Q1 2025 Johnson Controls International PLC Earnings Call
Speaker Change: Good morning and welcome to the Johnson Controls first quarter 2025
Earnings conference call.
Speaker Change: After today's presentation, there will be an opportunity to ask questions.
Speaker Change: To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note this event is being recorded. I'd now like to turn the conference over to Jim Lucas, Vice President, Investor Relations. Please go ahead. Good morning and thank you for joining our conference call to discuss Johnson Control's fiscal first quarter 2025 results.
George Oliver: Joining me on the call today are Johnson Controls Chairman and Chief Executive Officer George Oliver and Chief Financial Officer Marc Vandiepenbeeck.
George Oliver: Before we begin, let me remind you that during our presentation today, we will make forward-looking statements.
George Oliver: Actual results may differ materially from those indicated by forward-looking statements due to a variety of risks and uncertainties
George Oliver: Please refer to our SEC filings for a detailed discussion of these risks and uncertainties, in addition to the inherent limitations of such forward-looking statements. We will also reference certain non-GAAP measures.
George Oliver: Reconciliation of these non-GAAP measures to the most directly comparable GAAP measures are contained in the schedules attached to our press release and in the appendix to this presentation, both of which can be found on the investor relations section of Johnson Control's website. I will now turn the call over to George.
George Oliver: Thanks Jim and good morning everyone. Thank you for joining us on the call today. I'd like to start by taking a moment to thank all Johnson Controls employees for their hard work and tremendous contributions in helping us achieve an excellent start to the year with our strong quarterly results.
George Oliver: Before we get into the details and results, I want to briefly address the CEO transition we announced today.
George Oliver: As you've likely seen, the board and I have selected Joachim Wettermenes to succeed me as CEO of Johns Controls in March. I will remain on the board through August 1st to support a seamless transition and will remain an advisor to the company until I officially retire at the end of December.
George Oliver: It has been the honor of my career to lead John's Controls for eight years working alongside an incredible team and to have been a part of the JCI Tyco merger before that.
George Oliver: We have accomplished a tremendous amount during that time, and I could not be more pleased with the company we have built.
George Oliver: Together, we have successfully simplified our portfolio and positioned our company as a leading pure play building solutions provider.
George Oliver: We are driving results based on our unique value proposition with an ability to serve our customers over the life cycle of the building.
George Oliver: The company's future lies in building on the momentum we have underway.
George Oliver: Our company has an incredibly strong bench, including our talented CFO, Marc.
Speaker Change: This transition came together after a rigorous and thoughtful succession planning process, and I am confident that, as you get to know Joachim, you will agree that the company is in very capable hands, and he is the right leader for Johnson Controls.
Speaker Change: Gokim comes from Danaher, where he worked for 13 years. He is a highly accomplished executive with extensive experience scaling global companies with a foundation of customer orientation, innovation, and efficiency.
Speaker Change: His track record of leading service-oriented businesses and leveraging technology to deliver best-in-class financial performance is uniquely suited for where Johns Controls is in its value creation journey.
George Oliver: I will remain fully engaged until Joachim steps into the CEO role, then I will work with him and the rest of the management team as we seamlessly transition leadership and set Johnson Controls up for continued success.
Speaker Change: With that, I will turn to a more in-depth discussion of our first quarter performance.
Let's begin with slide 4.
Speaker Change: Johnson Controls is starting 2025 with great momentum and a clear focus as validated by our first quarter results.
Speaker Change: Importantly, each of our businesses contributed to robust revenue growth and significant margin expansion and remain positioned for ongoing shareholder value creation.
Speaker Change: These results reinforce the considerable progress we have made through our transformation efforts and demonstrate the success of our strategic initiatives which have driven increased demand for our core systems and service offerings.
Speaker Change: We are confident that our performance provides a solid foundation as we move through the year.
Speaker Change: Auto Momentum remains solid with 16% growth in the quarter, driven by double-digit growth in both systems and service.
Speaker Change: The sustained demand for our tailored engineered solutions offerings has not only fueled growth, but also positions us well for continued success.
Speaker Change: Our focus on driving operational excellence and fostering innovation is enabling our performance and building on our capability to deliver consistent, predictable results.
Speaker Change: Taking into account our strong performance to date, we are raising our guidance for the year. Marc will provide more details later in the call.
Speaker Change: We are confident in our ability to maintain our momentum and deliver long-term shareholder value creation.
Please turn to the next slide.
Speaker Change: Jones Controls is experiencing consistent progress across key verticals demonstrating the breadth of our expertise and stability of our business model.
Speaker Change: Our global presence across multiple domains with a simplified operating model enables us to assist and grow our customer relationships over the course of the entire building life cycle while also delivering safe, healthy, and sustainable solutions.
Speaker Change: By focusing on the entire life cycle, we create great customer intimacy while achieving a high level of customer retention, a key metric and differentiator.
Speaker Change: Our services business, supported by long contractual engagements, empowers us to optimize performance at every phase across all building systems, driving increased value for our customers.
Speaker Change: This is largely achieved through our global branch network and its more than 20,000 qualified technicians, but also through the continuous advancement in innovation and strategic use of AI.
Speaker Change: We leverage remote monitoring by employing AI to drive utilization and efficiency.
Speaker Change: For instance, proactive repair recommendations are contributing to a larger share of our overall services growth.
Speaker Change: Additionally, customer surveys indicate that Johnson Control's technicians are regarded as trusted advisors, which is due in large part to our local market strategy.
Speaker Change: Our product agnostic central operations infrastructure supports our technicians with monitoring, call intake, dispatch, and technical support to ensure a seamless and efficient process.
This provides best-in-class turnaround time and improves system uptime.
Speaker Change: I am pleased to report that Johns Controls was recently named the number one implementer among data center thermal management providers and was recognized as a top innovator.
Speaker Change: We are one of only two players to be named an overall leader in the field and are proud to be a key partner in supporting the infrastructure of the digital economy.
Speaker Change: We are capitalizing on the significant transformation underway to support safer and more efficient manufacturing reshoring initiatives in Industry 4.0. This is illustrated by how we are driving mission-critical solutions in the healthcare vertical.
Speaker Change: Hospitals and health care facilities face growing challenges including aging infrastructure in the need to meet ambitious sustainability targets.
Speaker Change: Our comprehensive portfolio, including advanced HVAC systems, fire protection, and our Open Blue platform, helps health care providers enhance air quality, improve infection control, and reduce energy costs while meeting regulatory requirements.
Speaker Change: Open Blue is another area where we have expanded upon our generative AI capabilities.
Speaker Change: Our software can now easily explain building equipment faults and trends using generative AI and help users with easy-to-understand investigation and resolution steps.
Speaker Change: Additionally, we can now analyze energy and carbon emissions across a real estate portfolio and evaluate compliance against any local regulations related to excess carbon emissions.
Speaker Change: Helping customers better plan and prioritize capital improvement projects and facility improvement measures
Speaker Change: Pharmaceutical manufacturing is also a dynamic area where demand for advanced production environments, including clean rooms, has surged to support the production of innovative therapies and medications.
These facilities require precise temperature, humidity, and air quality management.
Speaker Change: Our leading solutions ensure that they can operate efficiently, safely, and sustainably.
Speaker Change: Across the broader manufacturing sector, our ability to integrate smart, energy-efficient, and resilient technologies helps manufacturers optimize their operations and achieve their long-term goals.
Speaker Change: Our performance in these verticals and our use of AI demonstrate our ability to address the unique needs of mission-critical environments across a range of industries.
Speaker Change: By leveraging our advanced technology, digital innovation, and focus on sustainability, we continue to deliver measurable value for our customers and position ourselves as a leader in driving long-term growth.
Speaker Change: In summary, our strong start to fiscal 2025 reflects the success of our strategy to simplify our portfolio and position Johnson Controls as a leading pure play building solutions provider.
Speaker Change: The significant progress in our transformation is enabling us to achieve more consistent and predictable performance as we continue to deliver value for our stakeholders.
With that, I'll turn it over to Marc.
Marc: Thanks George. Before I give your results, I would like to thank you for your leadership of Johnson Controls.
Marc: I have deeply appreciated your partnership over the years and want to wish you all the best in your well-deserved retirement.
Marc: I look forward to working with you and Joachim over the coming months to ensure a seamless transition.
Please turn to slide 6.
Marc: Our long cycle backlog and unwavering commitment to operational excellence enables us to produce strong first quarter results and deliver enhanced shareholder value.
Marc: Organic revenue grew 10% and segment margin expanded a robust 200 basis points to 15% led by substantial improvement in both EMILA and global products.
Marc: adjusted EPS of 64 cents, was up nearly 40% year-over-year, and exceeded the high level guidance range by 4 cents.
Marc: We are pleased with our strong start to the year that reinforces our operational strength and effective strategy.
Marc: On the balance sheet, we ended the first quarter with $1.2 billion in available cash and net debt decreased to 2.3 times, which is within our long-term target range of 2 to 2.5 times.
Marc: Our adjusted free cash flow of approximately $600 million improved nearly $800 million year-over-year.
Marc: This trend demonstrates the significant improvements in our working capital fundamentals leading to increased efficiency, reduced cost, and enhanced customer satisfaction.
Marc: Let's now discuss our segmented results in more detail on slides 7 through 9.
Marc: Beginning on slide seven, global products had a strong start to the year. Organic sales grew 15% as price remained positive, and we delivered 11 points of volume growth.
Marc: Applied HVAC grew more than 30% with strong double-digit growth in North America and Emila.
Marc: Adjusted segment EBITDA margin expanded an impressive 740 basis points to 30.1% as our enhanced operational efficiencies are producing substantial margin improvements.
Marc: Turning to slide 8 and 9 to discuss our building solutions performance.
Marc: Building solutions deliver the strong quarter with consistent performance across all regions.
Marc: Olders grew 16% in the quarter, with strong double-digit growth in both systems and service.
Marc: Older in North America increased 18% in the quarter led by over 20% growth in system as we continue to see strong demand for data centers, healthcare, broader industrial, and manufacturing.
Marc: Additionally, we experienced an uptick in order during the quarter as our customers proactively adapt to the changing global landscape including anticipated tariffs.
Marc: Service grew 10% with broad-based strength across the portfolio. In Emila, orders were up 6% with 9% growth in service and 4% growth in system.
Marc: In Asia-Pacific, progress continued as our year-long effort to rebuild the pipeline led to positive outcomes.
Marc: Overall, orders grew 32%, led by a 40% growth in system, while service grew in the low teens.
Marc: Organic sales increased 8% led by 10% growth in service and 8% growth in systems.
Marc: Sales in North America were up 10% organically with continued strength across HVAC and controls.
Marc: In Emila, organic sales grew 6% with solid growth in controls, fire, security, and industrial refrigeration.
Marc: In Asia-Pacific, sales grew 5% organically, led by strong double-digit growth in our resilient service business.
Marc: The building solution segments have experienced notable margin improvements through strategically building backlog with higher margin system jobs with a long service tail.
Marc: Our margin story remained consistent this quarter, mirroring the positive trends observed in previous quarters.
Marc: By region, a MILA-adjusted segment EBDA margin expanded 240 basis points to 10.1%, driven by improved productivity and a positive mix from growth in service.
Marc: In North America, adjusted margin expanded 60 basis points to 12.1%, reflecting the execution of a higher margin backlog.
Marc: In APAC, adjusted margin expanded 20 basis points to 9.3%, driven by positive mix from our service business.
Marc: Building solutions backlog remains at record levels, growing 11% to $13.2 billion.
Service backlog grew 8% and system backlog grew 12% year-over-year.
Marc: Our record backlog provides visibility into future revenue, enabling us to drive consistent and predictable financial results. The strong foundation allows us to strategically plan and meet the sustained demand for our solutions, ensuring continued growth.
Marc: Let's discuss our fiscal second quarter and full year guidance on slide 10.
Marc: We exited the first quarter with strength and sustained momentum as we executed on our strategic initiative and expanded our record backlog.
Marc: This solid foundation offers great visibility into the remainder of fiscal 2025 and position us well for continued success and growth.
Marc: For the second quarter, we anticipate organic sales growth of mid-single digits, adjusted sigma-dimer gene expansion over 150 basis points to approximately 16.5%, and adjusted EPS in the range of 77 to 79 cents, representing 12 to 14% growth.
Marc: For the full year, we continue to expect organic sales growth of mid-single digits, which remains consistent with our long-term growth algorithm.
Marc: Following a strong start to the year and an improved service mix, we are pleased to raise our full year guidance for both Margin and Adjusted EPS.
Marc: Considering the potential impact of tariffs as known today and reflected in our guide, we anticipate higher profitability and continued enhancement in our financial performance.
Marc: This expectation is primarily due to our operational focus and strong beginning to the year. We now anticipate adjusted segment EBDA margin to expand over 80 basis points and adjusted EPS in the range of $3.50 to $3.60 per share, representing 9 to 12% growth.
Marc: The positive cash flow at the start of the year demonstrates our working capital fundamentals continue to improve.
Marc: As a result, we now anticipate achieving a pre-cash flow conversion of 90% or greater for the full year. We continue to target returning 100% of our pre-cash flow to shareholders through dividend and share repurchase.
Marc: A strong start to the year was driven by an ongoing transformation effort, an anticipation of focus, and precise execution.
Marc: Streamlining processes and prioritizing key initiatives have led to early successes, setting a positive tone for the rest of the year.
Marc: This solid foundation positions us well for continued growth and achievement. We look forward to leveraging our strong momentum throughout fiscal year 2025.
With that operator, please open the lines for questions.
Speaker Change: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2.
Speaker Change: And our first question comes from Nigel Coe from Wolf Research. Please go ahead. Thanks. Good morning, everyone. Thanks for all the details. So, congratulations on Joachim's appointment. I'm just wondering, you know, George, as chairman of the board, maybe you could talk about, you know, what sort of mandates, you know, you're delivering to Joachim. Is he coming in with a free hand? Just wondering any sort of guardrails around his mandate.
Speaker Change: I mean, you know, we named the YOCM effective on March 12th. It was through a rigorous and thoughtful succession planning process.
Speaker Change: He comes with, as we've discussed, a 13-year experience with Danaher, extensive experience scaling global companies with a foundation of customer orientation, innovation, and efficiency.
Speaker Change: I think as you look at his background, his track record of leading service-oriented businesses, leveraging technology to be able to deliver best-in-class financial performance is uniquely suited for where Johns Controls is in its value creation journey.
Speaker Change: I think as we've talked about, you know, with the strategy that we've developed.
Speaker Change: You can see the momentum that we've built with that strategy.
Speaker Change: and a lot of work around strategy that as we take that foundation forward, we're going to be positioned to be able to capitalize on the full growth potential of the company. Couldn't be more excited to have him coming on board, working with him, and ultimately going through a seamless transition.
Speaker Change: with the ongoing program and just maybe just touch on some of the changes you're making to the To the process to to maybe just deliver, you know, better and more consistent free cash flow
Speaker Change: Yeah, hey Nigel, so $250 million of restructuring cash in our 90% conversion and that's obviously a headwind against, you know, what you would expect to see at around 100%.
Speaker Change: we've talked about the other structural challenges that we've seen. As far as changes we are making and we've made, it's all about our operating system.
Speaker Change: and going back to the fundamental on what type of jobs we accept, how do we plan on billing the customer and collecting on the progress payment.
Speaker Change: It's also a lot of the work that has been done within our global products team in leveraging better volume and relying less on inventory.
Speaker Change: to be able to drive that growth. You saw global products in the quarter grew about...
Speaker Change: 11% unit with about the same level of inventory they had to hold in those businesses versus last year. So we are very pleased with what we are seeing from an operational standpoint and also fundamental change and that allows us to convert better from a free cash flow standpoint.
and Jim Lucas. Thank you.
Speaker Change: The next question comes from Steve Tussa from JP Morgan. Please go ahead.
Good morning.
They're all racist!
Speaker Change: Congrats on the on the appointment and seems like it was a nice exhaustive search. Seems like a good outcome.
Speaker Change: So just kind of calibrating the guidance here, I mean, your orders are comping up 16, you're organic, this quarter was pretty strong, yet you kind of held the mid-single-digit guide. Anything you're concerned about in...
Speaker Change: the next few quarters, although you did guide second quarter pretty well as well. So anything in the back half, obviously the comps get a bit tougher, but anything you're worried about in the back half to drive that type of slowing?
Speaker Change: Yeah, I wouldn't call it slowing, but yeah, you're right, Steve. The second half comp has become more difficult, particularly our fourth quarter, where we had very solid growth last year in Q4, and year-on-year compare there is pretty heavy, and the math, of course, of Q4 beats also higher from a total revenue standpoint, makes the arithmetic of the second half growth a little tougher. And I think the way you need to think about that mid-single digit...
Speaker Change: All of our businesses will grow in that mid-single-digit level. APAC may be a little bit higher than the rest.
Speaker Change: I think for us to be comfortable to start raising above that level, we need a little bit more clarity on what we think tariff is going to do overall to our markets or in markets particularly North America. And then seeing if APAC actually rebounds, you know, right now we're seeing them kind
Speaker Change: bottoming out and we're starting some growth but it's not the level of growth you would expect given the couple of challenging years these markets have seen.
Speaker Change: Lastly, on data center related business, I assume the orders are still pretty strong. Do you expect an acceleration? You booked a lot of orders last year. The lead times are a bit longer. Are you still seeing accelerated growth rates from a sales perspective?
in Data Center for 25.
versus 24.
Speaker Change: Yeah, yeah, versus 24. Both orders and revenue is accelerating. What you saw in the first quarter, that solid order, particularly North America, some of that had to do with some acceleration of those orders that people were trying to...
Speaker Change: to get ahead of the change in leadership in the country here in January and some of it had to do with further visibility that some of our larger data center customers have now on their demand for cooling over the next couple of years. But we don't see that momentum slowing down whatsoever.
Speaker Change: The next question comes from Scott Davis from Melius Research. Please go ahead.
Speaker Change: Hey, good morning guys. And I'll echo my colleague's comments on Yoakum. We know him well and he's gonna be a great fit for you guys, so congrats. Thanks Scott.
Speaker Change: Just given how large so many of these projects are, obviously data center, but not just data center, the projects overall seem to be meaningfully larger than perhaps what we've seen, at least in recent history. Do you see a change in that order book, the duration, the lead times, that type of thing?
Speaker Change: not just market-backed, but also how we address the opportunity we see in the market. And we see the pipeline of opportunity continue to grow, and as we focus our commercial organization towards the most...
Speaker Change: attractive parts of the market where we can actually sell value and margin, but also attach a long service still to the opportunities we look at.
Speaker Change: Naturally, that means we build a little bit stronger customer intimacy.
Speaker Change: With that comes orders that are probably a little bit earlier than we saw historically, where we were a little bit more transactional and reactive to the market, and therefore would take order kind of later in the cycle. So yeah, naturally, all those have a tendency now to have a little bit longer tail than they did. And then the core verticals that are growing, data center,
Speaker Change: healthcare and manufacturing are more, I would say, complex and elaborate customers that do multi-year planning. That includes pushing all those ability to revenue a little further down the timeline.
Speaker Change: Okay, that's helpful. And guys, this is not a criticism, just one would love to have some color though in incremental margins. When I just think about the service mix.
Speaker Change: This quarter and then the price in that backlog I would have guessed maybe incrementals to be a little bit higher than 30% but I know there's there's there's lots of there's always puts and takes to that Maybe if we need just get a little color on that and and I'll pass it on. Thank you
Speaker Change: No, absolutely. There's two real aspects, I would say, of conservatism still. The first one comes from foreign exchange, right? We've bought a nickel of pressure coming from just purely the dollar strengthening. It's not big, but from a margin rate standpoint, it puts a little bit of pressure.
Speaker Change: And the second thing I'll tell you is we really need to have a little bit more clarity around tariff and what it will do and how we will...
Speaker Change: be able to pass on that prize to the customer and can we...
Speaker Change: drive also margin on that price ultimately and and as you know that that tariff landscape is very fluid and changing rapidly.
Speaker Change: and so our ability to reach clarity, predict what it will do to our margin expansion is kind of, is a little bit muted in the second half.
Speaker Change: The next question comes from Julian Mitchell from Barclays. Please go ahead.
Julian Mitchell: you know, how we'd think about the speed with which you'd offset those effects with the higher prices and then anything more fundamental post that. Thank you.
Speaker Change: Yeah, it's hard to tell you with precision exactly how it's going to be affecting. I'll tell you two or three things. The first one is...
Julian Mitchell: We have evolved our manufacturing strategy to manufacture in-region for the region.
Julian Mitchell: and that has helped us protecting some part of what's been announced. As I mentioned earlier, that landscape around Paris is very uncertain right now and every day almost is.
Julian Mitchell: is changing, but we do have manufacturing capabilities in North America that are not just based in the continental US, some of it in Mexico, some of it is in Canada, and so depending on how those tariffs will be enacted will have a particular impact.
Julian Mitchell: I'll tell you, we have successfully dealt in the past with tariffs.
Julian Mitchell: either by passing it on to the customer, sometimes with margin, sometimes just one-for-one.
Julian Mitchell: And we've also been able to pass on some of the pressure we see through the supply chain, either directly on price concession from all suppliers, or naturally you'll have the effect of currencies on some of the tariff that will offset some of that pressure.
Julian Mitchell: We're working very diligently on our supply chain levers to drive better resilience in that supply chain and allow us to continue to drive that regionalization, reworking a little bit of our supply chain network to kind of minimize ultimately the effect of tariffs should they be enacted.
Thank you. Thank you.
Julian Mitchell: and then a decent step down in the second half from that number. So it is a sort of exit rate from this year, a good steady state with kind of stranded costs leaned out when we're thinking about the median term. Thank you.
Julian Mitchell: No, for sure. So part of that stranded cost is obviously sitting at corporate and the timing of
Speaker Change: moving some of that cost that you would have maybe historically seen in the segments that we've divested is now kind of sitting at corporate and as we look at the restructuring and the benefit
Speaker Change: of that restructuring, as you mentioned. You're going to see a lot of that coming out of the corporate expense in the second half, but particularly into 26.
Speaker Change: as we are going to be able to fully enact a lot of the activities from a transformation and restructuring, allowing us to really drive a lot of leverage on our corporate costs and taking it down quite materially, looking beyond this current fiscal year.
Speaker Change: Our next question comes from Amit Mahotra from UBS. Please go ahead.
Amit Mahotra: Thanks, thanks a lot. Morning everybody. George, as you, I just wanted to come back to the the CEO question maybe one more time. There's obviously been, you know, a lot of progress on the strategic side.
Speaker Change: So I assume we shouldn't expect much change in terms of, you know, where the portfolio of businesses is today, maybe an acceleration of the product, productivity margin opportunities. So maybe you can just talk about, you know, what you guys found, Joachim, sort of bringing to the table that you and the board found particularly attractive for the company.
Speaker Change: Yeah, the journey we've been on and with the strategy, we really set John's controls up to be the leader, you know, building commercial building solutions that are really built on
Speaker Change: at the core of it is the technology in our products.
Speaker Change: It's our digital platform that we deploy, and then it's ultimately the services that we gain with the connectivity and the use of data.
Speaker Change: And so as we've looked at the portfolio, you know, we are, you know, we'll complete the residential and light commercial divestiture by the end of the year. That's a big step towards being more of a pure play is roughly about 10% of the remaining
Speaker Change: portfolio that might not be core to the commercial building solutions and so we'll continue to update you as as we address those on an ongoing basis.
But we feel really good about
Speaker Change: You know, how we're positioned in the market, the differentiation that we bring to our customers, and then the operating model that we're operating with that now is delivering very predictable results, you know, right from how we're working with customers, how we're building pipeline, how we're converting pipeline, and ultimately how we're attaching services.
Speaker Change: And so, as I said earlier, with Joachim's experience coming in, and his operational experience as well as, you know, the strategic...
Speaker Change: experience, certainly as we look at the portfolio and the ability to be able to create growth, we see significant opportunity.
Speaker Change: And so, a lot of the focus will be, you know, now capitalizing on that opportunity with the strong operating system that we've built, really understanding the secular trends that are underway in the commercial building segment, and we believe that we're going to be uniquely positioned now to capitalize on more than our fair share.
Speaker Change: Okay, that's very helpful. Thank you. And just related to that, maybe one follow-up for Marc. With respect to margin outlook, can you just talk about maybe the cadence of margins from here as we progress through fiscal 25, and then as you think about, you know, benchmark the business and look at where the productivity opportunities are?
Speaker Change: Maybe a more longer-term question, where do you think the biggest margin opportunity exists today for the business?
Yeah, I...
Speaker Change: Looking first at how we look at the second quarter, you'll see margin improvement obviously across the board, but the biggest opportunity will come from
Speaker Change: As we see that lift in volume in Asia-Pacific, you'll see March in returning more closer to historical level. So for second quarter, and probably the same applies consistently for the second half, for the same segments.
Speaker Change: That's where we see the opportunity for a margin lift. North America will see improvement, but not at the same level as those other three businesses that see a lot of opportunity.
Speaker Change: Longer term, if you think about the opportunity set here, it's really twofold. The first one is we've set in place an operating model that works.
really well and is starting to deliver performance.
Speaker Change: but the continued simplification and the restructuring of what we are doing around where we manufacture, how we manufacture, the amount of product we have in our line card and how we deploy our commercial resource around the market against that.
You know.
Speaker Change: the foundation of our cost and it's all about leverage here and it's really that focus around customer back trying to continue to drive more than a fair shelf from a market growth standpoint.
Speaker Change: Our next question comes from Chris Snyder from Morgan Stanley. Please go ahead.
Chris Snyder: Thank you. Maybe I wanted to ask about two kind of longer-term questions here. The first is on the growth profile, you know, companies talking to kind of mid-single-digit growth this year. Obviously,
Chris Snyder: Some tough content here in the back half, so maybe stepping down to exit the year. But when you think longer term, how much runway do you think there is for the company to kind of maintain this mid-single-digit organic growth? Obviously, backlog is still incredibly high.
Chris Snyder: orders don't seem to be slowing down much. So any views on just the duration behind this? Thank you.
Chris Snyder: So if you look at the long-term algorithm around that mid-single digit, it's supported first by our continued service growth. That service business is probably going to run mid-single to high-single digit.
Chris Snyder: really coming from two fundamental changes in the operating model. First, every time we think about a new system, we try to get as much as we can from a service entitlement associated to that. That means, you know, focusing on the right vertical, but also continuously increasing our customer intimacy.
The second thing I tell you is...
We have created a base of products and capabilities.
that are well-suited for the sub-segments of the market.
Chris Snyder: that are fundamentally growing at a higher pace than what you would see in the expectation of GDP or market growth. And I'm thinking here about obviously data center we keep on talking about, but it's also generally of manufacturing capabilities as well as healthcare businesses.
Chris Snyder: Those three segments continue to outpace the market. That comment is actually applicable.
Chris Snyder: to the vast majority of our geographies and I think it will continue to evolve that way. So continue to drive product capabilities that serve that market well and where we can continuously generate value will help support that mid-single digit and hopefully more than that over the long-term algorithm.
Speaker Change: Thank you, I appreciate that. And then, you know, I want to follow up on some of the earlier commentary about the company realizing, you know, better margin backlog kind of starting to flow through into the P&L.
So, you know, I guess...
Speaker Change: are continually getting better, and then the second piece of that, you know, you guys obviously have a very big backlog, there's long duration behind it, you know, is there a price protectionism, you know, in the event that we get more tariffs coming through here?
Speaker Change: You know, are you guys able to offset that with price on what's already in the backlog? Thank you.
Speaker Change: Great question. So the margins in the backlog continue to improve simply because we continue to be able to sell value to customer. There's obviously going to be an inflection point at some time in the future but we're far from that inflection point as the way we see it.
Speaker Change: As far as tariffs, a large part of our backlog has contractual abilities for us to pass on that price.
Speaker Change: Some of those contracts allow us to pass the price and probably maintain margin. Some of those, it's more of a one-to-one, and therefore we can recuperate the headwind associated with the tariff, but maybe not the margin on top.
Speaker Change: And then there's a portion of our backlog that is with larger holders, larger customers that have, I would say, a little bit more leverage, and we will have to negotiate with those customers.
Speaker Change: how we are going to deal with the potential tariffs that could be applicable for those products.
Speaker Change: Maybe not word for word, but we have full protection. We have created products that are critical to their success, and we have real great partnership with them. So I feel very comfortable that we'll find a way to make it economical for both sides and create a successful relationship with them.
with those customers.
Speaker Change: Our next question comes from Joe O'Day from Wells Fargo. Please go ahead.
Hi Joe, is your line on mute?
Speaker Change: Our next question is from Joe Ritchie from Goldman Sachs. Please go ahead.
Hey guys, good morning and nice start to the year.
Joe Ritchie: Let me just kind of focus, I guess, my questions on margins. So, if I recall last quarter when we were talking about global products,
Joe Ritchie: There was an expectation, I think, that the margins were going to be kind of closer towards like the low to mid-twenties, and they came in a lot better. And so my first question is, what really surprised to the upside this quarter on global product margins?
Joe Ritchie: I wouldn't say surprise, right? We always put some conservatism to our guidance to try and make sure we don't surprise the negative too much.
Joe Ritchie: There's two elements that really drove the outsized margin of global product in the first quarter.
Joe Ritchie: their ability from a third-party revenue standpoint to drive a nice unit growth.
Joe Ritchie: you know, low to mid-20s, first half was contemplating. That team has done an excellent job driving that book-and-bill business, that short-cycle business at a very high level. Some of it came very transparently from some orders, accelerating as some people were positioning inventory prior to the new administration taking control in January.
and Tackling from a Commercial Standpoint.
Joe Ritchie: The other part is that as the data center vertical growth continues to accelerate, that business saw the benefit both internal margin and external margin.
Joe Ritchie: as we saw a lot of growth in our product sales through our field-based business or building solutions business in the other segment and as you know a little bit of volume in that business goes a long way and we saw across the board a better volume, better units particularly on our equipment.
Joe Ritchie: and our HVAC business that help really absorb those factories, get great productivity and really see a nice margin lift.
Speaker Change: That's super helpful, Marc. I guess maybe just a quick follow up to that. So was there a way that maybe
Joe Ritchie: quantify that that kind of terror-floating comment for the first quarter?
Joe Ritchie: And then, and then as you think about the second half of the year, it looks like you're, you're embedding about slottish margins. Is that just some conservatism because you're not really sure how the tariffs are going to play out?
Joe Ritchie: I'll answer the later with one word, yes, it's the uncertainty on tariffs as
Joe Ritchie: forced us, so to say, to put some conservatives on how we look at the second half and what it's going to do to margin rates.
Joe Ritchie: As far as what that did to the first quarter, I'll point you more in orders than revenue. If you look at that really strong first quarter of order of about 16%,
I would say about a third of that
Joe Ritchie: was orders that we would have normally probably sown in the second quarter where customers were just accelerating the orders because they wanted to get the uncertainty associated with not just tariff but overall the macroeconomic or political landscape and they wanted to get ahead of it.
Joe Ritchie: So there's a little bit of volatility in all those, as you know, if you look at all those quarter over quarter. And so I think this will solidify the year as we start really strongly, but we probably have some benefits.
Joe Ritchie: in Q1 of orders that we would have normally seen in Q2 and that will probably be reflected in our orders in the second quarter.
Speaker Change: Our next question comes from Noah Kay from Oppenheimer. Please go ahead.
Speaker Change: the group here. When we think about the mid-single-digit organic growth for the year, Marc, can you kind of give us some some goalposts for how you think about that among the different offerings? Assume that applied
Speaker Change: We continue to be a leader here, but of any color you can go out and be helpful.
Speaker Change: We do see continued growth in applied and also in industrial refrigeration, both those businesses.
Speaker Change: with the heat pump conversion in Europe as well as the data center globally and manufacturing is a great tailwind for HVAC applied business.
Speaker Change: or more transactional business or more electronics business. I'm thinking about our controls business as well as our fire and security.
Speaker Change: How's the challenge in the second half of the year, to be honest with you? The indicators, still from a construction standpoint, are not super, super strong. They're flattish, and that dampens a little bit our ability to grow from that market vertical.
Speaker Change: We've also been very diligent in driving the commercial team within those businesses to really focus on the sub-parts of the market that drive service.
Speaker Change: And so we think that while those particular product lines may be a little bit challenged in the second half of the year from a growth standpoint, not being able to hit double digits, they will at least provide a great base for ability to grow service in the long term.
Speaker Change: Very helpful, thanks Marc. And then you mentioned earlier the real focus on service entitlement for new business. Maybe just refresh us on where that entitlement or the attachment rate related to it fits today, and where you see it going over the next year or two.
Speaker Change: Yeah, our attachment rate right now is, depending on the business line, between the low 40s to the high 40s. The best businesses are higher than that, obviously, in the 60s and 70s.
Speaker Change: Where we think ultimately of entitlement is, while I don't want to box myself to an exact number, I always point to...
Speaker Change: industries that have demonstrated an ability to drive a very very high attach rate.
Speaker Change: I'm thinking about, you know, oil and gas industry or, for example, the elevator industry that is able to drive 60, 70, maybe sometimes higher than that. We feel that's where our entitlement is long term. It means making some change to our operating model, you know, drive more manufacturing for service and a few changes to how we address certain end market, but we think that entitlement is absolutely attainable over the mid to long term.
and Jim Lucas. Thank you.
Speaker Change: Our next question comes from Andrew Obin from Bank of America. Please go ahead. Yes, good morning. How are you? Congratulations on successful CEO succession.
Speaker Change: Just a question, I apologize, it was asked, in North America building solutions, productivity was a negative 20 million drag, as I said, I apologize if you explain it, but I think it's somewhat unusual, and how should we think about it for the rest of the year?
Speaker Change: Yeah, it's a short-term thing. So as we continue to see growth opportunity in North America, we've invested in incremental resources to drive against that growth, whether it's our commercial team and continue to hire more sellers and more sales support, as well as the ability to drive incremental service and technicians to be able to support that growth.
Speaker Change: If you go through a large hiring docket like that... ...what ends up happening in the very short term is you have a little bit of productivity... ...as you onboard those people and make them the best possible self... ...and drive productivity for the rest of the enterprise.
Speaker Change: So, I wouldn't take that small $20 million headwind in the quarter as the new normal for that business. It's really more of an uptick as we really made investment to continue to fuel that growth.
Speaker Change: Joshua, thank you. And on foreign security, you know, mid-single-digit, nice growth. A, could you just talk about sort of what's driving acceleration in the military, single digits, global product, mid-single digits, and how sustainable these trends are into the second half?
Speaker Change: Yeah, the accelerated growth in Emila is really around what we've been talking about for the last year almost, is we re-pivot completely that commercial organization and have taken a little bit more control over which part of the backlog they look at and just basic commercial intensity.
Speaker Change: We're going to continue to drive that team, and we believe that the mid-to-high single-digit non-violent security
in that business is going to continue to evolve.
Speaker Change: I'd say that the mid-single digit, that global product you saw in the quarter is two-fold. Very strong performance commercially, but kind of an easy compare if you look at the first quarter of last year where we were still reeling up the challenges we saw associated with the cyber incident. So they had a bit of an easier compare that team because they were very impacted by that incident.
Thank you. Thank you.
Speaker Change: Our next question comes from Sahil Manocha from RBC Capital. Please go ahead.
Speaker Change: Hi, good morning. This is Sahil Manochan for Dean Dre. Just one quick question for me. With net debt to EBITDA of 2.3 times and a cash position of $1.2 billion, how are you thinking about capital deployment priorities in the current environment?
Speaker Change: Our capital priorities have not changed, so we'll return 100% of free cash flow back to shareholders this year. The proceed of our divestiture, assuming there's nothing material from an M&A standpoint that comes between now and...
and the fourth quarter will be a hundred percent.
returned to the shelter via share repurchases.
Speaker Change: We will take our discontinued operations business cash flow and use that cash flow to reduce a little bit leverage and to bring it closer to the lower end of our two to two and a half.
Speaker Change: but our capital allocation and diligence we have there as a full support of the board and it's not going to change any time soon.
Thank you.
Speaker Change: Again, if you have a question, please press star, then 1. And our next question comes from Steve Volkman from Jeffries. Please go ahead.
Steve Volkman: Hi, good morning everybody. Thanks for taking my question. A couple of questions I guess on sort of where you are relative to capacity. So on applied and I guess large chillers specifically, I'm guessing things are fairly tight. Is there some color you can give us on that? And then should we be expecting some capacity additions at some point?
Steve Volkman: I would regionalize that answer a little bit. In North America, we have a little bit of capacity, but we are very close to be at capacity. We see, obviously, a very strong backlog, and a continued backlog, so we have great visibility there.
Steve Volkman: In Emila, we have capacity. We need to probably expand a little bit capacity to be able to follow the trend we see in data centers as well as heat pumps.
Steve Volkman: And in Asia-Pacific, we still have quite a bit of capacity to be transparent with you because the market has bottomed out, but it hasn't rebounded yet, and so our factories in Asia have the ability to drive a whole lot more growth in the future.
Steve Volkman: Okay, all right, great. And then maybe also on the same thread here, I think Marc, you just said something about adding some additional field engineers, I guess, in systems and service, but where are you on sort of utilizing these folks? Is there still upside to that? Do you really need more people in order to grow that business more?
Marc: So, our operating model really drives a very high level of productivity within a field technician.
We are continuously working on tools.
Speaker Change: to make them more productive. George talked about it in his opening comments.
Marc: AI is not just a great opportunity for us from a cooling and top-line growth standpoint. It's also an incredible opportunity to make our field technicians that much more productive.
either it's...
Marc: helping them figuring out what the problem is with a particular system or having them
Marc: standing ready a little faster when it comes to the type of products or services that they need to deliver that particular day. Therefore making their day more enjoyable but also much more productive and keeping the customer kind of happy as we come in and out of those facilities quicker.
Marc: We continue to invest in our field labor because it's a critical element of our service growth. Our ability to continuously drive service is critical and as you see us growing services mid to high single digit
Marc: Productivity will help us rely less on labor, but there's still going to be a labor component and we are going to continuously be searching for the next great talent there.
Speaker Change: Our next question comes from Andy Kaplowitz from Citigroup. Please go ahead.
Good morning everyone. Good morning Andy.
Andy Kaplowitz: So APAC order growth as you said was actually quite strong I know you're still probably a bit cautious about calling the all-clear there But can you call a definitive turn in that market with the understanding that it's still a fluid environment given the tariff situation?
Andy Kaplowitz: And, you know, as we saw early signs of the softness in the region, this goes back over the last 18 months. You know, we proactively took steps to adapt to the lower demand and ultimately, you know, the increased counterparty risk.
Andy Kaplowitz: And as we rebuilt the pipeline, we've now seen a very strong rebound here with orders at 32% in the quarter. We believe that we found the bottom, and with the current run rate, which is in line with the slower market demand.
Andy Kaplowitz: And so I think based on what we've seen, we've seen real stabilization in the business, and now we're really returning to growth, not only in building the backlog, but the way that we're going to convert going forward. I think, Andy, what's most important is the way that we continue to build services in spite of some of the pressure on the new systems.
Services continues to be strong.
Andy Kaplowitz: We'll continue to help maintain a healthy segment EBITDA margin, as well as continuing, while we're continuing to rebuild.
the systems business, so.
I think we'll see continued growth.
Andy Kaplowitz: within Asia-Pacific, not only recovery in China, but across the overall Asia-Pacific region.
Andy Kaplowitz: This is George and obviously there's a lot of questions on data centers which makes sense but you obviously have a lot of applied verticals and it seems like you're still getting leadership out of health care or education but maybe you can opine on you know some of these verticals and the visibility that you have you seeing improvement in office for example like what do you see across the verticals
Speaker Change: Yeah, great question. So we continue to see strong double-digit on data center as well as healthcare and some other vertical.
Speaker Change: We still don't see any acceleration in what I would call real estate.
Speaker Change: which is offices and mixed buildings would fall into that category for us.
Speaker Change: You still have owners that are trying to figure out what they're going to do with their current asset and you still see some hesitation in making certain investments. It's a market that's not declining, it's just not growing at the pace of the other. We have great solutions and products to address.
Speaker Change: that particular vertical as it rebounds, but it's not where we are seeing the most growth.
Speaker Change: seeing some positive signs there. And then everything from a semiconductor manufacturing or clean room biomed manufacturing still globally sees a great tailwind. And I don't think we are going to see a stop to that trend anytime soon.
Speaker Change: The next question comes from Joe O'Day from Wells Fargo. Please go ahead.
Joe O'Day: Hi. Sorry about that earlier. Thanks for getting me back in queue.
Joe O'Day: Wanted to start on just restructuring and you progress over the course of the quarter and just revisit kind of how you're thinking about the the cost impact in 25 the savings impact Whether anything's trending kind of a head or behind the plans there
Joe O'Day: Yes, so our expectation hasn't changed from a cost or a timing of it. What I'll tell you is, embedded in our guide in the second half, we've seen early signs of progress.
Joe O'Day: of the benefits. We started addressing very early on the stranded costs we saw as we were getting close to closing the transactionable diversity of the ADTI business as well as the residential and light commercial, and that gave us a little bit of a leg up on our ability to drive some of costs out earlier on. I think you're going to see some good signs in the second half of the year from a cost standpoint, but the vast majority of the
Joe O'Day: The benefit will really be yielded in fiscal year 26 as we close the transaction in Q4. It will give us an opportunity to really address the vast majority of that stranded cost in the fourth quarter into the first quarter of fiscal year 25, 26.
Speaker Change: Great, that's helpful, Culler. And then just wanted to come back to an earlier comment and about pricing going into backlog and talking about sort of selling value to the customer and just to understand your evaluation of the pricing today and the pricing opportunities and so what
Speaker Change: What goes into evaluating the value you're delivering and to what degree do you think you're being appropriately compensated for that?
Culler: Well, it varies on all the different verticals we play, but what I'll tell you is our ability to drive outcomes for customers.
Culler: allows us to not have to go into deep detail into what is the actual pricing of each component of the offering we present to them. It's a full solution, it's packaged.
Culler: and it allows us within our organization to drive best costing and maintain margin at all times. Obviously, things change.
Culler: whether it's tariff or otherwise, and we have contractual ways to actually address that through change orders with customers. As we actually go and implement those systems, the application varies out, and most of our contracts have an ability for us to address that through a process that is very defined and allows us to most of the time recover not only our cost, but as well the margin, and sometimes drive even better value for the customer and GCI.
Culler: This concludes our question and answer session. I would like to turn the conference back over to George Oliver for any closing remarks
George Oliver: Yeah, thanks. You know, to wrap up the call today, this quarter, Jones Controls achieved reconciliating backlog, double-digit organic sales growth, and broad-based strength across our portfolio.
George Oliver: You know, our strong start to fiscal 2025 is a testament to John's controlled, talented, hardworking team, as well as our unwavering commitment to innovation and operational excellence.
George Oliver: And I am confident that Yochim is well suited to lead Johnson Control's next chapter of growth as we build on the strong momentum underway to unlock enhanced value for our stakeholders. With that, Operator, that concludes our call today.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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