Q3 2026 Johnson Controls International PLC Earnings Call
Speaker #1: And please use the following method based on how you were joining us today: if you are attending via the webinar, please click the "Raise Hand" icon at the bottom of your screen to be added to the question queue.
Speaker #1: If you are dialing in by phone, please press * followed by 5 on your telephone keypad. I would now like to turn the call over to Mike Gates, Senior Director of Investor Relations, to begin.
Speaker #1: Mike, please go ahead.
Speaker #2: Good morning, and thank you for joining Johnson Controls fiscal Q3 2026 earnings conference call. Joining me on the call today are Johnson Controls Chief Executive Officer Joakim Weidemanis and Marc Vandiepenbeeck, our Chief Financial Officer.
Speaker #2: Before we begin, please note that today's discussion will include forward-looking statements regarding our future performance and financial results. These statements are subject to risk and uncertainties that could cause actual results to differ materially.
Hello everyone and welcome to the Johnson. Controls Q3 2026 earnings conference. Call, my name is Ryan and I'll be coordinating the call today.
Speaker #2: Please refer to our SEC filings for additional information regarding these risks. We will also reference certain non-GAAP measures, reconciliations of these non-GAAP measures are included in our earnings release, and the appendix to today's presentation—both of which are available on the Investor Relations section of our website.
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Speaker #2: I will now turn the call over to Joakim.
Speaker #3: Thanks, Mike. And good morning, everyone. Thank you for joining us on today's call. Johnson Controls delivered another solid quarter, extending the momentum we established in the first half and reflecting continued strength across the business.
I would now like to turn the call over to Mike Gates, Senior Director of Investor Relations, to begin. Mike, please go ahead.
Speaker #3: Let's begin with slide 4. Customer demand remained healthy across our portfolio, driven by the increasing need for high-performance, precise and energy-efficient operating conditions. Order momentum sustained above 25%, revenue grew 10%, adjusted EBIT margin expanded 260 basis points to 17%, adjusted EPS increased 35%, and backlog grew more than 30% to a record $21 billion.
Y'all come with a menace and Mark and deepen beak. Our Chief Financial Officer.
Before we begin, please note. That today's discussion will include forward-looking statements regarding our future performance and financial results. These statements are subject to risk and uncertainties that could cause actual results to differ materially, please refer to our SEC filings for additional information regarding these risks
Speaker #3: Based on this performance, we are raising our full-year guidance. Marc will cover the numbers in detail. But before he does, I want to discuss what is driving these results and why we believe Johnson Controls is increasingly well-positioned to deliver sustained profitable growth over time.
We will also reference certain non-gaap measures, reconciliations of these 9 Gap measures are included in our earnings release and the appendix, to today's presentation, both of which are available on the investor relations section of our website. I will now turn the call over to Yoakum
Thanks, Mike, and good morning, everyone. Thank you for joining us on today's call.
Speaker #3: The answer starts with the customers we serve and the role they play in the global economy and greater society. Every era is defined by the infrastructure it demands.
Johnson Controls delivered, another solid quarter, extending the momentum, we established in the first half and reflecting continued, strength across the business. Let's begin with slide 4.
Speaker #3: And this is the age of thermal management. AI factories advance in biopharma manufacturing, large research hospitals and universities require thermal management solutions capable of delivering performance, precision, and energy efficiency at unprecedented scale.
Customer demand remained healthy across our portfolio driven by the increasing need for high performance, precise and energy, efficient operating conditions.
Speaker #3: As AI infrastructure scales, customers are increasingly focused on maximizing computing capacity from available power. Yesterday, we introduced our AI factory absorption chiller reference design guide, which demonstrates how advanced thermal management can reduce cooling electrical demand by approximately 44% by converting waste heat into productive cooling.
Order momentum sustained above 25%, Revenue, grew 10%, adjusted ebit margin expanded, 260 basis points, to 17% adjusted, EPS, increased 35% and backlog grew. More than 30% to a record, 21 billion dollars.
Based on this performance, we are raising our full-year guidance. Mark will cover the numbers in detail, but before he does, I want to discuss what is driving these results, and why we believe Johnson Controls is increasingly well positioned to deliver sustained, profitable growth over time.
Speaker #3: These efficiency gains support additional AI computing capacity without increasing on-site power generation, creating the potential for billions of dollars of additional revenue over the life of a 1-gigawatt facility.
The answer starts with the customers we serve and the role they play in the global economy and greater society.
Every era is defined by the infrastructure at demands and this is the age of thermal management.
Speaker #3: While this represents a new approach for many data centers, it builds on more than 65 years of York absorption innovation and decades of experience deploying the technology and demanding environments.
AI factories, advanced and bio-pharma manufacturing, large research, hospitals, and universities require thermal management solutions capable of delivering performance, precision, and energy efficiency at unprecedented scale.
Speaker #3: This is yet another example of how Johnson Controls is helping customers get more value from existing power infrastructure while addressing one of the most significant constraints to scaling AI capacity.
As AI infrastructure, scales customers are increasingly focused on maximizing Computing, capacity from available power.
Speaker #3: It also expands our capabilities as we continue to innovate across the entire thermal management chain enabling us to play an even greater role in next-generation AI facilities.
Yesterday, we introduced our AI Factory absorption chiller reference design guide, which demonstrates how advanced thermal management can reduce cooling electrical demand by approximately 44% by converting waste heat into productive cooling.
Speaker #3: We are winning with customers by focusing where our technology differentiation matters the most, turning manufacturing into a competitive advantage and meeting our customers' need for flawless, uninterrupted operations.
These efficiency gains support additional AI Computing, capacity, without increasing on-site power generation, creating the potential for billions of dollars of additional Revenue over the life of a 1, gigawatt facility.
Speaker #3: Our lifecycle service franchise continues to benefit from the increasing importance of uptime, reliability, protection, and energy efficiency. Supported by an unmatched global field presence that allows us to serve customers wherever they operate and throughout the life of their assets.
While this represents a new approach for many data centers, it builds on more than 65 years of York absorption Innovation and Decades of experience deploying the technology and demanding environments.
Speaker #3: Our proprietary business system that defines how we work and deliver is beginning to translate into more predictable execution giving us an increasing confidence in our long-term potential.
This is yet another example of how Johnson Controls is helping customers get more value from existing power infrastructure, while addressing one of the most significant constraints to scaling AI capacity.
Speaker #3: Let me walk you through this on slide 5. Johnson Controls was built for this time because of two competitive advantages: for $140 years, we've shaped and protected indoor environments where the world's most important work gets done.
It also expands our capabilities as we continue to innovate across the entire thermal management change and enabling us to play an even greater role in Next Generation, AI facilities.
Speaker #3: That track record is built on two strengths that are difficult to replicate. First, our deep proprietary technology know-how and, second, an unmatched global field presence field technicians that are roughly twice the scale of our nearest competitor.
We are winning with customers by focusing, where our technology differentiation matters, the most turning manufacturing into a competitive advantage and meeting our customers need for flawless uninterrupted operations.
Speaker #3: Together, those capabilities give us a differentiated position in markets where performance, precision, and speed increasingly matter. We amplify these strengths through three growth accelerators.
Our life cycle service, franchise continues to benefit from the increasing importance of uptime reliability, protection and Energy Efficiency supported by an unmapped. Global field presence that allows us to serve customers wherever they operate and throughout the life of their assets.
Speaker #3: First, our strategic pillars provide clarity on where we focus our resources. Our solutions directly address the growing need for high-performance, precision, and energy efficiency across some of the fastest-growing areas of the economy.
Our proprietary business system that defines how we work and deliver is beginning to translate into more predictable execution, giving us an increase in confidence in our long-term potential.
Let me walk you through this on slide, 5, Johnson Controls was built for this time because of 2 competitive advantages.
Speaker #3: AI, mission-critical environments, and decarbonization. By aligning our organization around these opportunities, we can direct innovation, commercial, and operational resources toward the segments where we see the greatest potential to create value.
For 140 years, we've shaped and protected, the indoor environments where the world's most important work gets done.
That track record is built on 2 strength that are difficult to replicate.
First.
Speaker #3: Second, our proprietary business system which we continue to embed throughout the organization. This is how we run the company. It provides a common language and methodology for how we communicate, collaborate, and continuously improve.
A deep proprietary technology know-how and second an unmatched Global field presence with sales solution, Architects and field technicians that are roughly twice, the scale of our nearest competitor.
Together, those capabilities give us a differentiated position in markets, where performance, precision and speed increasingly matter.
Speaker #3: The objective is straightforward: win more customers by solving their biggest problems faster and more consistently than anyone else. That requires both winning behaviors as well as standard approaches that elevate and continuously improve the way we work.
We amplify these strengths through 3 growth accelerators.
Speaker #3: It is how we accelerate, rate, and speed of innovation, turn manufacturing into competitive advantage, and improve execution across our commercial and field operations. And third, we bring together our strategic pillars and business system to translate these advantages into growth, productivity, and shareholder value.
Growing need for high-performance, precision, and energy efficiency across some of the fastest-growing areas of the economy.
AI Mission, critical environments and decarbonization.
By aligning our organization around these opportunities, we can direct innovation, commercial, and operational resources toward the segments where we see the greatest potential to create value.
Speaker #3: It is about accelerating speed by limiting waste and processes focusing resources on the highest value opportunities and driving better outcomes for customers and shareholders alike.
Second, our proprietary business system, which we continue to embed throughout the organization—this is how we run the company.
Speaker #3: Moving to slide 6. On June 1, we hosted Going to Gemba Day. Providing a firsthand look at how strategy is translating into execution across Johnson Controls.
It provides a common language and methodology for how we communicate, collaborate, and continuously improve.
The objective is straightforward: win more customers by solving their biggest problems, faster and more consistently than anyone else.
Speaker #3: You heard directly from the team's closest to our customers and day-to-day operations, and saw how the business system is better enabling those colleagues to deliver for customers in targeted areas of the business.
That requires both winning behaviors, as well as standard approaches, that elevate and continuously improve the way we work.
Speaker #3: Our first stop was JDEC, our Advanced Development Engineering Center, and home of York, where 150 years of leadership at HVAC and thermal management demonstrated the increasing importance of innovation performance and precision.
It is how we accelerate the rate and speed of innovation, turn manufacturing into a competitive advantage, and improve execution across our commercial and field operations.
And third.
Speaker #3: You saw how our technology depth and R&D talent combined with the business system are unlocking a new level of speed and innovation capacity. In one example, the team accelerated this speed to market on a key product by 40%, helping us win a major customer opportunity.
We bring together our strategic pillars and businesses to translate these advantages into growth productivity and shareholder value.
Is about accelerating speed by limiting waste and processes. Focusing resources on the highest value opportunities and driving better outcomes for customers and shareholders alike.
Moving to slide 6.
Speaker #3: Second, we went to our airside center of excellence, or ACE, where for more than 50 years we've manufactured critical airside technologies. ACE is one of approximately 40 manufacturing facilities around the world where we are turning manufacturing into competitive advantage.
On June 1st we hosted going to Gamba day providing a first-hand. Look at how strategy is translating into execution across Johnson Controls.
Speaker #3: At ACE, we showcased how the team applied the business system to more than quadruple capacity on the computer room air handler line without significant capital investment, achieving 100% on-time delivery, reducing customer lead times by half, shrinking required manufacturing floor space by more than 30%, and cutting inventory by 50%.
You heard directly from the teams closest to our customers and day-to-day operations, and saw how the business system is better enabling those teams to deliver for customers in targeted areas of the business.
Our first stop was Jade Deck, our Advanced Development Engineering Center and home of York.
Where 150 years of leadership at HVAC and thermal management, demonstrated the increasing importance of innovation and performance and precision.
Speaker #3: Our final stop was our local market office in Baltimore. Where for the last 100 years the team has built deep relationship with owners, contractors, and consultants.
You saw how our technology depth and R&D Talent combined with the business system are unlocking a new level of speed and Innovation capacity.
Speaker #3: You saw how these same business system approaches and mindsets are improving customer-facing execution across system sales, system project execution, service sales, and service operations.
In one example, the team accelerated the speed to market on a key product by 40%, helping us win a major customer opportunity.
Second, we went to our airside Center of Excellence, or ACE, where for more than 50 years we've manufactured critical airside technologies.
Speaker #3: The team demonstrated how they're doubling customer-facing selling time, accelerating project engineering, improving service attachment rates, and reducing non-value added activities helping strengthen long-term relationships across the customer lifecycle.
Case is 1 of approximately 40 manufacturing facilities around the world where we are turning manufacturing into competitive advantage.
Speaker #3: These examples demonstrate what is possible as we continue to deploy our business system across the enterprise. While scaling takes time, we're already seeing improvements in performance, and the customer experience on targeted areas of business, highlighting what's possible as this becomes how we work everywhere.
At ACE, we showcased how the team applied the business system to more than quadruple capacity on the computer room air handler line without significant capital investment, achieving 100% on-time delivery, reducing customer lead times by half, shrinking required manufacturing force base by more than 30%, and cutting inventory by 50%.
Speaker #3: That opportunity reinforces our confidence in the updated long-term algorithm we introduced that day. We outlined a clear path to high single-digit revenue growth, operating leverage of more than 30%, double-digit adjusted EPS growth, and adjusted free cash flow conversion of approximately $95 to 100%.
our final stop was our local market office in Baltimore where for the last 100 years, the team has built deep relationship with owners contractors, and Consultants
Speaker #3: In summary, we are building momentum across the business. Our capabilities are critical to the high-growth sectors we serve, which are becoming more demanding, more energy-intensive, and more consequential.
You saw how these same business system approaches and mindsets are improving customer-facing execution across system sales System project execution, service sales and service operations. The team demonstrated, how they're doubling customer-facing. Selling time, accelerating project engineering, improving service, attachment rates and reducing non-value added activities. Helping strengthen long-term relationships across the customer life cycle,
Speaker #3: Customers increasingly require thermal management solutions that deliver performance, precision, and energy efficiency while helping them manage costs, capacity, and energy usage. Our ability to meet these evolving customer requirements will be a key driver of sustainable growth.
These examples demonstrate what is possible as we continue to deploy our business system across the enterprise.
While scaling takes time, we're already seeing improvements in performance.
And the customer experience on. Targeted areas of business. Highlighting, what's possible as this becomes how we work everywhere?
Speaker #3: Our business system is helping us translate our competitive advantages into better customer outcomes, more predictable execution, and improved productivity. Together, our technology innovation, manufacturing capability, global field presence, customer relationships, and business system position us to create value for customers and shareholders for years to come.
That opportunity reinforces our confidence in the updated long-term algorithm we introduced that day.
We outlined a clear path to High single-digit Revenue growth.
Operating leverage are more than 30%, double digit, adjusted, EPS growth and adjusted free cash flow. Conversion of approximately 95 to 100%.
Speaker #3: With that, Marc will now walk you through the details.
Speaker #2: Thanks, Joakim, and good morning, everyone. We delivered another solid quarter with broad-based growth, continued margin expansion, and stronger earnings. Our third quarter results reflect the momentum we have built throughout the year, supported by healthy customer demand, disciplined execution, and continued productivity gains across the business.
In summary, we are building momentum across the business. Our capabilities are critical to the high growth sectors, we serve, which are becoming more demanding, more energy, intensive, and more consequential.
Customers increasingly require a thermal Management Solutions that deliver performance, precision, and Energy Efficiency, while helping them manage, costs, capacity and energy usage.
Our ability to meet these evolving customer requirements will be a key driver of sustainable growth.
Speaker #2: Let's turn to result on slide 7. Organic sales increased 10% in the quarter, led by strength in applied HVAC and continued growth across both systems and service.
Speaker #2: System sales increased 11%, service increased 7%, and applied HVAC delivered high team growth supported by data center demand. This performance drove meaningful margin expansion, adjusted segment EBITDA margin expanded 220 basis points to 20%, while adjusted EBIT margin expanded 260 basis points to 17%.
together our Technology Innovation, manufacturing capability, Global field presence, customer relationships and business system position us to create value for customers and shareholders for years to come
With that, Mark will now walk you through the details.
Thanks for your time, and good morning, everyone.
We delivered another solid quarter with broad-based growth continued, margin expansion, and stronger earnings.
Speaker #2: Adjusted EPS was $1.42, up 35% year over year, and ahead of our guidance. Let's discuss our regional performance in more details on slide 8 and 9.
Our third quarter results reflect the momentum we have built throughout the year, supported by healthy customer demand, disciplined execution, and continued productivity gains across the business.
Let's turn to the results on slide 7.
Speaker #2: Orders increased 27%, extending the strong order momentum we have seen throughout fiscal 2026. Systems order grew 40%, service order increased 4%, and customer activity remained healthy across our key end markets.
Organic sales increased 10% in the quarter. Led by strength in applied HVAC and continued growth across both systems and service.
System sales increased 11% service increase 7%, and I applied to impact delivered High team growth supported by data center demand.
Speaker #2: From a regional perspective, the Americas continued to lead our performance with orders increasing 37%, led by sustained demand from data centers and other mission-critical environments.
Speaker #2: EMEA orders increased 6%, driven by high single-digit system growth. In APAC, orders grew 12%, reflecting growth across several regions including Northeast Asia, and India.
This performance drove meaningful marketing expansion, adjusted segment margin expanded 220 basis points to 20% while adjusted ebit margin expanded 260 basis points to 17% adjusted. EPS was a dollar and 42 cents up 35% year-over-year and ahead of our guidance.
Let's discuss our regional performance in more detail on slides 8 and 9.
Speaker #2: Across our end markets, demand remained healthy as customers continued to invest in high performance, reliable, and energy-efficient operating environments. Turning to revenue performance by region.
Orders increased 27%, extending the strong order momentum we have seen throughout fiscal 2026.
Speaker #2: India Americas organic revenue increased 11%, led by high teams growth in applied HVAC and solid double-digit growth in service. In EMEA, sales increased 1% despite the ongoing conflict in the Middle East.
Systems order grew 40%, service order increased 4% and customer activity. Remained healthy across our key and markets
Speaker #2: APAC grew 15%, led by 20% growth in system and continued strength in applied HVAC. Turning to margins by region. In the Americas, adjusted segment EBITDA margins expanded 260 basis points to 21%, driven by strong operating leverage on higher revenue.
From a regional perspective, the Americas continue to lead our performance with orders, increasing 37% led by sustained, demand from data centers and other Mission critical environments.
AIA orders increase 6% driven by high single digit system growth.
In APAC, orders grew to 12%, reflecting growth across several regions including Northeast Asia and India.
Speaker #2: In EMEA, margin expanded 20 basis points to 14%, as growth was largely offset by the impact of a recent divestiture. In APAC, margin expanded 180 basis points to 21%, supported by productivity improvements, favorable business mix, and higher revenues.
Across our end, markets demand, remain healthy, as customers continue to invest in high performance, reliable and energy efficient operating environments.
Turning to revenue performance by region.
In the Americas, organic Revenue increased 11% led by High Teens growth in applied HVAC and solid double digit growth in service.
Speaker #2: Backlog increased 32% year over year to a record 21 billion dollars. The strength in backlog supports our confidence in both our near-term outlook and our ability to deliver against the long-term growth algorithm we outline at going together that day.
In emia sales increased 1% despite the ongoing conflict in the Middle East.
APAC, grew, 15% led by 20% growth in system and continuous strength in applied HVAC.
Turning to margins by region.
Speaker #2: Turning to our balance sheet and cash flow on slide 10. We ended the quarter with approximately $600 million of cash on hand. Net debt declined to $1.9 times, below our long-term target range.
In the Americas, adjusted segment margins expanded 260 basis points to 21%, driven by strong operating leverage on higher revenue. In AIA, margin expanded 20 basis points to 14%, as growth was largely offset by the impact of a recent divestiture.
Speaker #2: Year to date, adjusted free cash flow increased to $2.1 billion, driven by earnings growth and disciplined cash conversion. We are no better positioned to invest in the business while maintaining balance sheet flexibility.
In APAC, margin expanded, 180 basis points to 21% supported by productivity improvements favorable business makes and higher revenues.
Speaker #2: Let's now discuss our fiscal fourth quarter and full-year guidance on slide 11. For the fourth quarter, we expect organic revenue growth of 9 to 10%, operating leverage of 45 to 50%, and adjusted EPS of approximately $1.55.
Backlog increased 32% year-over-year to a record $21 billion.
The strength in backlogs supports our confidence in both our near-term outlook and our ability to deliver against the long-term growth algorithm we outlined at Going Together.
Turning to the balance sheet and cash flow on slide 10.
Speaker #2: Our strong third quarter result and record backlog gives us the confidence to raise our fiscal 2026 guidance. We know expect organic revenue growth of approximately 8%, up from our previous expectation of approximately 6%.
We ended the quarter with approximately million dollar of cash on hand.
Net debt declined to 1.9 times below a long-term target range.
Speaker #2: We expect full-year operating leverage of 45 to 50%, consistent with our focus on profitability and disciplined execution, while delivering stronger revenue growth. As a result, we are raising our adjusted EPS guidance to approximately $5.05, representing roughly 35% growth and 50 cents higher than our original guide at the beginning of the year.
Year-to-date adjusted free cash flow increased to $2.1 billion, driven by earnings growth and disciplined cash conversion.
We are no better position to invest in the business while maintaining balance sheet. Flexibility
That's not discussed for fiscal, fourth quarter and full year guidance on slide 11.
Speaker #2: We continue to expect adjusted free cash flow conversion of approximately 100% for the full year, demonstrated that the higher earnings we are delivering continue to translate into strong cash flow generation.
A strong, third quarter, result and record. Backlog gives us the confidence to raise or fiscal 2026 guidance.
Speaker #2: As Joakim mentioned, while we remain early in our business system journey, we are beginning to see benefits in targeted areas of the organization, as we continue to embed our business system across the enterprise we expect further opportunity to improve productivity, execution, and customer responsiveness over time.
We know, expect organic Revenue, growth of approximately 8% up from our previous expectation of of approximately 6%.
We expect fully operating leverage of 45% to 50%, consistent with our focus on profitability and disciplined execution while delivering stronger revenue growth.
Speaker #2: Operator, we are now ready for questions.
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As a result, we are raising our adjusted EPS, guidance to approximately 5 and 5 cents, representing roughly, 35% growth and 50 cents higher than our original guide at the beginning of the year.
Speaker #1: We ask you please limit yourselves to one question and one follow-up. We'll wait one moment to allow the queue to form. Our first question will come from Nigel Coe with Wolf Research.
We continue to expect adjusted free, cash flow conversion of approximately a 100% for the full year demonstrated that the higher earnings, we are delivering continue to translate into strong cash flow generation.
As Yorkie mentioned, while we remain early in our Business System journey, we are beginning to see benefits in targeted areas of the organization.
Speaker #1: Your line is unmuted.
Speaker #3: Good morning, everyone.
Speaker #4: Good morning, thank you.
Speaker #3: Thanks for the question. Good morning. So I just wanted to maybe randomly start off with supply chain just given its seems to be a growing issue for some of the data center infrastructure suppliers.
As we continue to embed our business system across the Enterprise, we expect further opportunity to improve productivity, execution and customer responsiveness over time.
Operator. We are now ready for questions.
Speaker #3: I'm just curious Joakim, how are you feeling about the resilience of the supply chain, any bottlenecks you're experiencing, and confidence on sort of delivering on plan from here?
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Speaker #4: Yeah, so supply chain is always an issue when you're in a high-growth environment. And that's the headline. But then let's dig into that. If you remember from the go-to-gambit day, we were talking about how our deep technological know-how spans the five subsystems that make up an HVAC chiller.
We ask that you please limit yourselves to one question and one follow-up.
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Our first question will come from Nigel. Co with Wolfe research.
Speaker #4: But we also talked about the fact that we control the manufacturing and the cogs of those five subsystems. So we are more vertically integrated than some in our industry and in a high-growth environment that, of course, means that we control more of our own supply chain.
Your line is unmuted. Good morning everyone.
Speaker #4: And so I feel very good about where we are on many of our product lines. And then, of course, we don't make every single thing.
All right, thank you. Uh, good morning. Great question. Um, good morning. Um, so just wanted to, uh, I mean, maybe randomly start off with, uh, supply chain. Just giving its uh, seems to be a growing issue for some of the um, some some of the data center infrastructure supplies. I'm just curious, uh, Yokem, how you feeling about
Speaker #4: We don't drink a dig iron ore out of the parking lot. So, of course, we depend on external vendors as well. Occasionally, there are some bottlenecks.
Uh, the Brazilians, the supply chain—um, any bottlenecks you're experiencing, and confidence on sort of delivering on plan from here?
Speaker #4: We try to get ahead of that. Very occasionally, I will have to get involved myself personally and that is just, I think, an element of operating in a higher growth environment.
Yeah, so supply chain is always an issue when you're in a high growth environment and um that's the headline. But then let's dig into that. Uh if you remember from the go to gambling,
Speaker #3: Okay, that's great. Thanks, Joakim. And then obviously, it's really encouraging to see the double-digit organic growth, minus 10% in fourth quarter. I know it's a little bit early for FY27 color, but you've got really good visibility of the backlog.
We were talking about how uh our deep technological know-how spans, the 5 Subs that make up an HVAC Chiller. Um, but we also talked about the fact that we control the manufacturing and the cogs of those 5 subsystems. So um, we are more vertically integrated uh than some in our industry and in a high growth environment that of course means that we control more of our own supply chain.
Speaker #3: I'm just curious how you're thinking about kind of top-line growth in FY27.
Speaker #2: Yeah, you know, as you mentioned, Nigel, it's a bit too early to provide real specific fiscal year 27 guidance. But I'll tell you, we remain extremely confident in the way we've laid out the long-term algorithm at going to gambit day.
Speaker #2: Of high single-digit growth, top-line growth, and at least 30% of incremental. You will see quarters that perform at or above that level over the next couple of quarters.
And so I feel very, very good about, um, where we are, uh, on on many of our product lines, and then of course, we don't make, uh, every single thing we don't drink dig, uh, iron ore out of the parking lot. So of course, we that depend on external vendors as well. Um, occasionally, there are some bottlenecks, uh, we try to get ahead of that. Um, very occasionally, I will have to get involved myself personally. And, and that is just, uh, I think an element of operating in a higher growth, uh, environment.
Speaker #2: And that's really supported by our record backlog and the fact that our pipeline continued to grow in a very healthy manner. And the business system allows us to kind of improve the execution on that backlog and position us well for the future.
Speaker #2: But we'll provide you details on how we look at 27 at the next earnings call.
Okay, that that's great. Thanks, thanks again. And then, um, obviously it's it's really encouraging to see, you know, the, the double digit organic growth. Uh moment 10% in fourth quarter. Um, I know it's a little bit early for FY, 27, uh, color, but you've got really good. Visibility of the backlog and just curious how you're thinking about, uh, you know, kind of Topline growth and FY 27.
Speaker #3: That's great, thank you.
Speaker #1: Our next question will come from Amit Mehrotra from UBS.
Speaker #3: Good morning, gentlemen. Appreciate the question. I wanted to ask about the outlook for growth in applied HVAC. Obviously, huge step up in the quarter from sort of high single-digits to high teens growth.
Speaker #3: But orders are sort of running well ahead of that. And so I guess the question is, could you just offer any thoughts on sort of where we go?
Speaker #3: Can we further accelerate or are there just and high teens is very good and sort of that's the expectation going forward?
Causes to kind of improve the execution uh on that time the backlog and and and position as well for the future. But uh, we'll provide you details on on how we look at 27 at at at the next earnings call.
Speaker #4: Hey, good morning, Amit. Well, the way we think about it, we look at our pipeline and our pipeline continues to grow. At a very healthy rate.
That's great. Thank you.
Our next question will come from Amit Meera from UBS.
Speaker #4: And as you would suspect, data centers is an important part of that. But the non-data center pipeline actually is growing almost double-digit. So we're we feel very good about the continued strength here in our business from the demand side.
Good morning, gentlemen, appreciate the question. Um, I I wanted to ask about um
Speaker #4: And then from a supply chain and capacity point of view, we made meaningful physical plant investments about two years ago I think we had mentioned on a prior call earlier this year that we were ramping in those new facilities or expanded facilities.
Speaker #4: And we continue to do that and we actually had a very good quarter so we're ramping a little bit ahead of what we thought.
The outlook for growth in applied HVAC, obviously, huge step up in the quarter, uh, from sort of high single digits to High Teens growth. Um, and but orders are sort of running, well, ahead of that. And so, I guess the question is, could you just offer any thoughts on sort of where we go? Um, can we further accelerate or you know, are there just capacity or supply chain constraints and you know High Teens is very good and and and sort of that's the expectation going forward.
Speaker #4: And that's really our proprietary business system. At work, combined with some strengthening of the leadership that we have that's in charge of that part of the company.
Um, hey, good morning, Albert. Well, the way we think about it, you know, we look at our pipeline—our pipeline continues to grow at a very healthy rate.
Speaker #4: And the business system is going to continue to, as you saw, since you were there at the go-to-gambit day, help us create more capacity in the physical space that we already have.
Speaker #4: But of course, with this kind of growth, we're also going to have to add some new physical capacity. But the business system will help us stay ahead of that so we have some time to ramp other physical capacity expansion.
Speaker #4: So we feel pretty good at where we're at right now.
Speaker #3: Okay, got it. So it just I mean, just kind of understand what you're saying beneath the surface. It doesn't seem like there's any impediment to sort of further accelerate growth in applied HVAC.
And, uh, as you would suspect data centers is, is an important part of that. But, uh, uh, the non-data center pipeline, uh, actually, is is growing, uh, almost double digits. So, we're we feel very good about the continued, uh, strength here in our business from the demand side. Uh, and then from a supply chain and capacity point of view, um, we made, uh, meaningful physical plants, uh, Investments, about 2 years ago. Uh, I think we had mentioned on a prior call earlier this year that we were ramping in those new facilities or expanded facilities.
Speaker #3: And I guess my follow-up question on that, is around margins and operating leverage? Because you have this long-term framework of 30% plus. Obviously, you're punching way above that this year as you start this business model kind of evolution.
And uh, and and that we continue to do that. And we actually had a, a very good quarter. Uh, so we're ramping a little bit ahead of what we thought and it, that's really the our proprietary business system at work. Uh, combined with some strengthening of the leadership that we have that's in charge of that, part of the company.
Speaker #3: As we think about 27, 28, I mean, the backlog I assume as it converts is accretive to margins. Do we have another year or two where we're sort of punching above that 30% plus long-term target?
Speaker #3: How do we think about the slope of the operating leverage as we sort of further progress through this evolution?
And uh the the business system is going to continue to as you saw since you were there as I go to Gamba day, help us create more capacity in the physical space that we already have. Um, but of course, with this kind of growth, we're also going to have to add some new physical capacity but but the business system will help us uh stay ahead of that. Uh so we have some time to to ramp other physical capacity expansion. So we feel pretty good at what what where we're at right now.
Speaker #4: Yeah, I mean, as you
Speaker #2: see the growth accelerating beyond the mid single-digit you've seen that we've been able to maintain this year what I would call a very healthy operating leverage.
Okay, got it. So, it just—I mean, just...
Speaker #2: Between 45 and 50%. And that incremental revenue that we see is converting at rates that is extremely healthy. But it's closer to the long-term operating leverage framework we had laid out of 30 plus percent.
Speaker #2: So dynamically, you will see still higher than 30% operating leverage over the next 12, 18, maybe 24 months. But the way you need to think about that is the margin that we see in that incremental growth comes mostly from our data center revenue, which becomes a very large portion of our mix.
Trying to understand what you're saying beneath the surface, it doesn't seem like there's any impediment to sort of further accelerate growth and applied HVAC and and my I guess my follow-up question on that um, is around margins and operating leverage because you have this long-term framework of 30%, plus obviously, your punching way above that this year. As, as you start this business, um, uh, model, uh, kind of evolution. Um, as we think about 2728, I mean, the backlog, I assume as it converts is a creative to margins. Um, do we have another year or 2 where we're sort of punching above that 30%, plus long-term Target? How do we think about the the the the slope of the operating leverage as we sort of further progress through this evolution?
Speaker #2: And that means systems or systems business is growing ahead of our service business in the near term and that creates a small equipment mix margin a small headwind, I would call it.
Speaker #2: But nothing that would prevent us from continuing to commit well above the 30% incremental we laid out in go-to-gambit day as part of our long-term algorithm.
Yeah, I mean that you see the growth accelerating beyond the mid single digits. Um, you you've seen that we've been able to maintain this year, um, what I would call a very healthy operating leverage, uh, between 45 and 50 Cent. And that incremental Revenue that we see is converting at rates. Um, that is extremely healthy. Um, but these closer to the long term, um, operating leverage framework. We, we had laid out of 30 plus percent
Speaker #3: Got it. Okay, that makes a lot of sense. Thank you very much. Appreciate it.
Speaker #4: Thanks, Amit.
Um, so dynamically, you will see still higher than 30% operating leverage over the next 12 to 18, maybe 24, months.
Speaker #1: Our next question will come from Scott Davis with Melius Research.
Speaker #5: Hey, good morning, fellas.
Speaker #4: Hey, Scott.
Speaker #2: Hey, Scott.
Speaker #5: Congrats again on putting together some solid numbers here. Not looking to blow sunshine up your tail, but these are good results. So anyways, I wanted to ask you guys a little bit about market share shifts and potential I mean, how do the hyperscalers think about working with you guys and your peers?
Speaker #5: Do they think in terms of de-risking and kind of peanut butter spreading around kind of their supply base? Do they think in terms of who has the best capabilities and capacity delivery and quality?
We laid out in, uh, in go-to-market by the, uh, uh, as part of our long-term algorithm.
Got it. Okay, that makes a lot of sense. Thank you very much. I appreciate it.
Thanks so much.
Speaker #5: I mean, how are they thinking about it? And are you seeing any supply chain shifts that either benefit you guys or maybe perhaps don't benefit you guys?
Our next question will come from Scott Davis with Melius Research.
Hey, good morning, fellas.
Speaker #4: Yeah, I think the way it works, Scott, is our large data center customers they design or architect their data centers in certain ways. They make certain equipment choices as part of that overall architecture.
Hey, Scott. Congrats—uh, congrats again on putting together some solid numbers here.
I'm not looking to blow sunshine up your tail, but these are good results.
um, so anyways, I I wanted to ask you guys a little bit about uh,
Market share, shifts, and potential. I mean, how did the hyperscalers think about working with
Speaker #4: And then they are engaging with vendors as they do that. So I think you've heard that many times our large data center customers will send groups of engineers to sit with our engineers for a week, 10 days.
you guys and your peers, do they think in terms of
Of de-risking and kind of peanut butter or spreading around kind of the their, their supply base. Do they think in terms of who has the best?
Capabilities. And, um,
Speaker #4: So think of that as you're designed in and they will rarely just pick one partner that they design in with. There might be more two.
You know, capacity, delivery and, you know, quality—I mean, how are they thinking about it? And are you seeing any supply chain shifts that either benefit you guys, or maybe perhaps don’t benefit you guys?
Speaker #4: There might even be three. And then when it comes to this particular version this architecture of a data center that they might build let's just pick a number 10 of over the next two to three years they will then ask for or sit down with these couple of vendors that they've decided to work with from a design point of view and typically what happens is someone will get no one will rarely get all of it.
Yeah, I think the the way it works Scott is um, our large data center customers. Uh,
They design or architect, um, their data centers.
It in in certain ways they make certain, uh, equipment choices.
uh, as part of that overall architecture and, uh, and then they and they are engaging with, uh,
Speaker #4: It's usually split, but someone will get a little more of their purchases. And even if initially you were awarded a certain amount by executing better, for example, lead times, having less supply chain issues, and so on, you might actually in reality secure more than over time than you thought initially in the dialogue with the customer.
Vendors as they they do that. So I think you've heard that many times. Our our data center customers will send groups of Engineers to sit with our Engineers for for a week, 10 days.
Um, so so think of that as you you're designed uh in and they will rail to just pick 1 uh uh partner that they design in with there might be more 2. There might even be 3,
Speaker #4: So that's kind of broadly how it works. So you need to be so the conclusion is you need to be very actively involved on the design side when their architecting the overall data center.
And then, when it comes to, uh, this particular version, this architecture of a data center that they might build,
Speaker #4: And that's a very collaborative approach. And obviously, you need to then be competitive in their initial selection. And then you need to execute competitively to perhaps punch a little bit beyond the initial award if you will.
Uh, let's just pick a number—10—over the next two to three years. Um, they will then, um, ask for, uh, or sit down with these couple of vendors.
Speaker #5: And is the service side of it a similar kind of situation?
Speaker #4: Yeah, it's the service a good point. So that's usually part of the initial selection is your capability to be able to support the customers in the locations where the data centers are being built.
Speaker #4: And typically, what we do is as we get closer to actual selection of equipment for a particular site, of course, we will make sure that we make the customers very well aware of our local footprint.
Speaker #4: And as I think you know, our footprint is comprehensive. Across the United States and many countries around the world. And because historically, we've had a focus of having our own people serve our customers.
Um, but they've decided to to work with from a design point of view. And, uh, and typically what happens is, someone will get uh, no 1 will rarely get all of it. Um, it's usually split, but someone will get a little more, um, of their purchases. And, uh, even if initially, you were awarded a certain amount, uh, executing better for example, lead times having less, um, supply chain issues and so on. You might actually, uh, in reality secure more than over time than, than you thought initially, uh, in in the, uh, the dialogue with the customer. So, that's that's kind of broadly how how it works. So, um, you need to be so, uh, the conclusion is, you need to be very actively involved, uh, on the design side. When there are architecting, the overall Data Center.
And to and that's a very collaborative approach and uh, obviously you need to then be competitive, uh, in their initial selection. And then you need to execute competitively to perhaps punch a little bit beyond the the initial award. If you, if you will
Speaker #4: We have a few more feet on the ground than some of the other players in the industry. So we have multiple opportunities here to win but you need to win on the design side, to have a value prop that's strong.
And is the service inside of it in a similar kind of situation?
Speaker #4: You need to, of course, part of the value prop benefits versus costs be competitive. You need to execute well from a what's called a supply chain and delivery side.
Speaker #4: And then you need to have the ability and then later on the proof point that you can execute on service. And so when you can orchestrate all of that together, that's when you start to see market-winning growth.
Being built and, uh, and typically what we do is as we get closer to, uh, actual selection of equipment for a particular site. Of course, we will make sure that we, uh, make the customers very well aware of our local footprint. And as I think, you know, uh, our footprint is uh, comprehensive.
Speaker #5: And the question, I guess, really was our net net I mean, that was a fantastic answer. But net net, do you think you are gaining share then?
Speaker #4: We think we are for the categories that we focus on. Absolutely.
Speaker #5: Okay. Fair enough. Okay, thank you. Best of luck. I'll pass it on.
Uh, across the United States and many countries around the world. And, and, uh, because historically we've, we've, uh, had a focus of having our own people serve our customers, you know, we—we have a few more feet on the ground than some of the other players in the industry. So, so we have multiple opportunities here to—
Speaker #4: Thank you.
To to to win. Um, but you need to win on the design side to be to have the value prop that strong
Speaker #1: Our next question will come from Andrew Obin with Bank of America.
Uh, you need to, of course, uh, part of the value prop benefits versus costs be competitive.
Speaker #6: Good morning.
Speaker #4: Good morning, Andrew.
Speaker #6: Just a question I think you were highlighting at a recent industry event you were highlighting your product together with Armada, the modular product. I was just wondering if you could comment on how much interest you're getting from the customers and what kind of TAM it represents and also when and if it starts flowing through your revenue.
Uh, you need to execute well, from a um, let's call it supply chain and delivery side, and then you need to have uh, the ability and then later on the proof point that you can execute on service. And so, when you can, uh, orchestrate all of that together, that's when you you start to to see, um, Market winning growth,
Speaker #6: Is it margin accretive or is it margin diluted? Because of pass-through. Thank you. That's the first question.
And and the question I guess, really was our our net net. I mean, that was a fantastic answer. But net, net! Do you think you are gaining share? Then why?
Speaker #4: Yeah, great. Great question, Andrew. So we believe that the future data centers are not all going to be these mega data centers, the one gigawatts and maybe larger we believe that what we have seen when other human systems leveraging new technologies have been deployed across society that there's not just one approach and that there will be a decentralization.
We, we think we are for the categories that we focus on absolutely.
Okay.
Fair enough. Okay, thank you. Best of luck. I'll pass it on.
Thank you.
Our next question will come from Andrew Obin with Bank of America.
Good morning.
Good morning, Andrew.
Speaker #4: There will be a world where there are smaller closer to the edge closer to the end users different kinds of models of data centers.
Speaker #4: And it's really in that context that we collaborate with Armada and as you know, we also have an investment in that company. That application it's not brand new.
Uh, just a question. I think, uh, you were highlighting at a recent industry event, you were highlighting, uh, your product together with Armada the modular product. I was just wondering if you could comment, uh, on how much interest, uh, you're getting from the customers and what kind of Tam it represents. And also when and if it starts flowing through your revenue, is it margin or creative? Or is it margin diluted? Because uh of Pastor, thank you. That's first question.
Yeah, great. Great question, Andrew. So,
Speaker #4: These are, by the way think of them as data centers in a shipping container that we build in our factories and essentially has everything all the products that we sell at Johnson Controls in that shipping container.
Um, so we believe that the future data centers are not all going to be these mega data centers, the 1 gigawatt and maybe larger. We believe that...
Speaker #4: And these are a couple of megawatts and they get deployed and megawatts are increasing as we continue to innovate. And they are forward deployed.
Um, what we have seen when other human systems. Uh, leveraging, new technologies have been deported across society, that there's not just 1 approach and that there will be
Speaker #4: The traditional applications would think of oil and gas very remote locations and but there are also defense applications. And so we believe but we believe that those decentralized close to the edge types of applications are going to continue to grow and so we're very excited about the potential here.
Uh, a decentralization, there will be a a a world where there are smaller closer to to the edge to closer to the end users.
Um, different kinds of models of, of data centers. And it's really in that context, uh, uh, that we collaborate, um, with our Ma and
And, uh, as you know, we we also have an investment in that company.
Speaker #4: The TAM this is an earlier stage of the market. So the TAM is significant but it's in formation. So I hesitate to throw numbers out there.
Speaker #4: There are people who speculate around very significant numbers. We're working on a number of opportunities as we speak very meaningful ones and I think within the next couple of quarters we'll be able to talk a little bit more about this opportunity.
Um, that application, it's not brand new. Um, these are, by the way—think of them as data centers in a shipping container that, um, we build in our factories and, um, and essentially has—
Uh, everything, all the products that we we sell at Johnson Controls in in that shipping container.
Speaker #4: But think of it as an example where as I mentioned on the call, where we've taken a step back and we've basically as a company said, look, what's happening and human society and where can we bring our technological know-how to bear to advance human society and so we're taking a broader look at the AI opportunity and how we can help human society accelerate the advancements there.
And, um, these are a couple of megawatts, uh, and they get deployed, and now megawatts are increasing as we continue to innovate and they are forward deployed. Uh, the traditional applications would think of oil and gas. Um,
um, very remote locations um and but there were also defense applications and uh, so we believe but we believe that those decentralized
Close to the edge. Uh, types of applications are going to continue to grow.
Speaker #6: Thank you. And just a follow-up question. Where are we on sort of strategic review for some of the portions of your portfolio? Any update on timing where we could hear something from you?
Speaker #6: Thank you.
Speaker #4: So we continue the work on that. And as you've heard before, the guiding principle here is to create shareholder value. And but we continue to make progress and we will keep you posted but progress is good.
And uh, so we're very excited about the, the potential here. The The Tam, this is an earlier stage of the market. So the Tam is significant. Um, but it's it's in formation. So I hesitate to throw numbers up there. There are people who speculate around very significant numbers. Um, we're working on a number of opportunities, as, as we speak very meaningful ones. And, um, I think within the next couple of quarters, we'll be able to to talk a little bit more about this um, this opportunity.
But think of it as an example.
Speaker #2: And you've seen we've taken some portfolio action in the quarter. We continue to divest of residential subscriber business around the world. Quite successfully. We have a few more to go and we're making a lot of progress on actioning the commitment we've made in prior quarter in readjusting our portfolio adequately.
Society accelerate the advancements there.
Speaker #6: Thank you very much.
Speaker #1: Our next question will come from Chris Snyder with Morgan Stanley.
Thank you and just to follow up question. Uh, where are we on? Sort of strategic review for some of their portions of your portfolio? Any update on timing where we could uh hear something from you. Thank you.
Speaker #7: Thank you. I want to follow up on some of the commentary around data center and specifically I wanted to talk about your content within the data center.
So, we continue the work on that. And as you've heard before, the guiding principle here is to create shareholder value.
Speaker #7: I think on the last conference call, you guys said that your net content would go higher, but there is moving parts under the service.
Speaker #7: I think you said chillers could go down, but air handling goes up and then the CDU business certainly goes up. I would just maybe hoping to get a little bit more of a magnitude of those respective moves and really the heart of the question is is the legacy content going higher when we think about chillers and air handlers?
Speaker #7: And just versus how much of it is coming from CDU being a new product where you guys are gaining share? Thank you.
And, um, but we continue to make progress and we will keep you posted. Uh, but, uh, progress is good. And you've seen we've taken some portfolio action in the quarter. We we continue to digest or or residential, subscriber business around the world, um, quite successfully. We have a, a few more to go and, uh, we're making a lot of progress on on actioning. The, the commitment we've made in Prior quarter in, in readjusting, our portfolio adequately.
Thank you very much.
Speaker #4: I think broadly as we've commented before as rack densities increase, new chips are launched and put into use. The amount of heat generated in data centers continues to increase.
Our next question will come from Chris Snyder with Morgan Stanley.
Speaker #4: And by the way, with there are other things that generate heat too. Think the 800-volt DC and but not only. So the amount of heat that needs to be extracted out of a data center will continue to increase.
Speaker #4: And so therefore thermal management becomes even more critical for the data center. And obviously to do that energy efficiently is essential. So we will we really see the speculation around the reduced demand for chillers as that's going to be a very, very nominal impact if any.
Thank you. Um, I want to follow up on some of the commentary around Data Center and specifically. I wanted to talk about your content within the data center. Um, I think on the last conference call, you know, you guys said that your net content would go higher, but there was moving Parts under the service. I think you said chillers could go down.
But are handling goes up and then then the CDU business certainly goes up. Um I would just you know, maybe hoping to get a little bit more um of a magnitude of those respective moves. Um and really the heart of the question is like is the Legacy content going higher when we think about chillers and Air Handlers and and just burst how much of it is coming from, you know, CDU being a new product where you guys are gaining share. Thank you.
Speaker #4: We see the need for air handling units. Our silent air franchise, for example, continues to increase. The CDUs, as you pointed out, will become more important as more and more liquid cooling is implemented.
Speaker #4: And of course, we have the our alloy investment here from a couple of quarters ago that where we're making great progress and in pilots and some early orders now.
I think, you know, broadly, as we've commented before, as rack densities, increase new Chips, um are locked and put put into use the amount of heat generated and and data centers continues to increase. And by the way, with uh, there are other things that generate heat too. I think the 800 volt DC and and but not only so so the amount of heat that needs to be extracted that out of the data center will continue to increase
Speaker #4: And then our controls and then as you heard earlier today or the announcement we made yesterday, we now have an absorption chiller portfolio geared to the data center space that will allow our customers who generate power locally to capture a meaningful part of that excess heat and put it to use within the thermal management architecture, allowing them to reduce the power needed for thermal management by up to more than 40%.
And um, so therefore, you know thermal management becomes even more critical uh for the data center.
And uh and obviously to, to do that energy, efficiently uh is is essential. So um
It it, we will we we really see the speculation around the reduced demand for chillers. As that's going to be a very, very nominal, uh, impact if, if any
Speaker #4: So actually very, very meaningful value prop. So and we're going to continue to work on increasing our dollars per megawatt. If you will, I mean, even our model example that Andrew was asking about, as I mentioned, that container data center in a container I mean, it is loaded with everything that we make in this company.
We see the need for air handling units; our silent airport franchise, for example, continues to increase.
Um, the CD use as you pointed out will become more important as uh more and more liquid cooling is is implemented. And and of course we have um,
Speaker #4: So we are going to continue to drive the dollar value up per megawatt here. That's an essential part of our strategy.
The, our alloy investment here from a couple of quarters ago that, um, where we're making great progress, and, and pilots and some early orders now, and then our controls. And then, as you heard earlier today, or the announcement we made yesterday, we now have an absorption Chiller portfolio, geared to, to the data center space, that will allow
Speaker #7: Thank you. One thing that you've also talked about more is bringing in more comprehensive solution to market rather than maybe having the data centers piecemeal.
Speaker #7: Kind of the various equipment together. I imagine that that would lead to better energy efficiency for the data center. Is there any numbers or data or anything you could talk about about the level of efficiency savings?
Speaker #7: And then maybe the second point is do the hyperscaler customers care more about energy efficiency than they did a year ago? It's very obvious they should care given how much electricity they consume.
Speaker #7: But I know is there any difference between the type of customers and is there any do they care more than they used to? Thank you.
Speaker #4: You know, I think, Chris, they've always cared and I think they care a little more now. I mean, you read the same news that we read, right, around the headlines you hear about local communities being concerned about the impact on power prices and things like that.
our customers who, who generate power locally to, uh, capture a meaningful part of that excess heat and put it to use, uh, within the thermal management architecture, allowing them to, um, reduce the power needed for for thermal management by up to more than 40%. So actually very, very meaningful, um, value problem. So, and we're going to continue to work on uh, increasing our dollars per megawatt if you will. Um, I mean, even the Armada example that Andrew was asking about, uh, as I mentioned, you know, those that container at data center in a container. I mean, it is loaded with everything that we we make and, and this company. So um, we we are going to continue to uh, Drive the the dollar value up per megawatt here. That's an essential part of our strategy.
Um, thank you. You know, 1 thing that you've also talked about more is bringing in more comprehensive solution to Market rather than maybe, you know, having the the data centers piecemeal, um, you know, kind of the various equipment together.
Speaker #4: So which really leads the data center customers to make more careful choices about where they go build data centers. We haven't actually seen any impact on demand at all from what you see in the news.
Um, you know, I imagine that that would lead to better energy efficiency for the data center. Um, you know, is there any, like, numbers or data or anything you could talk about regarding the level of efficiency savings? And then maybe just the second point is,
Speaker #4: It's more a matter of where they get deployed. But the where has a lot to do with how much power is available. And there are constraints around power availability today.
And how much electricity they consume. But I know, is there any difference between the type of customers and is there any do they care more than they used to? Thank you.
Speaker #4: So of course, when they design a new data center that they're going to build 10 of over the next couple of years, it's easier to find more locations.
You know, I think Chris they've always cared and um,
Speaker #4: So less power you need, right? And then obviously the value prop of operating a data center. And if you're on thermal management, but today uses maybe think of it as a third of all the power that goes into a data center.
And I I think, uh, daycare a little more now. Um, I mean you you read the same news that we read right around the headlines to hear about the
Speaker #4: So whoever can eke out multiple percentage points of savings of energy not needed for thermal management, I mean, the value prop for that for our customers is very, very meaningful.
Local communities being concerned uh about the impacts on power prices and things like that. Um, so which really um leads the data center customers to
Speaker #4: And what we're working on is well beyond a couple of percentage points. And we'll talk to you more about that when we're ready to launch some of the solutions that we're working on right now.
To make more careful choices about where they go build data centers, as we haven't actually seen any impact on demand at all from what you see in the news. It's more a matter of where they get deployed.
Speaker #4: But really exciting. It's going to be very meaningful what we're working on.
But, but the where has a lot to do with, uh, how much power is available. And um, you know, there are constraints, uh, around power availability today. So
Speaker #7: Thank you. I appreciate that.
So uh of course when they design a new data center that they're going to build, you know, tanev over the next couple of years.
Speaker #1: Our next question will come from Jeffrey Sprague with Vertical Research.
Um if it's easier to find more locations, the less power you need, right? And then obviously the value prop of operating a data center,
Speaker #5: Thank you. Good morning, everyone.
Speaker #4: Good, Jeff.
Speaker #6: Hey, Jeff.
Speaker #5: Let me ask good morning. Let me ask even a bigger picture one if I can. Probably just more your opinion, Joakim, as opposed to something that could be truly answered.
Uh, and if you want thermal management, but today uses uh, maybe think of it as a third of all the power that goes into a data center. So whoever can
Speaker #5: But obviously there's a lot of hand-wringing out here in the market and investor sentiment about whether your end customers can really earnest acceptable return on all this investment looking out a ways and against that, obviously you've got to commit capital and you're adding capacity and the like.
Speaker #5: Just where do you stand on kind of the sustainability of this demand and do we have sustainable demand looking out two or three years that really supports the investments you're making and the confidence that we see apparent in the orders, et cetera?
Uh, EK out, you know, multiple percentage points of savings of energy not needed for thermal management. Um, I mean, the value prop for that, for our customers is very, very meaningful. And uh, what we're working on is well beyond a couple of percentage points and uh, we'll, we'll talk to you more about that when when we're ready to to launch uh some of the solutions that we're working on right now but really, really exciting. It's going to be very meaningful what we're working on.
Thank you, I appreciate that.
Our next question will come from Jeffrey sprag with vertical research.
Speaker #4: Yeah. So you asked for an opinion. So I'll give you an opinion. So as you know, I spent the five plus years before taking on this assignment in medical diagnostics and what's holding back the acceleration of the development of new therapies, vaccines, medicines, and diagnostics is our ability to make sense of all the data that exists already around human biology.
Thank you, good morning everyone. Um, let me ask good morning, let me ask you even a a, a bigger picture 1. If I can probably just more your opinion Yokem as opposed to something that could be truly answered. But, uh, obviously there's a lot of hand ringing out here in the market and Industrial sentiment about whether, you know, your end customers, you know, can really earn us, you know, acceptable return on all this investment looking out a ways, you know, and and against that obviously, you've got to commit capital and you're adding capacity and the like um, just where do you stand? Um, on
Speaker #4: And those industries are using AI already but if you think about versus what they could be using it, how they could be using it, I mean, we're still in the very, very early innings of usage.
Kind of the sustainability of this demand and do we have sustainable demand? Looking out, you know, 2 or 3 years, that really supports, you know, um, the Investments you're making and the and the confidence that we see a parent in the orders Etc.
Speaker #4: So I think the demand and it's not just that there are more researchers and this is a longer discussion now than there were. 20 years ago, doing research on human biology.
Speaker #4: But it's the availability of compute, the cost of it, and so on, the economics are very different, which means that more researchers have more access to AI and so that's just look at a corporation like our own for what we're using AI today.
Yeah, so so you asked for an opinion, so I'll give you an opinion. Uh so as as you know uh I spent the the the 5 plus years before taking on this assignment and uh medical Diagnostics and um
Uh, what's holding back? Uh, the acceleration of the development of new.
Uh, therapies, vaccines, medicines, um, and diagnostics.
Speaker #4: And I think we're making some good progress internally here. I mean, it's part of our proprietary business system that we're rolling out. But we're still single digits percent usage versus what we could be using it for and what I anticipate we'll be using it for over the next couple of years.
Is uh, our our ability to make sense of all the data that exists already around human biology.
And, um, those industries, um, are using AI.
Already. Um,
Speaker #4: So I think the demand for the output of the data centers is going to continue to grow meaningfully. I mean, we're just starting to understand and many large organizations how we can really use this capability at scale.
But if you think about versus what they could be using it for, how they could be using it.
Speaker #4: So I'm optimistic. I know there's a lot of speculation about CapEx and so on, but I think about it from a demand point of view and where it's going to be put to use.
Um, I mean, we're still in in the very, very early Innings of, of usage. So, I, I think that the demand and, and it's not just that there are more researchers and this is a longer discussion now than there were 20 years ago, doing research on on human biology, but it's the availability of compute, the cost of it. And so, on the economics are very different, which means that more
Speaker #4: And so I'm optimistic.
Speaker #5: Yeah. Yeah. No, helpful. And then just looking at maybe another little bit bigger picture question, but just looking at kind of the rising power demand and heat loads and the like, it would seem sort of the thermal and electrical solution need to clearly work in concert, not that they're not today, but just looking at your portfolio, or who you partner with on the electrical side, is there an avenue for JCI to play more on the electrical side or would this be sort of just a continued partnering relationship with whoever your hyperscale customer may choose to pick up that part of the equation?
Researchers have more access to Ai. And so, that's so, but super early Innings? And then I just look at a corporation, like, our own
Um, for what we're using AI today and I think we're making some good progress internally here.
Speaker #4: Yeah. I mean, I'd answer that. It's a good question. I'd answer that in a couple of ways. If you look at our materials from the Go to Gemba day where we talked about the five subsystems of a chiller, that we are part of our core proprietary technological know-how.
This capability of at scale. So I'm, I'm optimistic. Um, I um, I know there's a lot of speculation about capex and so on, but I think about it from a demand point of view and where it's going to be put to use.
Speaker #4: I mean, there are electrical aspects there. One of the subsystems, right? So we've clearly chosen there to own a subsystem that creates a whole system that performs at a higher level.
Speaker #4: And we have looked at that beyond the five subsystems that make a chiller. It's you could make some arguments around synergies power and thermal I think one has to think very carefully because about that because and we're not very interested in let's call it creating procurement synergies for customers.
And so I'm optimistic. Yeah, no, helpful. And then just looking at, uh, maybe another little bit bigger picture question, but just looking at kind of the rising power demand and heat loads and the like, you know, it would seem sort of the thermal and electrical solution need to, you know, clearly work in concert—not that they're not today—but, uh, just looking at your portfolio, you know, or who you partner with on the electrical side, is there...
Is there an Avenue for jci to play more on the electrical side? Or would this be sort of just a continued, uh, partnering relationship with whoever your hyperscale customer? May choose to, you know, pick up that part of the equation.
Yeah, I mean I I'd ask for that and it's a good question. I'd ask you that in a couple of ways.
Speaker #4: I mean, that might be helpful for customers, but it's actually not going to advance how data centers perform. So the way we think about it is how can we help improve the performance of the data centers?
Speaker #4: And so we're in multiple explorations trying to see what we could do there. So it's possible that we will very surgically expand our capabilities there.
Uh, if uh, if you look at our materials from the go to Gamba day, where we talked about the 5 Subs of the chiller, um, that that we we our part of our core proprietary technological. Uh, knowhow, I mean there are electrical aspects, uh, their 1 of the subsystems, right? So, so we've clearly chosen there to to own, uh, a subsystem that um,
Creates a whole system that performs at a higher level.
Speaker #4: And that could be through partnership or it could be a surgical inorganic moves. But I think a big picture today I think more of the synergies from a customer point of view are probably on the procurement side and so we will choose to focus our efforts more on the technology development than the value prop side.
And and we have looked at that Beyond uh the 5 Subs that make a chiller.
it's um,
you, you could make some arguments around uh synergies uh Power and and thermal
um, I think uh, I think 1 has to think very carefully uh, because about that because uh,
Speaker #5: Thanks for that perspective. Appreciate it.
Speaker #3: Our next question will come from Joe Ritchie from Goldman Sachs.
Speaker #6: Hey guys, good morning.
Speaker #4: Good morning.
Speaker #6: I was hoping that I was hoping you guys could help level set embedded in your guidance, your revenue guidance for the year. How much is embedded for data center revenues this year?
Speaker #6: And then also is kind of as you think about the backlog build, and the visibility that you have for FY27, how much of how much is already guaranteed that you would expect to kind of ship in the FY27 timeframe?
And we're not very interested in. Um, let's call it creating procurement synergies for for, for customers. I mean, that might be helpful for customers but it's actually not going to advance. Um, you know, how data centers perform. So the way we think about it is how can we help improve the performance, uh, of the of the data centers? And uh, so we're multiple Explorations trying to see what we could do there. Um, so it's it's possible, uh, that we will very surgically, uh, expand our, our capabilities there, um, and that could be through partnership, um, or or it could be
A surgical, uh, in inorganic moves. Um,
Speaker #2: Yeah. So data center revenues probably going to land in the high teens as a mix of percentage of revenue for fiscal year for fiscal year 26.
but, uh, I think, uh, on a big picture today, you know, I think more of the Synergy from a customer point of view, are probably on the procurement side and um, uh, so we, we will choose to focus our, our efforts more on the technology development and the value prop sign,
Thanks for that perspective. I appreciate it.
Speaker #2: We continue to see that subsegment grow much faster than the rest of the portfolio. Very healthy double digit for some subsegment even higher than that in terms of growth.
Our next question will come from Joe Richie from Goldman Sachs?
I think guys. Good morning.
Speaker #2: As we shape out the following years and as we discussed that going to Gemba, we see that that mix over the next three to five years becoming a third of the company from a revenue standpoint.
Speaker #2: And continue to be extremely accretive to the overall enterprise. I think Yoki mentioned it a little bit earlier on another question. As we continue to expand or install base because of the system growth, we've seen the last couple of years and we're going to see the next three or four years we continue to improve our service attachment rate and that install base will generate a very nice service growth mix over the next few years that will continue to fuel that data center mix and do it very, very profitably.
Good morning. I was I was hoping that uh I was hoping you guys could help level set. Um, embedded in your guidance, your Revenue guidance for the year. How how much is embedded for data center revenues this year? And then also is kind of as you think about the backlog build, uh, and the visibility that you have for FY 27, um, how much of you know how much is already. Um, you know, guaranteed that you would expect to kind of ship in the FY 27 time frame.
Speaker #6: Oh, that's helpful. Thanks, Mark. And then I guess just to follow on maybe sticking with data centers, how big is your CDU backlog today?
Speaker #6: And then have you guys gotten through some of the key final milestones in terms of testing, validation to start shipping
Yes, so so, so data center revenues, probably going to land in the high uh teams as a, as a mix of percentage. Uh uh uh of revenue for fiscal year, for fiscal year. 26, we continue to see that sub segments grow much faster than the rest of the portfolio. Um, very healthy double digits, uh, for some sort segment, even higher than that, in terms of growth as we, as we shape out the the following years, and as we discussed it, that going to DEA. We see that that mix over the next 3 to 5 years, becoming a third of the, the company, from a revenue standpoint, uh, and and continue to be extremely accretive to the overall
Speaker #2: Yeah. We are going to start shipping actually this quarter. Most of the testing and validation is through. We are still working through some of the highest per scaler validation.
Speaker #2: The pipeline for that business is well beyond the hundreds of millions and has now reached a billion dollar. We think the opportunity here is enormous.
Speaker #2: Again, it's allowing GCI to continue to expand the total addressable market. We have per megawatt and it will continue to do so part of a bigger broader solutioning for thermal management in the data center.
Whole Enterprise, I think, I think Yuki mentioned it a little bit earlier on on another question as we continue to expand or install base because of the system growth. We've seen the last couple of years and we're going to see the next 3 or 4 years. We we continue to improve our our service attachment rate. And that install this will generate a very nice service growth mix uh over the next few years that will continue to fuel that data center mix and and do it very very profitably.
On maybe sticking with data data centers.
Speaker #4: Yeah. And we had the recent Nvidia certification as well just a little while ago. So good progress here.
uh, how how big uh is your CDU backlog today and then have you guys gotten through, you know, some of the some of the keys like finalized, milestones in terms of testing validation to start shipping, your CD use
Speaker #6: Great. Thanks, guys.
Speaker #4: Thank you.
Speaker #3: Our next question will come from Nicole DeBlas with Deutsche Bank.
Speaker #7: Yeah. Thanks. Good morning, guys.
Speaker #2: Good morning, Nicole.
Speaker #7: Just good morning. Just wanted to start on if you guys could talk a little bit about what you're seeing with respect to the Middle East and how much of it impacts that had on the third quarter and I guess what you've embedded from a fourth quarter perspective for India growth and maybe when that business can return to more material growth.
Speaker #4: Yeah. Great. So we can't predict the Middle East any better than you can, I think. It's about 10% of our EMEA business and as you can imagine it's very challenging.
Yeah, we we we we are going to stop shipping actually this quarter, um uh most of the testing and validation is through. We're still working through some of the, the higher scalar, uh, validation the, the pipeline for that business, uh, is well beyond the hundreds of millions and, and, and has no reach a billion dollar. We we we think the opportunity here is enormous again, it's it's, uh, allowing GCI to continue to expand the total addressable Market. We have the Omega Watt and it will continue to do. So, part of a bigger broader solutioning for for for thermal Management in the data center. Yeah. And we had the recent Nvidia certification as well, just a little while ago so
um,
Good, good progress here.
Great. Thanks guys.
Speaker #4: The business environment in the Middle East right now. But building pent up demand for sure. So we have assumed that there will be no material change here in the next quarter to what we've seen here in the recent quarters.
Thank you.
Our next question will come from Nicole Delos with Deutsche Bank.
Yeah, thanks. Good morning, guys.
Speaker #2: And build up enough guide, Nicole, you'll see EMEA land in very low single digit to flat in Q4. And that's a couple of points of pressure vis-à-vis a normal run rate if the Middle East would have returned to normal, which I think we know for this quarter is not going to happen this fourth quarter is not going to happen.
Good morning, Nicole. Um, just good, good morning, just wanted to start on if you guys could talk a little bit about what you're seeing with respect to the Middle East and how much of an impact that had on the third quarter. And I guess what, you've embedded from a fourth quarter perspective for Emma growth and maybe win that business can return to more material growth,
Speaker #2: But beyond it, it's all about crystal ball.
Um, yep. Great. So, uh, we can't predict the Middle East any better than you can, I think, uh,
Speaker #7: Sure. Yeah. It makes total sense. And then APAC, came in above your expectations pretty significantly in three Q, I think, both revenue and margins pretty robust.
It's, uh, it's about 10% of our AMEA business. And, um, as you can imagine, it's very challenging—the business environment in the Middle East right now.
Speaker #7: I guess can you dive into what drove that and thought any thoughts on if that's sustainable into the fourth quarter?
Speaker #4: Yeah. I think there are a number of markets geographical markets that are quite healthy. India in particular. But not only. And there are some data center markets but also significant investments and for example, what we call referred to to as advanced manufacturing biopharma semicon, etc.
Um but building camps up demand uh, for sure. Um, so we we have we have assumed that there will be no material change here in the next, uh, next quarter or 2, what we've seen here and and, and the recent quarters
and build up, you know, you'll see meia land, you know, in very low single digit to Flat in Q4 and that's a couple of points of pressure via the in normal, run rate in the Middle East would would have returned to normal, which I, I, I, I think we know for, for this quarter
It's not going to happen. This fourth quarter is not going to happen. But beyond it, it's all about the crystal ball.
Speaker #4: And so even a country like Japan that you think is more a slow growing market is actually very strong right now on the back of investments in more advanced industries beyond data centers.
Speaker #4: And then we've made some good progress. We've been able to fortunate to strengthen our team in Asia PAC and so we're seeing I think some traction here from these very talented leaders who were super happy to have on board now who are doing a good job.
Sure. Yeah, it makes total sense. And then APAC came in above your expectations pretty significantly in Q3. I think both revenue and margins were pretty robust, I guess. Can you dive into what drove that and any thoughts on if that's sustainable into the fourth quarter?
Yeah. I think, um, there are a number of markets geographical markets that uh are quite healthy. Um, you know, Indian in particular um
Speaker #4: And I think we're still in the early innings of that.
uh, but not only, um,
And uh there are some uh data center markets.
Speaker #7: Thank you. I'll pass it on.
Speaker #4: Thanks, Nicole.
Speaker #3: Our next question, final question will come from Andy Kaplowitz with City Group.
Uh but also uh, significant Investments. And for example, uh, what we call referred to, as advanced Manufacturing,
Speaker #6: Good morning.
Speaker #2: Hey, Andy.
Speaker #6: So service plus 7% revenue growth and orders at plus 4% in Q3. I think we're both slightly better than Q2, but I'm surely thinking Johnson Controls could still do better than that 4% orders in North America that you have.
Um, by our pharma, um, semicon, etc. And so even a country like Japan, you know, that you think is more a slow-growing market, is actually very strong right now on the back of investments in more advanced industries beyond data centers.
Um, and then we've made some good progress. We've been fortunate to strengthen our team.
Speaker #6: So maybe just update us on where you are on your initiatives to improve service particularly in areas such as security which you've talked to us about before and should we expect a bigger turn in service growth as you go into 27?
In in Asia Pac. And, uh, so we're seeing, uh, I think some traction here from, um,
Uh these uh you know, very talented leaders who who uh were super happy to have on board now, uh, who are doing a good job. And, and I think we're still in the early Innings of that.
Speaker #2: No. You're right. What he means very confident in kind of the long-term service opportunity and how profitable that business has been. Returning to mid to higher single digit growth is the focus.
Thank you. I'll pass it on.
Thanks Nicole.
Our next question, and final question, will come from Andy Kaplowitz with Citi Group.
Speaker #2: HVAC and fire are performing well within that range. But as you mentioned it, we saw a bit of a decline in the American service backlog mostly associated with the security business.
1.
Speaker #2: It's not at all a profitability issue. It has to do really with a pivoting towards growth and the dynamic of price in that market.
Speaker #2: As you know, our security business is a little bit less differentiated than, for example, our HVAC business. And that has created a little bit of a competitive volume pressure and we're taking very targeted action.
On your initiatives to improve service, particularly in areas such as security, which you've talked to us about before, should we expect a bigger turn in service growth as you go into 2027?
Speaker #2: You saw an improvement in the quarter and you're going to continue to see improvement in the performance as we drive a little bit of greater consistency across the business both in America and EMEA.
Speaker #2: We still think there's a large opportunity to continue to drive or install base, especially when you see the system growth being in the double digit.
Speaker #2: And one of the big priorities we talked about at going to Gemba Day is the productization of our service offering and doing a better job at taking a differentiated go-to-market approach to be able to drive really better value proposition for our customers.
Speaker #2: So it's a small bump right now, but we think we've seen an inflection point.
Speaker #6: Very helpful, Mark. And maybe I could just double-click on foreign security then. It's Q3. Is that kind of sort of your targeted initiatives that you're doing?
No, you're right. We we remain very confident in in kind of the long-term Service uh, opportunity and and and how profitable that business has been uh, returning to Mid to higher single digit. Growth is is the focus, um, HVAC and and fire are performing well within that range. But as you mentioned it, uh, we saw a bit of a decline in the American Service. Backlog, we are mostly associated with with the security business. Um, it's not at all a profitability issue. Uh, it has to do really with a a pivoting on on towards growth, uh, and the dynamic of price in that market. Um as you know, our security business a little bit less differentiated than for example or like business. And that has to create a little bit of a competitive volume pressure. Uh and and we are taking very targeted action. You you saw an improvement in the quarter and you're going to continue to see Improvement in the performance, as we drive a little bit of Greater
Speaker #6: What's the underlying market doing? And again, what's embedded in the expectations for Q4 and beyond?
Speaker #2: Yeah. We're keeping up with markets, right? So the underlying market globally is flat the way we have been. We intend to do better than the market.
Speaker #2: And so a refocus of that organization both from fire detection, fire suppression, as well as our core security businesses as we pivot into next year is going to be a core focus to kind of lift up the growth of that business.
Speaker #2: Now, in all transparency, Andy, this is not going to be a high single digit or double digit growth market, but we think we can drive performance in that business in a more high single digit to mid single digit kind of level over time.
From systemy across the business, both in, uh, both in America. And in India. Um, we, we still think there's a large opportunity to continue to drive or install base especially when you see the system growth being in in in in the double digits, and 1 of the big priority. We talked about are going to Gamba days the productization of our, of our service offering and, and doing a better job at taking, a differentiated go to market approach, to be able to drive really better value proposition for customers. So it's a, It's a Small Bump right now, but we think, we think we, we, we we've seen, uh, we've seen an inflection point.
Speaker #6: Appreciate the color.
Very helpful, American maybe I could just double click on find security then like, you know, it's flat, I think in uh, Revenue in Q3. Um, is that kind of sort of your targeted initiatives? Is that you're doing, what's the underlying market doing? And, you know, again what's embedded in the expectations for Q4 and Beyond
Speaker #3: This concludes our Q&A session. I will now hand the call back to Joakim Weidemanis for any closing comments.
Speaker #4: Thank you. Thank you for all your questions today. We delivered another strong quarter. Driven by sustained order momentum, broad-based growth, and continued margin expansion.
Speaker #4: The combination of our differentiated technology, unmatched field presence, and the early proof points we're seeing from our proprietary business system reinforce our confidence in the opportunities ahead.
Yeah, we we're keeping up with markets, right? So the underlying Market globally Flats, uh, the way the way we have been, we, we, we, we intend to do better than the market. And so um, a refocus of that organization. Uh, both from fire detection, fire suppression as well as our as of course, security businesses as we pivot into. Uh, next year is going to be a core Focus to kind of lift up the growth of that business now.
Speaker #4: I want to thank our more than 90,000 colleagues around the world for their dedication to our customers. And for embracing new ways of working that help us serve them better every day.
Speaker #4: I look forward to continuing my conversations with all of our stakeholders. Thank you for joining us today.
In all transparency. And this is not going to be a high single digit, double digit growth uh, Market. But we think we can drive performance in that business in a in more uh, High single digit to meet single digit, kind of kind of level over time.
Appreciate the color.
This concludes our Q&A session. I will now hand the call back to Joakim for any closing comments.
Thank you. Thank you for all your questions today. Um, we delivered another strong quarter driven by sustained order momentum, broad-based growth, and continued margin expansion.
The combination of our differentiated technology, unmatched field presence, and the early proof points we're seeing from our proprietary business system reinforce our confidence in the opportunities that
I want to thank our more than 90,000 colleagues around the world for their dedication to our customers, and for embracing new ways of working that help us serve them better every day.
I look forward to continuing my conversations with all of our stakeholders. Thank you for joining us today.
This is now concludes today's call, thank you all for joining. You may now disconnect your lines
