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Wednesday, Nov. 5, 2025, at 8:30 a.m. ET CALL PARTICIPANTS Chief Executive Officer — Joakim WeidemanisChief Financial Officer — Marc Vandiepenbeeck Need a quote from a Motley Fool analyst? Email [email protected] Full-Year Sales Growth -- Sales increased 6% in fiscal 2025 (period ended Sept. 30, 2025).Segment Margin Expansion -- Adjusted segment margins rose by 100 basis points in fiscal 2025, indicating improved operating discipline.Adjusted EPS -- Adjusted earnings per share increased 17% in fiscal 2025.Free Cash Flow Conversion -- Free cash flow conversion reached 102% in fiscal 2025, exceeding the company's target.Annual Orders and Backlog -- Orders grew 7% in fiscal 2025 and backlog expanded 13% in fiscal 2025, closing at a record $15 billion backlog.Q4 Organic Revenue -- Organic revenue grew 4% in Q4 fiscal 2025, with segment margin up 20 basis points to 18.8%.Q4 Adjusted EPS -- Adjusted earnings per share of $1.26 rose 14% in Q4 and surpassed the high end of guidance.Available Cash and Net Debt -- Quarter-end cash was $400 million, with net debt at 2.4x.Regional Order Growth -- Americas orders grew 9% in Q4, EMEA orders increased 3% in Q4, and APAC orders declined 1% in Q4 due to lower systems sales despite service growth.Regional Sales Performance -- EMEA organic sales grew 9% in Q4, and APAC declined 3% on lower China volumes.Business System Implementation -- Over 700 employees engaged in business system initiatives, conducting more than 50 kaizens and training 200 leaders in boot camps.Sales Productivity Improvements -- Implementation of lean tools increased seller customer engagement time by over 60% in one of our local markets in fiscal 2025.Chiller Plant On-Time Delivery -- On-time delivery exceeded 95%, and lead times are on track to be cut in half at a key data center-focused factory as of fiscal 2025.New Product Launch -- Launched a coolant distribution unit, a critical component for liquid cooling in data centers.Energy Efficiency Impact -- Cooling technologies reduced non-IT energy consumption by more than 50% across most North American hubs.Decarbonization Project in Zurich -- Announced project to supply green heat to Zurich, more than doubling heat capacity versus prior projects and serving about 15,000 homes.2026 Financial Guidance -- Forecasting mid-single-digit organic sales growth in fiscal 2026, over 20% adjusted EPS growth to $4.55 per share in fiscal 2026, operating leverage of about 50% in fiscal 2026, and approximately 100% free cash flow conversion in fiscal 2026.Segment Margin Drivers for 2026 -- EMEA and APAC are expected to contribute most to margin improvement in fiscal 2026.Restructuring Program -- Spent approximately $200 million in fiscal 2025, yielding run-rate benefits that contributed to expanded segment margin guidance.Portfolio Optimization -- Reviewing approximately 10% of the portfolio for potential divestitures and exploring acquisitions with "very, very disciplined about capital allocation." Johnson Controls International (JCI +8.84%) highlighted accelerating demand for data center and decarbonization solutions, with a record $15 billion backlog supporting fiscal 2026 guidance. Management detailed measurable gains from its proprietary business system in fiscal 2025, including major improvements in sales productivity and factory on-time delivery, targeting high-growth verticals. Plans for continued margin expansion center on operational efficiencies, disciplined SG&A management, and robust benefits from an ongoing restructuring program. In Europe, a major heat pump deployment solidified the company's leadership in sustainable district heating projects and showcased the benefits of advanced, low-GWP refrigerant technology. In data centers, growth was supported by new products—including liquid cooling CDUs—and investments anticipating future semiconductor trends, enabling content expansion in critical cooling sectors in fiscal 2025. Management characterized the acquisition pipeline as "vibrant" according to Joakim Weidemanis and emphasized strict adherence to strategic and financial criteria in M&A decisions.Sustained improvements in receivables and inventory processes were identified as key drivers for maintaining high free cash flow conversion."We are not losing share. On Applied and the part of Applied that we are playing in. I'm very confident with that," CEO Weidemanis stated, directly addressing competitive positioning concerns in commercial HVAC.Leadership changes in segment and manufacturing roles are intended to accelerate customer focus and factory performance improvements.The company expects that SG&A leverage and business system rollouts will deliver incremental operating margin beyond historical averages, particularly in EMEA and APAC in fiscal 2026.Recurring, service-related revenue streams provide additional predictability for meeting 2026 guidance targets, beyond the booked backlog.Company strategy is to continually shift resources toward higher-growth verticals, such as advanced manufacturing, pharmaceuticals, hospitals, and research institutions, where operational and technology-driven differentiation may be most pronounced. INDUSTRY GLOSSARY 80/20 Principle: Operational methodology focusing efforts on the 20% of processes or products that drive 80% of outcomes or value.Kaizen: Continuous improvement events focused on process optimization and waste elimination, often practiced within Lean organizations.Chiller: Industrial equipment used to remove heat from a liquid, essential for cooling in commercial and data center applications.Coolant Distribution Unit (CDU): A system that manages and circulates liquid coolant, critical for efficient thermal management in liquid-cooled data centers.GWP (Global Warming Potential): Metric for assessing the climate impact of refrigerants and other gases; low-GWP refrigerants are favored for sustainability.On-Time Delivery: Key performance indicator measuring the proportion of orders fulfilled and delivered to customers by the promised date.Operating Leverage: Measure of how revenue growth translates into operating income growth, often expressed as the percentage increase in profit relative to incremental sales.Hyperscaler: Large-scale cloud or data center operator demanding high-capacity, advanced technical solutions. Full Conference Call Transcript Joakim Weidemanis: Thanks, Jim, and good morning, everyone. Thank you for joining us on today's call. As we close out our 140th year as a company, I want to begin by recognizing the extraordinary efforts of our 90,000 colleagues around the world. Their dedication to our customers and their commitment to our mission have been the driving force behind our progress and results. Since joining Johnson Controls International plc, I made it a priority to spend time where value is created—in the field with customers and our teams, at our innovation centers, and on the factory floors around the world. It's important to be right alongside our team as they do the work to deliver for our customers. These experiences have given me a firsthand appreciation for the passion and expertise that define our culture. Our customers and my colleagues on the front lines give me valuable insights on how we work and where we can improve processes and uncover new opportunities together. Learning about our capabilities and seeing our teams drive our company forward by problem-solving to better serve our customers has reinforced my belief in the strength of our foundation and the significant opportunities we're beginning to capture. Before I dive into the specifics, I want to summarize where we stand today and our path forward. First, we delivered strong results this quarter and for the full year, exceeding our free cash flow target and continuing to build a record backlog. Second, our proprietary business system is taking shape as our growth engine. Combining 80/20 and Lean principles with digital and AI approaches creates a more customer-centric and continuous improvement-oriented organization. Third, we are updating our long-term growth algorithm to reflect improved mid-single-digit top-line growth, enhanced operating leverage, double-digit adjusted EPS growth, and continuing to target 100% free cash flow conversion. Demonstrating that the opportunity in front of us is clear, significant, and achievable. Turning to our results, fiscal 2025 was a year of strong execution and momentum. Sales grew 6%, segment margins expanded by 100 basis points, and adjusted EPS increased 17%. Notably, we offset the dilution from the residential and light commercial divestiture in one year, ahead of our original expectations. Free cash flow conversion reached 102%, reflecting our disciplined execution and financial strength. Orders grew 7% for the year, and our backlog expanded 13%, ending at a record $15 billion. This sustained demand highlights the value our customers place in our solutions and the strength of our portfolio. This quarter's performance reflects our disciplined execution and operational focus. While our evolving business system is still in its early stages, we're already seeing encouraging signs of progress. Let's turn to slide six. Last quarter, we introduced our proprietary business system, a proven approach to building a stronger, more disciplined company. It is rooted in winning and retaining customers through differentiated products, services, and exceptional experiences. It's about enabling frontline colleagues, engaging all teams, and building a better Johnson Controls International plc, and being a magnet for talent. Our system is built on three pillars: Simplify, apply 80/20 principles to focus on what matters the most; Accelerate, use lean methodologies to remove waste and accelerate execution; and Scale, leverage digital and AI approaches to amplify impact across the enterprise. And it's anchored in a global cross-functional language and methodology for how we communicate and collaborate to win. The approach is practical, identify barriers to growth, and remove them quickly. We start narrow and go deep, get to the root causes, pilot countermeasures, adjust, and secure frontline buy-in before scaling broadly. While it's still early days and business systems take time to mature in large organizations, I'm energized by our progress. More than 700 colleagues are actively engaged across several priority areas and have conducted over 50 kaizens to date, with many more to come. We have already trained 200 leaders worldwide through activation boot camps. Leadership plays a pivotal role in the progress of our business system and our opportunity to build an even stronger company that is more capable, more focused, and more disciplined. A company that executes with consistency and delivers for customers where it matters most. To further strengthen our leadership capabilities and align talent with strategic priorities, we recently announced a new leader of our Americas segment, Todd Grabowski. He brings over thirty years of experience in the commercial part of our business and product management within our largest franchise, our global applied business. His industry knowledge and customer orientation will be instrumental as we accelerate growth and sharpen our customer focus in this important region. Earlier this week, we announced to our colleagues the hire of a global leader of manufacturing, a key role accountable for performance across our factory footprint driving improvements in safety, quality, delivery, and cost (SQDC), using our business system to build competitive advantage and winning performance for our customers, as well as drive overall productivity creating more funding for reinvestments. As we continue to strengthen our talent development, it will enable us to accelerate our progress. Last quarter, we highlighted two areas with clear potential: sales capacity and productivity, and factory on-time delivery. Today, I want to show you how our proprietary business system is already delivering measurable progress. By working together across teams and leveraging 80/20 and Lean tools, our conventional HVAC sellers in one of our local markets increased the time they're able to spend engaging with customers by over 60%. And our team manufacturing key chillers in North America improved on-time delivery to over 95%. These examples reflect our commitment to going narrow and deep, focusing on specific areas to uncover the true sources of waste and avoid surface-level fixes. This approach enables faster piloting, stronger frontline engagement, and eases broader deployment later across the organization. As is typical in continuous improvement, we see even more opportunities as we dig deeper. In the example of selling time with a customer, the team streamlined the sales process by eliminating non-value-added process steps and upgrading tools to accelerate the sales cycle. These improvements simplified workflows and led to more than a 60% increase in time spent engaging directly with customers. We're now applying AI to the overall sales of estimation and selection to codify, scale, and amplify several process steps that will yield even more time with customers on top of that. We have also been focused on improving the on-time delivery in one of our key chiller plants that serves the rapidly growing data center vertical. While we have a leading position in advanced thermal solutions for data centers, historically, our on-time delivery was inconsistent and our lead times were longer than what customers demand. Leveraging 80/20 and lean approaches, we have dramatically improved on-time delivery and are now over 95%. And lead times are on the way to being cut in half. I'm confident we can maintain this standard, which only strengthens our competitive advantage and our ability to win in this fast-growing vertical. This isn't about putting a playbook on a shelf. It's about fundamentally changing how we work. These improvements come from going narrow and deep, countermeasuring root causes, and engaging the teams impacted, ensuring sustainable change and easier scaling across the enterprise. Simplify, accelerate, scale. That's how we win together. As we move to slide seven, you'll see how our focus on technology innovation and sustainability is powering our future growth and reinforcing our leadership in mission-critical verticals. Johnson Controls International plc continues to strengthen its leadership in advanced thermal management. With AI-driven demand for high-density data centers pushing cooling technology to new limits, we are well-positioned across the thermal management or cooling chain as well as with our integrated offering of digital monitoring and controls. During the quarter, we successfully launched our coolant distribution unit offering, a major milestone in our differentiated data cooling center strategy. CDUs are critical enablers of liquid cooling, which is rapidly becoming essential as AI chips are becoming more powerful and generating more heat. Traditional air-cooled systems are reaching physical limits, driving a transition toward liquid and hybrid cooling architectures that improve thermal management performance in addition to energy and water efficiency. This launch, combined with our award-winning Y VAM magnetic bearing chillers, absorption chillers, and now our strategic investment in Excelsius, positions Johnson Controls International plc to deliver a comprehensive and integrated portfolio that addresses the full thermal management spectrum from chip to ambient, covering the entire heat capture, removal, and regeneration journey. We are receiving strong early interest from hyperscale customers who are prioritizing energy efficiency and sustainability, core pillars of our innovation strategy. Our data center solutions are aligned with global trends in AI and increasing compute density, where thermal performance is now a strategic differentiator. With our cooling technologies reducing non-IT energy consumption by more than 50% in most North American hubs, we are delivering substantial energy savings. This reinforces our role as a strategic partner to the world's leading data center professionals at a time when the vertical is poised for significant growth over the next decade. In Europe, we recently made a major announcement that underscores our leadership in decarbonization. Johnson Controls International plc will provide green heat to the city of Zurich, a landmark waste incineration project. While we've delivered similar solutions across the region, this deployment more than doubles the heat capacity of our previous largest project and ranks amongst the largest heat pump installations globally. To utilize the zero GWP refrigerant ammonia, our advanced heat pump technology will recover energy from flue gases and feed it into the district heating network, supplying heat to approximately 15,000 homes, about 15% of the city's total district heating demand. This project is another powerful example of how Johnson Controls International plc is enabling critical industries, institutions, and now cities to transition to sustainable heating solutions while maintaining reliability and performance. It highlights the tremendous opportunity to harness excess heat, reduce operating costs, and accelerate decarbonization. In 2024 alone, our heat pumps enabled customers to cut energy costs by 50% and emissions by 60%. The partnership we have with Zurich and other cities, as well as with hundreds of others, from global manufacturers and pharmaceuticals, chemicals, food and beverage, and more, solidifies our leadership position in the European energy and heat transition, where we can capture our share of these opportunities amid regulatory tailwinds accelerating customer demand. These initiatives reinforce our leadership in thermal management, decarbonization, digital solutions, and mission-critical environments. Supported by our commercially advantaged embedded service capabilities and relationships, the strength of our service model lies in the combination of customer intimacy, technical depth, and global reach. With direct service operations across the globe, Johnson Controls International plc delivers consistent high-quality support to customers over the life cycle. Mission-critical verticals such as data centers, advanced manufacturing, life science manufacturing, and large hospital and university research centers. Our ability to deliver consistent service across the global footprints of hyperscalers is a unique differentiator. As data centers multiply, our service model is helping maintain the pace. Positioned to deliver reliability wherever our customers build. Our view is that customers will always demand high-touch, high-availability service, and that is an unparalleled differentiator for Johnson Controls International plc. Now, as we look ahead, our guidance for fiscal 2026 builds directly on the momentum we've established this year. I already previewed our updated long-term growth algorithm, and Marc will discuss the details shortly. But I want to highlight how excited we are about the opportunity in front of us. In short, our strategy to leverage our strengths, particularly in HVAC, controls, and digital, to deliver differentiated value and long-term growth underpins our success. Our ability to meet global demand for mission-critical systems, whether in data centers or decarbonization projects, is backed by an exceptional service organization and positions us to capture significant opportunities ahead. With that, I will now turn it over to Marc. Marc Vandiepenbeeck: Thanks, Joakim, and good morning everyone. We closed fiscal 2025 on a strong note, delivering another quarter of solid financial performance. This consistent execution throughout the year has strengthened our foundation and positioned us well as we enter the new fiscal year. Our ongoing focus on stronger operational discipline, customer satisfaction, and continuous improvement is driving results. And we remain committed to generating sustainable long-term value for our shareholders. Now let's take a closer look at fourth-quarter results on slide eight. In the quarter, organic revenue grew 4% and segment margin expanded 20 basis points to 18.8%, driven by our ongoing focus on cost discipline, favorable mix, and the tangible benefit of our productivity programs. Adjusted EPS of $1.26 increased 14% year over year and exceeded the high end of our guidance range. On the balance sheet, we ended the quarter with $400 million in available cash. The net debt remained within our long-term target range of 2 to 2.5 times, declining to 2.4 times compared to the prior year. For the year, adjusted free cash flow improved by approximately $700 million to $2.5 billion. Our strong earnings performance and rigorous approach to working capital management enabled us to achieve a 102% free cash flow conversion for the year. This reinforces the strength of our execution and the quality of our earnings. Let's now discuss our segment results in more detail on slides nine and ten. We are seeing strong customer engagement and healthy demand for our solutions across key verticals. Orders grew 6% in the quarter, highlighted by 9% growth in The Americas, supported by strength in data centers. In EMEA, orders increased 3% despite a challenging comparison to 14% growth in the prior year, with double-digit growth in service. In APAC, orders saw a small decline of 1% as a decrease in systems more than offset mid-single-digit growth in service. At the enterprise level, organic sales growth was led by mid-single-digit growth in service. In The Americas, sales were up 3% organically on a tough compare, supported by continuous strength in both HVAC and Controls. EMEA delivered 9% organic growth with strong double-digit growth in systems and high single-digit growth in service. In APAC, sales declined 3% organically due primarily to lower volumes in China. These results reflect strong execution, particularly in The Americas and EMEA, against a backdrop of challenging year-on-year comparisons. Margin performance improved steadily throughout the year as we captured greater operating leverage and continued to optimize our cost structure. Our resilient operating model enabled us to align pricing, productivity, and mix to support consistent profitability even as market conditions evolve. This translated into notable fourth-quarter performance. By region, adjusted segment EBITDA margins in The Americas improved 50 basis points to almost 20%, supported by productivity gains and operational efficiency. In EMEA, margin expanded by 30 basis points to 15.6%, reflecting positive operating leverage from top-line growth. In APAC, margins declined 190 basis points to 17.8% as lower volumes in China created pressure on factory absorption. Our backlog remains at record levels, growing 13% to $15 billion. System backlog grew 14% and Service backlog grew 9%. With this momentum in mind, let's discuss our long-term outlook and capital allocation priorities on slides eleven and twelve. We are updating our long-term growth algorithm to the principles of our value creation framework and the momentum we have built this year. As we look ahead, we expect to deliver mid-single-digit organic revenue growth, operating leverage of 30% or better, double-digit adjusted EPS growth, and approximately 100% free cash flow conversion. This algorithm is supported by three key factors: First, the sustained demand for decarbonization and mission-critical solutions. Second, the continued evolution of our proprietary business system to drive operational efficiency. Third, the ongoing technological innovation through new product launches and a disciplined approach to portfolio management by channeling resources into our most attractive growth areas. On capital allocation, our priorities remain unchanged. We are investing in organic growth, focusing on returning capital to shareholders through dividends and share repurchases, and finally, pursuing selective acquisitions to strengthen our portfolio. Our strong balance sheet and consistent cash flow generation give us ample flexibility to execute on these priorities with confidence. Let's now discuss our fiscal first-quarter and full-year guidance on slide 13. Momentum remains strong as we begin the first quarter, supported by operational efficiencies and a record backlog. We anticipate organic sales growth of approximately 3%, operating leverage of approximately 55%, and adjusted EPS of approximately $0.83. For the full year, we are confident in our ability to deliver our long-term growth and profitability commitments. We expect organic sales growth of mid-single digits and adjusted EPS of up approximately $4.55 per share, which is over 20% growth. We anticipate operating leverage to be approximately 50%, which is above our long-term algorithm as our efforts to remove stranded costs are recognized faster in the new fiscal year. Our guidance reflects continued operational discipline, strong customer demand, and the visibility provided by our record backlog. Our ability to navigate evolving market conditions reflects the strength of our enterprise capabilities and the resilience of our operating model. We expect approximately 100% free cash flow conversion for the year, consistent with our long-term financial framework. This reflects our focus on earnings quality, working capital discipline, and efficient capital deployment, all of which support our ability to invest in growth while returning value to shareholders. We have built a strong foundation for the years ahead. As we enter fiscal 2026, our focus remains on advancing sustainable growth, expanding margins, and creating lasting value for all shareholders. We look forward to keeping you updated on our journey. Operator, we are now ready for questions. Nadia: Thank you. We will now begin the question and answer session. We ask you please limit yourselves to one question and one follow-up. The first question goes to Amit Singh Mehrotra of UBS. Amit, please go ahead. Amit Singh Mehrotra: Thanks. Good morning. Mark, the 50% operating leverage target for 2026, can you just walk that to segment EBITDA margins? There's the moving parts on corporate expense amortization, but it looks like it implies about 90 basis points of expansion from the 17.1. Correct me if I'm wrong, but if you can just kind of double-click on that, that'd be helpful. Marc Vandiepenbeeck: Yeah. Sure. Thanks, Amit. Good morning. Yeah. You're pretty close on margin, I would say, by segment. EMEA and APAC will be the main drivers of margin improvement this year. Not that The Americas will not contribute, but if you look at that incremental, they've shown a decent improvement this year, and the level of rank year on year will be probably a little bit more muted than the other segments. But overall, we feel very comfortable that our operating leverage will be in the 50s or above. Amit Singh Mehrotra: And then, Joakim, just on the opportunity going forward. I mean, there's a lot of stuff here. There's a cost opportunity. There's maybe a portfolio opportunity. Talked about M&A. Maybe rank those, just seems like there's maybe a huge G&A opportunity, but then also there's a lot of questions about maybe slimming down the portfolio further. But can you obviously, you're 237 days into the job now. So maybe just offer a little bit more color on prioritizing all those buckets of opportunity. Joakim Weidemanis: Hi. Good morning, Amit. Thanks for keeping count on the number of days I've been with the company. Well, let's start with where you left off with Marc. So the operating leverage, there's a reason there's a plus behind the guidance and how we're thinking about operating leverage. And that really comes back to what we're doing with the business system where we are going after driving productivity in our field operations and our factory footprint. And then field operations and service. And then in SG&A, you know, we see leverage opportunities, i.e., getting more out of the SG&A investment that we have, more the S of the SG&A, with the help of the business system. And I gave you an example here in the prepared remarks. So I'm very excited about the continued progress that we're going to be able to make there and hence the plus behind the leverage and the guidance. And then as we've talked about before, you know, we have and we're working away at reducing the G&A cost and our corporate costs. So we continue to do that. There's no change in our ambition level there at all. And then on the M&A side, we continue to work away at the portfolio that we have together with the board. And we have evolved a little bit more clarity on our future strategies here. But, you know, as I said last time, you know, that's a multi-quarter effort together with the board. And that effort is really guided by creating shareholder value. That's the number one principle. Right? And then in terms of acquisitions, we have started to apply some of the discipline that I have learned in prior roles prior to joining Johnson Controls International plc. So I can tell you that our acquisition pipeline is vibrant. And we are engaged in multiple situations. And we are being very, very disciplined about doing the proper strategy work, the proper target work, and not falling in love with anything in particular. And being just very, very disciplined about capital allocation. Nadia: Thank you. The next question goes to Nigel Edward Coe of Wolfe Research. Nigel, please go ahead. Nigel Edward Coe: Thanks. Good morning. Just want to go back to the 50% incremental margin, sorry, percent plus incremental margin for FY 2026. And if I take 30% as your baseline operating leverage, it suggests there's about $250 million of benefits over and above that 30%. Number one, is math okay on that? And just talk about that $250 million. And you suggested delayering a number of other initiatives. Is there anything in there for process improvements, etcetera, want to get a bit more details on that. And we think about this as confined to FY 2026? Or could that be benefits beyond this year? Joakim Weidemanis: Marc can help you on the exact math here. I'm sure we'll be talking about that in follow-up calls as well. But no, we are just getting started with our business system. And so some of the examples that I shared with you today, my objective was to share an SG&A example and an above gross margin example. And we are just getting started. And as you saw from the examples I gave, the opportunities are significant here. So that operating leverage is going to continue to improve over time. And, you know, the main reason we're actually shifting the guidance to include that and have a strong element of that is really reflecting what we're trying to do here. We're trying to build a higher-performing company that's more focused on profitable growth and both driving top line by pointing at higher growth opportunities, verticals, applications. But also doing the solid productivity work that I talked a little bit about as well as the responsible cost reductions that we've discussed in other quarters. Marc Vandiepenbeeck: And, Nigel, directionally, your numbers are there or thereabout. Yep. Nadia: Thank you. The next question goes to Stephen Tusa of JPMorgan. Steve, please go ahead. Stephen Tusa: Hey, good morning. Joakim Weidemanis: Good morning, Steve. Good morning, Steve. Stephen Tusa: Hello? Joakim Weidemanis: Yes, can you hear us? So just on this Stephen Tusa: Yes, I can hear you now. Just this amort coming down this year, can you just talk about the drivers and is that related to this $400 million restructuring charge you guys took in the quarter? Also kind of like what if it was in the amort, what was what's kind of like in that charge? What does that relate to? Marc Vandiepenbeeck: Yeah. It's not around the restructuring. It's more among the impairments took in the quarter, Steve. Reflects the different portfolio actions also we've taken over the year, obviously, but there's further reduction possible if we do act on some of the divestiture we've been contemplating for a while on the fringe of the portfolio. The vast majority came from those one-time actions you saw in the quarter. Stephen Tusa: Okay. Got it. So that decline in amort is sustainable is what you're saying? And is that part of like your stranded cost takeout? Or is that something outside? Marc Vandiepenbeeck: No. Completely outside. The stranded cost takeout is incremental to that. Okay. Stephen Tusa: Okay. And then just one last one on orders. I know you had a really tough comp in the first quarter of last year, but you beat this quarter. Is there what would you expect for the first quarter? Will you be up despite the tough comp or will that be down on the tough comp in 1Q? Order wise? Marc Vandiepenbeeck: Yes. As you know, generally don't guide around orders. I can tell you that the health of our pipeline continues to improve, and we see opportunity to continuously see growth on a world this quarter and the oncoming quarter as well. Stephen Tusa: Wow. So you can grow off that comp? In orders. Marc Vandiepenbeeck: That's right. Stephen Tusa: With your pipeline. Marc Vandiepenbeeck: Correct. Super. Thank you. Joakim Weidemanis: Yep. And maybe to just to reinforce that, you know, as part of building a faster-growing, more profitable company here, it's not just about the productivity work and the business system work that I talked about. It's also about pointing our efforts from verticals, applications, and so on at parts of the market that are growing at a faster rate. Nadia: Thank you. The next question goes to Jeffrey Todd Sprague of Vertical Research. Jeff, please go ahead. Jeffrey Todd Sprague: Hey, thank you. Good morning, everyone. Maybe just a couple of modeling mitts for me too. Interesting on the amortization, obviously lifting the earnings, but I was maybe actually a little bit more surprised that with lower amort, you've got this comfort level on a 100% cash conversion going forward. And I guess that cash flows from everything you're talking about from productivity. But maybe you could just give us a little bit more color on maybe what the target-rich environment might be on free cash flow and how that might unfold over the next year or two? Marc Vandiepenbeeck: Yes. Good morning, Jeff. So you're right, Amort is not reduction in Amort is not going to help, but we see opportunities to continue to outperform on our working capital management overall, but free cash flow conversion particularly. This year fiscal year 2025, we've seen strong improvements in our receivable management, just the way we bill a customer when we do and how we collect and the quality of that process. There's obviously continuous improvement we can bring there and there's a lot more we can do there. But I don't think moving forward, it will be the core pocket of opportunities where we think we're going to drive a lot of value moving forward from a free cash flow conversion comes a lot from our inventory management and the amount of inventory we need to continue to grow the company. And that's where the business system will bring tremendous clarity and visibility into where we can continuously improve and reduce that reliance and therefore improve our cash flow conversion. Joakim Weidemanis: Yeah. And that good morning, Jeff, by the way. And then that just hasn't been a focus in the past, Jeff. So that's an opportunity for us. Yeah. Yep. Jeffrey Todd Sprague: Yeah. And then Yokum, could you just address a little bit more color Marc alluded to the upside in EMEA and APAC margins for 2026. Are there some and I get the comps easier in Europe especially, but are there some clearly targeted actions that support that? Or are you counting on sort of stronger revenue recovery in those businesses? Maybe just a little bit more color on what's going on there. Joakim Weidemanis: Yes. I think the short answer is we're not counting on one single big thing. So it's a combination of things that we have largely proof of already that we're able to execute on. So it includes some elements of our pricing discipline that has become much better here over the recent couple of quarters. But it also includes a better discipline around where we point our efforts. But then also again, some of the examples that I gave here around how we're deploying the business system. That work is ongoing and in EMEA and Asia as well. So we see opportunities on multiple parts of the P&L here. Nadia: Thank you. The next question goes to Christopher M. Snyder of Morgan Stanley. Chris, please go ahead. Christopher M. Snyder: Thank you. I wanted to ask about the content opportunity into data centers. So maybe moving aside the CDU that you guys announced, if we look at the legacy business, I mean, I'm just kind of wondering how content changes on the move from air cooling to liquid cooling. I imagine the chiller opportunity is still as strong as ever. Could we lose some content in air handling? I'm just trying to figure out how that nets out as we look towards the future. Thank you. Joakim Weidemanis: I think the simple answer to that is because newer chips require more power and therefore generate more heat. So in general, more cooling is needed. So the scope of our offering and the performance required from the chillers only increases over time here. And if you have you heard me talk of in the past about, you know, how when I first joined the company, how I thought our technological capabilities in particular in HVAC are impressive. And some of the needs here of the data center market here going forward higher precision, higher capacity cooling actually plays to our strength. When it comes to the chillers. Marc Vandiepenbeeck: But if you think about the different offering we have between airside solution and chiller, we see continued demand for both. And regardless of how the chips themselves are cooled, you have solution liquid to air and liquid to liquid and liquid to air continues to see very strong momentum. And matches well our offering. And obviously, we have a very strong developing solution on liquid to liquid. Christopher M. Snyder: Thank you. I really appreciate that. I wanted to then follow-up on some of the investments that the company is making in the aftermarket. It seems like the investments in technology are both lowering the cost to serve the aftermarket for while also providing efficiency savings to the customer. So I guess my question is, is this more of a driver of share gain through the value add you're bringing to the customer? Or is it more of an opportunity to improve the incremental margin profile of services by lowering that cost to serve by using more technology and less labor, I would presume. Thank you. Joakim Weidemanis: It's both. It's really both. You know, you could say it's share gain because we're able to, with the technology investments, serve customers at a price point which allows them to outsource so we become more competitive in certain mission-critical applications so that they will actually give us that business versus having to maintain some of their own service staffs. But and then it's also share gain against various third parties that service our equipment as well as, you know, every other OEM in this industry. But as we deploy the technologies, we also reduce our cost to serve. So it's both a share gain and a margin improvement effort here. And I'd say, you know, we're in the early innings of that. In general, as an industry, when it comes to deploying more sophisticated technology-based approaches and life cycle services. So that's an exciting area for us both from a growth and a margin improvement outcome. So we'll be talking more about that over the next couple of quarters. Nadia: Thank you. The next question goes to Nicole Sheree DeBlase of Deutsche Bank. Nicole, please go ahead. Nicole Sheree DeBlase: Yes, thanks. Good morning, guys. Marc Vandiepenbeeck: Good morning, Nicole. Good morning. Joakim Weidemanis: Hi. Yeah. Maybe just starting with the nice acceleration you guys saw in order growth this quarter. Can you talk a little bit more about maybe what you saw from a vertical perspective within Applied in particular? And any color on the magnitude of data center order growth that you'd be willing to give? Good morning, Nicole. Yeah. So we typically don't comment on order numbers by vertical. But I can talk I can say that in general, you know, we have a shorter list of verticals that's driving outsized growth of our backlog. Backlog is up 13%. We have an ingoing backlog of almost $15 billion going into this year, record backlog. We never had that kind of backlog in this company, which is phenomenal. So data centers, you mentioned, a vertical we're very excited about. Our pipelines remain very healthy. Those orders are variable. You know, we get, you know, a couple of very big ones in one quarter and, but maybe not every quarter, but overall over a couple of quarters, you can see the results here. So, 13% up in backlog. So data center is very healthy. And then you have verticals such as pharmaceutical or biologics rather, manufacturing, where new campuses are being built. So the pharmaceutical campuses of the past cannot manufacture the drugs of the future here that are biologics based. So that's a vertical that's very healthy for us. And then in general, you know, large campuses where a significant amount of research is conducted. So think both universities, general research institutions, but also hospitals that of course are places of significant research. Those kinds of verticals are very, very healthy for us. And then finally, you know, what we typically would call, you know, advanced manufacturing. So semiconductor and other types of manufacturing where very precise indoor climates need to be created because they're mission-critical for the manufacturing. Those are generally the areas where we see the healthiest growth. Nicole Sheree DeBlase: Okay, got it. That makes sense. Thank you. And then just maybe a little nitpickier one around the quarterly cadence of organic growth. I think you guys have embedded a little bit of deceleration in the first quarter. If you could maybe speak to what's driving that? And then the way you see organic growth kind of progressing throughout the year to get back to mid-singles? Thank you. Joakim Weidemanis: Yeah. It's really a compares issue, Nicole. So think of the first half being lower than the half. And like I said, it's mostly a compares issue. You know, the backlog that we have gives us good visibility to what we can do in the individual quarters. And then, of course, our service business, there's such a heavy recurring element there. So we have pretty good predictability there as well. And so we're excited about the outlook for the year here and we'll keep you updated as we make progress here. But the tale of compares first half and second half. Nadia: Thank you. The next question goes to Scott Reed Davis of Melius Research. Scott, please go ahead. Scott Reed Davis: Hey, good morning, guys. Frank Gilpin from Belgium. So you're doing a lot of stuff here. 80/20 lean, you've changed a bunch of leaders and stuff, and it's a lot of change. And none of that works if there isn't accountability and to the right KPIs. Have you changed compensation structures meaningfully down into the organization, Yokum, or do you need to? Based on what you've seen so far? Joakim Weidemanis: I would say, you know, in terms of accountability, you know, first, have to define, you know, what you're going to measure to hold people accountable for. So, you we're in the process of establishing and rolling out what we call our enterprise KPIs. There are nine of them, which we could probably come back and talk about at some other point in time. And how we do that and drive them through the organization is as important as the compensation part to drive a higher level of accountability for holistic results. And as we're deploying that throughout the organization, we are looking at the different compensation approaches and models that we have. And I would largely say there's some tweaks here and there, Scott, but not fundamentally any big changes that are necessary. Scott Reed Davis: Okay. And have you pretty much unwound any remaining Matrix within the management within the structure of the organization? I mean, I haven't heard you talk about running a certain number of P&Ls, but maybe you can address that. And just talk about how you change that part of the organization. Joakim Weidemanis: So that's work in progress, Scott, together with the team. And we made a couple of changes like you pointed out here. So trying to put in place a championship team that can help us build a champion of a company here. And as we staff up here, of course, we have more capabilities, higher caliber. In our senior-most teams, you know, we're reflecting and looking at structures and so on. We made a couple of tweaks since I joined, but no major moves. Not at this point. Nadia: The next question goes to Joseph Alfred Ritchie of Goldman Sachs. Joe, please go ahead. Joseph Alfred Ritchie: Thank you. Good morning, guys. Marc Vandiepenbeeck: Good morning, Joe. Good morning. Joseph Alfred Ritchie: So, Yokum, I want to focus on the strategic investment in Excelsius. And ultimately, you know, with the launch of your CDU, just can you maybe just, like, double-click on, like, how complementary the investment is, like, whether you'll be going to market together. I just want to try to understand what the opportunity is as I think about this over the course of the next twelve to twenty-four months. Joakim Weidemanis: Yeah. Yeah. Good question. So we continue to invest beyond the chillers and the various HVAC solutions that we have, right? So and the way we think about it is, you know, what's the end-to-end thermal solution that is needed for data centers? And the CDU investment or launch rather is to capture a market that's significant in there right now. And that product was really a result of very close collaboration with a number of our existing hyperscaler customers. And it's actually a platform with several different products available in all the regions of the world. Already. So we're super excited about that. Excelsius is about really about looking ahead. And this is a two-phase cold plate technology platform. And so here we're looking ahead. You know, what are the chip launches that NVIDIA and others will be making over the next four to five years and, therefore, what kind of cooling solutions end-to-end thermal solutions will be needed. And so Excelsius is about anticipating what will be needed in four to five years from now. But, of course, applications for this technology are available already today. And we are going to be working on both commercial collaboration as well as technology and product integration. One plus one equals more than two here over time. So we're excited about both. One is short-term drive revenue now. And the second one is more strategic, anticipating where the puck is going and what will be needed over the next four to five years. Joseph Alfred Ritchie: Very helpful. Thank you. And then just to follow on there, just around the portfolio, you've mentioned a little bit on the fringes, on the divestitures. Just how is your thinking evolved just in terms of, you know, addition by subtraction across the portfolio? Joakim Weidemanis: Yes, so there's no change. We had mentioned already well before I joined actually that about 10% of the portfolio, you know, we're looking at alternatives for. And better ownerships. And the driver here is to create shareholder value. And then there are some other parts of the portfolio that I've mentioned before that we've been looking into. So strategically, how we're positioned, what one could do with the businesses operationally, much do we think we can improve them, and this is a dialogue we're having with the board and over the next couple of quarters, we'll draw some conclusions and decisions and they will all be guided by driving shareholder value. That is goal number one. And we'll keep you posted. Nadia: The next question goes to Julian C.H. Mitchell of Barclays. Julian, please go ahead. Julian C.H. Mitchell: Thanks. Good morning. Maybe I just wanted to circle back to the discussions on commercial HVAC, because I guess in The Americas, for example, I think the last few quarters, you've grown at a sort of high single-digit rate in Applied. I think some of your competitors are growing at a much faster pace in revenues right now. And I suppose when I look at your guidance for 2026, it doesn't suggest an acceleration in the applied business. I just wondered if that was correct on '26 and how we should think about that applied HVAC growth in revenue vis a vis the market growth rate? Joakim Weidemanis: I have read those scripts as well. We are not losing share. On Applied and the part of Applied that we are playing in. I'm very confident with that. And so and I also I know what we have in the back with coming in orders. And in the pipeline. So for the verticals where we are pointing our company, we are we can always do better but we're doing pretty well. Julian C.H. Mitchell: Understood. Thanks very much. And then just my follow-up, I suppose, would be just circling back to clarify on that incremental margin or operating leverage, sorry, guide for fiscal 2026. Is the right way to think about it that you've got a sort of traditional segment EBITDA operating leverage of sort of high 20s percent, let's say, similar to that 30% long-term algorithm. And then the augmentation to get to 50% for the year is the amortization reduction largely in some stranded cost takeout. Is that the sort of framework for margin expansion this year ahead? Marc Vandiepenbeeck: No, I would say the traditional op leverage you'll get out of the segment is solidly in the 30s, excluding some of the benefit from amortization. And then the effect of our restructuring and transformation will come down that number. And that's how we're going to get well beyond that 30 plus percent algorithm we shared. So for 2026, more than 30% and then over time, obviously, this will naturally go back to a 30 plus kind of average as you go beyond twenty-seven. Nadia: The next question goes to Joseph John O'Dea of Wells Fargo. Joe, please go ahead. Joseph John O'Dea: Morning. Good morning. Can you unpack the mid-single-digit organic for fiscal 2026 a little bit? Talk about the price, if that price is already in place any color on volume by regions HVAC versus Fire and Security. Just give us a little bit of a sense of how it all comes together. And sort of what is already there with respect to price and kind of backlog and what you would still need to go get to achieve it? Joakim Weidemanis: Yeah. So, I'll start and then Marc will fill in with some additional detail. Our backlog grew by 13%. We have a record backlog going into the fiscal year that we're in right now. $15 billion. Of course, not all of that is shippable in this year, but the vast majority is. On top of that, we have a very significant large part of our service business that is not in the backlog is recurring. So we actually have pretty good predictability for the year. Already. And as I alluded to here, our growth guidance here is not counting on anything that we haven't been proven to be able to execute on already, such as price, but also in terms of what growth we're able to drive in the different regions, or the different businesses that we are in. So I'd say that's sort of the headline here and that's why we have such great confidence in the guide here. And then, Marc, I'm still so new, so I don't know exactly how what detail of guide we provide here to the colleagues on the call. Marc Vandiepenbeeck: Joe, overall, if you think first regionally, I would say across the board, everybody is going to be within that mid-single-digit with, you know, EMEA might be just slightly above the average, but The Americas and APAC just at the enterprise level. So we segment, think about it overall, wherever the company guide overall lands. And then by domain, yeah, our traditional applied in HVAC business will grow probably a little faster than the mid-single digits supported by the strength in some of the core verticals we talked about, including data center. And then fire and security will be probably on the lower end of that enterprise guide probably bring some contribution, obviously, to growth. But not as much as the domain that are highly supported by those high-growth verticals. Joseph John O'Dea: That's helpful color. And then on the restructuring side of things and coming back to the $500 million over a multiyear period of time, can you just update us on what you achieved in 2025? What's baked into the 2026 guide with respect to that $500 million? Marc Vandiepenbeeck: Yes. So if you look at that $500 million benefit and we had mentioned when we launched the program, kind of two to three-year program, $400 million on restructuring expenses, we probably spent about $200 million in fiscal year 2025, a little bit ahead of where we anticipated when we started the program. But the run rate benefit of that $200 million is reflected both in our guide here for '26, but also in the upside of results we saw in 2025. As you know, we came into the year with expecting segment margin up 50 plus and we then moved that to 90 and now have achieved up 100. So you can see that benefit probably close to the $350 million to $450 million run rate as we exceed 25 and printed into our guide for '26. As we look at further opportunity that the business system will provide, that our monaco focus on reducing our footprint, there may be some incremental restructuring that's going to be needed above and beyond the original program, but I don't think we are there yet. And as we look at opportunity, obviously, we expect the return on any incremental restructuring beyond that program we've announced to actually translate into the operating leverage kind of profile we laid out as part of our new algorithm. Nadia: Thank you. The next question goes to Andrew Burris Obin of Bank of America. Andrew, please go ahead. Andrew Burris Obin: Yes, good morning. Marc Vandiepenbeeck: Hey, Andrew. Good morning, Andrew. Can you hear me? Andrew Burris Obin: Hey. How are can. Yeah. Just to dig in a little bit more on the data center market. Generally, you guys, I believe you invented the Magdaring chiller. A lot of your competitors are at a capacity to go after this market. Do you think over the next three years given your capacity additions, given sort of the efforts to improve the throughput on-time delivery, do you think you can keep your market share? Or do you think it's just naturally as incremental capacity comes in from other players, your natural market share donor just given what everybody else is doing? Joakim Weidemanis: That's a great question, Andrew. We are going to take share. We made a significant investment in capacity before I got here. But now with the example that I gave you, leveraging our business system, where, you know, we had one of our high sellers and data centers was not running at a very variable on-time delivery and too long lead times. So with the focus work that we've done here over the last couple of months, you know, we brought on-time delivery up to 95% and we're on track to cut the lead time in half. And that lead time will be market-leading, and we know that already because we've taken orders as a result of having capacity earlier and faster than some others in some cases. And of course, that's it's you shouldn't generalize all the time, right? But our goal is to build a capability here, an innovation capability, to stay on the forefront of what's needed by the data centers, just on the chillers, but as we talked about here, the end-to-end thermal solution or the cold chain, including CDUs, and anticipating what will be needed in the future. Excelsius and other investments, and then to be and have a manufacturing position, that is very agile and fast with market-leading lead times. And then augmented finally with our proprietary and differentiated, you know, 40 plus thousand people in the field around the world. And because field service, life cycle services, is such an important part in the data center market. Because downtime or unexpected downtime is just so incredibly more valuable to avoid if you can in data centers than in most other verticals. So we are definitely building continuing to build off of the capabilities that we already have but strengthen those to make sure that we stay on the forefront here. We are not going to donate market share. Nadia: Thank you. This concludes our Q&A session. I will hand the call back to Joakim Weidemanis for any closing comments. Joakim Weidemanis: Thank you. We have an exciting future ahead of us here at Johnson Controls International plc. And the important work we have underway will position us to capitalize on compelling opportunities ahead. Not just in data centers as I was just commenting on, but more broadly. With a culture focused on customers and centered around our proprietary businesses, I'm confident we'll continue winning with our customers and delivering value to our shareholders. I'd like to take another moment to thank our 90,000 colleagues around the world. You are the foundation of our company. And I'm energized by the prospect of what the future has in store for us. I look forward to continuing my conversations with all of our stakeholders. Thank you all for joining today and see you on the follow-up calls. Nadia: Thank you. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.
