Q2 2025 Johnson Controls International PLC Earnings Call
[inaudible]
Speaker Change: Good morning and welcome to the Johnson Controls Second Quarter 2025 earnings conference call. All participants will be in listen only mode.
Speaker Change: Should you need assistance, please signify conference specialist by pressing the star key followed by zero.
Speaker Change: After today's presentation, there will be an opportunity to ask questions.
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Please note, this event is being recorded.
Speaker Change: I would now like to turn the conference over to Jim Lucas by the President of Investor Relations.
Please go ahead.
Speaker Change: Good morning, and thank you for joining our conference call to discuss Johnson Controls' fiscal second quarter 2025 results. Joining me on the call today are Johnson Controls' chief executive officer, Joachim Whiteham-Minus, and Marc Vandiepenbeck, our chief financial officer.
Speaker Change: Before we begin, let me remind you that during our presentation today we will make forward-looking statements that reflect our current views about our future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties.
Speaker Change: Please refer to our SEC filings for a list of these important risk factors that could cause actual results to differ from our predictions.
Speaker Change: We will also reference certain non-GAAP measures throughout today's presentation. Reconciliation of these non-GAAP measures are contained in the schedules attached to our press release and in the appendix to this presentation, both of which can be found on the Investor Relations section of Johnson Controls website. I will now turn the call over to Jochem.
Joachim Weidemannis: Thanks, Jim, and good morning, everyone. Thank you for joining us on today's call. I'm just about two months into the job and I'm appreciative of the very warm welcome I received from the Johnson Controls team. I'd like to start by thanking our 100,000 colleagues around the world for their dedication to our customers and the work they do every day. Thanks for joining us on today's call.
Joachim Weidemannis: As you can see from our strong second quarter results, we continue to execute better across the portfolio.
Joachim Weidemannis: Organic sales grew 7%, segment margins expanded 180 basis points to 16.7%, and adjusted EPS increased 19%.
Joachim Weidemannis: During the quarter, orders were up 5% led by continuous strength in our leading applied and resilient service businesses.
Joachim Weidemannis: Overall, we grew our record backlog by 12% to $14 billion. At a fundamental level, these results show broad based and sustained demand for our differentiated solutions. And now, as a more focused company and with strength and execution, we're driving value for all of our customers and shareholders.
Joachim Weidemannis: Our strong performance in recent quarters, combined with a continuous momentum in our recurring businesses and record backlog give us the confidence to today raise our guidance slightly for the full year. Marc is going to provide more details on this later in the call.
Speaker Change: Now I will share how I've been spending my initial weeks at CEO of Johnson Controls and some of my early observations. I will also touch on the benefits of our new organizational model and reporting segments.
Speaker Change: Before I start, my main takeaway is that I see great potential in this iconic 140 year young technology based and service-enabled company. I have a good sense even in these early days of the opportunity to further enhance value for shareholders.
First, what am I seeing? [inaudible]
Speaker Change: Prior to my role at Johnson Controls, I spent 13 years at Danaer, profitably scaling global businesses by building stronger capabilities in operational execution and accelerating organic growth, as well as making strategic acquisitions.
Speaker Change: I learned from that experience that the best way to get to know a business faster than in depth is to spend a considerable amount of time at Genba. This means joining our team on the front lines where the action is and where the value is created.
Speaker Change: Over the last eight weeks, I have visited eight countries, many customers, hundreds of our field colleagues, all of our main R&D centers, and walked the floor in 15 factories.
Speaker Change: I am becoming ingrained in the business, getting up to speed on the needs of our customers, markets, competitors, technologies, services, and assessing our capabilities in operational and growth execution, talent and strategy.
So where are we now? [inaudible]
It's clear to me that Johnson Controls has considerable strengths.
Speaker Change: First, our market leading franchises, such as our York HVAC business, and our Medicine Building Automation Controls platform.
Speaker Change: Second, our talent in the field is a true differentiator. We have over 40,000 dedicated and customer oriented employees.
Speaker Change: Finally, our technological capabilities and our product domains are impressive. Our capabilities are evidenced by our many industry first and nearly 8,000 patents with more coming.
Speaker Change: Johnson Controls has come a long way over the last several years, but as I said, there's still great potential to unlock in this iconic technology based on service-enabled company. An important step in achieving this is our new structure.
Let me discuss our new organizational model.
Speaker Change: Johnson Controls has been undergoing a lot of change the past few years, including the pending sale of our residential and
Speaker Change: We have now evolved our operating model, which is an important first step to make us a more customer-centric organization.
Speaker Change: As you can see on slide five, we have reorganized that the three geographical custom-oriented reporting segments which are supported by leading global functional capabilities.
Speaker Change: Our goal is to achieve market leading performance and build a faster growing and more profitable company by strengthening how we serve our customers, improving our operational performance, and accelerating innovation.
Speaker Change: Our three-year graphical segments serve as our consolidated commercial engine regardless of channel strategy responsible for improving customer intimacy and market reach while delivering profitable systems and life cycle solutions growth.
Speaker Change: The geographical segments are supported by two global centers of functional excellence. The products and solutions group is tasked with accelerating our rate and speed of innovation and improving our operational performance in supply chain and manufacturing.
Speaker Change: Our Commercial and Field Operations team is tasked with building capabilities in all commercial areas by deploying best practices and tools which enables our regions to grow faster by finding and winning more customers while improving how we serve them over the life cycle.
Speaker Change: This organizational model clarifies and delineates roles and responsibilities in a much better way, and it is the right next step for Johnson Controls. We're looking forward to realizing its benefits.
Speaker Change: with that. As I said, I have a few initial impressions to share.
Speaker Change: First, throughout my travels, I can see that there are opportunities for us to focus a lot more on our customers and our competition in all functions on layers in our organization.
Speaker Change: I'm encouraging everyone at Johnson Controls, from customer facing to senior leadership to prioritize winning with our customers and to act with speed and urgency.
Speaker Change: This emphasis coupled with our new operating model will allow us to build a more agile, faster executing and thereby faster growing and more predictable execution engine.
Speaker Change: Second, our operational and innovation execution is slowed by complexities in our current product offerings, number of skews, footprint and operating methods.
Speaker Change: This can be unlocked with tried-improven, lean-and-business system approaches.
Speaker Change: As some of you know, Lin is about orienting and aligning an entire organization around our customers involving all employees in waste elimination and continuous improvement to build capabilities, better processes, and speed in short a winning execution engine.
Speaker Change: Third, I'm taking an objective fresh look at our strategy and how to best further optimize our portfolio. I will share more at a later point in time about what I think is good for Johnson Controls, because I deepen my understanding of our businesses and markets and customers.
Speaker Change: I still have a lot of listening and learning to do. I want to continue to do it where the real value is created. Add Yambam. [inaudible]
Speaker Change: We are building on a solid foundation and I believe with more relentless focus on customers across our organization, as well as on lean-enabled execution fundamentals. We will be able to drive accelerated value creation.
Speaker Change: We have a unique offering and an enviable service capability that is driven by our culture of innovation. Johnson Controls will continue to redefine building performance, driving the next era of smart, safe, sustainable and autonomous buildings and powering our customer's missions.
Speaker Change: And with that, I'll turn it over to Marc to cover the quarter. Marc? Marc?
Marc Vandiepenbeeck: Thanks, Joachim, and good morning, everyone. Please turn to slide 6.
Marc Vandiepenbeeck: Oficial second quarter was strong across the board, of team as were diligently to navigate dynamic market condition and capitalize on opportunities in front of us.
Marc Vandiepenbeeck: We remain focused on driving consistent, predictable growth and delivering value to our shareholders.
Marc Vandiepenbeeck: Adjusted EPS of 82 cents was up 19% year of a year and exceeded the high end of our guidance range.
Marc Vandiepenbeeck: The strong first half of the year reflects off teams ongoing dedication and strategic execution.
Marc Vandiepenbeeck: On the balance sheet, we ended the second quarter with approximately $800 million in available cash.
Marc Vandiepenbeeck: and net debt decreased to 2.4 times, which is within a long-term target range of 2 to 2.5 times.
Marc Vandiepenbeeck: Adjusted free cash flow for the quarter was strong, resulting in an impressive increase of approximately 1.1 billion dollars a year today. This improvement supported by strong working capital fundamentals and just goes over 60 financial management and solid operational
Marc Vandiepenbeeck: Let's not discuss off-segment results in more details on slide 7-9 [inaudible]
Marc Vandiepenbeeck: Beginning on slide seven and eight, our building solutions region delivered another solid core.
Marc Vandiepenbeeck: Orders grew 5% in the quarter, despite facing a tough comparison and the impact of accelerated orders in the prior quarter due to global uncertainties.
Marc Vandiepenbeeck: This grows underscored the sustained customer demand for differentiated solution and services.
Marc Vandiepenbeeck: Geographically, all those in North America increase 4% in the quarter, with mid-single digit growth in both systems and service.
Marc Vandiepenbeeck: In Emila, others were at 10%, with 13% growth in service and 8% growth in systems.
Marc Vandiepenbeeck: In Asia-Pacific, orders were flat as we continue to implement our strategy in China, prioritizing the booking of profitable system projects with upfront payments. Meanwhile, service orders do nearly 20 percent.
Marc Vandiepenbeeck: Organic sales increased 7%. We solid high single-digit growth in both systems and service.
Marc Vandiepenbeeck: Sales in North America were at 7% organically with continued strength in both age back and controls.
Marc Vandiepenbeeck: Inemida, organic sales grew 5% led by 9% growth in service. In Asia-Pacific, sales grew 13% organically with strong double-digit growth on both systems and a resilient service business.
Marc Vandiepenbeeck: Margin, for building solutions, has been steadily improving over the past few quarters and we continue that trend this quarter, or focus on operational efficiencies and an optimized service make
Marc Vandiepenbeeck: By region, a military-adjusted segment of Yvidar Margin, expanded 410 basis points to 12.5% driven by improved productivity and the positive mix of service growth.
Marc Vandiepenbeeck: The high-of-system growth was a positive contributor to the overall margin expansion within global products.
Marc Vandiepenbeeck: Building solutions backlog remains at record levels, growing 12% to $14 billion. System backlog grew 12% and survey backlog grew 9%
Turning to Slide 9.
Marc Vandiepenbeeck: Global products continued to build momentum and delivered another strong quarter of growth and margin improvements.
Marc Vandiepenbeeck: Organic sales grew 8% as price remained positive and we delivered 6 points of volume growth. Applied age back grew more than 20%, with strong double digit growth in North America and Emila.
Marc Vandiepenbeeck: Adjusted Segment EVA Marching, expanded 600 basis points to 30.3% as it improved operational efficiencies
Marc Vandiepenbeeck: Let's discuss our fiscal third quarter and full year guidance on slide 10.
Marc Vandiepenbeeck: Our second quarter of performance and continued growth in all those in backlog, positioners for continued success in the second half of fiscal 2025.
Marc Vandiepenbeeck: For the third quarter, we anticipate organic sales goals of mid-single digits. I adjusted Sigma Damage in of approximately 17.5% and adjusted EPS in a range of $0.97 to $1.
Marc Vandiepenbeeck: For the full year, we are maintaining for organic sales growth of mid-single digit as our continuous ranking orders and a resilient backlog provide visibility into the second half.
Marc Vandiepenbeeck: With our strong start to the year and continue the improvement in our operational efficiencies, we are raising of full-year guidance for Marchings, Adjusted EPS, and Free Cash Flow Conversion.
Marc Vandiepenbeeck: We know and anticipate that just a segment EBDA is pushing to expand Roxy 90-day response and adjusted APS to approximate $3.60 per share, representing hopefully 12% growth.
Marc Vandiepenbeeck: Our working capital metrics have consistently improved, and our free cash flow performance has been stronger to date. As a result, we know and dissipate achieving free cash flow conversion of approximately 100% for the full year.
Marc Vandiepenbeeck: We continue to target returning 100% of our free cash flow to shareholder through dividend and sharey purchases.
Marc Vandiepenbeeck: Lastly, or updated guidance, consider the current geopolitical environment, including tariffs.
Marc Vandiepenbeeck: Based on the regulatory environment as we know it today, we believe our annualized exposure to tariff before mitigating actions is approximately 2% of sales or 3% of cost of goods all.
Marc Vandiepenbeeck: As you can see on slide 11, we have activated many levels to enhance our resilience and mitigate the expected impact from tariffs.
Marc Vandiepenbeeck: This includes strengthening or in-region for-region manufacturing strategy, dynamically transforming of supply chain by pivoting to local sources, accelerating or pricing action, and asserting of contractual ride to the change all those.
Marc Vandiepenbeeck: We believe by leveraging the strategies coupled with our long cycle business and resilience service mix, we have the capability to navigate the complexities of the current geopolitical landscape and continue to deliver strong performance.
Joachim Weidemannis: Before opening the lines for question, I would like to turn the call over back to Joaquim for a few additional comments.
Thank you, Marc.
Speaker Change: I'm truly excited to lead this iconic company into this next chapter. As a more focused company, we have a great foundation to build upon. Looking ahead, my initial priorities are to increase our teams focus on customers and continue to develop and strengthen our ability to execute for the customer.
Speaker Change: I would like to take a moment to recognize and thank Marc for his continued impact on Johnson Controls, not just over his nearly 20-year career but in particular as our CFO since January 2024.
Speaker Change: While we've only worked together for just two months now, he is a strong partner and has helped me get up to speed. I enjoy partnering with him and look forward to continuing to do so.
Speaker Change: I also want to recognize George Oliver for his support as I stepped into the role as CEO and for his significant contributions over the last eight years. He has set us up well for our next chapter.
Speaker Change: Finally, I'm looking forward to engaging with many of you, the investors and analysts that I have crossed paths with since earlier in my career at Matt Lerslito, and then during my 13 years at Danher.
Speaker Change: I expect to continue to seek your input and perspectives as part of my effort to build transparent and constructive relationships. My goal is to help our team unlock the true potential and build a winning, sustainable, high-performance company as measured by all of our stakeholders.
With that operator, please open the lines for questions.
Speaker Change: We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone.
Speaker Change: If you're using a speaker phone, please pick up your handset before pressing the keys.
To withdraw your question, please press star them too.
Speaker Change: In respect of time, we ask you to limit yourself to one question and one follow-up question.
Speaker Change: At this time, we will pause momentarily to assemble the roster.
Speaker Change: And our first question will come from Scott Davis of Melius Research. Please go ahead.
Speaker Change: Hey, funny guys. Thanks, Scott. You're welcome to your first call. Thank you, Scott. Hey, hey.
Scott Davis: I know this is a little bit of a conceptual question, but yeah, how do you plan to kind of launch lean or deploy lean, I should say?
Scott Davis: and an organization in this large. And maybe the better question to ask, really, is how ready is the organization? Have they already been, has already been some lean implemented? And, you know, how broad I guess? [inaudible]
I'll just kind of open it up to that
Yeah, thanks for that question Scott and
Speaker Change: I know you are one of several people on this call who is quite familiar with what Lin is about, but just a reminder, it's an approach to align an entire organization towards the customer.
Speaker Change: and then involving all of your people, not just manufacturing, but everyone in waste elimination building stronger processes capability so that you can execute faster for the customer and in doing so, becoming faster and more competitive, but also, of course, taking out. [inaudible]
Cost and Capital
Speaker Change: So to answer your question, I mean, the interesting thing here is that was, and it was a long time ago, but some of the automotive connections, there are some remnants of lean in a few places in this company.
But the foundation is not very strong.
Speaker Change: But the interest is there. People have seen some of it in the past. So there's an open-mindedness to it, which is great. That's not always the case in my experience with all the acquisitions that have been involved in over the years. So I'm happy to see that. Now, where do you start? I'm going to start.
Speaker Change: I mean, you typically tick a value stream, for example, a product line, and you take an end-to-end approach starting with a customer.
all the way through your installation. [inaudible]
all the way through the factory. [inaudible]
Speaker Change: all the way back to suppliers as well as the order entry days and so on.
Speaker Change: and you basically value stream and map issues, opportunities for improvement. Already in my first eight weeks here, it's fairly clear what a couple of value streams would be where we're going to start.
and, as a matter of fact, we have already started...
Speaker Change: slowly working on one value stream. So it's a matter of prioritizing. You can't boil the ocean and do it everywhere. You have to pick a value stream at a time.
Speaker Change: But I'm really excited about it. I see that there are tremendous opportunities for us here, applying lean execution fundamentals.
Speaker Change: So you came just to follow up on that. I mean, you mentioned the too many SKUs or too much complexity in the SKUs one kind of other way. Do you expect those value streams to kind of lead you down the path of SKU rationalization or is that a separate kind of hurdle?
Speaker Change: Now, you do it together. So as you're taking it on the value stream, I mean that's you will discover as you go map the challenges that you have in that value stream, you fairly early in my experience, you'll find those kinds of complexities. Thank you very much.
Speaker Change: and so we'll go after them. Now we have a separate exercise that we've started attacking the SKU proliferation that we have. So there's some low-hanging fruit that we can go after before we start attacking each value stream.
I'm sorry. I'm sorry. I'm sorry. I'm sorry.
The next question comes from Steve.
and Steve Toussaint of J.P. Morgan. Please go ahead.
Hi, good morning.
and Steve, good morning, Steve!
Um...
Speaker Change: and I guess just thinking about that a little bit of a step further on the entitlement of these businesses, I think we've looked at it in the past.
Speaker Change: Perhaps JCI has a lower margin entitlement due to its business model of...
You know, a bit more kind of field labor. [inaudible]
Speaker Change: projects. How do we think about the entitlement of this business? Can we look at some of the publicly traded peers and think about your margins being able to go there? Or is there some sort of ceiling due to the business model that you see?
Speaker Change: The way I see it, Steve, is that in addition to the product side, we have tremendous opportunity on the margins and the field as well.
Speaker Change: And, you know, this value stream mapping that I was talking about, you know, applies to, you know, how we can approach growth unlocking further growth as well as margins in the field.
Speaker Change: and of course there are also, you know, not just process but there are digital tools and approaches.
Speaker Change: available to us that could enable us to grow the margins very nicely in the field. So I don't see that we would have a bigger limit on the margin expansion here than any of our peers, not at all.
Speaker Change: Okay, got it, and then as far as portfolio is concerned, how do you think about this portfolio? Do you like the construct with fire and security and HVAC and controls integrated? Or is that something that you're poking around at as well? [inaudible]
So, yeah, so I'm here to create shareholder value. Thank you.
Speaker Change: And then the first thing you have to do when you're looking at portfolio, which is, you know, looking at what you have or potential acquisitions, you need to start with strategy, of course. So, as I mentioned in the introduction here.
Speaker Change: I am taking a pretty deep and fresh look at our strategy.
Speaker Change: for the entire business as well as the individual pieces. And I'm just eight weeks in.
Speaker Change: But of course you see some patterns and you draw some conclusions already. Now you need to be a little careful because I am only eight weeks in. So at the appropriate time I'll come back and share more of what I've learned and what I think is the right thing for Johnson Controls.
Speaker Change: The next question comes from Nigel Coe of Wolf Research. Please go ahead.
Nigel Coe: Thanks, good morning, and Joe can appreciate the open remarks, very helpful. I wanted to actually start off with free cash flow because you raised the guidance to about 100% with obviously very strong performance in the first half of the year.
Nigel Coe: So I'm just wondering, you know, obviously that's been a big initiative for you, Marc, to improve the free cash conversion. So, you know, what is the right level going forward? Are we now at a point where free cash conversion can be at that hundred percent level in 26 million?
and Model, the strength of a working capital. [inaudible]
Nigel Coe: structure and how we've continuously improved our processes, really start generating value across the entirety of the working capital, whether it's a receivable ability to build and collect on time, managing or payable, but particularly working on our inventory and not having to build too much inventory as we continue to grow fairly rapidly.
Nigel Coe: Those working capital metrics continue to improve. We have those fundamental headwinds that we've talked about that, that are not changing in the coming couple of years. So I think it's a bit early for me to tell you like we're going to be a hundred percent all the way forever. But I think I see good signs for us to be solidly in the 90s and probably better as we continue to improve those operational efficiencies through the working capital. [inaudible]
That's great here, and then Joker, I know it's...
Nigel Coe: 30 days, and you've been in the seat for eight weeks, so. But, you know, Dana Herz, obviously, a company that's, you know,
Nigel Coe: devotes more than 100% of the three cash votes to attack physicians. And JCI's commitment is more on the returning capital to shareholders. So, where do you stand on cap allocation going forward? Do you think the scope for JCI to be more positive? Or are you committed to that that that children return?
Nigel Coe: So, I think the work I'm doing on the strategy together with the team here is going to help us answer that question.
Nigel Coe: Now, I do think that there are opportunities with some of our franchises to continue to differentiate with a technology angle.
Nigel Coe: and so part of the strategic work that I'm doing is to explore how to do that at pace, but...
Nigel Coe: Like I said, I'm digging into the strategy right now, I'm taking a fresh independent look from the past, if you will, and then based on that. When I'm ready, I will come back and talk more about what that means for the capital allocation strategy. Thank you.
Speaker Change: The next question comes from Amit Mehrotra of UBS. Please go ahead.
Thanks. Good morning. Welcome, Yokem.
Speaker Change: As you think about positioning the business for higher returns, I guess I'm trying to understand the drivers of that between cost out and cost leverage.
Specifically, is there an opportunity for absolute? [inaudible]
Speaker Change: Cost takeout, which I assume could be executed on relatively quickly, or is this really more about leveraging the existing service network and service cost base?
Speaker Change: via, you know, a higher service attachment, which is obviously seems like maybe it's a little bit more of a longer cycle journey. I'm just trying to...
Speaker Change: We're Wall Street analysts, so we're not very patient, but until as a result we want to calibrate my expectations or expectations on what the organization can do with anything in the near term to improve margins.
Speaker Change: Yeah, you know, I think the reality is, it's a situation that we're going to be doing both.
Speaker Change: and I've seen this situation before, by the way, so if we take the field, the service capabilities, we have 40,000 people in the field, they're in sales as well. But there, I would say there's more about cost leverage.
Speaker Change: You know, it takes decades to build a field position that we have. I mean, it's really an enviable position.
Speaker Change: But so there it's more leverage. So there will be working on process efficiencies, getting more capacity out of the people that we have digital approaches, as well as service offerings.
and then applying lean principles. [inaudible]
which is really about, like I said, removing waste. [inaudible]
Speaker Change: increasing speed and being able to execute more predictably. But as you do that, you invariably find costs takeout and capital takeout opportunities. So I think away from the field, it's a combination of leverage, but there's where you're probably going to see more costs takeout. Thank you very much.
Speaker Change: Okay. And then just maybe one for Marc, if I could. So I just with the pending divestiture of Rezzi like commercial, I just think the business is obviously evolving into a much more longer cycle business. And I'd be curious to kind of.
Speaker Change: Understand as you enter into new contracts and orders, how you manage the pricing of those contracts, just given the backdrop of inflation and obviously tariffs. Basically, how do you just ensure the pricing of the backlog reflects some of those uncertainties in kind of moving parts? Okay, so that's all for now.
Speaker Change: Yes, over the past couple of years, we've implemented very strong contractual terms that allows us both to reprise, as we see, potential inflation, but also manage better change order. You know, as you might have gone through the history, we had some delay in our ability to execute on our pricing strategy earlier on during the high inflation periods. We've now completely overhauled our approach there.
Speaker Change: and it's not just our contractual term, but it's our ability to execute on those change order and get after the benefit you're entitled under your contractual agreement and all of the process that come behind on being able to actually price costs and defend to the customer the value you've generated for them.
Joe Ritchie: The next question comes from Joe Richie of Goldman Sachs. Please go ahead.
Joe Ritchie: Hi, good morning, and welcome, Yokem, the board to working with you. Thank you.
Yeah, so um...
Joe Ritchie: You know, the company right now is signed up for some really nice margin expansion this year, right? You know, the 90 basis points.
Joe Ritchie: I'm curious as you're thinking about kind of like the medium term opportunity, I know again early days, should we be expecting, you know, some similar level of margin expansion beyond this year, just any way that you can either, either,
Joe Ritchie: You know, help quantify or maybe come back to us in a later date on how you're seeing the opportunities to develop. Thank you very much.
Yeah, so I see...
Very interesting opportunities to both accelerate growth.
Joe Ritchie: and improved margins. And I talked a little bit about, you know, how I think, you know, by shifting how we work.
Joe Ritchie: being much more customer and competitor-oriented and implementing lean approaches to improve our operational execution.
Joe Ritchie: So I think we're going to see both, as we discussed here, opportunities from the leverage of resources, assets that we already have as well as cost reductions.
Um
Joe Ritchie: I'm actually really excited about what we could do here over the next couple of years, and I really see no reason for why we couldn't reach or surpass over time, and I will come back to the timing of that, you know, where some of our competitors are at today.
Joe Ritchie: I will have to think about how quickly we can get to some of the profitability levels that prior businesses that I've run.
Joe Ritchie: and I'll have to come back to that at a later point in time, but I see us as having really, really compelling opportunities here.
Speaker Change: Great, yeah, that sounds great. We're looking forward to that update and then maybe just on the, you know, fundamentals of business today. Let's see what we can do today.
Speaker Change: I'm curious, there's been still a lot of consternation around data center growth. We ended up visiting you guys at Data Center World a few weeks ago.
Speaker Change: It also sounded like you were in the process of potentially, you know, coming out with a liquid cooling product. And so can you just maybe just provide an update how that business is trending with the expectations are for just investments and new product rollout. Thank you. Yeah, sure. So that's that's why I have been able to dig into. Thank you.
Speaker Change: in depth. And I've met with many of the largest customers that we have. So here's actually a part of the company where we have been more customer-oriented, I would say to none other parts of the business. And I don't mean to suggest that we're not customer-oriented overall. I just...
Speaker Change: I'm suggesting we can be even more customer-oriented, but here in the data center business, as some of you probably know, you know, we've worked with some of the largest customers with their engineering teams over the last couple of years to help them design their architecture of their data centers.
Speaker Change: and so we're working very closely with them, and the reason we have been invited and are doing so is our differentiated, high performance, you know, York Chiller platform, efficiencies water consumption and so on.
Speaker Change: and so we have a very good position in this market and the demand as many of you have written about.
Speaker Change: is continues to be very, very healthy. And we don't see that...
Speaker Change: and decreasing the rate of growth there at all over the next couple of years. So we're super excited about our continued growth there and what we can do based on the differentiation we have today. Thank you.
Speaker Change: and maybe I could add a little bit more color. [inaudible]
Speaker Change: That market, of course, as many of you have written about, is a large part of it, is in North America, but a growing part of it is an Asia pack, Europe is a little bit behind from a market point of view. I'm not talking about our sales now, but the market. [inaudible]
Speaker Change: and as our large global customers have started to expand into Asia, because of the work that we've done with them here in North America, you know, we are. Thank you very much.
Speaker Change: because these are more mission-critical applications. You know, the service capabilities are incredibly important.
Speaker Change: So we're capitalizing on that, as well as investing, not just in manufacturing, I think that's something we've talked about, probably prior calls, but we're also investing in the field here with specific data center competencies so
Speaker Change: So I'm really excited about what we're going to be able to continue to do in the data center world.
Julian Mitchell: The next question comes from Julian Mitchell of Barclays. Please go ahead.
Julian Mitchell: Hi, good morning and welcome Joachim. Maybe the first question is just on the margin outlook in the short term. So your operating margins were up I think close to 200 bips in the first half year on year, you know, second half looks like it's guided sort of flatish year on year. Just wondered, you know, how much of that is a tariff? [inaudible]
Julian Mitchell: Margin rate headwind, how much is maybe something going on with mix and BSNA, certainly the margins were down in the second quarter. Any sort of thoughts on how that plays out from here please. Thanks for your time.
Joachim Weidemannis: Yeah, great question, Julian. So on the BSNA element here, as I mentioned in the opening remarks, some of that leverage, you see the improvement in margin at global product, benefiting from the volume that BSNA is managed to pull through. And as we segment, and that's one of the bigger reason to do such a thing, is you're going to have a more harmonized view of how the Americas would look like. We've shown you a little bit of these
Joachim Weidemannis: The historic pattern, but very shortly, we will issue a harder second quarter, shaped out under that new, resegmented view of the business. And you will see that benefit and that continues in improvement in marching, coming through the America segments.
Joachim Weidemannis: As far as how we've guided the balance of the year, you're right, there's on a margin rate standpoint, we have taken an approach where we are recovering the vast majority of the impact. [inaudible]
Joachim Weidemannis: that we see from the tariff environment, but we are not applying margin on a lot of that and what that comes down to is it puts a little bit of a damper on our ability short term to improve that margin, but it doesn't really change that momentum over time. As we continue to take a lot of actions on simplifying our operating model and leaning out of cost structure, I think we will see some some photos websites as we will be able to do that in the future.
Navigate through that tariff momentum in the next year.
That's great. Thank you. And then maybe one for…
Speaker Change: Yeah, Kim, maybe just sort of fire insecurity market, you know, it's undergrown HVAC for some time. I think this quarter it sort of flatish sales in BSNA up only low single and global products. You called out the franchise strength at the beginning in York and metasis. So just wanted sort of what are your initial impressions of the fire and security? [inaudible]
Speaker Change: Portfolio, I imagine there's a very broad range of performance and metrics within it, but any sort of broad-brushed perspectives and how easy do you think it is to rejuvenate growth there? Yeah.
Speaker Change: Yeah, I think those are the fire and security franchises are also strong franchises for us. And what I have to learn more about is, as you pointed out, you know, that what is the growth acceleration potential there?
Speaker Change: and I think it's a little too early for me to offer a conclusion on that, but part of my strategy work is trying to understand what could we expect to realistically get out of the individual franchises.
Speaker Change: and I have to come back on that, but you know, I-
Speaker Change: As many of you know from Dan or you know, not all franchises grew at the same rates, not all franchises had the same profitability levels or a cash flow contributions right so. [inaudible]
Speaker Change: So I'm thinking about, you know, could there be different roles that different parts of the portfolio plays for us, right? Not only...
Speaker Change: in terms of what should we be in, or what should we not be in, right? So I'm taking a rich fresh
Speaker Change: Dispassionate look at our strategy and what's possible in the market with what we have and based on that I'm going to come back and share with you at the appropriate point of time when I think it is the right thing for us to do. Thank you.
Noah Kay: The next question comes from Noah Kaye of Appenheimer. Please go ahead.
Noah Kay: Hey, thanks. Mark, I just want to follow up on Julian's question around the margin impacts. So is it possible to kind of dimension for us, you know, the assumption around the gross cost inflation, or even the net cost inflation as a margin headwind?
Noah Kay: Yeah, I would think about it not so much as a headwind, but as a dampener in our ability to continue to expand margin, you know, if you look at the second half or anticipation is the America segment was going to be able to...
Noah Kay: Dray's further malging expansion, and as we have to pass through some of that impact...
Noah Kay: of Sarif, whether it's a $1.00 or sometimes just changing a little bit of supply chain and incurring some short-term cost as we pivot.
some of that supply chain to a more localized, originalized. [inaudible]
Noah Kay: product solution. We end up with some costs that we can recover $4.00, just not apply, or gross margin rate, and not making an earnings opportunity. As you know, we for a lot of our businesses. This is a lot of money, but it's a lot of money, and it's a lot of money, and it's a lot of money.
Noah Kay: We enter into relationships that last multiple decades as that piece of equipment gets service throughout the life cycle. And we want to be remembered as a team that manage and navigate it through the tariff situation in a manner that our customer will continue to perceive as a fair balance, but where we have to recover $$4.00 or cost impact result.
trying to get marching on top.
Speaker Change: I appreciate that strategy. And then you talked at the beginning about the streamlined operating model, really going through the regions.
Noah Kay: You also mentioned the data set their business as a very good example of where JCI is strong.
Speaker Change: You know, anything back to a little under a year ago when there was basically a global organization.
formed around some excellence and go to market and data centers. So,
Speaker Change: Just thinking about, you know, that as an example, is there a blueprint here for, you know, creating any kind of new infrastructure within the company from a sort of product to go to market perspective at a global level? And where might that focus be if so?
Speaker Change: I don't have any new structures in mind in addition to what I discussed here earlier, but within that structure there are dedicated resources on the regional side for major verticals and data centers is a major vertical.
Speaker Change: and on the product and solution side there are of course the R&D engineers teams dedicated to data centers and
Speaker Change: Some of our factories happen to have, you know, manufacturing lines dedicated to data centers, so...
Speaker Change: So within that structure, of course, there will be for the verticals or customer groups where it's warranted, there will be teams that are a little bit more dedicated. And so what I would anticipate though is that in addition to data centers, over time,
Speaker Change: and we'll see what my strategy work leads to exactly here, but I would expect that in addition to data centers that we might have a few more vertically oriented teams within our regions and global products and solutions.
Speaker Change: Obviously focused on verticals where we believe that there are larger and more imminent growth opportunities. So I think the structure overall is set and then how you activate it for particular growth opportunities. Thank you.
Speaker Change: You know, within the structure we might choose to focus some resources, just like we've done for data centers, and then we'll continue to do so.
Speaker Change: By the way, I mean, that's our structure here. I don't want to downplay what we've announced, but...
Speaker Change: You know, it's sort of a very logical structure and it's one that, of course, is tried and proven and that I've seen and worked with and
Speaker Change: and other companies, right? And so what I just talked about there is based on my personal experience in other industries where you had multi-vertical plays, but you needed to have global geographical coverage. You needed to have R&D teams that are focused on technologies. Thank you.
Speaker Change: platforms, but when it comes to applying them in specific vertically oriented products, you need to organize a little differently inside these teams. So it's a well-tried and proven approach that I'm very familiar with the way we're what I talked about here.
Speaker Change: The next question comes from Chris Snyder of Morgan Stanley . Please go ahead.
Chris Snyder: Thank you. I wanted to follow up on some of the data center commentary, you know obviously a marker that you guys have been in for a long time but...
Chris Snyder: You know, just given the, I guess, more rapid growth in history, it does feel like there are, you know, maybe new entrants or new competitors more focused on the market. Has there been any change in the competitive environment and data center, versus two or three years ago? And what could that mean for JCI? Thank you. Thank you.
Marc Vandiepenbeeck: So here, I'm going to have to defer to Marc because, you know, I'm eight weeks in, so I've done a lot of studying who's in it now, but Marc.
Marc Vandiepenbeeck: commercially it's the fastest growing market and saw a lot of
adjacent industries have started to look at.
cooling as an opportunity for them to expand.
Marc Vandiepenbeeck: I think that's where the 140-year experience in creating, differentiated...
Marc Vandiepenbeeck: solution for customer and technological advantage plays a critical role. So yes, you've seen new entrance over the last three years.
Marc Vandiepenbeeck: coming in with products that are very attractive but don't create the technological advantage that we've been able to get to. We have a particular your product.
Marc Vandiepenbeeck: that has a very wide operating range, and that provides to a customer with a global single platform where they can expand and standardize their infrastructure and that ability to continuously engineer, iterate and improve on the leading product I think provides a real differentiated value for customers.
Speaker Change: Yeah, thank you. Yeah, I think maybe if I could add to that. I mean, I was at our global R&D Center for high performance HVAC chillers here on Friday.
digging deep into our technology capabilities. And, uh,
Speaker Change: I mean, at the end of the day with new entrance and new evolutions of how you configure a data center and so on, there will be more opportunities for us. But at the end of the day, you need to get heat out of that server room.
Speaker Change: And at the end of the day, our chiller, it's kind of like the aircraft engine.
You need the highest performing aircraft engine.
that doesn't take...
Speaker Change: Power away because you want power to drive the chips, right?
Speaker Change: and to design and manufacture a high-performance, chiller Think Aircraft engine at the levels that we're performing. You know, that is not something you learn in 10 or 20 years. Yes, this is...
Speaker Change: built on unique know-how that we've developed over decades. And it's not just to know-how, it's also how our products are configured. And I don't want to go into all the details with that right now, but obviously having this know-how, there are parts of the chiller. Thank you very much.
Speaker Change: Technology-based differentiation is built on that we don't buy off the shelf.
Speaker Change: Parts like new answer and so are other people might might do so we've designed modules that are application specific and thereby you know we're able to just.
Speaker Change: to beat out more performance out of our high performance chillers than many other people can. So, from a bit, it would be a great need for high performance chillers and this place to our strengths.
Speaker Change: and everybody's continuing to evolve, of course, but I do think we really are very well positioned here.
Speaker Change: Thank you. I appreciate that. And then maybe just following up and I'd be interested to hear your views on installation. There's always a lot of question and focus on JCI's installation business. And then any color on just the ability to make sure that installation is ultimately kind of being the engine that's driving the aftermarket service side of the house. Thank you. Thank you.
Sure.
Speaker Change: You know, I think that's one of those questions that's not black and white, right? So part of my strategy work that I'm doing right now is that exact topic.
Speaker Change: and I'll give you an example of how we approach that. I mean, it's very pragmatic.
Speaker Change: You know, we're taking a look at, you know, hundreds of projects where we did different degrees of installation, you know, because we don't always do 100% of all the installation for our products, right?
Speaker Change: And then we're looking at the financial performance of that. We're looking at the how competitive we were with or without installation. We can see that from our pipeline data.
Speaker Change: and then we're looking at the actual in-the-real world linkage to a service contract attachment.
Speaker Change: and to answer some of the questions that you're raising here. And I think it's time to do that. And I would expect that the conclusion is going to be not black and white either. I think the conclusion most likely is going to be that...
Speaker Change: under these and these circumstances, for these and these types of customers, for these and these types of products.
Speaker Change: Installation with this and this scope makes sense for us competitively financially and from a service attached point of view. And very likely we'll conclude that in some other instances, it does not make sense.
Speaker Change: But I think we're just trying to develop greater clarity on how to win, how to execute.
Speaker Change: and not just with the systems up front, but of course over the lifecycle. And I'll come back at a later point in time and share more details about that. It's hardly a unique situation, by the way. I've seen this kind of.
Speaker Change: situation in other businesses in my career. So I'm actually excited about this is one simplification. When I was talking about simplification and complexities, this is one area that we're digging into under that top headline. Thank you very much.
Speaker Change: The next question comes from Andrew Obin of Think of America. Please go ahead.
I guess good morning.
Speaker Change: Andrew. Morning. Good morning. Welcome. Yeah, thank you. Just a question I want to apply. You definitely called out strength in data centers. What are the other verticals driving applied growth and other any vertical sort of creating headwinds that you worried about?
Speaker Change: So broadly, I mean, most of our verticals are actually performing pretty well. I mean, I also read perhaps some of the same industry reports that some of you read Dodge, ABI and so on.
Speaker Change: So, a few weeks ago, I started to not just look into how we're performing by verticals, which is sort of rear view mirror, you know, the orders and the sales but also look at leading indicators to try and understand what might be coming our way.
Speaker Change: and so really the conclusion is that, you know, fairly broad, we're fairly broad-based, good growth.
Speaker Change: and in terms of the leading indicators, at this point in time, we don't see any slowdown in some of the areas that you might think there would be slowdowns in based on Dodge and ABI. Now, of course, we're exiting like commercial.
Speaker Change: The next question comes from Nicole DeBlase of Deutsche Bank. Please go ahead.
I guess maybe just starting with a question on…
Speaker Change: Price versus volume, presumably with tariffs coming into the fray in the back half. You guys have probably raised your expectation for pricing I'm guessing. Did you invent any sort of contingency with respect to volume just because of all the macro uncertainty? Or are you taking a view, hey, we have a really robust backlog, as you mentioned, the leading indicators look good. And so there's no expectation of significant volume do you sell in the back half? Yeah.
Speaker Change: Now, if you look at, first of all, how we think about price versus products, particularly in our building solutions business, the scope of that business, each job vary year on year. And so it's not so much about the number of units you sell and the volume price dynamics become a bit complicated. It's more about the value you're providing to a customer. And if we are pricing appropriately, then you see the margin continuously benefit from that. [inaudible]
in terms of what we see from a macro level.
The level of macro uncertainty [inaudible]
Speaker Change: remains pretty high after all of the tariff impact. And while we are mostly a long cycle business, whether it's on our systems,
or service businesses, we still have a...
Speaker Change: called it 25% of the company that's short of cycle in nature and we have built in some perspective on what could potentially happen to some of our end markets and vertical as some of that uncertainty is built into our guide. [inaudible]
Speaker Change: The next question comes from Andy Kaplowitz of Citigroup. Please go ahead.
Good morning, everyone.
Speaker Change: Good morning, Andy. Good morning. Paul Joseph has already been asked to come on late but just want to focus on service for a second. I know it's been a big priority for GCI over time. You know, Joe Kim, as you come and look at the business, where do you think attachment rates couldn't go over time? And you know, what does GCI have to do to sort of continue to improve attachment? I don't know. I don't know. I don't know. I don't know.
Speaker Change: And you may have heard that I also think that our 40,000 people in the field is really an enviable, you know, positions out. That's something that's been built over decades, right?
Speaker Change: and as some of you asked in terms of margin improvement, and so on, when I answered that, you know, what could we do in the field? I think there's more about leverage. How do we build more capacity with lean approaches, process improvement, digital approaches, and so on so that we can get even more out of our...
Speaker Change: and our field colleagues, not just capacity, but response time as well, which is an important element when you're in a service business, right? It's menu and time to respond as what defines your competitive advantage, right? Um, um,
Speaker Change: So, I think if I look at some of the attachment rates that we have in some of our businesses today, I see very interesting opportunities for improvement.
Speaker Change: and I don't want to go into exact numbers right now. Maybe I can come back to that at another point in time.
Speaker Change: But I don't see why we couldn't move the attachment rates to something much higher than where we're at today, over time.
Thank you. Bye bye.
Speaker Change: So as excited as I am about applying lean, you know, overall, you know, just a reminder for everyone, it's I'm not talking about factories yet only right of course I'm including that but I'm I'm thinking about applying lean in our service businesses as well as you know all of our back offices and in the corporate overhead as well over time here, but I hate service I think is a tremendous opportunity for us.
Thank you.
Dean Dre: The next question comes from Dean Dray of RBC Capital Markets. Please go ahead.
Bye!
Speaker Change: Thank you, good morning everyone, and I'll add my welcome to you, Kim.
Hey Dean, how are you?
Speaker Change: Hey, do we really well? You're almost said your first conference call into your belt, so congrats.
Thanks, Deane.
Speaker Change: Hey, in the interest of time, I'll keep it to one question. And, you know, the surprise for us in the release today, it's a pleasant surprise that your guidance is a single point of 360. And you still have, you know, the back half of the year to go. That's pretty precise. And this is a quarter where a number of industries are actually pulling guidance. [inaudible]
Speaker Change: and you're doing kind of the opposite, which speaks to, you know, a question about your degree of confidence and the earnings visibility and the backlog of strength and so forth. How did that all come together and what's your thoughts on earnings visibility? [inaudible]
Speaker Change: Yeah. Well, first of all, maybe I should say, you know, I think that of everything I've read, you should not increase guidance when you're at the New C.A.L. But then as Mark discussed here, and as I said in my commentary, you know, we we do have
Speaker Change: and very good visibility. Some of our parts of our business is long cycle. And then the recurring part of our business is a significant part as well.
if you do the math. [inaudible]
Speaker Change: We're in a good position here. I've gone through this math with my partner Mark here multiple times, going back to my first comment in great details. It's really based on how we're positioned with the backlog, the long cycle and the recurring.
Speaker Change: and the actions that we've already started to implement on the tariff countermeasures, as I mentioned here so.
So that's kind of the background.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to your welcome, White Amanda, for any closing remarks.
Joachim Weidemanis: Great, thank you for that. And before I start with the closing remarks, it was great to reconnect with several of you over the last couple of weeks and on this call. You know, I believe the partnership, the interaction, the questions you ask help make us better and think about things in a better way. So thank you for that.
Speaker Change: but to quickly recap, we're pleased with our strong second quarter results.
Speaker Change: A record backlog and strengthen orders show broad-based demand for our differentiated solutions.
Speaker Change: and we have continued momentum underway. And now we're the more focused portfolio and simpler organizational model and over time stronger customer orientation and lean enabled execution. We're well positioned to accelerate value for all of our customers and shareholders.
Speaker Change: and I want to really thank our dedicated team around the world and to all of you for joining today's earnings call. I look forward to continuing the discussion over the next quarters and with that operator that concludes our call.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.