Q3 2025 Johnson Controls International PLC Earnings Call
Nadia: Q3 2025 earnings conference call. My name is Nadia and I'll be coordinating the call today. If you would like to ask a question at the end of the presentation, please press star followed by one on your telephone keypad.
Hello everyone and welcome to the Johnson Controls Q3 2025 earnings conference call.
My name is Nadia, and I'll be coordinating the call today.
Jim Lucas: I will now hand the call over to Jim Lucas, Vice President, Investor Relations, to begin. Jim, please go ahead.
if you would like to ask a question at the end of the presentation, please press star followed by 1 on your telephone keypad,
Jim Lucas: Good morning, and thank you for joining our conference call to discuss Johnson Controls fiscal third quarter 2025. Joining me on the call today are Johnson Controls Chief Executive Officer Joakim Weidemanis and Marc Vandiepenbeck, our Chief Financial Officer.
I will now hand the call over to Jim Lucas. Vice president in better relations to begin Jim. Please go ahead.
Jim Lucas: Before we begin, let me remind you that during our presentation today, we will make four looking statements that reflect our current views about our future performance and financial These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Please refer to our SEC filings for a list of these important risk factors that could cause actual results to differ from our predictions. We will also reference certain non-GAAP measures throughout today's presentation.
Good morning and thank you for joining our conference call to discuss Johnson Controls fiscal, third quarter, 2025 results, joining me on the call today are Johnson Controls chief executive officer you'll come. Wait a minute and mark them, deepen back, our Chief Financial Officer. Before we begin, let me remind you that during our presentation today, we will make 4 looking statements that reflect our current views about our future performance and financial results.
These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Please refer to our SEC filings for a list of these important risk factors that could cause actual results to differ from our predictions.
Jim Lucas: Reconciliations of these non-GAAP measures are contained in the schedules attached to our press release and in the appendix to this presentation, both of which can be found on the Investor Relations section of Johnson Controls' website.
Joakim Weidemanis: I will now turn the call over to Joakim. Thanks, Jim, and good morning, everyone. Thank you for joining us on today's call. This morning, we announced strong third-quarter results, continuing the momentum we've sustained throughout the year. Organic sales grew 6 percent, segment margins expanded 20 basis points to 17.6 percent, and adjusted EPS grew 11 percent and exceeded our guidance. Year-to-date adjusted free cash flow has nearly doubled to $1.8 billion and we are on track to deliver over 100% free cash flow conversion for the year. Orders grew 2% led by strength in the Americas and offset by ongoing softness in China.
Reconciliations of these non-gaap measures are contained in the schedules attached to our press release, and in the appendix, to this presentation, both of which can be found on the investor relations section of Johnson Controls website. I will now turn the call over to Yoakum
Thanks Jen and good morning everyone. Thank you for joining us on today's. Call this morning, we announced strong third quarter results, continuing the momentum, we've sustained throughout the year, organic sales, grew 6%, segment margins expanded, 20 basis points to 17.6% and adjusted EPS grew 11% and exceeded our guidance.
Year-to-date adjusted free cash flow has nearly doubled to $1.8 billion, and we are on track to deliver over 100% free cash flow conversion for the year.
Joakim Weidemanis: Our backlog grew 11% to $14.6 billion and remains at record levels. We continue to see strength in demand for both our systems and services.
Joakim Weidemanis: We are now building an even stronger foundation for long-term success by developing a business system focused on simplifying operations, accelerating growth, and scaling our impact. This includes sharpening our focus on what matters most to customers and deploying lean principles to tackle barriers to growth.
Orders grew 2% led by strengthening the Americas and offset by ongoing softness. In China, our backlog. Grew 11% to 14.6 billion dollars and remains at record levels. We continue to see strength and demand for both our systems and Service Solutions.
We are now building an even stronger foundation for long-term. Success by developing a business system focused on simplifying operations, accelerating growth and scaling our impact.
Joakim Weidemanis: We're raising our full year guidance, and Marc will give more details later in the call.
This includes sharpening. Our focus on what matters most to customers and deploying lean principles to tackle barriers to growth.
Joakim Weidemanis: I now have my first quarter under my belt. And tomorrow is my 140th day at a company celebrating 140 years of leadership. That is 140 years of winning with customer driving innovation and supporting the advancement of human society with solutions for smart, productive, safe, and sustainable buildings. After all, the advancement of science, education, health care, and manufacturing occur in buildings.
We're raising our fully your guidance, and Mark will give more details later on the call.
I now have my first quarter under my belt and tomorrow is my 140th day at a company celebrating 140 years of leadership that is 140 years of winning with customers driving Innovation and supporting the advancement of human society, with solutions, for smart productive, safe and sustainable buildings.
Joakim Weidemanis: As we celebrate and reflect upon our history, we believe our best days are still ahead of us. Unlocking our potential depends on placing even greater emphasis on the customer. Our goal is to deliver consistent, predictable results over time and outperform our competition, enabling strong capital allocation and enhancing value for shareholders.
After all the advancement of Science Education Healthcare and Manufacturing occur in buildings as we celebrate and reflect upon our history. We believe our best days are still ahead of us.
Unlocking, our potential depends on placing even greater emphasis on the customer.
Joakim Weidemanis: Since joining Johnson Controls, I've had the opportunity to travel the globe, visiting our largest factories and spending time in the field with our customers and teams. I have visited well over 100 customers, all of our major innovation centers, and walked more than 30 plants. I met with hundreds of our frontline colleagues in sales, service, R&D, and manufacturing. These travels produced insights that will inform our future success as a company. First, we need to sharpen our focus on our customers while also staying ahead of the competition. Customer centricity will fuel accelerated growth by enabling us to win and retain customers more effectively through differentiated offerings and how we serve them.
Our goal is to deliver consistent, predictable results over time and outperform our competition, enabling strong capital allocation and enhancing value for shareholders.
Since joining Johnson Controls, I've had the opportunity to travel the globe, visiting our largest factories and spending time in the field with our customers and teams.
I have visited well over a 100 customers, all of our major Innovation centers, and walked more than 30 plants. I met with hundreds of our Frontline colleagues and sales service R&D and Manufacturing.
These travels produced insights that will inform our future success as a company.
First, we need to sharpen our focus on our customers while also staying ahead of the competition.
Joakim Weidemanis: Second, it's essential that we enhance our investment in R&D to accelerate innovation. Our IP portfolio is strong, with 8,200 patents and more on the way. Our products and solutions deliver results that resonate with our customers. While we possess considerable strength, there remain opportunities to accelerate growth within our core domains by addressing gaps in our product portfolio.
Customer centricity will fuel accelerated growth by enabling us to win and retain customers more effectively through differentiated offerings and how we serve them.
Second, it's essential that we enhance our investment in R&D to accelerate innovation. Our IP portfolio is strong, with 8,200 patents and more on the way.
Our products and solutions deliver results that resonates with our customers.
Joakim Weidemanis: Third, our field position of 40,000 frontline colleagues has been and continues to be a competitive advantage. We see clear opportunities to better equip and support them, making it easier for them to deliver for our customers. By doing so, we can get more leverage from our team and expand capacity and productivity to drive stronger results.
While we possess considerable strengths, there remain opportunities to accelerate growth within our core domains by addressing gaps in our product portfolio.
Joakim Weidemanis: Given the importance of this effort, we recently appointed Chris Scalia as Executive Vice President and Chief Human Resources Officer. Chris brings a unique combination of people and culture strategy, operational excellence and a deep commitment to building high performing We're excited for Chris to hit the ground running as we continue to transform Johnson Controls into a growth-focused, customer-centric powerhouse and a magnet for talent.
Third. Our field position of 40,000 Frontline colleagues has been and continues to be a competitive Advantage. We see clear opportunities to better equip, and support them make. You get easier for them to deliver for our customers by doing. So we can get more leverage from our team and expand capacity and productivity to drive stronger results.
Given the importance of this effort. We recently appointed Chris Galia as Executive Vice President and Chief Human Resources officer. Chris brings a unique combination of people and cultural strategy, operational excellence and a deep commitment to building high-performing teams.
Joakim Weidemanis: As we look ahead to our ongoing transformation, developing a business system and embedding it in our cultural foundation is a critical step in driving long-term success, one that requires dedicated effort, discipline, and patience. My deep experience with proven business systems, combined with spending meaningful time at GEMBA, has helped us shape a clear vision for what this could look like at Johnson Controls. This business system is how we will win and run the company. It will be anchored in proven methodologies like 80-20 and Lean and augmented by digitization and AI. First, 8020 is a powerful operating model that sharpens our focus cutting through complexity so we can concentrate our energy on what matters most to our customers.
We're excited for Chris to hit the ground running, as we continue to transform Johnson Controls into a growth focused, customer Centric Powerhouse and a magnet for talent as we look ahead to our ongoing transformation, developing a business system and embedding it in our cultural Foundation is a critical step in driving long term success 1 that requires dedicated effort, discipline and patience. My deep experience with proven Business Systems combined with spending meaningful time at Gamba has helped us shape a Clear Vision for what this could look like at Johnson Controls.
This business system is how we will win and run the company. It will be anchored in proven methodologies, such as 80/20 and lean, and augmented by digitization and AI.
Joakim Weidemanis: We simplify. Then, adopting principles of lean, we convert this focus into action with a strong orientation of what matters most to our customers. We eliminate waste, streamline workflows, and accelerate processes to drive speed and efficiency across the organization to better serve customers and increase our competitiveness. we accelerate. And throughout the process, we embed digitization and AI as core enablers in our process improvement. This augments our focus and speed with smarter systems and the ability to scale impact for our customers and our people. We scale. So Simplify. Accelerate. Scale.
Our focus is on cutting through complexity so we can concentrate our energy on what matters most to our customers.
we simplify
then adopting principles of lean. We convert this focus into action, with a strong orientation of what matters most to our customers.
We eliminate waste, streamline, workflows and accelerate processes to drive speed and efficiency across the organization to better serve customers and increase our competitiveness.
We accelerate.
And throughout the process, we embed digitization and AI as core enablers in our process improvement. This augments our focus and speed with smarter systems and the ability to scale impact for our customers and our people.
we scale.
so,
Simplify.
Joakim Weidemanis: While we've made progress over the last several quarters, we know that with a strong business system in place, we can accelerate and improve our results over time. We will solve customer problems faster and more effectively by empowering our people. It will become our way of life at Johnson Controls.
Accelerate scale.
Joakim Weidemanis: Our efforts are already underway. Since the last earnings call, we have identified a number of growth blocks. and we are actively addressing. In general, the growth blockers center around the speed of execution and more effectively and efficiently leveraging our existing capabilities in the field and beyond. To ensure speed in decision-making and implementation, it is important to identify the root cause of these growth blockers and develop countermeasures that we can then implement into consistent, repeatable processes. We have started with a narrow focus to deliver results quickly, and then we will scale more rapidly.
While we've made progress over the last several quarters, we know that with a strong business system in place, we can accelerate and improve our results over time. We will solve customer problems. Faster and more effectively by empowering our people. It will become our way of life at Johnson Controls.
Our efforts are already underway since the last earnings call. We have identified a number of growth blockers and we are actively addressing them.
In general, the growth blockers center around the speed of execution and more effectively and efficiently leveraging our existing capabilities in the field and beyond.
To ensure speed and decision-making and implementation. It is important to identify the root cause of these growth blockers and develop, countermeasures that we can then Implement into consistent. Repeatable processes.
Joakim Weidemanis: I can give you two early examples of progress. The first example is in our conventional HVAC. where we're creating value for our customers and our frontline colleagues who serve Our objective is to substantially increase the amount of time our sales teams can dedicate to engaging with customers by streamlining internal processes and eliminating waste that does not contribute direct value to the customer experience. Over the last four weeks, this team has identified specific countermeasures to double time with customers for our seller. This will unlock opportunities to better leverage our enviable field position.
We have started with a narrow Focus to deliver results quickly and then we will scale more broadly.
I can give you 2 early examples of progress. The first example, is in our conventional HVAC business where we're creating value for our customers and our Frontline colleagues who serve them.
Our objective is to substantially increase the amount of time. Our sales teams can dedicate to engaging with customers by streamlining. Internal processes and eliminating waste that does not contribute Direct Value to the customer experience.
Over the last four weeks, this team has identified specific countermeasures to double time with customers for our sellers.
Joakim Weidemanis: Another focus area is improving lead times for our key chillers in North America, where we continue to see dynamic growth in the fast-expanding data center burden. We have an opportunity to cut lead times in half, which will both improve our competitiveness and create additional manufacturing capacity.
This will unlock opportunities to better leverage our enviable field position.
Another Focus area is improving lead times for our key chillers, in North America, where we continue to see Dynamic growth in the fast expanding data center, vertical.
Joakim Weidemanis: As we deliver substantial improvements around the growth blockers we have identified, we can replicate these successes and deploy across our global portfolio. With momentum building, our executive team has been trained on the core foundations of our future business system, and each of them have participated in at least one Kaizen. After countless Kaizens throughout my career, I participated in my first Johnson Controls Kaizen a couple of weeks ago. Over the next few months, we will train our top 200 leaders and ensure their participation in Kaizens and our program overall. As we begin to see tangible results from these early initiatives, we will expand engagement and training across the organization.
We have an opportunity to cut lead times in half which will both improve our competitiveness and create additional manufacturing capacity.
As we deliver, substantial improvements around the growth blockers, we have identified.
We can replicate these successes and deploy across our Global portfolio. With momentum building. Our executive team has been trained on the core foundations of our future business system. And each of them have participated in at least 1 kaisen. After countless kaizens, throughout my career, I participated in my first Johnson Controls kaisen a couple of weeks ago.
over the next few months, we will train our top 200 leaders and ensure their participation in Kaizen and our program overall
Joakim Weidemanis: While we have many opportunities to drive growth through operational improvement and ultimately more consistent predictable results, we're also continuously evaluating and refining our strategy. This has started with a fresh, objective view of all our business lines and Looking ahead, we will evaluate our portfolio and make strategic decisions to ensure sustainable growth through targeted acquisitions or thoughtful exit.
As we begin to see tangible results from these early initiatives, we will expand engagement and training across the organization.
While we have many opportunities to drive growth through, operational Improvement, and ultimately more consistent predictable results. We're also continuously evaluating and refining our strategies
This has started with a fresh objective view of all our business lines and solutions.
Joakim Weidemanis: As we move forward, our focus will progress to a comprehensive review of our operations, including our manufacturing and back office. to further unlock productivity and capacity.
Looking ahead, we will evaluate our portfolio and make strategic decisions to ensure sustainable growth through targeted acquisitions or thoughtful exits.
Joakim Weidemanis: In summary, we believe there are clear opportunities to optimize our portfolio, footprint, cost structure, and the way we work going forward. This is an ongoing process with continued focus on delivering shareholder value.
As we move forward, our Focus will progress to a comprehensive review of our operations, including our manufacturing, and back office networks to further unlock productivity and capacity.
In summary, we believe there are clear opportunities to optimize our portfolio, footprint, cost structure, and the way we work going forward.
Joakim Weidemanis: It has been a productive four months since I started at Johnson Controls. My excitement continues to build as we become more intensely focused on the customer, the people on the front lines who serve them every day and drive adoption of our future business. I look forward to the journey ahead as we work together to deliver even greater value for our customers, team members, and shareholders.
This is an ongoing process with continued focus on delivering shareholder value.
It has been a productive 4 months since I started at Johnson Controls my excitement continues to build as we become more intensely focused on the customer. The people on the front lines, who serve them every day and drive adoption of our future business system.
Marc Vandiepenbeeck: With that, I will now turn it over to Marc. Thanks, Joakim, and good morning, everyone. Turning to slide 6. We deliver strong results in the fiscal third quarter. While the broader environment remains uncertain, our executions continue to drive meaningful results. focus on operational efficiency is helping us to deliver for our customers and reinforce our competitive edge. Our team is committed to generating consistent, long-term value for our shareholders. In the quarter, organic revenue grew 6%. segment margin expanded 20 basis points to 17.6% as we proactively mitigated the impact of tariff through strategic sourcing and cost management initiatives.
That I will now turn it over to mark.
Thank you and good morning, everyone. Turning to slide 6.
We deliver strong result in the fiscal third quarter.
While the broader environment remains uncertain, our execution, continued to drive meaningful results of focus on operational, efficiency is helping us to deliver for customer and reinforce our Competitive Edge.
Our team is committed to generating consistent long-term value for shareholders.
Marc Vandiepenbeeck: adjusted EPS of $1.05, was up 11% year-over-year and exceeded the high end of our guidance range. On the balance sheet, we ended the third quarter with approximately $700 million in available cash. Compared to last year, net debt declined to 2.5 times, which is within our long-term target range of two to two and a half times. Year-to-date adjusted free cash flow improved approximately $900 million year-over-year to $1.8 billion. Strong performance, driven by improved cash conversion, reflect our disciplined financial management and consistent operational execution.
In the quarter, organic Revenue, grew 6% and segment, margin expanded, 20 basis points to 17.6%. As we proactively mitigated the impact of tariff to strategic sourcing and cost management initiatives.
Adjusted EPS of a dollar and 5 cents was up 11% year-over-year and exceeded the high end of our guidance range.
On the balance sheet. We ended the third quarter with approximately 700 million dollar in available cash.
Compared to last year. Net debt, that declined to 2.5 times, which is within our long-term, target range of 2 to 2 and a half times.
Marc Vandiepenbeeck: Let's now discuss our segment results in more detail on slides 7 and 8. Orders in the quarter grew 2% as growth in Americas was muted by softness in China. Customer engagement remains strong and we continue to see healthy activity across our pipeline.
Year to date adjusted free cash flow improved approximately 900 million dollars year-over-year to 1.8 billion dollars. The strong performance driven by improved cash conversion, reflect our discipline financial management and consistent operational execution.
It's not discussed or segment results in more detail on slides 7 and 8.
Others in the quarter, grew 2%, as growth. In America was muted by softness in China.
Marc Vandiepenbeeck: Additionally, the mix of all that is shifting toward higher margin solutions, enforcing a lot of growth and profitability. Geographically, although in America's increased 5%... mid-single-digit growth in systems. In EMEA, orders were up 2% against a tough comp with 6% growth in service offsetting a 1% decline in systems. In APAC, orders were down 8% as a decline in systems more than offset double-digit growth in service. At an enterprise level, organic sales growth was led by solid mid-single-digit growth in both system and service. Sales in Americas were up 7% organically with continuous strength in both HVAC and controls.
Customer engagement remains strong, and we continue to see healthy activity across our pipeline.
Additionally, the mix of order is Shifting toward higher margin Solutions, the enforcing our growth and profitability Outlook geographically orders in America's increase, 5%, is mid single digit growth in systems.
In Amia others were up 2% against a tough comp with 6% growth in service of setting a 1% decline in systems in APAC. Others were done 8% as a decline in system, more than offset, double digit growth in service.
At an Enterprise level, organic sales growth was led by solid. Mid single-digit growth in both system and service.
Marc Vandiepenbeeck: In EMEA, organic sales grew 4% led by 8% growth in service. In APAC, sales grew 6% organically with strong double-digit growth for more resilient service business.
Marc Vandiepenbeeck: We continue to maintain healthy margin through discipline, cost management, and strategic pricing, ensuring profitability even in a dynamic market environment. Operationally, we have driven greater efficiency across our core processes. while improvement in our service mix have allowed us to prioritize higher value offering that enhance customer satisfaction and support long-term profitable growth. By region, EMEA-adjusted segment EBITDA margin expanded 100 basis points to 14.1%, driven by improved productivity and a positive mix of service growth. In APAC, adjusted margins expanded 70 basis points to 19.4% as productivity continued to improve. In America, adjusted margins improved 10 basis points to 18.5% as system growth outpaced service Our backlog remains at record levels, growing 11% to $14.6 billion.
Sales in America were up 7% organically, with continuous strength in both HVAC and controls. In AMIA, organic sales grew 4%, led by 8% growth in service in APAC. Sales grew 6% organically, with strong double-digit growth for a more resilient service business.
We continue to maintain healthy margins through discipline, cost management, and strategic pricing, ensuring profitability even in a dynamic market environment.
Operationally. We have driven greater efficiency across our core processes. While improvement in our service makes have allowed us to prioritize. Higher value offering that enhance customer satisfaction and support long-term profitable growth.
By region eme adjusted segment, EB margin expanded 100 basis points to 14.1% driven by improved productivity and the positive mix of service growth.
In APAC, adjusted margins, expanded, 70 basis points to 19.4% as productivity continued to improve.
in America, adjusted margin improved 10 basis points to 18.5% a system growth outpace, service growth
Marc Vandiepenbeeck: System backlog grew 11% and service backlog grew 8%.
Marc Vandiepenbeeck: Let's now discuss our fiscal fourth quarter and full year guidance on slide nine. As we enter the fourth quarter, we are building on strong momentum driven by enhanced operational efficiencies and a backlog that remains at historical high level. We anticipate organic sales growth of low single digits, adjusted segment EBITDA margin of approximately 18.6%, and adjusted EPA and CDA range of $1.14 to $1.17.
Our backlog remains at record levels growing 11% to 14.6 billion dollars system. Backlog re 11% and service. Backlog. Grew 8%
Let's now discuss our fiscal force, quarter, and full-year guidance on slide 9.
Marc Vandiepenbeeck: As a reminder, we have a challenging comparison due to a large one-time project we successfully executed last year. Based on strong execution and consistent performance, we are reaffirming our full year guidance for mid-single-digit organic sales growth and approximately 90 basis points of adjusted segment EBITDA margin expansion. Additionally, we are raising our outlook for adjusted EPS and free cash flow conversion. We now expect adjusted EPS in the range of $3.65 to $3.68 per share, representing 14 to 15% growth. Building on our strengthened working capital position, year-to-date free cash flow performance reflects solid execution and financial discipline.
As we enter the fourth quarter, we are building on strong momentum driven by enhanced operational, efficiencies, and a backlog that remains at historical high levels. We anticipate organic sales growth of low single digits adjusted segment ebit margin of approximately 18.6%, and adjusted EPA, and see the range of 1.14 to $1.17. As a reminder, we have a challenging comparison due to a large 1-time project with successfully executed last year.
Based on strong execution and consistent performance, we are reaffirming our full-year guidance for mid-single-digit organic sales growth and approximately 90 basis points of adjusted segment EBITDA margin expansion.
Cents to $3.68 per share, representing 14 to 15% growth.
Marc Vandiepenbeeck: As a result, we now anticipate achieving free cash flow conversion of greater than 100% for the full year. We continue to target returning 100% of our free cash flow to shareholders through dividends and share repurchases.
Building on our strengthened working capital position year to date free cash flow performance, reflects, solid execution, and financial discipline.
Marc Vandiepenbeeck: Finally, we expect the sale of our residential and light commercial HVAC business to Bosch to close in our fiscal fourth quarter. While we anticipate returning the majority of the net proceeds to our shareholders through share repurchases, the impact on this year's share count is expected to be minimal, with the benefits primarily accruing in the next fiscal year.
As a result, we now anticipate achieving free cash flow conversion of greater than 100% for the full year. We continue to target returning 100% of our free cash flow to shareholders through dividends and share repurchases.
Finally, we expect the sale of our residential and Light commercial attract business, to Bosch to close in our fiscal Force quarter.
Operator: Operator, we are now ready for questions. We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If you would like to remove your question, please press star followed by two. When preparing to ask your question, please ensure your phone is muted locally. We ask you please limit yourselves to one question and one follow-up.
While we anticipate returning, the majority of the net proceeds, to our shareholders, through share repurchases, the impact, on this year's share count is expected to be minimal with the benefits, primarily accruing in the next fiscal year.
Operator: We are now ready for questions.
We will now begin the question and answer session. If you would like to ask a question please press star. Followed by 1 on the telephone keypad.
If you would like to remove your question, please press star followed by 2.
When we're preparing to ask your question, please ensure your phone is immediately muted.
Amit Mehrotra: The first question goes to Amit Mehrotra of UBS. Amit, please go ahead. Thanks, Maureen. Joakim, I guess as you approach Five months on the job. I know that's not not a lot of time or a long time But I guess it would just be helpful nonetheless to understand your initial observation You know, what are some of the KPIs you're focused on? You know to kind of make sure the global organization is moving in the right direction And you know importantly how quickly you think we can see some of the tangible product progress on the return profile Yeah, good morning, Amit.
We ask you, please limit yourselves to 1 question and 1 follow-up.
The first question goes to Amit Marotta of UBS. Amit, please go ahead.
Thanks, um, morning, um, Yoakam, I guess as you approach.
Uh, 5 months on the job. I know, that's not not a lot of time or a long time, but it, I guess it would just be helpful. Nonetheless, to understand your initial observations.
Joakim Weidemanis: I hope you're doing well. Four months in, you know, as you heard here in the prepared commentary, you know, I visited A lot of places around the world, more than 100 customers, walked more than 30 plants, and sat with colleagues in all of our innovation centers. And I think I've gotten a really good grasp of the opportunity here.
Um, you know, what are some of the kpis you're focused on? Um, you know, to kind of make sure the global organization is moving in the right direction and, you know, importantly how quickly you think we can see some of the tangible product, um, progress on the return profile of the business? Yeah, good morning, Ahmed. I hope you're doing well, um, 4 months in, you know, as you heard here in in the prepared commentary, you know, I visited
Joakim Weidemanis: And you've heard me talk about before, number one is we need to sharpen our focus on the customer at every level and every function of our company. And that's that's such a foundational point. And I'll come back to that. and I also see opportunities to continue to drive growth through innovation, through increased investments in R&D. I'll come back to how we're going to fund that. And I see, you know, that we have, you know, really this enviable field position, you know, 40,000 colleagues in the field, you know, a capability that's been built over decades, difficult to replicate.
A lot of places around the world, you know, more than 100 customers walked through more than 30 plants and sat with, um, colleagues at all of our innovation centers. And, um, I think I've gotten a really good grasp of the opportunity here. And, um, you've heard me talk about this before, you know, number one is, you know, we need to sharpen our focus on the customer at every level and every function of our company.
And that's that's such a foundational point and I'll come back to that.
um,
And um and I also see opportunities to continue to drive growth through Innovation, through increased investments in R&D. I'll come back to how we're going to fund that.
Joakim Weidemanis: But we have to find ways to unlock faster improvement in the company, that improvement that is valued by customers and gives us room to continue to invest in, for example, innovation.
and um and I see, you know that we have, you know, and really this enviable field position, you know, 40,000 colleagues in the field, you know a capability that's been built over over decades difficult to replicate
Joakim Weidemanis: And that's why I spoke about a new business system that is in formation that we have started to deploy. And you heard a little bit about on the prepared remarks that that is anchored in 80-20 simplification and lean, which is about acceleration, speed in many ways is the ultimate competitive advantage and augmented by digitization and AI to scale. So simplify, accelerate, and scale. And the notion here is that speed is one of the largest competitive advantages. And, you know, you can't like go too broad too quickly. So because you also want to get the buy in from your organization while you deliver value early.
Um but we have to find ways to unlock faster Improvement in the company that Improvement that is valued by customers and gives us room to um to continue to invest. And for example innovation
and um and that's why, you know I I spoke about a new business system that is in formation uh that we have started to deploy and you heard a little bit about on the prepared remarks that that is anchored in
8020 simplification and lean, which is about acceleration. You know, speed in many ways is the ultimate competitive advantage.
And uh, a augmented by digitization and AI to scale. So simplify accelerate and scale,
And the notion here is that speed is 1 of the largest competitive advantages.
Joakim Weidemanis: So, so we've started already. And we're going deep. And as you heard, I gave two examples, one commercial example, which is more growth oriented, and one operational example, which is both cost and growth oriented. So the commercial example, and these examples are examples, capabilities that we're building that we're going to deploy much broader over time. But you want to start narrow so you can really understand, you know, the root causes of why we're not able to perform better, and so that you can go after the countermeasures and then, you know, build new processes and capabilities, and then inspire other people in other parts of the company to do the same.
And, you know, you can't like go too broad too quickly, so because you also want to get the buy-in from your organization while you deliver value early. So,
So, we've started already, and we're going deep. And as you heard, I gave two examples: one commercial example, which is more growth-oriented, and one operational example, which is both.
Cost and growth oriented. So,
Joakim Weidemanis: So the two examples were in our HVAC conventional business in North America and one part of the country, you know, we have a team working on in their fourth Kaizen now, actually, and where we have a path to basically doubling the selling time that our sellers have in that part of the business by improving and removing waste from processes and improving the processes that we have. So that I'm very excited about, you know, the potential of that, you know, more broadly over time. And then on the operations side, I gave you an example of where we're working on cutting the lead time in half.
In North America and 1, 1, part of the country. You know, we have a team working on, and their fourth kaisen. Now, actually,
And where we we have a path to basically doubling the selling time that our sellers have and that part of the business by improving and removing waste from processes and improving the processes that we have.
uh so that I'm very excited about, you know, the potential of that you know more broadly over time
Joakim Weidemanis: And we're in our third Kaizen on that one. I was in one of those Kaizens myself, actually, the other week. And, you know, cutting lead time in half is, you know, the what you do to to achieve that is basically the same things, similar things you would do to reduce cost and capital tied up working capital that So, that effort will generate efforts beyond reducing lead time. And, of course, reducing lead time makes us more competitive, and in that case, you know, the product lines we started with are oriented towards the data center market where demand is still very high, and being able to deliver faster than others is an important part of our competitive advantage.
And then uh, on the operations side, I gave you an example of where we're working on cutting the lead time in half.
And um uh we're in our third kaisen on that 1. I was in 1 of those kaizens myself. Actually the other week.
And you know, cutting lead time in half is, you know, what you do to achieve that.
Is basically the same things. Similar things you would do to reduce cost and capital tied up working capital. That is uh so that effort will generate efforts Beyond reducing lead time. And of course reducing the lead time makes us more competitive.
Joakim Weidemanis: So, anyway, so we're starting narrow, exciting the organization, training the organization, and then we're going to deploy this more widely over time. And, you know, we have lots of opportunities here on these kinds of themes, so I'm very excited about that. Thank you.
And in that case, you know, the product lines we've started with are oriented towards the data center market where demand is still very high. Being able to deliver faster than others is an important part of our competitive advantage. So anyway, so we're starting now.
Exciting! The organization training, the organization, and then we're going to deploy those more widely over time. And, you know, we have lots of opportunities here on these kinds of themes. So I'm very excited about that.
Scott Davis: Moving on to the next question from Scott Davis of Mellius Research.
Scott Davis: Scott, please go ahead. Hey, good morning, guys. And appreciate the appreciate the color on that on that question. I'm kind of going to go a slightly different direction. The you know, you've had 140 days, maybe that's not enough time to answer this, perhaps, but All right, do you have a...
Thank you. Moving on to the next question from Scott Davis of Melia's research. Scott, please go ahead.
Hey uh, good morning guys.
Good morning Scott. And, uh, appreciate the uh,
Appreciate the color on that. On that question, I’m kind of going to go a slightly different direction. You know, you’ve had 140 days; maybe that’s not enough time to answer this, perhaps. But
Joakim Weidemanis: better sense, Joakim, now of how you can accelerate growth in fire and security and how that business really, how HVAC and fire and security can really lever off of each other. I think historically, it's always been a question mark of whether they fit or not, but I think investors at this point are pretty open-minded on hearing your view. Yeah. Thanks for that question, Scott. These are, as we spoke about last time with all of you, I mean, I see these are fundamentally different businesses serving a similar customer base, but different personas at different points in time.
are are do you have a a a
Joakim Weidemanis: And so we're calling it as it is. That doesn't mean that they aren't businesses that don't have potential. They have potential as well. And many of the examples I gave on the new business system here are focused on HVAC and controls, because we think that those markets inherently have higher levels of growth, but there's growth in fire and security as well. And so the approaches that I described, we are gradually going to deploy into those businesses, and we think there's good potential to improve the performance there as well over time.
Better sense Yoakam. Now of what the how you can accelerate growth in Fire and Security. And how that business, really, how how HVAC and and Fire and Security can really uh lever off of each other. I think historically, it's always been a question mark of whether they fit or not. But um, I think investors at this point are pretty open-minded on on hearing your view. Yeah, yeah. Thanks for that question, Scott. Yeah, these are as we spoke about last time. Um, with all of you, I mean, I see these are fundamentally different businesses serving a similar customer base, but different person as a different points in time.
And so we're we're calling it as it is, um, that doesn't mean that they don't aren't businesses that don't have potential, they have potential as well.
And, um, many of the examples I gave on the new business system here are focused on HVAC and controls, because we think that those markets inherently have higher levels of growth. But there's growth in Fire and Security as well.
Joakim Weidemanis: And then, like I said, we are taking a dispassionate view at the portfolio, and we are two plus months into a deeper strategic review of our businesses where we're at today and looking at the future and who we would like to be. And we'll keep, and the board, of course, I'm working very closely with the board. And obviously these are not things you conclude in sort of one cycle, one board meeting. So over the next couple of months, together with the board, we're gonna start to draw conclusions on what the portfolio will look like here going forward.
And so the the approaches that I described, you know, we are gradually going to deploy into those businesses and we think there's good potential to improve the performance there as well over time. And then, like I said, you know, we are taking a um, dispassionate view at the portfolio.
And um, we are uh, 2 plus months into a deeper strategic review, um, of our businesses where we're at today, and, and looking at the future, and you know who we would like to be, and we'll keep, and the board, of course, I'm working very closely with the board. And obviously, these are not things you conclude in sort of 1 cycle, 1 board meeting so, oh, over the next, uh, couple of months, you know, together with the board, we're going to start to draw conclusions on.
You know what, the portfolio will look like here going forward.
Jeff Sprague: Thank you. The next question goes to Jeff Sprague of Vertical Research Partners. Jeff, please go ahead. Thank you. Good morning, everyone. Wondering if we could shift to free cash flow. Marc, nice to see the bump here. morning.
Thank you. The next question.
For research Partners. Jeff, please go ahead.
Marc Vandiepenbeeck: Maybe could you address, and certainly Joakim, your thoughts on this also, but where the most significant opportunities are on the free cash flow side? Should we view this 100% plus sort of a catch up on low hanging fruit, or is your confidence level that the company can kind of consistently be in that 100% zip code rising? For sure. Well, thanks for the comments. We had a strong start of the year in cash flow and we've continued that momentum. I think the progress we've made this year has a lot to do with our accounts receivable, our collection management, and everything goes from managing order and managing customer through that experience.
Thank you. Good morning everyone. Uh, wondering if we could shift to free cash flow. Um, Mark nice to see uh, the bump here, you know, this morning. Um, maybe could you address and certainly Yoakam, love your, you know, your thoughts on this also. Um, but but where you know the most significant opportunities are on the Free Cash Flow side, um should we view this 100% plus sort of a catch up on low hanging fruit or you know is your confidence level that you know the company can kind of consistently be in that 100% zip code uh Rising here.
For sure. Well, yeah, thanks for the the comments. Um,
Marc Vandiepenbeeck: That has allowed us to really continuously improve the conversion throughout the year and has allowed us to get to that 100 plus percent conversion. Almost a billion dollars of improvement year on year is a good feed, but it doesn't mean that we are done and that's all of the benefits we are going to see. We still have those. fundamental structural headwinds we've talked about, you know, the effective tax rate being slightly different than the cash tax rate, and we still have slightly elevated capex, but those two things over time will die down.
Cash flow and we've continued that, that momentum. I think the progress we've made this year has a lot to do with our accounts receivable or collection management, and everything goes from managing order and managing customer through that. That experience that has allowed us to really continuously improve the conversion throughout the year. Um and and as you know, allowed us to get to that 100 plus percent conversion. Um you know almost a billion dollar of improvement year on year with um is a good feedback, but it doesn't mean that uh, we are done and that's all of the benefit. We we are going to see. We still have those
Marc Vandiepenbeeck: There's a lot of opportunities that are gonna come from our lean efforts and lean transformation. And I think if you think about when we start that flywheel around that lean transformation, the need for facilities will reduce over time, which will reduce capex, which will reduce inventory. Our ability to increase cycle time and improve, you know, customer centricity will also drive ultimately better outputs from an inventory standpoint. And we think that's where moving forward, the larger opportunity is, but there's still progress to be made on every aspect of the fundamental of our free cash flow.
fundamental structural headwinds. We've talked about, you know, of our effective tax rate being slightly different than the cash tax rate and we still have slightly elevated capex. But those 2 things over time will die down there. There's a lot of opportunities that are going to come from our our lean efforts and lean transformation. And I think if you think about, um, when we start that flywheel around that lean transformation, the need for um, facilities will reduce over time, which will reduce capex, which will reduce inventory, or ability to increase, cycle time and improve, you know, uh, customer centricity will also Drive ultimately um better um, outputs from an inventory standpoint. And we think that's where moving forward. The larger opportunity is, but there's still progress to be made.
Joakim Weidemanis: Yeah, I mean, I'll second that. And, you know, the lead time reduction example I gave, I mean, in principle, that means that, you know, we'll be able to get a lot more output from that facility without adding additional physical asset space. And so that means that we're gonna sort of decouple versus historical trends, the capex that we need for our growth. So that's really what that is about. And we're also going to, by the same token, because with the approaches we're applying there, decouple the addition of inventory dollars for the growth dollars that we have.
On on on every aspect of the, the fundamental of a free cash flow conversion.
Yeah, I mean I mean I I'll second that and uh, you know, the lead time reduction example, I gave I mean in in principle. That means that, you know, we'll be able to get a lot more output from that facility without adding additional uh physical assets space.
And so that means that we're going to sort of decouple.
Versus historical, um, um, uh, trans, you know, the capex that we need for our growth. So that's that's really what that is about and uh
Joakim Weidemanis: So that's really what that lead time reduction initiative is about, and like I said, we've started narrow and we'll go broader over time.
Marc Vandiepenbeeck: But then on the commercial side as well, we have a workstream, I think we're in our second Kaizen now, where we're looking at how we're performing on billing and how fast do we bill, how accurate is our billing? And therefore, what is sort of the first pass yield on customers paying invoices? Every company, no company in this world is perfect on invoicing, right? There's sometimes you miss a few. And if you have a couple of percent of invoicing errors that you need to redo versus less than 1%, that not only impacts customer satisfaction, but of course also your cashflow.
And we're also going to buy the same token, um, because with the approaches, we're applying their decouple, the uh, edition of inventory dollars for the growth dollars that we have. So, so that's that's really what that lead time, reduction initiative is about. And like I said, we've started narrow and we'll go broader, um, over time. But, you know, then on the commercial side as well, you know, we have a, um, workstream, uh, I think we're in our second kaisen now.
Um, where we're looking at, you know, how we're performing on on billing and uh, you know, how fast do we build? How accurate is our billing? And therefore, you know how what is sort of the first pass uh, yield on customers paying uh invoices you know every comp no company in this world is perfect on invoicing, right? There's sometimes you miss a few and if if you have a couple of percent of invoicing errors that you need to re,
Marc Vandiepenbeeck: So we've seen some good opportunities in that area too. So those themes give me confidence that we're going to be able to maintain the cash conversion that we've seen so far.
We do versus less than 1%. You know that, uh, not only impacts customer satisfaction, but of course also your cash flow. So, we've seen some good opportunities in that area too. So, those themes give me confidence that, um, you know, we're going to be able to maintain, you know, the cash conversion that we've seen so far this year.
Nigel Coe: The next question goes to Nigel Coe of Wolf Research. Nigel, please go ahead. Thanks. Good morning. Just want to follow up on that last point.
The next question. Go to Nigel Co of wolf research Nigel, please, go ahead.
Marc Vandiepenbeeck: I don't want to sound greedy, but with the intangible amortization, is there a pathway to maybe being above 100% free cash conversion based on the current report and structure? And then maybe, if we could maybe go back to the portfolio, very clear messaging there. Are we still in the zone of 5% to 10% of the current portfolio being, you know, I guess with a question mark over its strategic importance? Yeah, Nigel. I understand the question on above 100. I think it's a little early for us to commit. What I can tell you is that historically, we've said the algorithm was, you know, 85, 90 plus percent.
Thanks, good morning. Um, just want to follow up on that last Point, man. I don't want to sound greedy, but with the intangible ization, is there a pathway to maybe being above 100% free? Cash? Conversion? Based on the current reporting structure? And then maybe, uh, uh, if we could maybe go back to the portfolio, um, very clear messaging there, uh, are we still in the zone of 5 to 10% of the company portfolio? Being, you know, uh I I guess with a question mark uh over its strategic um importance.
Marc Vandiepenbeeck: I think we are comfortable that we'll be able to deliver solidly in the 90s in terms of conversion. And over time, as we see the improvement on the lean transformation, yielding the result, we could raise from there. But at this stage, it's a little bit too early. On the portfolio, I would say the immediate actions we're taking on some of the assets that we believe are non-core, it's still within that 10, 15 percent range. Now, there's a broader amount of work that's being done. Joakim alluded to that earlier.
Yeah. Nigel. Um, I I understand the the the the the the question on above 100. I think it's a little early for us to commit. What I can tell you is that historically, we've said the the algorithm was, you know, 85, 90 plus percent. I think we are comfortable. That will be able to deliver um solidly in the 90s in terms of conversion and over time. As we see the um the the Improvement of
Marc Vandiepenbeeck: And, you know, that could be greater than that 10 percent over time as we validate kind of a strategic vision with the board and kind of decide where we can focus and orient the company to be successful and grow fast.
Earlier and and you know, that could be greater than that 10% over time as we uh validate kind of our strategic Vision with the board and and and kind of decide um, where we can focus and Orient, the company to be uh, to be successful and and and and grow faster.
Steve Tusa: The next question goes to Steve Tusa of JPMorgan. Steve, please go ahead. Hi, good morning. Hey, Steve. Good morning, Steve.
The next question, go to Steve Tusa of JP Morgan. Steve, please go ahead.
Hi, good morning.
Steve Tusa: Can you maybe just, the order number and low single digit was maybe a little bit lighter than I was expecting.
Steve, good morning, Steve.
Marc Vandiepenbeeck: How do you guys feel about that trending into the fourth quarter and then secondarily, what's the timeline for when you guys provide perhaps a bit more of a longer term outlook around what all this action is going to turn into financially? Very good. Yes. So orders in America was strong. You know, EMEA, in my view, was better than perhaps what the number appears to be because of a compare. And then, clearly, there's ongoing softness in China. And so, as you would expect, you know, we've continued to dig deep into, you know, leading indicators or pipelines or so on.
Um, can you maybe just uh, the the order, uh, you know, order number at low? Single digit was maybe a little bit lighter than I was expecting. Uh, how do you guys feel about that trending into the, um, into the fourth quarter and then secondarily, um, what's the timeline for when you guys, you know, provide uh perhaps a bit more of a longer term Outlook around. Um you know what, what all this action is going to turn into financially.
Very good. Yes, so orders in America were strong.
You know, in Mia, um, in in my view was was better better than perhaps what the number appears to be because of a compare, and then clearly there's ongoing softness in in China.
Joakim Weidemanis: And my conclusion is that, you know, our core vertical markets, they remain healthy. and it's not just, you know, our health care verticals and our data center verticals, but Overall, there's no change, so I feel good about our pipeline. And, and then on China, you know, which, you know, we've, we've talked about before is bouncing around the bottom, I guess we've, we've called it, you know, our, we continue to be very disciplined there around going after higher margin systems orders, and then prioritizing our service business there.
And so as you would expect, you know, we've continued to dig deep into, you know, leading indicators, our pipelines and so on. And and my conclusion is that, you know, our core, vertical markets, they remain healthy.
And, um, it's not just, you know, our healthcare verticals and our data center verticals. But, uh,
Uh, over overall, there's no, no change. So, um, so I I feel good about our Pipelines.
Joakim Weidemanis: and so we had healthy growth on the service side and China is maybe a longer discussion but I was there recently and maybe the one tidbit is that you know that market is gradually turning into a more mature market in the sense of that you know the retrofit part of the market is continues to steadily increase you know which was is different than a number of years ago when it was sort of a new construction new build market so it's starting to look a little bit more like some of our western markets but near term, short term, yes new builds in China.
And um, and then on China, um, you know, which uh, you know, we we've talked about before as bouncing around the bottom, I guess we've, we've called it, um, you know, our we continue to be very disciplined there. Around going after higher margin systems orders and then prioritizing our service business there.
And so, we had Healthy Growth on the service side and, uh, China's is is, is maybe a longer discussion, but I was there recently and maybe the 1 T bit. Is that, you know, that market is gradually turning into a more mature Market, in the sense of that, you know, the retrofit part of the market is continues to steadily increase.
Joakim Weidemanis: has been talked about by many players is a challenging space to be so we need to be very diligent about what we choose to go after there and protect the manager margin.
Um, you know, which was is different than a number of years ago when it was sort of a new construction, new build market. So it's starting to look a little bit more like, um, you know, some of our Western markets. But but near-term short-term yes uh new builds in in China.
As has been talked about by by many players is uh a challenging space to be. So we need to be very diligent about what we choose to go after their and protect the manager of margins.
Joe Ritchie: The next question goes to Joe Ritchie of Goldman Sachs. Joe, please go ahead. Hey, good morning, guys. Good morning.
The next question, goes to, Joe Richie of Goldman Sachs, Joe. Please go ahead.
Hey, good morning, guys.
Joakim Weidemanis: So, you know, with Yeah, so, you know, with the quarter ending with record backlog, Joakim, I'm curious whether there's a way for you get to.
Good morning. So you know with, um,
Marc Vandiepenbeeck: Give us an initial framework for 2026, and then maybe just go back to Steve's question on the long-term targets, just wondering whether you're planning an investor day next year as well. Yeah, so I appreciate, Steve, I apologize, we didn't answer your question, so I will make a note of making sure that we do that next time. We are working on 2026 as we speak. I'm 140 days in, so of course I want to make sure I do a really detailed job together with Marc there.
Marc Vandiepenbeeck: But maybe, Marc, you could share a few words on where we're at. Yeah, and we are on the finalization of our internal plan for 2026, so it's a bit early for us to comment on this. But I think overall, the long-term algorithm we've been talking about, with, as a reminder, mid-single-digit top-line growth, looking for well over 25% incrementals, and then double-digit EPS growth remain the basis for now. But as we implement the new business system, as we continue to do our strategic review, it's hard to imagine not having better incrementals, for example, over time, and understanding how that will play out.
Yeah. So, you know, with, um, with the quarter ending with record backlog Yoakam. I'm I'm curious, um, whether there's a way for you to get to, to maybe just give us an initial framework for uh, for for 2026 and then and then maybe just go back to these questions. Uh, on the long term targets. Uh, just wondering whether you're planning an investor day uh, next year as well. Yeah, so I appreciate Steve, I apologize. We didn't answer your questions. So I will make make a note and make sure that we do that. Next time we, we are working on, uh, 2026 as we speak. You know, I'm of 140 days in. So, of course, I want to make sure I do a, a really detailed job together with Mark there, so, but maybe Mark, you could share a few words on where we're at. Yeah.
Marc Vandiepenbeeck: influence the ultimate long-term algorithm.
And we are on the, the finalization of our internal plan for, for 26. So it's a bit early for us to comment on this. But I think overall the long-term algorithm we've been, uh, we've been talking about, um, with as a reminder, mid single digit Topline growth, um, looking for well over 25% incremental and then double digit. Um, EPS growth remain, um, um, Remain the the basis for now. Um, but as we implement the new business system, as we continue to, uh, do our strategic review. Um, it's hard to imagine, um, not having better incremental for example, over time and understanding how that will uh um,
Marc Vandiepenbeeck: I think we'll be better positioned to give you a view on that as we close the year, release the fourth quarter, and start talking guidance for 26 and give you a better view.
Marc Vandiepenbeeck: As far as investor day, we really want to go through that deep understanding of our strategic orientation before we take people deeper into what the new long-term from an investment TC. So give us a little bit of time there to get through that and sharpen our pencil on the strategic.
Joakim Weidemanis: And on the guide, you know, the two examples I've mentioned that we're working on. vehicles to implement our new business system. to reinforce what Marc said. The commercial example I gave you with increasing the amount of selling time available for our sellers, that's really about decoupling the needed investment in field personnel to drive growth, decouple versus how that algorithm has worked in the past. And then the operations example I gave is really about decoupling both CapEx inventory and costs, quite frankly, to also drive the kind of growth that we aspire to here from the cost.
Close the year, release the fourth quarter and start talking guidance for for 26 and give you a better view as far as investor day. We really want to go through that. Um, deep understanding of our strategic orientation before we we take people deeper into, um, what the new GCI may look like and and what it would mean, uh, long term from a, from an investment thesis. So, give us a little bit of time there to get through that and, and, and sharpen our pencil on on the Strategic view. Yeah. And and on, on the guide, you know, the what, what I, the 2 examples I've mentioned that we're working on this vehicle to implement our new business system.
Just a reinforcement. Mark said, you know, we're the commercial example. I gave you with, uh, increasing the amount of selling time available for our sellers, you know, that's really about decoupling.
Um, the needed investment in the field Personnel to drive growth decouple versus, you know, how we've that algorithm is working in the past. And then, uh, you know, the operations example, I gave is, is really about decoupling, uh, both capex inventory and costs quite frankly. Um, to also, uh, Drive the kind of growth that that we aspire to here, from, from the cost.
Nicole DeBlase: The next question goes to Nicole DeBlase of Deutsche Bank. Nicole, please go ahead. Yeah, thanks. Good morning, guys. Good morning, Nicole.
The next question goes to Nicole at the Blaze of Deutsche Bank. Nicole, please go ahead.
Marc Vandiepenbeeck: Just wanted to ask something, hello, just wanted to ask something about short-term in nature. I think typically if we look at EPF seasonality throughout the year, you historically tend to see like a low teens percentage increase in 4Q relative to 3Q. The guidance this year implies, you know, something a bit lower than that.
Yeah, thanks. Good morning, guys.
Marc Vandiepenbeeck: So just want to understand, you know, Marc, if you could kind of help with any major puts and takes between 3Q and 4Q that we should be considering. Thank you. Yeah, nothing in particular. There's two kind of dynamic that are happening at the same time. There's a bit of uncertainty on what tariff we'll do full flow on the bottom line. So far, we've executed very well, but we've taken some conservative view into the fourth quarter. And then you got to remember with the extraction of our residential and light commercial business, which was more transactional, shorter cycle business, we are now a little bit of a longer cycle company.
Good morning, Nicole. Um, just wanted to ask something, hello, just wanted to ask something about short-term in nature. Um, I think, typically, if we look at epes, seasonality throughout the year, you've historically, tended to see like a low teens percentage, increase in 4, q relative to 3Q, the guidance this year implies, you know, something a bit lower than that. So just want to understand, you know, Mark if you could kind of help with any major puts and takes between 3 and 4 q that we should be, considering thank you.
Marc Vandiepenbeeck: And therefore, the variation you see quarter over quarter is a little bit less seasonal. Now, transparently, the fourth quarter, particularly in our HVAC and controls business, is very healthy quarter of generally from a growth and therefore absorption of our team, simply because of the weather in the Northern Hemisphere. And so it will naturally provide better tailwinds overall, but nothing vastly different if you look at the enterprise from a continued basis.
Yeah, no nothing. In particular, there's 2, kind of dynamic that are happening at the same time that there's a bit of a uncertainty on on, uh, on what tariff will do. Full full on the bottom line so far. We've executed it very well, but we've taken some conservative view into the first quarter. And then you get to remember, who is the extraction of our, um, residential and Light commercial business, which was more transactional shorter cycle business. We're now a little bit of a longer uh, uh, cycle company and and therefore the variation, you see, quarter over quarter is a little bit less seasonal now transparently the first quarter, particularly in Orange back and controls business. Um, it is very healthy quarter of June early from a growth and therefore absorption of our
Of a field team, um, simply because of of the weather in in the northern hemisphere. Um and so it will naturally um um, provide better Tailwind overall, um, but nothing vastly different if you look at the Enterprise uh, from a continued basis standpoint.
Jo Odia: The next question goes to Jo Odia of Wells Fargo. Jo, please go ahead. Hi, good morning. Good morning.
The next question, goes to Joe odia of Wells Fargo. Joe, please go ahead.
Jo Odia: In reference to your comment around the, hi, just the comment around the algorithm and well over 25% incrementals, can you touch on restructuring and the program that was announced last fall of the $500 million, what savings you anticipate achieving this year, just kind of broad strokes, what the setup would be for what you can achieve next year.
Marc Vandiepenbeeck: And then separately, and with some of the legislative developments, just anything on on tax, I think. outlined that that could be up four or five hundred BIPs year over year as we go into next year, but not sure of any recent developments. Now, so on restructuring, Joe, so $400 million of restructuring costs, we've probably spent just a little over that. And we think we've gotten probably dollar-for-dollar restructuring saving. That's really part of the margin improvement story as we eliminate a lot of the stranded costs associated with the residential and light commercial sales throughout the year, even before the close on the transaction.
Hey, good morning. Um, Mark in reference to your comment around the um, hi. Uh, just the, the common around the the algorithm and, you know, well over 25% incremental, can you touch on restructuring and the program that was announced last fall of the 500 million voice savings. You anticipate achieving this year um just kind of broad Strokes. What what the setup would be for what you can achieve next year? Um, and then separately, and with some of the legislative developments, just anything on on tax. I think, you know, you've previously outlined that, that could be up 4 or 500 bips year-over-year as we go into next year. Um, but not sure of any recent developments there. No. Um, so long as you're structuring Joe, so 400 million dollar of of restructuring costs. We've probably spent just a little over that. Um, and we think we've gotten, uh, probably dollar for dollar restructuring saving, that's really part of the, the multi.
Marc Vandiepenbeeck: And so we believe we are going to continue to drive towards that $400 million to get the full run rate $500 million benefit at the exit of 26.
Marc Vandiepenbeeck: I can tell you that the early efforts around our lean journey and transformation will probably have to think about how we position the restructuring, the balance of the restructuring program, and if we should further extend it and potentially gain even more benefit from a return on those restructuring efforts. From a tax standpoint, there's some small changes at the fringe that will require kind of differentiated planning on our side, but net-net, the rate headwind I've been talking about of four to 500 basis points on, as a reminder, 12% base effective tax rate in 25 will remain in force.
Potentially gain even more, um, benefit from a, a, a return on those red structuring. Um, efforts
Marc Vandiepenbeeck: It's really around that global minimum tax and how that drives the pressure on the rate. If you recall, the interesting component there is that from a cash tax rate, it doesn't materially change the math for 26, which is, by the way, a little bit of a tailwind from a pre-cash flow conversion as our cash tax rate will remain in the low 20s, high teens, potentially, depending on different action we take.
From a tax standpoint, um, there's some small changes at The Fringe that, uh, that, that that will require kind of differentiated planning on our side, but net net. Um, the rate headwind have been talking about a 4 to 500 basis points on, um, as a reminder, 12% base, uh, effective tax rate in in, in 25 and and how that, that drives the, the pressure on the red. If you recall, the interesting component there is that from a cash tax rate. It doesn't materially change the math for for 26, uh, which is, by the way, a little bit of a Tailwind from a 3 cash flow conversion as as our cash tax rate will remain in the low 20s High Teens potentially depending on on different action we take
Andrew Obin: The next question goes to Andrew Obin of Bank of America. Andrew, please go ahead. Hi guys, good morning. Good morning, Andrew. Hey, just a question going back to America's orders.
The next question, goes to Andrew open of Bank of America Andrew. Please go ahead.
I guess. Good morning Andrew.
Andrew Obin: Could you by any chance, disaggregate the orders between fire and security, commercial, HVAC and specifically, what are you seeing on data centers, because you have such a strong market share globally, in the market, given the overall strength, you know, I would echo the sentiment, I would have expected a little bit more growth, but maybe just give us a sense what's happening. Are there any specific push outs, but you know, by verticals? Thank you, in America's. Yeah, thanks, Andrew. Yeah, data centers continues to be very healthy. And, you know, it's about 10% of our sales today, growing very nicely.
Joakim Weidemanis: And there's, there's of course, a reason why we decided to deploy the initial stages of our business system focused on, on the operations manufacturing side of things to help cut lead times for a data center product line. So, so we see that continuing here. Over time, we're doing well with both hyperscalers and colos.
Hey uh just a question, going back to uh America's uh orders. Could you by any chance uh disaggregate? Uh, the orders between Fire and Security commercial HVAC and specifically, what are you seeing on data centers? Because you have such a strong market share globally in the market had given the overall strength. You know, I would Echo the sentiment. I would have expected a little bit more growth, but maybe just give us a sense. What's happening, are there any specific push outs? But you know by verticals. Thank you in America. Yeah. Thanks Andrew. Um, yeah. Data centers continues to be um, very healthy. Um and um you know it's about 10% of our our sales today. Um growing very nicely. And there's there's of course a reason why we decided to, uh, deploy the, the initial stages of our business system focused on, on the operations, manufacturing side of things, the foot to to to
Help cut lead times for a data center product line. So so we see that uh continuing here
Joakim Weidemanis: and perhaps we can have a more detailed discussion at another point in time. So that's that side of the business. The HVAC and applied side of our business in general is doing very well. and the example I gave on commercial where we're deploying the business system is in HVAC and applied outside of data centers and so we're already growing at a very healthy rate there. and fire and security is we're growing but at a lower rate than HVAC. That's more in low single digits. We see those are shorter cycle businesses, by the way, as well.
Uh, over time, um, we're doing well with both hyperscalers and colos.
And um, perhaps that, that we can have a more detailed discussion at at another point in time. So, so that's that side of the business. The, the HVAC and applied side of our business, in general is doing um, very well. Um,
And the, uh, the example I gave on commercial where we're deploying the business system is in HVAC and Applied.
Uh, outside of data centers. And so we're we're already growing at a very healthy rate their
Uh, and Fire. And Security is, uh, we're we're growing but at a lower rate than than, uh, HVAC. Um, that's more in, in low single digits.
Joakim Weidemanis: I think you know that. We see plenty of opportunity to apply the principles of what we're doing on the HVAC sales side in those businesses, as well. But we chose to start in HVAC because in short term, we just think there's a bigger opportunity there. But so the HVAC and data center heavy is the story here, but those other businesses are still growing at are still growing, but low single digits.
Um, we we see those are shorter cycle businesses by the way, as well. And I think, you know that
Um, we see plenty of opportunities to apply the principles, uh, of uh, what we're doing on the HVAC sales side.
Uh, in those businesses as well. Um, but we chose to start an HVAC because a short term, we just think there's a a bigger opportunity uh, their uh, but so the h h h, applied HVAC and and data center. Uh, heavy is is, is the story here, but uh, but those other businesses are are still growing at U are still growing, but low single digits.
Christopher Snyder: The next question goes to Chris Snyder of Morgan Stanley. Chris, please go ahead. Thank you. You know, if we look at GCI service business, it's had a really It's really good top line growth, you know, over the long term. But if we look back at history, is there any, you know, color you could kind of talk about or provide as to how margins have expanded or the business has kind of driven operating leverage, you know, over the last, you know, few to several years? I think, I think the answer to that is not enough operating leverage.
The next question, goes to Chris Schneider of Morgan Stanley. Chris, please go ahead.
Thank you. Um, you know, if we look at the JCI service business, it's had really...
It's a really good Topline growth you know, over the long term. Um but if we look back at history, is there any, you know, color you could kind of talk about or provide um as to how margins have expanded or the business has kind of driven operating leverage, you know, over the last um, you know, few to several years.
Joakim Weidemanis: And that's not is now an opportunity for us. And I think there are And from my travels, two reasons for that. I think just just like we, the example I gave on the HVAC sales, you know, by applying lean principles, we're able to and remove waste in our internal processes and help accelerate the sales process just in general. I think we have the same opportunity in service so that we can gradually break the back off of the connection between service growth and adding service costs. So I see good opportunity in that.
I think I think the answer to that is not enough operating leverage. Uh, and that's now is now an opportunity for us. And I think there are
Um, from my travels, two reasons for that. Um, I think just like the example I gave on the HVAC sales, you know, by applying lean principles, we're able to.
Remove waste in our pro internal processes and help accelerate the sales process in general. I think we have the same opportunity in service so that we can gradually break the back of the connection between service growth and adding service costs.
Joakim Weidemanis: That's a body of work that we're going to be launching over the next quarter here. So there's an operational side to the story. And then I think in a couple of our businesses, The way we productize services, I think there is an opportunity to add more differentiated service products to our portfolio.
Um, so I see a good opportunity in that. That's a body of work that we're going to be launching over the next quarter here.
Uh, so there's an operational side to the story, and then I think, in a couple of our businesses...
um,
Joakim Weidemanis: And perhaps I can come back to that at some point in time in the future. But when I spoke about in the prepared commentary about wanting to increase investments in innovation, I'm not only talking about investments in systems, but also in service products. Some service products might require a few tweaks and changes and additions to our systems on the install base, as well as new products. But there's also innovation opportunities on, for example, how you digitize services to be able to deliver, if I could call them, more outcome-oriented service products to customers versus more sort of break-fix-oriented services.
The way we productized Services, I think there is uh an opportunity to add um more differentiated service products to our portfolio. And perhaps, I can come back to that at some point in time in the future. But when I spoke about in, in the prepared, commentary about, um, wanting to increase in Investments and Innovation, I'm not only talking about investments in systems.
um but also in service products and some service products might require some a few tweaks and changes and additions to
Joakim Weidemanis: So I see good opportunities, both operationally. as well as from a product and differentiation point of view and being able to both continue the service growth and then, like I said, break the back off of the growth and the cost so that the margin can improve over time.
Our uh, systems, uh, on the install base as well as new products. But, but there's also Innovation opportunities on. Um, for example, how you digitize services to be able to deliver, if I could call them more outcome oriented service products to, to customers versus more sort of breakthrough.
Oriented services. So, I see good opportunities both operationally.
As well as from a product of differentiation point of view, and being able to both continue the service growth and then, like I said, break the back off of the growth and the costs so that the margin can improve over time.
Julian Mitchell: The next question goes to Julian Mitchell of Barclays.
Julian Mitchell: Julian, please go ahead. Hi, good morning. Thanks very much. I just wanted to ask about sort of operating margins and a couple of different questions on it. I think first off, you know, the OMX is fairly muted year on year in the second half of this fiscal year. I understand tariffs are weighing, but is the sort of construct that that or those related headwinds last sort of through the first half of next fiscal year and then you get a larger sort of jump in the back half on margins as that tariff headwind eases? And sort of beyond the next 12 months, I guess I was intrigued, Joakim, about you sound sort of relatively muted on the margin potential in fire and security, perhaps the growth outlook as well.
The next question, goes to Julian Mitchell of Barclays Julian. Please go ahead.
Hi, good morning. Um, thanks very much, um, just wanted, um, hey, uh, just uh, 1 to ask about sort of operating margins. Um, and a couple of different questions on it. I think, first off, you know, the omx is fairly muted, um, year on year in the second half of, of this fiscal year, understand tariffs are weighing. But is the sort of construct that that, or those related, headwinds last sort of through the first, half of next fiscal year. And then you get a larger sort of jump in the back half on on margins as that tariff headwind eases and sort of beyond the next 12 months. I guess I was intrigued. You know it came about you you sound sort of relatively
Muted on the margin potential in Fire and Security.
Joakim Weidemanis: And I just wondered if that's around JCI's positioning.
Joakim Weidemanis: uh... something around market share because certainly there are some peers out there like you know honeywell or a legion say this past quarter or two who are putting up pretty decent numbers uh... in various parts of FNF Yeah, thanks.
Perhaps the growth Outlook as well. And I just wondered if that's around jci's positioning.
Marc Vandiepenbeeck: Well, I'll let Marc take the first half of the question, and then I'll add on. Yeah, so on the OMX, you're right, but part of it on the rate standpoint is clearly the tariff. We've been able to recover the vast majority of that headwind, not always being able to consistently drive margin on that recovery. Some markets, we have more pricing power, and we have been able to recover with margin. Some other markets, given the size of the tariff impact, it was a little bit more difficult to justify to the end customer that we ought to receive margin on that.
Um, something around market share because certainly, there are some peers out there like, you know, Honeywell or Allegiant say this past quarter or to putting up pretty decent numbers, uh, in various parts of FNS. Thank you.
Marc Vandiepenbeeck: And then you've got to remember, there's a lot of stranded costs in RSG&A associated with the continued, discontinued operation, the residential-like commercial. There is a lot of work underway and progress being made to actually take that cost out, but that's muted a little bit our ability to expand margin beyond the expectation. But I think moving forward, we have opportunity.
Yeah, thanks. Well, I'll let Mark take the first half of the question and then I'll, I'll add on. Yeah, so on the UMX, um, you you're right, but part of it on the red standpoint is, is clearly the Tariff. We, we, we've been able to recover the vast majority of of that headwind. Uh, not always being able to consistently Drive margin on that, on that recovery. Some markets, we have more pricing power and we have been able to, to recover with margin some other markets, given the size of of, of of, of, of the Tariff impact. It was a little bit more difficult to justify to the End. Customer that that, uh, we, we ought to receive margin on that and then you get a, remember, there's a lot of stranded casting or sgna associated with the continued discontinued operation, the residential Light commercial, there is a lot of work on the way, um, and and progress being made to actually take that that cost out. But that's muted a little bit to our ability to expand margin beyond the beyond the, uh, uh, the
Joakim Weidemanis: I'll pass it on to Joakim on the fire and security margin. Yes, so if we start with FHIR, and since you mentioned Honeywell, you know, they've done a, I think, from what I understand, a very nice job on the product portfolio over many, many years, you know, so when I talked about us having some product gaps in our portfolio, I was thinking about FHIR detection as one example. So we play a little bit more on the, let's call it the premium or the more sophisticated system side of the market. We have some opportunities to go beyond that.
Expectation, but I think, moving forward, we we have opportunity. Um, I'll pass it on to to, to yoke on the Fire and Security margin opportunity. Yeah, yes. So on on, if we start with fire and since you mentioned honey, well, you know, they they've done a, I think a from what I understand, a very nice job on the product portfolio over many, many years, you know. So when I talked about,
Joakim Weidemanis: Over time, and And on the security side, you know, it's a market that consists of many, many different kinds of solutions. So you need to be careful with, you know, the apples to apples or apples versus oranges. You may recall that I used to be on the board of Asa Abloy, you know, Legion's biggest competitor, right? So I've seen that from many different angles. So on the security side, like fire detection, there are some product gaps that we have opportunities around. Now, on the service side of things, to talk about margins, as I mentioned here previously, you know, I think there's good opportunities to...
Us having, uh, some products gaps in our portfolio. I was thinking about power detection as 1 example. Uh, so we play a little bit more on the let's call it the premium or the, the more sophisticated systems side of the market. We have some opportunities to, to go beyond that, uh, over time. And, um,
Market that consists of many, many many different kinds of solutions. So you need to be careful with, you know, the Apples to Apples, or apples versus oranges. You may recall that I used to be on the board of Assa abloy.
Uh, you know, Allegiance, biggest competitor, right? So, I've seen that from many different angles.
um, so on the security side, uh, like fire detection, there are some product uh, gaps um, that we have opportunities around
Joakim Weidemanis: to do work to, again, break the back off of the service growth and the service margins based on applying lean principles and how we operate in the field on providing the services. And I also think there are some opportunities and productization of services that could drive greater differentiation. So I see those opportunities. Now, again, we do see the opportunity in HVAC and controls as being one of having higher growth over time and probably a little bit of a higher margin opportunity over time as well. It doesn't mean the other two are bad businesses. I think we can operate those better over time versus how we have in the past.
Um, now on this service side of things to talk about margins. As I mentioned here previously, I think there's a good opportunity to...
Joakim Weidemanis: And like I said, you know, we're working away at the strategic review of the portfolio diligently, thoughtfully, and once we have a conclusion, we will certainly let you know.
To do work to, to again break the back off of the service growth and and the service margins, uh, based on applying lean principles and how we operate, um, in the field on Sir, providing the services. And, uh, and I also think there are some opportunities and, and productization of services that could drive greater differentiation. So, um, so I see those opportunities. Um, now I again, I, I, we do see that the opportunity in in HVAC and controls as as being 1 of having higher growth over time and, uh, probably a little bit of a higher margin opportunity over time as well. It doesn't mean the other 2 are are bad businesses. I think we can operate those better, uh, than over time versus how we haven't in, in the past.
Um, and like I said, you know, we're we're working away at the uh, strategic review of the portfolio diligently thoughtfully and once we have a conclusion, we'll we will certainly let you know.
Andy Kaplowitz: The next question goes to Andy Kaplowitz of Citigroup. Andy, please go ahead. Hey, good morning, everyone. Hey, Andy. Just wanted to follow up on that line of conversation a little bit. You've had recently strong margin improvement, I think, in your other segments outside of the Americas. So if we think about the Americas going into 26, obviously, you have a mixed component. We've talked about tariffs, and you just talked about service. Can you improve the margin there as you go into 26? Is there anything in the competitive environment that may be holding you back? Because I know you've shown good improvement in Europe pretty quickly.
The next question, goes to ADI, Capital Wits of City Group, Andy, please go ahead.
Hey, good morning everyone. Hey Andy. Hey Andy.
Joakim Weidemanis: So can you do that in the Americas? And, you know, how do we get there?
Just just want to follow up on that line of conversation a little bit. You've had recently, strong margin Improvement, I think in, you know, your other segments outside of the Americas. So as we think about the Americas going into 26, obviously, you know you have mixed components we've talked about tariffs and you just talked about Service. Uh, can you improve the margin there as you go into 26? Um, you know, is there anything in the competitive environment that may be holding you back? Uh, because I I know you've shown, you know, good Improvement in in Europe, pretty quickly. So can you do that in the Americas as well?
Yeah, maybe, maybe I can start, you know, with a little bit of a long term view that we discussed a little bit more on on our previous call or a quarter ago.
So based on and and I still have the same view as, as when we spoke last which is I really see no reason for why uh from a margin point of view, you know, we should both be below our direct competitors over time. You know. It's not a 1 year thing, it's not a 5 year thing either and I I think over time, you know, we can Aspire um, beyond that.
Marc Vandiepenbeeck: I mean, I gave you some examples today, in the prepared remarks of how we're going to apply and deploy a business system to do that both I gave you a commercial example and an operational example. And the two I gave happened to be North America oriented examples, but they will, over time, deploy that in other regions as well. So, yes, I believe we have continued opportunity in all regions on margins. Yeah, and in the short term, Andy, you have a system that continues to update service, and so that, our service business being overall a higher margin business, that will taper a little bit, the mixed headwind you were talking about.
And um you know how do we get there? I mean I gave you some examples today uh in the prepared remarks of how we're going to apply and deploy a a business system uh to do that. Both I gave you a commercial example and an operational example and
Marc Vandiepenbeeck: This quarter, we had year-on-year, you know, M&A headwind, about 20 basis points that didn't help. But from a growth in productivity, if you exclude tariff, we had solid improvement in that margin line. And so I think it's more muted in the short term, and as we get through those tariff changes, and we get the M&A behind us, and the mix balances out to a more balanced 50-50 between service and system, I think, in addition to the opportunity, you have some tailwind here in the Americas for a margin.
And, um, the 2 I gave were happened to be North America oriented examples. Um, but they will over time, we will deploy that in other regions as well. So yes, I I believe we have, uh, continued opportunity and, and all regions on margins. Yeah. And, and, and in the short term Andy, um, you you had system that continues to update service. And so that also his business being overall, a high amount in business that, that, that will, uh, taper a little bit. The mix head. When you were to, to talking about this quarter, we had year on year, you know, m&a headwind about the about 20 basis points, that didn't help.
But from a, a growth in productivity, uh, if you exclude tariff, we uh, we have solid Improvement in that margin line. Um, and so I think it's more muted in the short term and as we get through, um, those, uh, those tariff changes and we get the m&a behind us and the mix balances out to a more balanced 50/50 between service and and system, I think, uh, in addition to the opportunity, you have some Tailwind here in in in the Americas, for the margin standpoint.
Deane Dray: The next question goes to Deane Dray of RBC Capital Markets. Deane, please go ahead. Thank you. Good morning, everyone. Hey, Deane. Good morning, Deane.
The next question, go to Deanna, Dre of RBC Capital Markets. Dan, please, go ahead.
Thank you. Good morning, everyone. Hey, good morning in
Deane Dray: Hey, I wanted to circle back on free cash flow, if we could, and it really wasn't very long ago where JCI was, you know, struggling at that 80% conversion with kind of tempered expectations on where and how it would be improved. And it really does feel like you've turned a corner here. Just can you give us a sense of the sustainability above, you know, to be in and around 100% and just remind me, did the sale of Resy provide any kind of structural lift to the cash conversion cycle? Let me start with that last one.
On free cash flow if we could and it really wasn't very long ago, um, where jci was, you know, struggling at that 80% conversion with, uh, kind of tempered expectations on where and how it would be improved. And it really does feel like you've turned a corner here, just, can you give us a sense of the sustainability above, you know, to be in and around 100% And just remind me. Did the sale of resi provide any kind of structural lift to the, uh, cash conversion cycle?
Marc Vandiepenbeeck: Resi was actually a headwind. It was a higher cash flow converter, because of the GV structure we had within that business. So that put about 5% to 10% headwind to overall enterprise conversion. In terms of sustainability, and to kind of give you a sense of the two different, we've fundamentally changed a lot of processes internally, how we build, how we onboard supplier, how we manage our inventory. And we've been a little bit more maniacal around where we deploy capex and the pace at which we deploy those capital expenditure. And you combine all of that together, it provides a solid foundation to at least performing in the 90s, or 95 plus, I would say from a free cash flow conversion.
Let let me start with that. Last 1 Rez was actually a headwind. Um, it was a higher cash flow converter, uh, because of the GV structure, we, uh, we had was in that business so that put about 5 to 10% headwind, uh, to our overall Enterprise conversion, um, in terms of sustainability. Um, and, and to kind of give you a sense of of the 2 different, um, we've fundamentally changed a lot of processes internally how we build, how we on board supplier, how we manage our our inventory. And we've been a little bit more maniacal around where we deploy capex and the pace, at which we deploy, those capital expenditure and you combine all of that together. It it it provides um, a solid foundation to at least.
Marc Vandiepenbeeck: I don't think any of those fundamental at risk of going backward, quite the opposite, as we are in a process of improving that they provide short term till win. And I'm very confident that we're going to be able to hit that 95 plus percentage. And then over time, as the progress on lean, as I mentioned earlier, on the lean transformation that flywheel start providing additional tailwind, I think we'll be more comfortable talking about 100 or 100 plus, but at this stage, I'll stick to 95. Yeah.
Joakim Weidemanis: And we're early in the journey on inventory improvement. So over time, we're going to go make some progress there.
Performing in in the 90s, uh, or 95. Plus I would say from a free cash flow conversion. I, I don't think any of those fundamentals are risk of of, of going backward, quite the opposite. As we have in a process of improving the the provide short-term tailwind. And I'm I'm I'm very confident that we're going to be able to hit that uh that 95 plus uh uh uh uh percentage and then over time as the progress on on lean, as I mentioned earlier on the lean transformation, that flywheel start. Uh um uh providing additional Tailwind. I think will be more comfortable talking about a 100 or 100 plus but at this stage I'll stick to 95. Yeah. And where early in the journey? On inventory improvements. So over time, we're going to go make some some progress there.
Joakim Weidemanis: This concludes our Q&A session.
Joakim Weidemanis: I will now hand the call back over to Joakim Weidemanis for any closing comments. Well, thank you all for your questions. We have an exciting future ahead of us here at Johnson Controls. We have a lot of work underway, as you heard, and many opportunities to unlock. With a culture centered around a growth business system, I'm confident that our increased focus on our customers will allow us to continue to win with that.
This concludes our Q&A session, I will now hand the call back over to you again at wider, manace for any closing comments.
Well, thank you all for your questions. Um, we have an exciting future ahead of us here at Johnson Controls.
Joakim Weidemanis: I'd like to take a moment to thank our 100,000 team members around the world. You are the foundation of our company, and I'm confident for what the future has in store.
We have a lot of work underway as you heard and many opportunities to unlock uh with a culture, centered around our growth business system. I'm confident that our increased focus on our customers will allow us to continue to win with them.
Operator: I look forward to continue my conversations with all of our stakeholders. Thank you. Thank you all.
I'd like to take a moment to thank our 100,000 team members around the world. You are the foundation of our company and I'm confident for what the future has in store.
I look forward to continuing my conversations with all of our stakeholders. Thank you, thank you all.
Operator: This now concludes today's call. Thank you for joining. You may now disconnect your lines.
This now concludes today's call. Thank you for joining. You may now disconnect your lines.