the year on the lower range of that mid-single-digit range. And I think we are going to print the second half on the higher half of that range, the better half of that range. And if you look at the content of that backlog, all of it could be shippable in the next 12 months. But a lot of it depends on customer availability and customer ability to accept that order. And the way the dynamic works with some of our larger relationship is, It's an ongoing conversation with those customers. The quicker they can take it, the quicker we can turn revenue. There's obviously at a certain level of growth a capacity constraint, but we don't believe we've reached that capacity constraint just yet. There's opportunity to improve there. But overall, we think that backlog continues to support a solid mid-single legit revenue guide. What I would say is if you continue to unfold that backlog beyond the next 12 months, I think we'll be very comfortable to start talking about a slightly better growth than what we see maybe in the prior quarter.

The next question goes to Andrew Obin of Bank for America. Andrew, please go ahead.

Yes, good morning. Can you hear me?

Hi, Andrew. Yes, we can. Thank you for asking. Good morning.

Of course. Just a question. I mean, clearly improving throughput has been a key KPI for you. And, you know, I think I'm trying to figure out this order thing as well. Should we think that there is a relationship with freeing up more capacity and your ability to take more orders in the near term?

Yes. Absolutely. So, and on the capacity, you know, we made significant investments in physical plants and machinery before I joined the company. And so we more than tripled our physical capacity. And then with the lean work, the business system work, you know, there's an opportunity to keep expanding that capacity materially, very materially, without having to spend the same amount of capital. We may need a little bit of capital here and there, but nowhere close to what we've spent in the past. When larger customers are negotiating or looking at placing larger orders for a number of data centers that they're planning over the next couple of years, one of the factors they do look at in vendors is their ability to deliver, and it's the reliability. approved points and the ability to turn things around quickly. That doesn't mean that they need things, you know, in six weeks from now. They're simply very super realistic about their own ability to plan ahead and manage all the construction work and so on. So they know that their plans may change as the project progresses and then they need a partner who can react quickly and be flexible on the factory side. So that's kind of where both the capacity the lead times and the reliability of the on-time delivery come in. So, yeah, it's definitely part of a competitive advantage in this game that we're playing.

And just a follow-up question on slide six. I mean, clearly you're highlighting this product introduction. I think a lot of us were in Vegas and saw a specifically like AHT product, which I think is very important for you to lead product into competition. Are you starting to – are we seeing the impact of these product introductions? on your orders this quarter, or is this still to come?

I think it's very minor in the orders that we've taken so far. So it's more about what's to come. And by the way, those launches, I did get a note from the team, so thanks for stopping by and spending time with our team there. All those new products, I mean, they are a result of the work that we do together with our customers, and I alluded to it. earlier this morning, you know, we have a large engineering team coming in from, from our customers and that sit with us for a week, 10 days. And, uh, so we're, we're creating a new, uh, roadmap product roadmap, you know, basically off of what they have learned by applying ours and other people's products. And, uh, so that's why we're so excited about the launches that we have because we know that the, these precise needs are there and, uh, We will be able to see that in our order. I expect, you know, already here ramping in the quarter we're in already.

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

Hi. Good morning. Just on the capacity expansion and the tripling of physical capacity, is that specific to chillers or includes air handlers, just any specificity around it and kind of global versus Americas? And then, you know, really just in terms of the fixed cost impact that that has today, any quantification of a burden today and sort of how you see that improving, you know, over the next 12 months or so?

Good question. The answer is that, you know, we have invested in capacity across the board, meaning chillers, air handling units, and because of the investments in the air handling unit capacity, we also made room for the CDU business that we launched into here a couple of quarters ago. The fixed cost aspects of those investments have already been in our run rate for more than a year.

And presumably, that's a tailwind kind of each quarter in terms of utilization.

It creates leverage opportunity as the volume comes in. Absolutely.

Yeah. Yeah. And as we continue to work on the lean work to eke out more capacity without adding fixed cost, yeah.

Thank you. The next question goes to Andy Katowicz of Citigroup. Andy, please go ahead.

Hey, good morning, everyone. I think – good morning. I think foreign security markets, I think you said, were up like low single digits in the quarter. But as you know, a lot of those businesses are short cycle. So are you seeing an improvement in sort of more of your short cycle markets these days, given where the global economy is and specifically the U.S. economy looking a little better?

I'd say there's no material change in the markets yet. I think the change that we are working on operationally is what you heard me talk about. I talked about the HVAC seller capacity time with customers and so on. That kind of work, you know, we've embarked on in the other parts of the company as well. And then for those, the fire and security businesses, we're also looking over the where are we specifically pointing the effort at what parts of the market and trying to help that team just be more clear about our priorities and making sure that we're behaving in the way and pointing the effort at the most attractive parts of the market. So like I mentioned before when I got the portfolio question, regardless of what the outcome is on the portfolio, we're making sure that You know, we improve the execution, the operational performance of all parts of Johnson Control.

I think that's helpful. And then maybe I just want to ask the sort of capacity question in a different way. Like, obviously, you're getting larger orders now, and they're becoming a bigger part of the portfolio. I assume they're competitive on pricing, but what's your ability to scale these projects themselves? I mean, you know, maybe you have 50 chillers or 100 chillers in each of these orders. can you get better margin on these individual projects moving forward?

In terms of our ability to scale, there are no, we have no major bottlenecks at this point in time at least. And to some extent, you know, larger orders have always been part of it if we talk about data centers. But by the way, on the pharma side that I commented on and some of the prepared remarks here too, some of those factory build-outs are also significant projects. So that's not a new phenomenon. And the capacity build that I talked about, it isn't just the physical facilities, it's also the resources around that, project engineering teams, project management teams, and and, you know, capabilities like that. So we have made those investments as well and are working on improving our ability to get more out of those teams. And it's the same lean principles we're applying in those teams as we're applying in the factories. On the margins, I mean, these are, of course, discussions where obviously the customers ask for multiple bids. But then also, you know, there's an ongoing discussion, as you heard, of eight of our engineering teams that sit with our engineering teams, and we try and come up with solutions that really offer real, tangible value, less energy consumption, more cost savings, and things like that. And as we do that work, we, of course, look at opportunities for us to also be very, very cost competitive. So... There's no particular margin headwind coming out of this, if that's the question. We don't see that at this point in time.

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

Thank you. Good morning, and thanks for fitting me in. Look, Yoko, you sounded, you know, obviously very happy about the record order quarter. It sounds like you're pretty sanguine on the pipeline as well. If you could maybe just characterize what the pipeline of orders looks like today versus maybe three to six months ago. And then also, if you kind of think about your data center customers, has there been any real discernible shifts? in like colas versus hyperscalers and where you're seeing demand growth today?

Pipeline continues to remain very healthy and healthier. We are also doing, I should, and it's not that things are just falling in our laps. You know, we're working with our sales teams around the world So in addition to the example I gave you about the double the amount of time that our HVAC sellers in one region are spending with customers, we are also in the process of rolling out a very practical, pragmatic pipeline management approach, which basically aims to help and teach our sales leaders and our individual sales contributors on how to more effectively plan and spend their time. And in my experience, having done that a number of times, what tends to happen is that you just get better pipeline growth and over time you're positioning yourself for even better order of growth. So that's on the pipeline. And, of course, the results of, as I alluded to in my prepared comments here, being much, much more deliberate with our teams about which parts of the market we want to go after versus maybe not as important, that has an impact as well. As you shift your effort more to parts of the market that have out there growth rates, your mix of your pipeline and order entry, of course, changes as well. And then collusion is high, too, yeah. Yeah, I mean, there are incremental changes in how certain hyperscalers or colos approach how they do business and how they buy and who they partner with and so on. But look, there are no real material changes in how the big players are behaving. I think as a result of our growth in the future, it started to, but more in the future, we'll come also from Asia-Pac and Europe, and the mix there of hyperscalers versus what's called local players, is a little different than in the United States, but materially different. So I think, if anything, our data center business is going to broaden, and I think that's a good thing.

Thank you. This concludes our Q&A session. I will hand the call back over to Joachim Wiedemannis for any closing comments.

Thank you. And thank you for all your questions today. And thank you for those of you who visited our booth at AHR. You certainly kept our team on their toes there. So, but great to have you and host you there. This quarter's results reflect the momentum that's building across shopping controls. as our teams operate with greater clarity, discipline, and consistency. And we're seeing those improvements show up in how we serve customers and in the strength of our results, as you can see. I want to thank our 90,000 colleagues for their commitment and energy. Your focus and ownership are what's giving such confidence in our opportunities ahead. I look forward to continuing my conversations with all of our stakeholders. Thank you for joining us today.

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