Johnson Controls International Aktie

Hello, everyone, and welcome to the Johnson Controls Q4 2026 Earnings Conference Call. My name is Ryan, and I'll be coordinating the call today. [Operator Instructions]

I will now hand the call over to Eric Swanson, VP, Investor Relations, to begin. Eric, please go ahead.

Good morning, and thank you for joining Johnson Controls Fiscal Fourth Quarter 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.

As a reminder, today's discussion will include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings for additional information.

We will also reference non-GAAP measures. Reconciliations are included in our earnings release and presentation appendix available on our Investor Relations website.

I will now turn the call over to Joakim.

Thanks, Eric, and good morning, everyone. This is Eric's first earnings call since joining our Investor Relations team last month, and we're excited to have him on board.

I want to start by recognizing Johnson Controls colleagues around the world. Over the last 18 months, we've made significant progress toward becoming a more focused thermal technology company, growing at a faster rate with more investment capacity and higher profitability. At the end of the day, it's our people who bring these strategies for life, combining our technology and deep field and manufacturing expertise to deliver for customers. Their commitment to customers and disciplined execution is reflected in the consistency of our performance.

Fiscal 2026 was an important proof point for the framework we introduced at our going to Gamba Day in June. Our differentiated technological capabilities, unmatched field presence, global manufacturing strength and proprietary businesses are helping us move with speed, win with customers and strengthen performance.

For the full year, we exceeded both our initial fiscal 2026 guidance and the raised outlook we provided during the year. Organic revenue increased more than 8%. Adjusted EPS increased 37% and adjusted free cash flow conversion was 103%. We enter fiscal 2027 with momentum and confidence in our ability to continue creating value for customers and shareholders.

That confidence is grounded in a business model built around three reinforcing elements. Our strategic pillars focus resources on the most attractive opportunities including AI and data centers, mission-critical environments and decarbonization. Our proprietary business system and powers frontline teams accelerates problem-solving and drives continuous improvement everywhere in our company. And our economic engine converts those advantages into differentiated customer value, innovation, manufacturing scale and frontline productivity.

The result is a powerful value creation engine that helps our colleagues win and deliver for our customers and grow profitably and compound value over time. These capabilities are increasingly relevant as our priority customers are investing in some of the world's most demanding operating environments to deliver the outcomes they aspire to. This is especially evident across AI and data centers, advanced manufacturing and biopharma.

As customers scale capacity in these verticals, the environment supporting their operations are more heat and energy intensive, need to be controlled within tighter tolerances and are less tolerant of disruption. Our portfolio brings together integrated thermal management and controls with liquid cooling technologies, including cooling distribution units and cold plates for data centers. We combined subsystem technology developed in-house with the ability to design, deliver and service the broader architecture across the thermal chain, including controls.

As data center architectures continue to evolve, we see additional opportunity in modular data centers. We believe our differentiated capabilities position us well in this emerging segment, and we are investing to win and building a stronger partner ecosystem. Our collaboration with Armada is one example. As announced at the NVIDIA GTC in Berlin, together, we plan to build 500 megawatts of distributed edge compute capacity in 2027, bringing together our thermal management technology, engineering capabilities and global manufacturing scale to bring capacity online faster.

Our advantage comes from bringing together five areas of expertise: a focused portfolio oriented toward high-growth mission-critical verticals, proprietary technologies built over the last 150 years, an unmatched global field presence of approximately 50,000 sales solution architects and highly skilled technicians and emerging manufacturing advantage focused on quality, capacity and delivery and our proprietary business system. These five areas of expertise allow us to solve complex customer challenges with greater speed, create differentiated value and support sustained profitable growth. We are a global thermal technology leader that is built for this time.

With that context, Marc will take you through the financial results in more detail.

Thanks, Joakim, and good morning, everyone. We finished the year with strong fourth quarter results. Organic revenue increased 12%, led by strong double-digit growth in Americas and APAC. Systems grew 13%, reflecting continued strength in data centers while service continues to deliver with a solid 8% growth. That top line growth combined with continued productivity contributed to margin expansion across all three regions. Americas adjusted segment EBITDA margin expanded 210 basis points to 22%. EMEA expanded 80 basis points to 16.4%, and APAC expanded 110 basis points to 19%.

Strong operating performance, combined with lower corporate expense, drove significant adjusted EBIT margin expansion of 300 basis points to 18%, aligning our operating leverage well within range despite much higher growth. Adjusted EPS increased 32% to $1.66. The demand environment also accelerated as we exited the year. Orders increased 44%, driven by continued data center demand, along with strong growth across other mission-critical verticals including battery and semiconductor manufacturing and large research universities. Backlog grew 43% to a record $23 billion, reflecting sustained demand for our differentiated technology and capabilities.

Our operating performance translated to strong cash flow generation, supported by the disciplined execution and working capital focus embedded in our business system. For the full year, adjusted free cash flow was $3.2 billion, representing 103% conversion. We ended the year with $600 million of cash while net debt declined to 1.8x below our long-term target range. And we returned $2.5 billion to shareholders through share repurchases and dividends.

This performance provides capacity to invest for growth, maintain our investment-grade credit profile and return capital to shareholders. With customer demand extending well beyond fiscal year 2027 and requirements continuing to scale, customers need a partner with the capabilities and willingness to invest alongside them. Joakim will now discuss or we are investing to meet the demand.

As Marc said, we see customer demand translating into a record backlog, a strong pipeline and increasing visibility into longer-term demand with our largest customers. We're acting decisively on that opportunity, investing ahead to expand capacity and capture a larger portion of the growth in our highest growth markets, while simplifying Johnson Controls to reduce complexity, move faster and increase earnings power. Both are integral to our value creation plan and reflect a consistent and disciplined approach to capital allocation, investing where we see the greatest opportunities for growth while building a simpler, more productive company.

We expect approximately $900 million of capital expenditures in fiscal 2027. This investment puts us in a strong position to capture a larger portion of the growth. It is anchored in the demand we see across our backlog and pipeline as well as the longer-term requirements we are planning for with our largest customers, particularly in our highest growth markets. This capital will strengthen our ability to win new business and capture the significant opportunity had. It will also expand capacity, improve lead times, delivery and quality, enable us to serve customers as their requirements scale.

Our business system is enabling us to add that capacity more efficiently. Without the productivity and capital efficiency we are driving across the company, we estimate the capital requirement would have been more than 2x higher. We are applying that same discipline to our restructuring actions, reallocating resources and capacity toward the areas where we see the strongest opportunities for growth.

While our growth investment is focused on thermal technology, our restructuring actions are concentrated primarily in other parts of our portfolio outside our most technology-differentiated mission-critical verticals. There, we are optimizing our manufacturing and warehouse footprint, streamlining the functions that support those operations and moving accountability closer to customers. We anticipate approximately $400 million of restructuring expense over fiscal 2027 and fiscal 2028, and expect approximately $600 million of gross annualized savings by fiscal 2029. These actions will position us to support the growth we see today and the opportunities ahead. Additional capacity positions us to capture increasing demand, simplification, improved speed and accountability. And productivity creates room to reinvest, expand margins and increase earnings power.

Marc will now review our fiscal 2027 guidance.

The investments and actions Joakim just outlined position Johnson Controls to accelerate growth while maintaining our margin expansion trajectory. Our fiscal year 2027 outlook reflects the strength of the demand environment, the visibility provided by our backlog and continued improvement in execution. For the first quarter, we expect organic revenue growth of 12% to 14%, operating leverage of 30% to 35% and adjusted EPS of $1.15 to $1.20. For the full year, we expect organic revenue growth of 11% to 12%, ahead of the high single-digit growth in our long-term algorithm.

We expect operating leverage of greater than 30% and adjusted EPS of $6.15 to $6.30. At the midpoint, that represents 21% EPS growth from fiscal 2026. As we meaningfully increased capital expenditure to support growth, we expect an adjusted free cash flow conversion of approximately 95%. Our ability to maintain such a strong cash flow conversion while increasing investment, investing in restructuring and increasing manufacturing capacity demonstrate the strength and quality of our earnings and disciplined capital allocation.

Operator, we are now ready for questions.

[Operator Instructions] Our first question will come from Amit Mehrotra with UBS.

I appreciate the question. Maybe we can start with backlog and growth, obviously, both extremely strong. Maybe you can just talk about your ability to sort of keep growing the backlog as the revenue growth picks up. Do you still expect to sort of convert 70%, 80% of that over the next 12 months? And I noticed F&S growth sort of perked up in the Americas, which is encouraging to see. Maybe you can just talk about sort of the expectations there as well.

So we had very healthy order entry in the quarter coming off of a prior quarter where the order entry also was very strong. So our backlog continues to grow, while our ability to execute and deliver through our manufacturing operations, but also our field teams continues to improve.

Our pipelines, Amit, continue to grow. They're very healthy in multiple verticals. Of course, data centers was very strong, but we also have a number of other mission-critical verticals that continue to grow here from both pipeline and orders point of view. So we're very confident with the guide that we've given here.

And I guess, Marc, just as a follow-up on the incremental margin of 30% plus, and that's obviously consistent with the long-term framework. I understand that obviously, there's a need for capacity. But at Investor Day, we talked a lot about this opportunity to create synthetic capacity. And so maybe you can just balance those two? And is there maybe an opportunity to sort of exceed the long-term framework in '27, just given how early we are in the journey of the productivity initiatives.

Yes. So we're already exceeding the long-term algo on the top line, right? We guided that 30-plus percent incremental on a high single-digit long-term algo, which we're seeing a much faster growth now going into fiscal year '27, and yet are maintaining that operating leverage well above 30%.

The underlying question is how much headwinds do we see as we build that capacity into the factory. There's an opportunity to accelerate growth and potentially create higher operating leverage in the back end of the year as the ramp-up stabilize a little bit, and we get to a better run rate from the infrastructure we've built. And of course, the business system continues to drive enormous opportunities for us to create that soft or synthetic capacity within the factory allowing us to really create more output with much, much less capital. As Joakim laid out in his opening remarks, we think we would have probably have needed about twice as much capital as we were going to need over the next year or so to be able to invest in the growth we have seen and that continues to increase from our customers.

And the $900 million, Amit, investment in capacity here is obviously in manufacturing, but it's also in innovation as well as investing in digital and AI approaches to continue to -- which is part of our proprietary business system to continue to drive more productivity and better execution capabilities in our field operations.

Our next question will come from Nigel Coe with Wolfe Research.

Note about FY '26, congratulations on wrapping that up. Just I want to go back to the orders and obviously, standard strength in the Americas good traction elsewhere. But just curious if there's any change in the kind of the consoles of the orders. Is this still largely a chiller story? Or are we starting to see a bigger mix of, I don't know, module or CDU, just wondering if there's any change in the mix of orders.

Yes. So what we've been working on in particular in the data center area is to increase our TAM. And as you've heard over the last couple of quarters, we've increased our offering, added CDUs, acquired a cold plate company that we're now making good progress with several major customers. And in modular data centers, that is not a new product line for us, but with a little bit increased focus here and a little bit more innovation work, you've been able to read about some of the progress that we've been making here more recently. So chillers is the largest part of our portfolio still, but a good part of our growth is starting to come from these efforts that we -- I outlined here to increase our TAM. So we're very encouraged about what we're seeing here.

No question. And then just coming back to the -- it looks like it's a new restructuring program, Marc, the $400 million of expense to yield to $600 million of savings by FY '29. Number one, I just want to make sure this is the new program on top of the existing program. And maybe just bring us up to speed in terms of where we are right now on the current program and the sort of savings you expect to realize on the current program.

Yes. So if you look at the existing program that really came from the divestiture of our residential light commercial, a lot of that program had to do with fixing how we organize and the base cost and the support infrastructure that drives solutions and function support for customers. And we're very pleased with how that came about. So we had announced about $400 million of expense for $500 million of savings. And we've spent about 85% of that $400 million. And you can see as it translates into the earnings here this year, the run rate savings is probably $100 million to $150 million above that original $500 million target. So the outcome and the speed at which we generate the savings ended up, a, being much faster on the old program, but also being much higher.

As we looked at more opportunity to simplify the portfolio, we clearly saw the opportunity to simplify the part of the portfolio that is less geared towards the mission critical and data center and simplify a little bit on our logistics and manufacturing footprint, which hasn't been touched as part of the original program. And so that new program, we expect will have maybe a little bit longer lead time than the original program, less low-hanging fruits. But I think it will bear probably as good of the level of return as the first program did. And we are very excited about the opportunity to further simplify our infrastructure.

Our next question will come from Steve Tusa with Wells Fargo.

Just on the earnings bridge for '27. I think you break out mix and things like that. You mentioned the savings this year. Can you maybe give us a little bit of color on mix, price/cost and then any kind of savings you're flowing through just to help decompose a little bit the margin?

Yes. The -- so I'll get past the divestiture, right, that we put on that bridge. But clearly, the year was really supported by the accelerated growth that we saw mostly in system, and that's a for chiller output revenue that came about. Because of the efforts we did from a business system standpoint, we saw a lot of productivity. The mix uplift we saw really had to do with the different mixes of businesses that generated that incremental revenue. So less traditional fire and security business and more of the higher-end-margin Chile where we differentiate more, and we have the ability to really deploy our technological advantage, and that created a gross margin life.

Now transparently service was a slight drag into that internal mix. But if you net all of that out, it's really focusing and orienting our growth opportunity against end market where we can differentiate and provide solution for the customer that they're willing to pay for.

Okay. And your price cost positive?

We have price cost positive for the year. There was a lot of inflation on both material and a little bit on raw. You can see that while we maintain price cost positivity, the incremental price we got on top of inflation does not fully translate into the same margin rate. Said differently, we don't get exactly the 37% gross margin rate we have on a recovery on inflation, but we're absolutely price cost positive, it's just slightly margin dilutive for the year.

Our next question will come from Scott Davis with Melius Research.

Congrats on a great year. And just quick to clarify on Steve's question. Are you -- do you need more price in '27 to be price/cost positive?

No. We are price cost positive in '26, and we will be price cost positive in '27. We don't need more relative price. My point, Scott, was if you get 100 points of price and you have a cost increase of 80, your price cost positive by 20. But that 20 is less than your normal 37% in our case, gross margin rate. And so -- yes, ideally, I'd always love more price, but we want to remain competitive in the way we play in the market. And so we'll continue to act as good guardian of our shareholders' money. And price way higher than what we see in inflation, but our ability to maintain from an inflatory standpoint, the entirety of the gross margin rate of the enterprise at time will become challenged.

Okay. That's helpful. And then are you guys done with 80/20 in fire security? And I don't mean that well, growth reaccelerated. So are we kind of -- have you anniversaried the tougher kind of comps there on 80/20 or was growth itself just that much stronger?

Well, when it comes to the business system that we have built and are deploying that's a multiyear journey. So to some respect, and it's the good news that you're never done because there's always more opportunity. I think what we're seeing is to go back to the performance of some of those businesses is that as a result of leveraging our business system, but also as a result of some work changes we made a couple of quarters ago where we have decentralized decision-making and empowered frontline general managers with a broader scope of responsibility, think being able to influence the customer end to end. I think we're starting to see the early benefits of that. So I'm very encouraged and expect to see more here going forward.

Our next question will come from Joe Ritchie with Goldman Sachs.

I echo everybody's congratulations on a great year. The first question I have is really just around the backlog conversion. So your guidance implies call it, roughly around $3 billion in incremental revenue in FY '27 versus FY '26. Obviously, backlog is up $8 billion. What I'm trying to understand is just -- is it just the nature of the projects that you're booking and when those projects are expected to deliver? And is there potential upside to Amit's question from earlier around like some better capacity to be able to deliver more of your backlog in FY '27 than what's implied in your balance?

Yes. No, fair question, Joe. The $23 billion backlog we've not accumulated over the past year, that really provides us very clear visibility into the growth for '27 and is fully embedded in how we've outlooked the 11% to 12% organic revenue growth for the year. We still anticipate 70% to 80% of that backlog to convert into revenue over the next 12 months. That's not something that has changed. And the remainder of that balance extends beyond fiscal year '27. The primary constraint really is not demand. The demand continues to accumulate and the mix of projects is not materially changing. But in some cases, we see customers that continues to face power and some electrical infrastructure limitation, that influences their commitment on when they want to take delivery and the project timing and simply the schedule of how that will all unfold. But we are very confident that we are going to continue to build a backlog and continue to build capacity to accelerate growth.

That's great, Marc. And then I guess just my follow-up question, maybe just on the capacity. You guys talked about this ability to create some better capacity. I'm just curious just given the demand environment remains so strong? Is there a point where this capital efficient drug that you guys have maybe requires additional hard CapEx? Or do you feel like you've got good line of sight for the next couple of years?

I think we have pretty good line of sight for the next couple of years. And we'll back that up with what many of you who participated in our go to Gamba Day in June, where we showed an example of how we had taken a part of a factory and quadruple the capacity without adding headcount, capital and actually have reduced the number of space needed. So there are still many opportunities like that available to us. So our capacity expansion going forward is going to continue to be less capital intensive than in the past.

Our next question will come from Andrew Obin with Bank of America.

Can you just talk about what's happening in just HVAC supply chain, specifically, I'm thinking Silent-Aire? A lot of headlines, a lot of concerns. You seem to have been able to deal with it well. Where are we? What does it look like into next quarter? And what are your assumptions into next year? And how are you managing it?

Well, so first of all, thanks for that question. So first of all, as you heard also from at the go to Gamba Day and those materials for those of you who weren't there are on our website. So our vertical integration here is really a significant advantage in a high demand environment that we're living in right now. And you'll recall, we talked about for chillers, for example, that chiller is really 5 key subsystems, and we own not just the proprietary technological know-how, but also control the COGS.

So we manufacture the 5 side systems and are quite vertically integrated. And we, of course -- but we're not vertically integrated on everything. So we continue to look at what would make sense economically to do more in-house to reduce the dependency on potential shortages from a variety of vendors. And included in that is also looking at potential acquisitions of -- I think of them more as surgical acquisitions, bolt-on acquisitions to help protect our supply chain here. But so far, our teams are executing very well. So even though there are the odd issues, which there always are in manufacturing, we're able to execute pretty well here, as you see from the results.

And then just maybe more a technical question. Given your relationship with Armada, how does the modular product flow through your P&L? How should we think about it? Because you sort of -- you cite about capacity additions. Do we just assume all of this revenue flows through the P&L and margin? Or how should we think about modeling it?

Yes. So the way that flows through is our Silent-Aire. So relationship with Armada is we are really the infrastructure provider of those containerized modular edge compute sovereign AI pods. As you know, we are very proud of being -- now qualified for the new NVIDIA program, and we announced that plan to ramp up 500-megawatt with them.

Armada has the entirety of the software layer and distributed application that goes through that compute. And we take care and revenue in our P&L over the next 12, 18 months, everything that has to do with the equipment and those container eves -- modular data centers. And so we're very excited about that opportunity. The growth it represents. We think that market will continue to evolve and will continue to evolve to the positive. Some of the political environment and the uncertainty around logistic allocation and the need to accelerate the speed to compute will continue to be a critical item for our customers.

In our TAM, our dollars per megawatt, if you will, is higher in this kind of business than in most other parts of the data center business that we're in -- I'm talking about per megawatt now. And so you should think about those modular data centers as having pretty much everything we develop and own included in it.

Our next question will come from Nicole DeBlase with Deutsche Bank.

Can we just talk a little bit about what you're seeing with respect to the Middle East and what you've baked in for the Middle East within the EMEA outlook for 2027?

So the Middle East was challenged in 2026. But over the last couple of quarters, it would seem like some customers have figured out how to live with the uncertainty of the environment. And therefore, we are projecting a slight improvement in what we expect from that region. But of course, there's still a lot of uncertainty around what's going to happen there. So we're not back to where we were before the uncertainties.

Okay. Understood. And then with respect to the global intrusion announcement yesterday, is it possible to size that business in terms of the total divestitures that you guys were -- have been considering that you've disclosed? And any update on the progress for -- or the time line for additional divestitures?

Yes. So First, that intrusion business, if you remember, it's residential, very light commercial type of business. As you know, those are two end markets that we've really decided were noncore for what JCI does and really not aligned with our mission-critical approach. We anticipate to close that transaction towards the end of the second quarter of '27. That transaction will be slightly dilutive. Think about $0.15 on an annualized basis once it's closed. So for the balance of fiscal year '27, it won't be highly material as we look into it. But depending on the timing, we'll keep you posted. The annual revenue of that business is right around $0.5 billion.

And then, Nicole, we continue to work on our overall portfolio and the overarching goal here is, of course, to create shareholder value. And so there is more work going on, and we'll keep you posted. But meanwhile, of course, we're -- as per the other question that was asked, we're making sure that we continue to execute better across the portfolio.

Our next question will come from Noah Kaye with Oppenheimer.

Yes. So your comment earlier about the productivity of the CapEx you're adding and how would have been twice as high were it not for the business system. I wonder if we could put some additional parameters around that. Is there a way to think about the revenue capacity that this investment is bringing? Because I think it would be a good measure of kind of your capital efficiency here and obviously help us understand some of the longer-term growth possibilities.

The goal is to keep up with the demand as we see it coming from the mission-critical vertical like data center, meaning the goal is to keep up for a longer period of time with double-digit growth demand in terms of revenue opportunity. Doesn't mean we'll be a double-digit growth company forever, but it means that the objective of the buildup of our infrastructure in '27 and in '28 is to maintain that double-digit trajectory and capture as much as we can of the opportunity as we see it and maintain that leadership position in those critical domain that JCI has been operating in.

And keep in mind, again, the $900 million, of course, manufacturing is an important part of that. But as I've mentioned before, there is an important part of innovation investments in there as well to accelerate the rate, the speed and rate of innovation to further our competitive advantage, capitalize on 150 years of know-how technological, know-how that we built up. And then there's also a chunk of investment related to basically, think of it as productivity in the field that will enable our -- with AI and digital approaches and tools enable our field to serve and win more customers.

A question on some of the regional orders dynamics. I think it's striking that Americas was so robust this quarter. When we look at the pipelines and where we're seeing inflection in pipeline growth, one could argue that EMEA and APAC are perhaps seeing more excel at this point. I'm curious to know if you see that in your pipeline as well? And how you think about the implications for orders growth from here moving into the next several quarters?

So our pipelines continue to grow at a nice rate in all three regions. Now having said that, the some of the secular drivers around data centers, semicon, those two verticals that really are related to the world's desire and need for more compute. -- the drivers are much stronger in the United States and Asia Pacific. And by the way, in Asia Pacific, they have strengthened in a very nice way here over the last couple of quarters. Europe is just simply a little bit earlier in its journey when it comes to all things compute, but we expect that to hopefully change here over the next year.

Beyond those verticals, there are healthy pipeline growth in, for example, biopharma, but also defense for the obvious reasons you can read in the paper every day what's going on in the world, right? So -- and so the mix of what's happening in the pipeline is a little bit different by region here. But generally, pipelines are growing very nicely in every region.

Our next question will come from Jeffrey Sprague with Vertical Research.

Couldn't stay away, guys. I hope you're doing well. Just coming back to backlog and conversion. I know there's been a couple of questions on this. But the fundamental principle of the backlog you share with us, I believe, is backlog that you can deliver within the next 12 months? Obviously, what you can deliver and what the customer accept are maybe two different things, which gets us to maybe that 70% to 80%. But I want to confirm that's fundamentally correct. The backlog is technically deliverable within 12 months. And then -- so maybe you could -- if that's so, then the numbers do suggest fairly significant revenue upside relative to your guide, and it obviously is an initial guide, we get that.

But maybe just kind of talk about maybe those customer bottlenecks? Are they getting more significant, what role you can maybe play in helping untangle some of the stuff? And just any other perspective on that sort of broader question.

Yes. So as I mentioned earlier, the primary constraint is really not demand. And yes, the definition, as you laid it out, is exactly what it is. We unconstrained supply and constrained demand, we could deliver the entirety of that backlog in the next 12 months. It doesn't mean that our customer will be able to -- and in some cases, the customer continued to face the same problem as they have historically. I wouldn't say not at a faster pace. So dynamically, the market isn't changing. The location maybe in some of those data centers is moving a little bit wrong, but we don't see really a slowdown or more difficulty from a customer standpoint to accept the orders. But your point stands, if some of those constrained simplify or loosen up a little bit over the next 12 months, our ability to unfold more of the backlog quicker is absolutely an opportunity. And -- as you said, 11% to 12% is where we see the year coming in. Should the market evolve a little bit differently, we could be -- potentially do better.

And then maybe since we're near the tail end of the call, and you covered a lot of ground. I'll just throw a modeling knit at you, Marc. Just kind of the movement in and Armada, looks a little odd, dropping down the way it did in Q4 and then back up in Q1. Can you just provide a little color on what's going on there?

Yes, the Armada coming down was just part of the normal amortization schedule. And when you see it coming back up, it's associated with the transaction we did on Alloy that increased in the quarter, the amortization expense, as you know, new acquisitions, especially technology capability acquisition will come sometimes with a little bit more than you normally do. But those are for the good reason and we're really excited about the opportunity that Alloy brings from a heat exchanger differentiation as well as our entry into the cold plate market and differentiated CDU opportunities.

Our next question will come from Varun Govindaraj with Bernstein.

These few months, there's always the scale that sellers are going away at GTC Berlin NVIDIA put out another video showing that. Clearly, it's not reflecting in your strong order numbers, but are you sharing anything at all from customers indicating a shift away from chillers? And just as you plan for this over the longer run, how are you thinking of managing that risk away?

Thank you for the question. I think lots have been written on that topic by many on this call. I think there will be some situations over time. We're on the margin. Perhaps 1 or 2 tier chillers will be needed. But by and large, customers are designing data centers with redundancy and designing them for operating at a certain peak conditions, which even though you think you may be able to reduce number of chillers and practice in reality, that's not how they're being designed at least not yet with less chillers that is.

Now regardless of that, as I mentioned before, our strategy in the data center market is to continue to increase our TAM per megawatt, and we're doing that through a number of ways. But if I talk about two approaches. One is, and we've talked about this before. One is simply approaching our strategy is to win in the overall thermal architecture of the entire data center to be able to reduce the amount of energy used for even higher capacity and more rapid response cooling. And we're doing that by adding -- have been adding capabilities in CDUs in cold plates and in controls. And there's more to come, and we'll be announcing more here in the next couple of quarters.

And so that's one way to increase the TAM and help our customers basically design and operate much more efficient data centers. And then the second thing which we talked about earlier on this call is really the modular segment that we have been in for a number of years, but that we've decided to double down on because we think the opportunity is very, very compelling here in the near and medium term. And there, again, as I alluded to, our TAM per megawatt is even higher than in the larger gigawatt data centers.

Got it. And then as a quick Chile-related follow-up, are you seeing anything happen on the mix between air cooled and water cool units just with this whole narrative around water conservation? Whatever you can share qualitatively?

The mix has not changed materially recently. And as you know, almost all of the data centers that are being built today have closed loop water cooling systems and consume less than -- much, much less than your local golf course. And so I think this water consumption point is something -- many of our customers are addressing now with the general public through their ramping PR agencies here. It's quite frankly, old news and not the way centers have been designed for a long time.

Our next question will come from Brett Linzey with Mizuho.

I wanted to follow up on the pipeline, the CDU and then the incremental business on cold plates. I guess as we look at that $1 billion pipeline, how much of that is already converted into orders -- firm orders here. And then thinking about as that new capacity comes online, how much is effectively spoken for versus really dependent on future order conversion?

Only a small portion of that $1 billion plus pipeline is converting to date. So there's a lot of upside opportunity, and we continue to see that pipeline growing. We are ramping up capacity for CDU in all three regions. That capacity is mostly spoken for as we look at it. But part of the investment we're making, the $900 million of CapEx has to do with ramping up the capacity at speed to reduce our lead time and have the opportunity to accelerate the order rate for a very differentiated CDU product offering.

And then in general, on capacity, let me share a little bit the types of discussions I'm having with some of our larger customers which basically is along the following lines. We have, over the last year, staffed up with an incredibly strong manufacturing and operations team which is why, and they're helping us deploy the business system to create capacity through lean manufacturing, but they're also very strong an experience that's standing up new capacity as we continue to do, and we've talked about on this call. We are able to -- for many of our product lines, stand up new plants, physical plant capacity within 12 months.

And with the lean manufacturing the business system, we're able to create meaningful capacity within quarters in addition to what we get for the -- with the hard capacity that we create. Many of our customers it takes more than a year to build the data center, right? So they are ordering in some cases, up to a year ahead of when they need the actual equipment. So we're trying to create a situation here, and I think we're there where we can -- we have flexibility on creating capacity faster than the demand requires it. And so we're trying to create a bit of a business model change, which we believe is going to be part of our many aspects of our differentiation.

Yes. I appreciate that. And then just a quick follow-up on service and specifically the attachment rates. So very strong growth in systems, service, obviously, strong. But the rate of growth, not the same level. What really explains that? I guess, is it duration? Or is there resource allocation? Maybe just talk about the uptick in your attachment rate trends.

Well, so we're in many different service businesses, right? You've got HVAC, you have fire, you have security. And within those businesses, there are different service games, right? So it's -- you can't really generalize. We've spoken about in prior quarters where the growth has been more subdued in particular, in our security part of the portfolio, the service and the security portfolio, where we have done work to look at what kind of contracts we want to be involved in the growth run rate and the profitability of those. And as we're repositioning and a little bit in the service side of the -- security service side of the business, we're still seeing a little bit of subdued growth there, but it's starting to pick up. But as we've said in prior quarters, we still probably have another 1 or 2 quarters ahead before we're on the other side of that. So the security service business is the one that is -- has the biggest opportunity here.

Our next question will come from Toby Okwara from Morgan Stanley.

Congrats on the great quarter. Just wanted to follow up on some of the service questions and specifically in data center. I guess was this -- as the business mix is more towards data center, does that change the service opportunity long term at all? Or how do you kind of think about that?

Yes, it will. And obviously, the systems growth is very, very healthy, and the attachment rates in the data center world are higher than fleet average. So over time, that will benefit us -- and we believe that our field footprint is one of the industry's largest. And as we're deploying our business system, and as many of you who visited us on the go to Gamba Day could see we're not just improving our ability to productize and sell services, but we're also improving our ability to execute on those services more productively. So we believe there is both a, over time, a top line acceleration opportunity, but also a very nice margin opportunity here.

And then following up on some of the international questions. I guess outside of Middle East, how did the growth look in Europe there? And what would you need to see in the market to see acceleration in the catch up to the growth that we've seen in Americas and APAC?

Yes. So first of all, I think it's important to understand that our business mix is quite different in Europe than the other two regions. So we're much heavier on fire and security in Europe. And -- but building our presence on thermal management, meaning HVAC and controls. So -- and that's where the investments are going in Europe. As you heard the market in Europe for data centers and semicon is in earlier stages than it is in the United States and Asia Pac, but I think that over the next few years, we're going to see a significant pickup in that, and we're positioning ourselves to be ready for that.

This concludes our Q&A session. I will now hand the call back to Joakim Weidemanis for any closing comments.

Thank you all for joining us today. So we exit fiscal 2026 with great momentum, record backlog and clear visibility into the year ahead. Our differentiated technological capabilities, our unmatched field presence and proprietary business system positions us to support customers as their requirements continue to scale and to create increasing value for our shareholders.

I want to thank our more than 90,000 colleagues around the world for their commitment to our customers and for continuing to raise the standard of execution across Johnson Controls. Thank you for joining us today.

This now concludes today's call. Thank you all for joining. You may now disconnect your lines.

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. [Operator Instructions]

I would now like to turn the call over to Mike Gates, Senior Director of Investor Relations to begin. Mike, please go ahead.

Good morning, and thank you for joining Johnson Controls Fiscal Third Quarter 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.

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 risks and uncertainties that could cause actual results to differ materially. 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 in 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 Joakim.

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.

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. 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.

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 of demands, and this is the age of thermal management. AI factories, advanced and biopharma manufacturing, large research hospitals and universities require thermal management solutions capable of delivering performance, precision and energy efficiency at unprecedented scale. 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. 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.

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 in demanding environments. 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. 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.

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. Our life cycle 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. 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.

Let me walk you through this on Slide 5. Johnson Controls was built for this time because of 2 competitive advantages. 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 strengths that are difficult to replicate. First, our 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.

We amplify these strengths through 3 growth accelerators. 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. 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. 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.

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. 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. 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.

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. 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 colleagues to deliver for customers in targeted areas of the business. Our first stop was JADEC, our advanced development engineering center and home of YORK, where 150 years of leadership in HVAC and thermal management demonstrated the increasing importance of innovation, performance and precision. 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 the speed to market on a key product by 40%. And 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 have manufactured critical airside technologies. ACE is one of approximately 40 manufacturing facilities around the world, where we are turning manufacturing into a competitive advantage. 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%.

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 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.

These examples demonstrate what is possible as we continue to deploy our business system across the enterprise. While scaling takes time, we are already seeing improvements in performance and the customer experience in targeted areas of business highlighting what's possible as this becomes how we work everywhere. 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%.

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 thermal management solutions that deliver performance, precision and energy efficiency while helping them manage cost, capacity and energy usage.

Our ability to meet these evolving customer requirements will be a key driver of sustainable growth. 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.

With that, Marc will now walk you through the details.

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.

Let's turn to results on Slide 7. In 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% and service increased 7% and applied [ HVAC ] delivered high-teen 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%. 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. 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. 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, 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. Across our end markets, demand remained 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. In EMEA, sales increased 1% despite the ongoing conflict in the Middle East. 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. 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. Backlog increased 32% year-over-year to a record $21 billion. 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 outlined at Going to Gemba Day.

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 1.9x below our long-term target range. Year-to-date, adjusted free cash flow increased to $2.1 billion, driven by earnings growth and disciplined cash conversion. We are now better positioned to invest in the business, while maintaining balance sheet flexibility.

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. Our strong third quarter results and record backlog gives us the confidence to raise our fiscal 2026 guidance. We now expect organic revenue growth of approximately 8%, up from our previous expectation of approximately 6%. 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 $0.50 higher than our original guide at the beginning of the year. We continue to expect adjusted free cash flow conversion of approximately 100% for the full year, demonstrated that the higher earnings we are delivering continued to translate into strong cash flow generation. 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.

Operator, we are now ready for questions.

[Operator Instructions] Our first question will come from Nigel Coe with Wolfe Research.

So just wanted to maybe randomly start off with supply chain, just given it seems to be a growing issue for some of the some of the data center infrastructure suppliers. I'm just curious Joakim, how you're feeling about the [ Brazilian ] supply chain, any bottlenecks you're experiencing and confidence on sort of delivering on plan from here?

Yes. So the 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 Going to Gemba Day we were talking about how our deep technological know-how spans the 5 subsystems that make up an HVAC chiller. But we also talked about the fact that we control the manufacturing and the COGS of those 5 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. 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. 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. We try to get ahead of that. Very occasionally, I will have to get involved in myself personally, and that is just, I think, an element of operating in a higher growth environment.

Okay. That's great. And then obviously, it's really encouraging to see the double-digit organic growth of 10% in the fourth quarter. I know it's a little bit early for FY '27 color, but you've got really good visibility on the backlog. I'm just curious how you're thinking about kind of top line growth in FY '27?

Yes. 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 Gemba day of high single-digit growth, top line growth and at least 30% of incremental. You will see quarters that the format or above that level over the next couple of quarters. And that's really supported by our all record backlog and the fact that our pipeline continues 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. But we'll provide you details on how we look at '27 at the next earnings call. .

Our next question will come from Amit Mehrotra from UBS.

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. 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? Can we further accelerate or are there just capacity or supply chain constraints and high teens is very good and sort of that's the expectation going forward?

Amit, well, the way we think about it, we look at our pipeline, our pipeline continues to grow at a very healthy rate. And as you would suspect, data centers is an important part of that, but the nondata center pipeline actually is growing almost double digits.

So we're -- we feel very good about the continued strength there in our business from the demand side. And then from a supply chain and capacity point of view, we made a meaningful physical plan investments about 2 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. 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. And that's really the -- 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. And the business system is going to continue to, as you saw, since you were there at the Going to Gemba Day, help us create more capacity in the physical space that we already have. 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. So we feel pretty good at where we're at right now.

Okay. Got it. So just -- I mean, just trying to understand what you're saying beneath the serve. It doesn't seem like there's any impediment to sort of further accelerate growth in applied HVAC. And my -- 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. As we think about '27, '28, I mean the backlog, I assume as is accretive to margins. 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 slope of the operating leverage as we sort of further progress through this evolution?

Yes. I mean as you see the growth accelerating beyond the mid-single digits. You've seen that we've been able to maintain this year, what I would call a very healthy operating leverage between 45% and 50%. And that incremental revenue that we see is converting upgrades that is extremely healthy but is closer to the long-term operating leverage framework we had laid out of 30-plus percent. .

So dynamically, you will see still higher than 30% operating leverage over the next 12 to 18, maybe 24 months. But the way you need to think about that is that the margin that we've seen that incremental growth comes mostly from our data center revenue, which becomes a very large portion of our mix. And that means systems or systems business is growing ahead of our service business in the near term. And that creates a smaller equipment mix margin, a small headwind, I would call it, but nothing that would prevent us from continue to commit well above the 30% incremental we laid out in the Go to Gemba Day as part of our long-term algorithm.

Our next question will come from Scott Davis with Melius Research.

Congrats again on putting together some solid numbers here, not looking to blow Sunshine for tail, but these are good results.

So anyway, 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. Do they think in terms of derisking 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. 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?

Yes. I think the way it works, Scott, is our large data center customers, they design or architect their data centers in certain ways, they'd make certain equipment choices as part of that overall architecture. And then -- and they are engaging with vendors as they do that. So I think you've heard that many times our large data center customers, we'll send groups of engineers to sit with our engineers for a week, 10 days. .

So think of that as you're designed in, and they will really just pick one partner that they design in with. There might be more two, 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 2 to 3 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 we'll get -- no one will rarely get all of it. It's usually split, but someone will get a little more of their purchases. And even if initially you were awarded a certain amount 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. 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 they're architecting the overall data center. And that's a very collaborative approach. And obviously, you need to 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.

And is the service side of it, a similar kind of situation?

Yes. 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. 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.

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. 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 be -- to have a value prop that's strong. You need to, of course, part of the value prop benefits versus cost be competitive.

You need to execute well from a, let's call it, supply chain and delivery side 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.

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, Joakim?

We think we are for the categories that we focus on. Absolutely.

Our next question will come from Andrew Obin with Bank of America .

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, is it margin accretive? Or is it margin dilutive because of pass-through? That's the first question.

Yes. Great. Great question, Andrew. So we believe that the future of data centers are not all going to be these mega data centers, the 1 gigawatts and may be 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. 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. 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. 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 in Johnson Controls in that shipping container. 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. The traditional applications would think of oil and gas very remote locations and -- but they 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.

The TAM, this is an earlier stage of the market. So the TAM is significant but it's information. So I hesitate to throw numbers out there. 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.

But think of it as an example -- as I mentioned on the call, where we've taken a step back and we basically, as a company said, look, what's happening in 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 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?

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 you've seen we've taken some portfolio actions in the quarter. We continue to divest or residential subscriber business around the world. Quite successfully, we have a few more to go, and we are making a lot of progress on actioning the commitment we've made in prior quarter in readjusting our portfolio adequately.

Our next question will come from Chris Snyder with Morgan Stanley. .

I wanted to follow up on some of the commentary around data center. And specifically, I wanted to talk about your content within the data center. I think on the last conference call, 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 air handling goes up and then the CDU business certainly goes up. I was just maybe hoping to get a little bit more of a magnitude of those respective moves.

And really, the heart of the question is, like, is the legacy content going higher when we think about chillers and air handlers? And just first, how much of it is coming from CDU being a new product where you guys are gaining share?

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. And by the way, with -- there are other things that generate heat. I 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. 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. 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. And of course, we have our alloy investment here from a couple of quarters ago that where we're making great progress in pilots and some early orders now.

And then our controls. And then as you heard earlier today, 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%. 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 the Armada example that Andrew was asking about, as I mentioned, that container, a data center and a container, I mean, it is loaded with everything that we make in this company. So we are going to continue to drive the dollar value up per megawatt here. That's an essential part of our strategy.

One thing that you've also talked about more is bringing a more comprehensive solution to market rather than maybe having the data centers piecemeal kind of the various equipment together. I imagine that, that would lead to better energy efficiency for the data center. Is there any like numbers or data or anything you could talk about, about the level of efficiency savings?

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. But is there any difference between the type of customers? And is there any -- do they care more than they used to?

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 we hear about the local communities being concerned about the impact on power prices and things like that. 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. 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. 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, the less power you need, right?

And then obviously, the value prop of operating a data center. If you on thermal management, but today uses maybe think of it as 1/3 of all the power that goes into a data center. 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. 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, but really exciting. It's going to be very meaningful what we're working on.

Our next question will come from Jeffrey Sprague with Vertical Research.

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. But obviously, there's a lot of hand-wringing out here in the market and investor sentiment about whether your end customers can really earn us 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. Just where do you stand on kind of the sustainability of this demand?

And do we have sustainable demand looking out 2 or 3 years that really supports the investments you're making and the confidence that we see apparent in the orders, et cetera?

Yes. So you asked for an opinion. So I'll give you an opinion. So as you know, I spent the 5-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.

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. 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, 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.

So that's -- but super early innings. And then I just look at a corporation like our own for what we're using AI today, and I think we're making some good progress internally here. I mean it's part of our proprietary business system, they'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. 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. 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 and so I'm optimistic.

Yes, helpful. And then just looking at maybe another a 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 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?

Yes. 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 5 subsystems of a chiller, that we -- are part of our core proprietary technological know-how. 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. And we have looked at that beyond the 5 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. 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. 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, and that could be through partnership or it could be surgical inorganic moves. But I think a big picture today, and 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 and the value prop side.

Appreciate. SP1 Our next question will come from Joe Ritchie from Goldman Sachs.

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? And then also as kind of as you think about the backlog build and the visibility that you have for FY '27, how much of -- how much is already are guaranteed that you would expect to kind of ship in the FY '27 time frame?

Yes. So data center revenue is probably going to land in the high teens as a mix of percentage of revenue for fiscal year or fiscal year '26. We continue to see that subsegment grow much faster than the rest of the portfolio, very healthy double digits for some subsegment even higher than that in terms of growth. .

As we shape out the following years and as we discussed it back Going to Gemba, we see that mix over the next 3 to 5 years, becoming 1/3 of the company from a revenue standpoint. And continue to be extremely accretive to the overall enterprise. I think Joakim mentioned it a little bit earlier on another question, as we continue to expand our installed base because of the system growth we've seen in the last couple of years, and we're going to see the next 3 or 4 years. We continue to improve our service attachment rate and that installed 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.

That's helpful. And then I guess just a follow-on maybe sticking with these data centers. How big is your CDU backlog today? And then have you guys gotten through some of the key like final life milestones in terms of testing and validation to start shipping your CDs? .

Yes. We are going to start shipping actually this quarter. Most of the testing and validation is true. We are still working through some of the high speed scaler validation. The pipeline for that business is well beyond the hundreds of millions and has now reached $1 billion. We think the opportunity here is enormous.

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.

Yes. And we had the recent NVIDIA certification as well just a little while ago. So good progress here.

Our next question will come from Nicole DeBlase with Deutsche Bank.

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 EMEA growth and maybe when that business can return to more material growth?

Yes. 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 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.

And build up in [indiscernible] you'll see EMEA and in very low single digit to flat in Q4. And that's a couple of points of pressure vis-a-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. But beyond it's sort of about crystal ball. .

Sure. Yes, it makes total sense. And then APAC came in above your expectations pretty significantly in 3Q, I think, both revenue and margins robust. I guess can you dive into what drove that? And any thoughts on if that's sustainable into the fourth quarter?

Yes. 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 as advanced manufacturing. Biopharma, semicon, et cetera. 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. 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. And I think we're still in the early innings of that.

Our next question -- final question will come from Andy Kaplowitz with Citi Group.

So service plus 7% revenue growth and orders at plus 4% in Q3, I think were both slightly better than Q2. But I'm sure anything Johnson Controls, could you still do better than that 4% orders in North America that you have. So maybe just update us on where you are on your initiatives to improve service particularly in areas such as security, which you talked to us about before? And should we expect a bigger turn in service growth as you go into '27?

No. You're right. We remain 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. 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. 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. .

And as you know, our security business, 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 are taking very targeted action. 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 Americas and EMEA. We still think there's a large opportunity to continue to drive our installed base, especially when you see the system growth being in the double digit. And one of the big priority we talked about Going to Gemba Day 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. So it's a small bump right now, but we think we've seen an inflection point.

Very helpful, Marc. And maybe I could just double click on fire security then like it's flat, I think, in revenue in Q3. Is that kind of sort of your targeted initiatives that you're doing? What's the underlying market doing? And again, what's embedded in the expectations for Q4 and beyond? .

Yes. We're keeping up with market, right? So the underlying market globally is flat the way we have been. We intend to do better than the market. And so a refocus of that organization both from fire detection, fire suppression as well as our core security businesses. As we pay it into next year is going to be a core focus to kind of lift up the growth of that business.

Now transparency, 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.

This concludes our Q&A session. I will now hand the call back to Joakim Weidemanis for any closing comments.

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. The combination of our differentiated technology, unmatched field presence and the early proof points we're seeing from our proprietary business system reinforced our confidence in the opportunities ahead.

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 now concludes today's call. Thank you all for joining. You may now disconnect your lines.

Well, good morning, and welcome to the home of York. This is how Johnson Controls began. A professor and a technology innovator that had a problem at hand that needed to be solved, and he solved it with technology. 140 years later, we're here. And when we think about it, the future of many of the scientific discoveries that are now being deployed in human society requires even more of that kind of innovation, application-specific technology-based innovation. The scientific discoveries that I'm talking about that are now being deployed widely in society are not just AI that requires more thermal management at an economic price point and being energy-efficient, but also biologics manufacturing and other forms of advanced manufacturing, which we'll talk more about.

But let's start with data centers. The greatest infrastructure build-out in human history. We expect data center CapEx to reach $7 trillion by 2030. But this growth of AI factories, factories of intelligence depends on mission-critical infrastructure. And that's where we play. These data centers can only scale with highly efficient thermal management or cooling, heat extraction at a fraction of the cost, at a fraction of the energy that they require today. Otherwise, we can't deploy the future chip generations, that all the chip manufacturers are continuing to launch.

And that's not just a problem for the future. That's a problem right now. There's a constraint. The data centers can't get hold of enough power. They don't want to divert power to cooling. And that's where we play, and we'll talk more about that today, not just at the component level or at the product level, but we are taking a position in the entire thermal management chain.

Then we have biologics. Biologics is the next generation of drugs that's already here. And just like you hear from the what it's called, people are manufacturing biology, live biology. And that requires thermal management or very, very precise and high capacity thermal management controlled within very, very tight tolerances to avoid yield losses that some of these factories are experiencing today in the 30% to 40% range, which, of course, dramatically impacts the cost of these drugs -- cancer curing, but also delaying drugs that are about to be launched or in the pipelines of all of the large pharmaceutical companies. They can't do what they aspire to do without high capacity, high precision and highly energy-efficient thermal management.

And that energy efficiency is not an academic point. All of these industries that I just talked about are much more energy intense than their prior incarnations. AI factories, the data centers are infinitely more energy intense, use more energy both for the compute, but also for the thermal management and cloud storage data centers, that was the data centers of the prior generation. The same thing is going on in biologics. Biologics plants are on average, about 7x as energy-intensive as traditional pharma manufacturing. And I could go on and on. I could talk about other forms of advanced manufacturing, batteries, semicon and so on and so on.

These are industries that are also pushing the boundaries of the performance of their products. And as they do, in many cases, they are requiring even more precise indoor operating conditions and that's where we play. The energy though is -- that they consume, if you draw the map or align and project into the future, there's not going to be enough energy on this planet to fuel all of those industries. And that's one of the reasons why the cost of energy has continued to go up and up over the last couple of years and is projected to increase -- increasingly so in the future as well. So to be able to help them do what they do with a high capacity, high precision thermal management, we also need to be able to do that at a fraction of the energy that's being used today.

So human society needs help to basically decarbonize or reduce energy intensity, whichever word you want to choose for that, what we have to do from a technology innovation point of view is actually the same. So we have a really important role to play here. So we, in some ways, were born to -- for this time when our capabilities and thermal management are more important than they have been in our history and perhaps in human history. These are all constraints that I was talking about, constraints that you will meet our innovators today that they are working very hard to resolve with technology-based innovation.

And so that in a nutshell for me, is why I chose to join this company. What other place could you go work, what you do, what your team does really matters, really matters for the development of human society and where technology-based innovation based on the types of capabilities that we have already exist in the organization. We haven't quite fully unlocked our potential yet. We'll talk more about that later today, but we have the wrong capabilities. And we have a few more things going for us in terms of our potential that we're going to work on unlocking here.

So let's talk about where we are today and a couple of the topics that we're going to spend time on together. So great companies are really built around 3 things. Number one, you have to work on something that matters that you can develop a passion for that your people can develop a passion for. You have to pick something that you can be the best at. And number three, you have to be able to do this in a way that creates an economic engine so that you can keep fueling the work that you're doing, that matters that people are passionate about and that we can continue to evolve our ability to be the best at.

So the great thing with Johnson Controls, for me and for all the colleagues that you're going to meet today is that all those 3 things come together, and that's actually what we're working on. So we have, what I would say, the raw capabilities for what it takes to win. We have the 2 bookends that you see on this slide. We have impressive and unique differentiated technological skills and thermal management, not only, but that's where we're going to spend most of today about. We also have one of the industry's most comprehensive field footprints, and that really matters because customers, of course, buy our solutions not to just buy them and use them for a couple of weeks, but they plan on using our platforms for decades in many cases, and they need that life cycle support. So both these bookends are capabilities, and you'll meet many of the people here today that were built over decades and of course, on the technological capabilities, like I said, we're in the home of York here, they've been built in and around this area over the last 150 years. Think about it this way. My grandparents' grandparents, that was the generation that worked here. That's the thermal management, 150 years ago. So all of what you're going to hear about are skills and capabilities that have evolved over time from generation to generation of leaders. So 2 fantastic strong bookend, and we'll go a little deeper into those.

But to have those bookends and those are great capabilities. You have a lot of potential, but how do you unlock that? We'll talk a lot about that here today as well. First, you have to clarify in a large organization of almost 100,000 people, you cannot be working on 15 things on the same time. It has to be clear to everyone what our priorities are. So over the last year, we have developed and clarified for our people work we're going to be focusing on. And those are articulated in our 3 strategic pillars. And they are really centered around many of the things that I talked about in my introduction here.

We are going to help the world unlock the constraints and deploying AI in human society by making it much easier and faster and more economical to stand up a data centers. We're going to enable, for example, the biologics manufacturers to do what they do without losing 30% to 40% of their yield. And we're going to very actively help the world decarbonize or reduce our dependence on energy by making sure that everything we do consumes just a fraction of the energy that our technologies need today over time.

Clarity on its own and a large organization like this is an accelerant because when you align across the organization, so your salespeople know that these are the priorities, and we help direct their efforts towards these strategic pillars when your R&D teams and your product management teams knows these are the priorities and your innovation road map start to change. The wheels start to not just work better together or the COGS work better together. But over time, you're able to work a little faster. So having clarity on its own is an accelerate.

Number two, what we've been working on over the last year is really our business system. And that is really the main theme of today. You're going to hear about how we're going to unlock our potential, these core capabilities that we have that haven't fully been unlocked yet, you are going to hear how we're going to do that with the business system.

So the strategic pillars is where we point the effort and focus the organization and the business system is how we're going to improve this company, and you'll hear a lot more a little bit later what that is all about. And those 2 things together orchestrated in the right way, which we're working on, will and is creating this economic engine that will help us continue to make even more room for investments in innovation, for example, but in other areas as well, while we also improve the financial performance of our company.

So let's talk a little bit more about our strong technological capabilities, the capabilities that have really been built in this facility in this area over the last 150 years as well as in our controls, engineering and innovation center in Milwaukee. So as you saw on the last quarterly call, where we talked about what that differentiation actually is built on, it is built on the fact that we own both the unique technologies and each one of the subsystems that in this case, here illustrated for an HVAC unit or high-performance chiller, we own all the technological capabilities within each one of those subsystems. We also manufacture all of those subsystems. So we both control the ability to innovate within each one of the subsystems at speed as well as precisely for the types of customer applications that we're going after.

We also own the COGS. We can make trade-offs and choices and we can do that while we're innovating as well. And so we do that for each subsystem. But by owning the capabilities across the entire system we can make system-level decisions on how to eke out even more performance out of the whole system that we're launching we can choose at what speed we'd like to go at and innovation, and we can greatly impact the COGS because, as many of you have heard, 90% of your COGS is controlled when you design the product, and not later when you manufacture it because many of those decisions have already been made.

So in the chiller here, there are 1,000 patents and innumerable amount of trade secrets behind this -- these products that we have in the market today. Now you could argue, have we really leveraged these skills over time. And you'll see later on today, we'll talk about how we're unlocking greater speed of innovation and increasing our capacity for innovating even more because we have the raw capabilities that you see articulated on the right which is an example of energy consumption. So in principle, we have the capabilities to help customers cut their energy consumption in half already today through the capabilities that we have in our HVAC systems, our Control systems, Metasys as well as our digital and AI-based overlay systems. Again, we can debate how well we have unlocked that potential. That's what we're working on. That's what the business system is here for.

So that was an example of how we're innovating on the subsystem level as well as the holistic system level to create a highly differentiated offering for our customers. That was an example on an HVAC chiller level. That same way of working, we have, over the last year, been applying to the thermal architecture or the thermal chain of AI factories of data centers. So we've taken positions beyond chillers, beyond air handling units with the Silent-Aire franchise, and beyond the learnings we've had over the last decades of serving those data center applications. And we've moved left on this chart into closer and all the way to the chip and build a portfolio of capabilities now that will allow us to apply that same kind of thinking, systems thinking holistically across the thermal chain in a data center.

And that way of working will allow us to not just reduce the amount of power that needs to be diverted to cooling or providing more cooling today but over time, as we move into a 2-phase cold plate world will actually allow us to dramatically cut the amount of power needed for the whole thermal architecture for the entire data center. Some of these innovations, which we'll talk to you about at some later point in time, are going to be truly category changing for thermal management over time.

And we haven't maybe talked to you too much about the details of the Alloy acquisition and the Accelsius partnerships, but they both have one thing in common. These are highly science and technology-oriented companies. And with Alloy, we didn't acquire a building or some hardware. We really acquired a group of highly talented engineers out of the -- PhDs out of MIT and Harvard and Boston. So we're super excited about what we're going to be able to do there to really make an impact on the world in the data center world.

And the other book end that I talked about, if the clicker could work, if you could advance one slide, please. As I talked about here previously was our global field presence around the world. So this is something that's been built over decades. And we're not only talking about service people, as you see on the right-hand side, many of our customers are not buying commodity products, right? They're buying something that needs to work with the system that they're designing, whether that's a biologics plant, a data center, a battery plant, semicon plant or for that matter, research -- economic research hospital.

So they need advice early in the design of their overall system from people like our sales consultants our solution architects to guide them on what the best choices are for the outcomes that they're trying to drive. But the depiction on the right here really talks about our service capabilities, which are the large group of people that we have in the field in about 100 countries around the world that help us support our customers to really get the value out of the systems that they have purchased over the life cycle of when they're using these products, which, in many cases, is 20-plus years. So they really rely on our people for that long. They have people changes in their organizations. They don't always remember how to operate certain things at certain points in time. Something changes in their overall system, something needs to be tweaked on our side of the equation. And that's where our service engineers in the field come in to play.

And so as you can see, we have a significantly larger team around the world than most of our competitors. And these are people who weren't just hired from high school yesterday, right? These are people who have, in many cases, decades of experience, domain expertise, not just on the technology side, but also in terms of helping customers think about how to run the system as part of their overall system. So a great competitive advantage. But here again, we can ask, hey, have we really leveraged disadvantage? Have we unlocked our potential here that we have? And we haven't yet, but that's what we're going to show you, that's what we're working on today with the business system.

So what is the business system? Business system is really how we are going to transform this company. And that's why we're going to spend the rest of the day showing you how we're doing that. But I'll take a step back. For those of you who are not familiar with this, we're, of course, not the only company that is applying a business system. Many have some efforts, fewer have really managed to, over time, make it part of how they run the company. But that's what we're doing here today, and you'll meet a few people who really have understood how to do that. So we're going to show you how we're doing it.

But let's take a look at this image here. This is a Formula 1 pit stop. I'm sure some of you might have seen some videos in the 1990s. I'm told, I'm actually not a Formula 1 fan. One day, I'll have to learn more about that. But in the 1990s, it would take 9 to 10 seconds to change the tires. Fast forward today, they're able to do it in less than 2 seconds. So how have they done that? Cross-functional, continuous improvement, establishing standards, executing on the standards, going back, continuous improvement cross-functionally again and again and again and they just continue to get better and faster. That's sort of the idea that you should have in your head when you think about a business system.

A business system, when implemented well, changes the culture of the company and creates a situation where a team of people, a group of people is able to just continue to improve and improve and improve and improve continuously. There's no end to it. Think about it in another way, business system is very much about speed, about speed of execution, about eliminating things that slows you down. You'll see plenty of examples of that today.

So it is -- of course, there are some approaches, there are some tools, but it's very much a way of working together, human beings as a team, think of your favorite sports team. I'm sure you've heard analogies of, hey, we had all the best players, and I won't start with a baseball analogies. Now I'll just say that the brewers, Milwaukee Brewers don't really have many big names but they just keep on winning, and they have a system for how they do things, how they train people, how they work together. And you've heard that in other sports as well. That's pretty much the mental picture you should have of a business system as you walk around here today.

And you're going to see it, by the way, being practiced at Gemba, where value is created, where the action happens it doesn't happen back in the office in the headquarter, right? The business system is all about teaching people to work together at Gemba where value is created. It's also a lot about problem solving, but we'll come back to that. Speed to solving problems.

More broadly, the tools and approaches that are part of the business system, some of which you will see during the day, fall into these 3 categories: Simplify, so we have a set of approaches and tools that help us simplify what we do, what should we not work on, what's less important, what's more important? Let's focus on what really matters, kind of like our strategic pillars in some way for the enterprise.

Then we have Accelerate. That's really built on what many of you will have heard about called lean. Lean -- person who went to Japan many, many years ago, regrets not calling it learn. Lean makes it sound like it's all about cost. It's actually not. It's about speed, speed to learning, speed to learning that you have a problem, speed to figuring out why you have a problem, speed to countermeasuring, why not solve because you only countermeasure until you find a better way. So there always -- so it's speed to learning, but it's really speed, as I said before.

And then, of course, today, Amplify, there are off-the-shelf ish tools available to apply AI and digital while we're improving processes while we're working on speed that just weren't available a few years ago. A few years ago, we would have to hire data scientists. We've been competing with Google and Microsoft and the tech companies for talent like that. But now with the tool sets that they've developed, and the wider availability of digital and AI people, we've been able to now create approaches for how we build in AI and digital into our business system and as we improve the processes against speed. And I think of the speed part is we take something that used to take months and weeks and turn it into weeks or days. And with Amplify, we're able to take the weeks and days and today's in hours and sometimes even minutes. You'll see some examples of that later today.

Some of the foundational approaches within the business system that you're going to see during the day are the following 5, and these are sort of general concepts that the business system builds on. So number one, standard work. For anything that you do in a company or in a sports team for that matter, make sure that the expectation or the best known way of doing it is defined and clear for everybody. Let's make sure that if you're playing defense, you know what your role is on defense. That the best known way is defined and that you're trained and everybody knows what the best-known way is until you find a better way, of course, but you always have to start with the standard.

You'll hear about problem solving. We want to teach everyone in this company, and we're well on the way to become really good problem solvers. Most human beings, in particular, those who've gone to college and have more advanced degrees, tend to think of themselves as outstanding problem solvers. What I found when you work together in a company cross-functionally, your organization's problem-solving capability isn't always that strong. But the more problem solvers you can have in a company close to where the action is, the more likely are to be able to spot a problem to get to an understanding of why you have the problem and to get the countermeasures quickly. So problem solving is something that is a very strong element of our business system. And that's why all the best of the leaders that we have in the room says problem solvers on the back because we want to remind everyone that everyone needs to be a strong problem solver.

And you have something called value stream mapping. Value stream mapping is -- and you'll hear plenty of that today as well, is an approach to look at an overall process, starting with the customer, going end to end to figure out where is value created and where is -- where is the waste? What's holding us back from going faster, for example? Why do we have to have so much inventory in the process? It could be physical inventory in the factory or it could be something as simple as we're waiting for approvals in an administrative process and there's a bottleneck somewhere.

So value stream mapping is a way to -- a team-oriented way, to enable a team to together map out an end-to-end customer process, always anchored in the customer to be then able to see where we are going to apply our improvement efforts such as Kaizen. Kaizen are groups of maybe 8 to 10 people that get together for 4 to 5 days to solve big problems. Not just make a plan for solving the problem or analyzing, but solve the problem rapidly in a week. And as you will see later, we're running lots of Kaizens now. And of course, those need to be pointed at the big problems that we identified in the value stream maps. And they're always cross-functional. The people on these teams are always cross-functional. They typically also always involve an AI or a digital person so that we can apply those approaches, digital AI approaches in the week when we're making the improvement.

And then visual and daily management. You'll see some examples of that, too. Once we've improved a process with some of the tools and approaches that I just talked about, we typically stand up what we call visual daily management which looks like something that you see on the screen here, where the team is working in the process meet on a daily or on a weekly basis to basically track how we're doing for how they define what winning looks like for that process.

Each column here is one metric. That's one aspect of what winning looks like. Each line is -- the top line is daily. The second is typically weekly, maybe monthly. The third line is, if we're off target you see red or your -- green, you didn't almost win the Olympic metal, you're on or you're off. The third line is the Pareto of where or why you might be off. And the fourth line, typically handwritten is the team as they stand there on a daily or a weekly basis. They are agreeing committing to each other what actions they're going to take to get back to green. And if nothing else creates the accountability so that when they stand there tomorrow morning or next week, again, we're all reminded about what we committed to each other to drive improvement. This -- all these tools help with faster problem solving and also faster and better sustainment of all the countermeasures that we were implementing.

So where are we on the journey? I already got that question on the way in here. You guys are good. You get on the questions right away. So the way to transform a company with the help of the business system, I mean I have learned over the last 2 decades, 2 prior companies I worked in. You always have to -- I have learned pick high-impact areas that are widely recognized to be big opportunities. So that's not a list of 60. That's a shorter list, 10 or less.

Then in those impact areas, this could be things like why are our salespeople in Michigan only spending 10 hours a week selling. It seems like you could sell more if you could spend 20 hours a week [indiscernible]. That's what I've learned in my career. So that's a high-impact problem, not just in Michigan, but we know that problem exists in several places. But we've decided to start in Michigan, go narrow and go really deep to really understand the problem and start to implement the countermeasures. And as we were doing the work, we were training not just the people on the front lines, but we're training and bringing in leaders into the value stream maps that we were doing, into the Kaizens that we are doing. And so they could themselves see that this cross-functional way of working at Gemba really enables us to get to countermeasures implementation of sustainment much, much faster. This is a better way of running the company, and this is the way we're running a company. There's no other way we're running the company. So that also needs to be clear to everybody. Not because I said so, but because they're seeing it themselves, and they're seeing the enthusiasm and the motivational impact this has on our people on the front lines.

So you can see some of the numbers here. We have ignition. I would call it, ignition. Now we're moving beyond ignition, and we're starting to scale and roll out some of the improvements that we've driven. You'll hear about many of them during the day here, to other areas. And you can see there are a lot more cities and locations added here. And this is now starting to accelerate here over time. You don't change a company in a year, a week. It takes -- if you have 100,000 people, it takes a little while. But results are already starting to show up in the P&L. And they will continue to show up. And the idea here, like I said, is to build the engine, the team, the capability that just keeps on improving and improving and improving. And there's going to be no end to the improvement that we're going to be able to drive. And this is the way that we are going to use to unlock our full potential that I started to talk about here earlier in the presentation.

So what you're going to see today are really excellent, I think, examples of the power of the business system. So we're here at JADEC, our advanced development and engineering center. Home of the York. We've been innovating here for 150 years. And you're going to learn a lot about our unique technological capabilities within our thermal management. But you're also going to learn about how with the business system we are going to double the capacity of this team, of this facility without adding capital without adding more people. We are going to add more people. But if we didn't add, we could still double the speed and the capacity of innovation. And you'll agree and understand much better after the tour, but that's the kind of potential that we're talking about with the business system.

We're then going to take you to one of our manufacturing facilities. It's not our largest facility, but it just happens to be in this area. And that's the facility -- one of 40-plus factories that we have around the world. And with the work that the team has done there, we're now able to quadruple the capacity of that plant. Without adding capital, without adding people, it's just simply applying the business system. And it's a combination of people who know how to do this together with people who know our processes, our company, our applications, and if you put these types of people together, they do the work at Gemba, they do the value stream mapping, the Kaizens and so on. These kinds of results are possible.

And then finally, we're going to end the day in Baltimore in one of our local market offices. And there, you will see what I think I've mentioned on some of the quarterly calls earlier this year and last year, how we're helping both our sales and service teams double the amount of time with customers, double the amount of selling time with customers. And it's the same approach, value stream mapping, Kaizens, cross-functional teams, including our digital and AI teams working together at Gemba. So these are the kinds of results that are possible. And you can't copy paste and do everything in 6 months everywhere in every corner of the company. But this is what we're going to be rolling out over the next couple of years here in the company.

Now before we start the tour, I just want to mention that you are going to meet a number of leaders, and you will also have a couple of guides with you, not professional tour guides, but they are people who are doing this work, senior leaders in the company. But I also want to make sure that I highlight here that your -- for us overall as a leadership team, one of our promises to our employees is to make sure that we have a safe working environment that they can rely -- their families can count on them coming home because they work in the way they came to work because we have a safe working environment. We will make sure that we provide the right safety gear for you during the day. Sometimes you'll hear people talk about PPE. It's basically safety stuff and listen to your guides and we'll provide you with the right type of equipment at the right locations.

Just having the best people being aware of that we're moving around, of course, is one of those elements. Very good. So these are the people you're going to meet during the day, in addition to the guides that you have. So these are -- and they will introduce themselves, you'll hear that the majority of these people have worked for Johnson Controls for decades. Feel free to ask them questions. How they're thinking about the whole theme of using the business system to unlock our full potential. I think you're going to find some people who are really quite enthusiastic about what we're doing here. You're also going to find a few people who joined us more recently to help us accelerate the pace at which we can go. But a great group of people.

As you can see from some of these titles, there are some VPs, but mostly, we have people here who are doing the actual work, they are not full-time presenters to groups of visitors like you, not at all. They are the people doing the work. And I think that's sort of the objective of the day here is for you to get a chance to meet the people who are going to apply or are applying the business system and who are going to lead the improvement and the transformation of our company.

Our job as leaders is to support them, to help guide them, sure provide some directions, priorities, the strategic pillars. But at the end of the day, they're the ones doing the work. And when I say we have ignition, it's ignition with people on the front lines. And why I'm saying it takes a few years to go implement everywhere? Well, it's because we have to not just get to the top 200 leaders, we have to get to our people on the front lines. But this is a known approach, by the way. It's a known journey, well at least it is to me and a few others on the team here. And so I can tell you, when I say we have ignition, we truly have it, and we're now truly starting to build momentum beyond the ignition. You will see it from our colleagues. Don't take it for me. You should take it from the colleagues that you're going to meet here.

Very good. So with that, we are now going to break into our group's. And there we go. So you have a vest so that should be a clue where you should go. So look for the color -- same color of your vest. That's the team that you're going to have 2 over here, 2 over here. So please, you're now free to get up and then go join your team, and I will be walking with one group during the day, and then I will see you in the wrap-up as well. So I hope you enjoy and have a great day here. Looking forward to it.

Please head to your color coded table to receive your headset and safety glasses. You will move as a group to your first station. Thank you.

Before we begin, here are our customary forward-looking and cautionary statements as well as non-GAAP financial information. Additional details can be found on our Investor Relations website where this presentation has been posted.

All right. First of all, I wanted to thank you for going to Gemba with us today. I think we made a clear case for what is changing at JCI and what the potential value creation opportunity is here. But what I wanted to do over the next 15 minutes before we move into Q&A, is bring all of this together and kind of demonstrate what the opportunity JCI has to offer. That opportunity is anchored in really 3 separate. Can you move to the next slide, please.

In 3 separate differentiated opportunity. First, our technology what you saw at JADEC, where innovation and the ownership of the different subsystem provides us an ability to create new technologies faster than the competition and how to innovate our peers. It's also a great framework, a microcosm or ability to drive differentiated value proposition where it matters the most for mission-critical customer as well as our data center customer. Second is our global field presence, very differentiated field presence where our business system actually comes to life for the ones that were at the Baltimore facility, you saw what that could bring as well as our manufacturing footprint, our global manufacturing footprint is a great competitive advantage and provides tremendous amounts of opportunity, which I'm going to cover in a minute. And then finally, our business system.

The business system is what's turned discipline and culture into tangible, predictable results for the enterprise and for our shareholder. We can scale everything we've shown you today over time, and drive compounding value and continue to address the growth opportunity that's ahead of us. So to try and summarize a little bit the 3 stages you've seen, starting with our innovation capability at JADEC. JADEC really translates product innovation into Advantage, a whole ecosystem, a whole terminal solution, not just at chiller, but you saw the CDU. You saw our collate with alloy, and you saw all of the subcomponents that allows us with the compressor with the VSD to provide differentiated offering.

We are the only OEM that has that capability in-house, both for innovation and testing and reengineering. You've seen also our ability that the business system has to accelerate our pace of innovation, reducing the cycle time of innovation, allowing our team to be much more productive and create new innovation faster. That results into chiller that provide 50% less consumption that are 25% to 30% less cost burden for our customer, but also massively shorten our time to market.

Next that is, you saw how we take that technology and convert it into and converted into manufacturing excellence. That's where the business system shines earlier into the cycle. You saw team being able to improve the capacity, the production of that facility 4x higher than it was 3 or 4 months ago. not by building a whole new factory, not by investing a whole bunch of CapEx, not by creating some magic transformation, but really applying the business system from value stream map through Kaizens, sustaining with daily management and really transformating the output.

What does that mean? 4x more production, 4x more revenue. 43% on-time delivery 4 months ago, a 100% on-time delivery today, happier customer. And then from a capital intensity standpoint, very little CapEx required to achieve that and an inventory that's reduced by up to 50%. Great outcome from the business system into a real practice manufacturing world.

And then lastly, about Baltimore, you saw our capabilities and where the field execution brings that technology developed at JADEC, the manufacturing you saw at and actually bring solution where the customers are, where we engineer solution, provide the execution of the system and live with those products through their life cycle. You also saw where we can execute better where the opportunities lie, both from the productivity with our sellers, when we managed to double the time those sellers are able to spend with customers allowing them to drive more pipeline and ultimately, better secure orders.

You also saw where our engineering cycle time, not the engineering of new product, but the engineering of solution for our end customer was cut by 70% with much more to come with the potential to get to 90%. And where we found a way to reduce about 1/3 of the non-value-added time that our field team was spending particularly our technician doing little -- minutia that didn't drive revenue and didn't drive customer satisfaction.

All of those 3 sites, JADEC is the Baltimore branch, all play a key role. They play a key role through a life cycle opportunity. They also play a key role for the largest growth opportunity the company has today, which is data center. We are very well positioned to capture that growth. And we have opportunity to improve our operating leverage through the utilization of our business system. Remember, we've started very narrow. There's a few sites, a few factories, a few work stream, and we went very, very deep, and we sold at Gemba, and you saw that during your visit.

The goal is to take these learnings, these capabilities and scale them across the enterprise. There's also opportunity to digitize and improve and accelerate that expansion, that scalability throughout the enterprise. But the level at which we are right now in those 3 sites really show you the power of a strong business system supported by frontline team that really get energized and feel that the adoption is not a top-down approach, but it bottoms up.

Let's move on to the 2 big opportunities that are in front of us. The first one being our service opportunity. We have the largest frontline organization of all of our direct peers. 50,000 colleagues strong. This is a franchise that's extremely hard to replicate and took us a decade to create. We can maintain long-term relationship deep in the market and we can continuously improve the life cycle opportunity with those customers, by providing differentiated service offering. You saw during the visit in the branch that the business system is already renewing some barriers and that some Kaizens have led to really early wins. But the service opportunity continued to improve. We have performed fairly well in service over the last few years between mid- and high single digits. We believe we can drive higher single-digit growth over time. through a better productization of our service offering.

What do we mean by productization is really creating a service offering that leverage the digital capabilities we have, the service delivery system with outcomes that the customers are looking for. By improving that service attach rate, we can keep customers longer, drive higher revenue over the life cycle and be there when it's time to replace those units. We also need to scale our standardization of service through the major vertical that provide the biggest opportunity.

Data center, obviously, is a nascent opportunity from a system standpoint. The service opportunity will compound over time. I'll talk about that in a minute. But as we move to that cycle faster, the service opportunity will compound and our service revenue will benefit from that.

Talking about data center. Data center last year in 2025 was about 12% of our revenue. We think with the opportunity we see throughout the life cycle of data center but as well with the differentiated technology we've demonstrated with you today as well as the acceleration of the capacity of production of the enterprise that it will be about 1/3 of the company within the next 5 years.

We're very confident of that for 1 key reason. The life cycle churn time of a data center customer is about 60% faster than a traditional customer. because the vast majority of our customers do not use their chiller at 100%, 24/7, whether it rains or shines. And therefore, we think that opportunity will over time compound the growth opportunity from the data center and continue to expand our capabilities there.

Talking about capital efficiency. Over time, we've made a lot of investment, particularly in the last 3 years in creating hard capacity in the market, building factory and roof line under which we've been able to build more units. That has allowed us to maintain a certain level of capacity. But as the data center growth continues to accelerate, we see the demand expanding.

In the shaded green area that you see between the blue and the green, we believe that the opportunity that lies in front of us in terms of creating soft capacity out of those hard capacity dollar investment will allow us to maintain a very competitive growth rate as an enterprise, meaning we have decoupled the need for capital expenditure with the top line revenue growth of the company.

However, if you look at the health of the pipeline of the data center, not just this year, next year, but over the next 5 years, we believe that at some point, half capacity will be needed. With the work that is underway in the implementation of our business system across our 40 factories, we believe that shouldn't prevent us from still performing between 95 and 100% free cash flow conversion, even with a much, much higher growth rate as well as a much higher profitability rate, maintaining a very high quality of earnings.

That will be also based on a very disciplined capital allocation. The ability to compound return over time is anchored in that disciplined approach. First, focusing on investing in innovation. That investment in innovation is, of course, everything you've seen at DEC but also making the right tactical acquisition over time to double down technologies that allows us to create a competitive advantage and sustain it over time. Balancing near-term performance with value creation, obviously, will be critical. And so continuously making investment in our field execution and service, digitizing that platform and doing more and more of the exercise that you've seen today in our Baltimore branch. We have a very healthy pipeline of M&A opportunities. We have a healthy opportunities to drive further growth organically.

The 2 will drive a better capital efficiency because the capital we will use to deploy against that growth opportunity, as I just described it to you, will provide better return overall. And then finally, we are committed to returning 100% of our free cash flow to shareholders and maintain a very strong balance sheet to be able to support that healthy pipeline of M&A opportunity.

Now talking about growth, we have a clear path to accelerating our growth. Our long-term algorithm has been for quite some time, pegged around mid-single digit. But if you look at the opportunity by vertical, whether it's data center, mission-critical or the decarbonization end market, or if you look it by domain, whether it's HVAC or controls, we believe we can further accelerate the growth trajectory of the company. And we have a clear path to a high single-digit organic growth overall as an enterprise.

What does that mean for the entirety of our value creation framework, if you don't mind moving to the next slide. We are going to improve -- okay, value creation framework. We're going to improve the shape of our growth algorithm. First, organic growth, as I just mentioned, moving from mid-single digit to high single-digit organic revenue growth. And we are not changing and we are doubling down on our ability to drive operating leverage at 30-plus percent from where we were in the current algorithm. We will still commit to double-digit growth in our EPS and our capital efficiency will allow us to grow at that pace while maintaining 95% to 100% free cash flow conversion. So a change in growth with are impacting either the bottom line or the ability to leverage the bottom line or the cash generating for our shareholders.

Finally, what you've seen today is a small micro case snapshot of a much larger opportunity. The business system is are we going to run the company and how we're going to drive that opportunity sustainably, consistently over time across the enterprise. And I think we've demonstrated that from a technology standpoint, from a capability standpoint, from a leadership standpoint, from a frontline engagement, we are all set to really create a differentiated outcome for our shareholders.

With that being said, I think we're going to open up for Q&A.

Thanks, Mark. At this time, I'll invite you'll come back on stage, and we'll start the Q&A session. We have about 30 minutes allotted for questions where we'll open it up to the room. [Operator Instructions].

Thanks, Nigel Coe from Wolfe Research. First of all, thanks a lot for putting this together, really, really good day, very informative. Also a great bus as well, by the way. So I'd be curious why were the 4 service sites chosen? Are they particularly good, particularly bad, some in the middle. And what I'm trying to get at here is, obviously, the KPI improvements, early signs are really, really encouraging. Is that -- do you think that's representative of what can be done across the 400 field ops?

Yes. So the headline is they're totally representative of what can be done. There's without a shadow of a doubt, we have these precise opportunities and more going forward. We've just gotten started. We just shared with you a couple of problems that we worked on. problems are just opportunities waiting to be unlocked as you heard earlier today, right?

Now, JADEC, we chose because York is the heart of this company. Thermal management is extremely consequential for the continued development of human society in many ways. I could probably keep going for an hour on that. But so York, we wanted to go to JADEC. But then these -- the 2 other sites were just in proximity and -- but they're very representative of what the opportunity is.

From UBS. A quick question on just that point because when I look at that CapEx chart that you put up, you're creating a lot of synthetic capacity is the way I think about it, which is obviously the biggest debit to the incremental margin algorithm. And just given a quadrupling the revenue in 2 years with no hard CapEx. It just doesn't seem to me that 30% incremental margins is overly ambitious in the context of that type of synthetic capacity improvement.

Now obviously, there's a lot of heavy lifting. It's very easy for me to say that from the outside looking in. So maybe there's just -- you want to deliver on it and maybe outperform and underpromise, overdeliver, or is there something else that I'm missing that I'm not interpreting that correctly. The second question, before I get my mic taken away, is really about data center market share because you talked about chillers and subsystems within the chillers and then CDUs and now cold plates with alloy, is that how the buyer of the data center is purchasing that equipment. Is it allowing you to win? Or is that something in the future that now you have to sell into the marketplace to kind of earn the share that you think you have right to?

Yes. Do you want to take the guide question.

I'll take the first -- yes. So you got to remember, this is a long-term algorithm. Now bathe on a high single digit, potentially faster at time growth rate. And the 30% is a little plus at the end for that varies. There will be period particularly in the next 12 or 18 months. where we will do better than 30% as the cost opportunity and the leverage comes in. But telling you our 3- to 5-year algorithm is forever call it whatever number you had in mind, I made 50% is going to be hard to defend at this stage. But if we continue to drive the business system the way we've laid it out, the opportunity is very clear.

Yes. And we'll keep updating the algo as we make more progress. The opportunity to go back to Nigel's question is fairly well understood. -- having been part of transformations like this a couple of times, you can't always gauge this early in the journey, how fast you can go. And so that's what we're going to be figuring out over the next year or so. And as we learn more we will keep you updated on the algo. Talent, by the way, is typically a rate limiter or an accelerant. And so you saw a mix today of very talented individuals with deep domain expertise in this industry and their individual functions, augmented with some talent from other industries to come help accelerate our journey here. and we'll be doing more of that here going forward. But we'll keep you posted as we make progress on the journey here.

Then on the data centers, today, you're correct. I couldn't think of a single example where somebody buys starting from the chip now, cold plates, the liquid loop, the technical loop, the CDU, the air handling units, which are not going away on the contrary and the chillers and the cooling tower if one is needed.

But one of the reasons for that is because nobody has a real, technically based technology-based value prop to prove that we can perform at a different level than the subsystems can on their own today, which is what we can prove on the chillers. That's kind of the point where we're trying to make this morning with the 5 subsystems being able to optimize for the whole system.

So what we're working on is to apply exactly that way of working to develop technology-based differentiation for the entire thermal architecture of a data center. And because so much is at play in the data centers, as you -- I think most of you know, it's so difficult to get hold of power. So once you have it, you want to, of course, use most of it for compute. There's a cost side of it, there's a capital side of it as well. So these are customers that are very savvy. And if somebody can come up with a holistic solution that just delivers better than the individual pieces. There will definitely be counterparts for that. As a matter of fact, I think we didn't -- at least we forgot to mention it on the tour that we were at JADEC this morning, our Innovation Center -- forget I'm talking to the audience on the camera here as well, is that every week almost, we have a major data center customer, hyperscaler or colo that has sent a group of engineers to spend a week with us to co-innovate together. And so I'm not speaking about the real things here. I'm speaking about conversations that we've been having for quite some time with the engineers, the technologists on the data center side of things.

Julian Mitchell from Barclays. Maybe just a first question around sort of thoughts on the portfolio. I think high single-digit organic growth total entity. Is the implication of that then the no major divestments are needed growing at such a good rate? And then on the second part, it was more of a technical one, but as you see data centers move towards more liquid cooling. How does that affect that churn or replacement rate of cooling equipment?

Good questions. On the portfolio, I mean, we don't have any new news versus what we've spoken about before on quarterly earnings calls and so on. And that is that we maintain a very shareholder-oriented view on how we're assessing what to do or not do with the portfolio, things coming in, things potentially going out. And we're really about maximizing shareholder value here, right? Now as you saw, in one of Mark's slides, not every portfolio has the same growth opportunity or not every part has the same margin opportunity or cash generation profile, right? And I don't know. There are probably companies out there that have the perfect portfolio. I guess I was never really blessed with that in my career. So I think of it as a sports team. You have the offense or the striker, and then you have the midfield and you have the defense. I'm mixing different sports, I realize.

But yes, so some parts of our portfolio are going to drive high growth and some have a higher-margin opportunity. Some, although lower growth have a very attractive cash generation profile, which helps with the investments in other parts of the portfolio. So -- for now, what we're doing until we conclude on what to do with this or that part of the portfolio, we're making sure that we try to improve every part of what we own.

That was the first question. And then the second question was the -- I actually have to say that the honest answer is I have to think about that a little bit. I don't know that it's really all that different. You wrote -- you published a very good report here recently. So I know you've done a lot of work on the topic. Do you have a point of view on that?

[indiscernible].

Yes. I think all like Mark was alluding to, all of what we do in data centers will have a faster replacement rate than the rest of our portfolio. I'd have to think a little bit more about the liquid cooling specifically.

It's Joe O'Dea, Wells. On that topic, just when you think about kind of margin profile in data center and the equipment versus the service side and just how you think about the life of a data center and what that means for the service opportunity as you continue to grow that installed base of the equipment, but how much service opportunity you're going to have on that relative to traditional business?

Yes. I can take that one, yes. So a lot of what we do in life cycle services is about making sure that customers stay up and running. The worst thing that can happen is unplanned downtime. And then you have revenue loss and perhaps other consequences. And the concern and the data centers about revenue loss is exponentially higher than it is in almost all other verticals that we serve. So the service attach rate that was one of the stations that we visited here in the Baltimore commercial office. That was a general discussion about all verticals. But the attach rate, the initial attach rate of service contracts is much higher retention data center is for the industry on average.

What they're looking for, too, in terms of value creation from us, response times, what we take on is more comprehensive than the average service business that we have. So per chiller, if I stay on chillers, the opportunity is much larger in data centers. than in the average industry.

And from a margin standpoint, that service productization I was mentioning as well as the natural concentration on where the chillers are located, provide potential margin opportunity over time. to go from a 40% margin to something greater over time.

And then just on air handling and this idea direct to chip and what that means for requirements and then the growth that you're talking about in front of you on the cause -- just to address that a little bit more in terms of what you're seeing on the requirements for air cooled in the facilities.

So if you think about it in terms of our opportunity per megawatt, I'll just simplify it. It's going up. It's increasing. And which Julian actually addressed in his report, the marketing I'm giving you, Julian, it's amazing. But the simple sort of explanation is there is more -- there are more things that generate heat in the data center, inside the server room than the actual chips. So it's not enough to just cool the chip, you need to cool the room as well. And I mean, I've over the last couple of weeks, visited, I don't know how many data centers, but even if they're liquid cooled, there are even more air handling units going in than we had anticipated originally.

Nicole DeBlase from Deutsche Bank. I guess, first, just going back to the discussion around owning the entire thermal chain and making that a benefit to the data center customers. Do you have all the pieces of the pie or the puzzle that you need to address that whole thermal chain today? Or are there any white spaces where you feel like you need to put more effort in organically or inorganically? And then second quick question is just with every -- all the changes that you're making with the business system, how do you get buy-in all the way down to the employees on the plant floor.

Yes. So the first question is -- we have the core -- we have the core technological capabilities in the entire thermal architecture or the thermal can today. But we haven't done what at least I talked about with our group, which is take alloys basically heat transfer capabilities. And we're going to -- I think we talked about this at the quarterly call as well. We're going to use their technology, their know-how to basically make our CDUs much more differentiated. That will happen within the next year in terms of when it hits the market and sales before that, of course, we're going to do pilots with large customers, and it will turn our CDU into something a bit more differentiated than everything else that's on market.

So there are a number of things we have to do organically. And possibly, there could be some acquisitions, but we don't need any major capital deployment to build out the capabilities in that thermal chain. And then how do you get the buy-in from the shop floor? It's -- I mean, basically, as you heard today, and speaking to the audience who weren't here.

So we toured our innovation center, spoke to engineers or work in innovating new products. We toured our factory. We didn't actually speak to individual operators on the floor. And then we toured our commercial office here. But here, you spoke to individual contributors as well. But all these business system activities that you heard about today, the value stream maps, identifying waste, the Kaizens that we then -- small groups of people working together for 5 days to address some of these waste and opportunities.

All those Kaizens include people on the shop floor, if it's in manufacturing or individual sellers. Well, I think you heard Eric talk about that. or individual engineers or individual procurement people in those Kaizens. And the way you get buy-in is basically, you start with a value stream map because you bring all these colleagues from these different functions together and you've identified a problem to solve. You typically try to start with for the customer, and then you map out what all now needs to happen to serve the customer in a way that we'd like to serve the customer.

And when you do the value stream map, during 3, 4 days together in a room like this. Actually, this is the room, some of these value stream maps were done. When people start to help to try and define how the work is done today, first thing you find is people don't agree because they do it differently. I was taught differently. When I thought this was supposed to -- the way it was supposed to be done. Then you have this realization that, oh, okay, maybe this isn't as defined as we would like it to.

Then the second thing is people realize what amazing opportunities we have to simplify the process and remove waste. And then immediately, they sort of launch into, okay, what would we have to do to improve this overall process. They define which Kaizens we're going to run and then they're part of that.

So the business system is -- in some ways, it's a gigantic change management tool for involving people at all levels in the organization to work towards 1 common goal. And the reason you can't just go copy paste everything you've seen on the tour today is because you have to have people go through this change management process to get their buy-in. And then you can count on that the change that we're implementing is going to sustain. You have -- you create a new standard, off of which, next time we do a value stream map, we'll do even -- we'll find even more opportunities. And it's a virtuous cycle. It never ends.

Joe Ritchie, Goldman Sachs, and thanks again for everything today. It was amazing. Appreciated the swag as well.

You look good in that half.

Yes, thanks. Thanks. I'm wearing a lot. So you answered the question earlier on margins. So Mark, your answer to 30% plus. It's interesting, look, high single-digit growth over the long term, sounds great. If you think about your last couple of quarters, the order rates were well above high single digits, right, 30% and 39% in the last 2 quarters. And so as you kind of think through, maybe this is the velocity question or answer that you gave earlier -- but just turning those orders into growth in the coming, let's just call it, 12 to 24 months, how much visibility do you have into that and the ability to potentially run faster in the medium term?

Yes. Yes. So we've had very healthy order entry. Our backlog is at record levels. And while all this is happening, in our pipelines, our funnels for new business continues to grow and is very healthy. And so we're quite optimistic that continuing. And then the work that you saw at ACE are manufacturing capacity capability, that exact same work is ongoing, as you heard or so, 8 factories. And many of them are -- don't only serve data centers, but they do a lot of manufacture a lot of our data center-oriented products.

And just like you saw in ACE, month-over-month, our capacity and our ability to -- our lead times are coming down. Our on-time delivery is coming up. And so I think we're going to continue to improve very nicely here, and we'll keep you updated on what the rest of the year is looking at like as we speak here in the future. But things are looking very good.

Tim Wojs from Baird. Thanks for everything. My question -- yes, exactly. My question is just as you -- I mean, you showed some of the things you did in manufacturing and some of the things you're doing on the service side. If you look at -- I don't know if you would want to split the organization that way. But if you looked at the opportunity going forward? Do you see more opportunity from a margin perspective in the service business and kind of the branch business or more on the manufacturing side?

There are significant opportunities on both sides of the house. I think we've spoken about before that we have 40 -- it's actually 43 or 44 plants around the world. And with what you saw at ACE, we're probably not going to need 44 plants in the future. So the opportunity there is significant. But then as you saw here in our commercial office, we have significant capacity opportunities in sales and service and project engineering, project execution. And by the way, these were just the topics we are today, right? There are other areas that we're exploring as well.

But they all have one thing in common. It's like we're breaking the back off of growth, top line growth and cost growth. The cost in manufacturing is a little -- the composition of it is different than the field cost. The field costs are very people-oriented, right? So it's more about getting more out of the talented people that we have. We'll continue to add -- functions, definitely not in G&A, but in sales and service. As we grow, we may need to do that despite what you saw today. On manufacturing, it's -- there -- the opportunity is in terms of productivity, of course, is to get more out of the same people or if we consolidate plants, a little bit different story. But you also have the fixed cost opportunity and you have material cost opportunity as well as logistics cost opportunities. So there -- both are significant how we go about capitalize on them is a little different.

And we'd be remiss if we didn't talk also about the inventory opportunity. So it compounds from margin to cash. It's -- it's quite 50-50, but overall, it's hundreds of basis ponts.

Toby O'Hara from Morgan Stanley. I wanted to ask 2 questions. One on in the data center business, there has been some discussion on the shift to more industrial controls versus traditional building. how that kind of changed your innovation pipeline and conversations with customers? And then the second part on chiller capacity and the market is do you have any sense of where like the mix shift may be going in terms of water versus air cooled?

Yes. So on controls, I know there's that discussion. The way I think about it is there are thermal controls temperature humidity and the stuff we do. And then you have all the controls that you need around power. And then there are controls around what kind of load is coming in for the data centers, right? So I tend to think of it more as in what use cases do you need controls for I think what's -- the way the market is going to play out is that -- and in particular, since we are going to build out the whole thermal chain, controls is an essential part of that. And controls is never generic controls, right? It's always very application-specific controls. So I think as I look into the future, I think controls will fall more into 1 of those 3 buckets versus the other way around.

Yes. And then a coal versus water sold. I think if we were maybe 18 months ago, there was a trend where people anticipated water to grow as a bigger share of the market. The vast majority of the market is air. I think we've seen the market staying about where it's at in terms of air core chiller, part of that has to do with the level of innovation we brought to market and the ability to actually drive some very strong performance as well as the uncertainty of where those data center would actually be built. And we see air as being a little bit more flexible from a location standpoint than water over time.

Probably our last question.

[Push ] Citigroup. So you kind of highlighted the different phases where you're implementing your business systems, engineering, sales, service, maybe like if it's possible to rank like which department is kind of leading where there are more opportunities? Like ultimately, like we want to understand like how fast you can convert your backlog. So some color there.

Yes. I think -- so the backlog has grown very -- I need to repeat for the camera. We had record order entry, record backlog. And of course, it's -- the order entry from data centers is very healthy. And so the 8 factories that we chose to prioritize for implementing what you saw at ACE today are the ones that are mostly focusing on data centers. And so we feel very good about where we're at. We'll keep you posted as and when we can do better than what we've said here about the next couple of quarters. We feel very good about where we're at.

All right. Thank you for the questions. At this point, I'll turn it over to Joakim for some closing comments.

Yes. So I'll just try to summarize a little bit, but also reflect a little bit personally on some of the reasons why I chose to join. So first, a little context. I think we live in an incredibly interesting time for -- if you work for a company like we do. Scientific discoveries over the last decade are now in mass implementation and society. AI because of the announcements in compute, biologics, not the old traditional pharmaceuticals, and I could keep ongoing semicon, batteries and so on. all these technological advancements that are now in application have 2 things in common. Thermal management is so important for the performance of the processes that are involved in those industries. Number one.

Number two, they are all much more energy intensive than their previous incarnation. AI data center versus cloud data center biologics plant, 7 times more and -- has been a classic pharmaceutical plant. So the energy costs are increasing. So the need for energy-efficient, high precision, high capacity thermal management has never been higher. And so it's super exciting to work in a business in a company like this.

And what we're trying to do is, of course, we're trying to build one of the most consequential industrial tech or infrastructure tech companies for our time. And what's so cool about Johnson Controls is hopefully, your takeaway will be today. As you saw in JADEC, our innovation center, we have 150 years. That's the heart of York, my grandparents, it was that generation that started the innovation work there. So talk about a bookend to have in terms of capability, the raw talent that's been built over generations in JADEC within thermal management, technology-based capabilities. It's just amazing.

Now we can debate. Have we really unlocked that at speed over the last years. I think the answer is no. I want to come back to that. We also have the other book end, which is our 50,000 field colleagues. We saw some of them here in Baltimore. People who have worked here for decades, as you've heard, and in many cases, they're capitalizing on customer relationships, as you heard from JP, that have been built over generations of leaders as well. So we have these incredible capabilities, and we have more than twice the field footprint than many of the other people that we compete against.

So we have these 2 phenomenal bookends that we've now chosen to leverage and point at some of the most consequential technology deployments that are happening in human history. And by the way, are growing much, much faster and need our capabilities, right?

Number one. So we're going to up our growth that way. Number two, with the business system, we are, as we try to show you today, unlocking our full potential, both in innovation, by doubling our capacity and speed of innovation as well as manufacturing, where you saw how we're quadrupling the capacity of a plant without any major capital. And then here in our commercial office where you saw that with the business system, we're able to, for example, double the amount of hours with customers. But it's the business system implemented and led by our people on the front lines as well as different management levels that make this all possible. But the combination of the people that you met with the deep domain expertise as well as capabilities of being able to deploy a business system and not just motivate, but educate people so that they can really do it on their own, and that's going to just accelerate over the time is what gives me such great confidence that we have a bright future here at Johnson Controls.

So thank you for your time today. We look forward to welcome you next time. We'll pick some other areas to show you then what we're working on. And we -- I know that it was a long day, some time in the bus. We try to make it worthwhile for you learning experience there as well. But we thank you so much for your confidence in us. It means a lot for us and our people.

Thank you.

Great. Okay. So good morning, everyone. I just want to say thank you for making the day 2 of the conference here. We're going to have a trio of industrial companies on stage, beginning with Johnson Controls. My real pleasure to welcome back to stage, Joakim Weidemanis, CEO of JCI; and Marc Vandiepenbeeck. I'm glad I got that out of the way because these are 2 more challenging -- and I'm glad I didn't -- I'm glad I got through that.

Yes, perfectly normal where we come from.

But Joakim, Marc, thanks for being here. It's always a pleasure. And Joakim, maybe I'll hand over to you for some opening remarks.

Yes. Thank you, Nigel. Thank you all for being here. So I'm a little bit more than a year into this role. And just to go back to why did I join and what did I find after I got here. So I always -- what I learned before I joined the company was that this company has some unique proprietary technological capabilities within thermal management broadly, meaning HVAC and controls, but also in other areas. Question was whether we have been leveraging that enough to drive outsized performance. The answer is no, we have not. And then I saw that we had a company with one of the industry's largest field footprints, about 50,000 people in the field. And the question is if we have been leveraging that enough historically to drive competitive advantage through, for example, life cycle services. And my hypothesis was that we hadn't fully leveraged that yet.

And a year in, I found those things to be true, but I'm even more excited now about our opportunities to unlock our potential, not just in those 2 areas, but in particular, in those 2 areas. And we can talk a little bit more about the progress we're making in doing that by implementing what we call our business system, which is how we're going to run the company, how we're going to improve the company. And perhaps for those of you who have heard some of our earnings calls, that's really about simplification, acceleration with lean principles that other companies, that perhaps some of you follow, have applied over many, many years. And then in addition, with digital and AI approaches. And so acceleration and lean, I think about that as be able to do work that took weeks, to be able to do it in days now. And the amplification with digital and AI, we have now plenty of examples where we're able to take work that takes days and turn it into hours and even minutes sometimes.

So we're making good progress standing up and implementing our business system. And that was important to get going to start to drive some performance improvement while we took a little bit of time to figure out where we are with the different parts of the portfolio. And so I'm glad -- I'm pleased that we made some progress on clarifying for ourselves internally where we are and that we've distilled down then for each of the businesses, what the expectations, what we can expect realistically, what the expectations are on our leaders as well as, probably most importantly, clarified for our leaders what our strategic priorities are. Because I think when you're trying to improve the company at pace, it's very important to offer clarity to people on where we're going and what we're going to prioritize versus all the 59 other things that we're not going to work on right now.

So some good progress there. We had a decent quarter. Our last quarter, orders were up 30%. Our backlog is a record backlog, $20 billion. Sales growth now at 6%. We expect that to -- that growth rate to improve over time. EBIT margins up 200, almost 300 basis points and a decent cash conversion here. And a lot more to do, which is the fun part of being part of this team.

That's great. Thanks. That's a great way to set the table. And you touched on a lot of topics that I want to dive into as well. But -- I'll kick off the Q&A. I'll come back to the audience halfway through with any questions that you have. Look, I think it'd be remiss to not start with, you talked about the progress, but maybe just talk about what you've accomplished in the first year? Where is the sort of the changes most advanced? What needs to be done? Where do you need to build muscle? Kind of a progress report on where we are?

Yes. I think so I can go deeper into the business system, which is something that just needs to build and will drive continued improvements in performance in parallel as we work on implementing and executing on the strategy that we've defined. But maybe I'll start with the people side of things. It's important to make sure you have the right people on the bus. And for those of you who follow Jim Collins or read books he's written, he talks about first the who and then the what. So we've made a couple of changes in the seniormost team. We have a new CHRO. We have a new North America leader, who was an internal promotion. The CHRO was an outside hire, one of the most talented CHROs in America, I would argue. We have a new Asia Pac leader, and we're working on a couple of more changes that have been announced internally, and we're trying to staff up, of course, with the team that's going to help us win here in the space. So that's on the first the who and then the what.

Then on the what, we've clarified, like I said, our strategic priorities. And no surprise, we'll come to that, I'm sure. But we want to help humans unlock their potential with the help of AI. We have important things that we can do for our hyperscaler and colos customers. I think as many of you know, 30-plus percent of all the energy that they have struggled to secure for their data centers has to be diverted to cooling away from compute. We have the capabilities, and we made a couple of moves that improve, strengthen those capabilities to reduce that 30% to something materially less, which is a very strong value prop in that space.

Second strategic pillar is really about, if you think about some of the innovations, scientific discoveries that have been made over the last couple of decades, that are now in full deployment in human society. I'll just take one example. It's the pharmaceutical industry. All the old factories were chemical plants. All the new plants are biologics plants. As you can hear, you can't -- you need a very different plant to manufacture biology. And the indoor operating conditions, temperature, humidity, control, pressure, particulate in the air and the tolerance, very, very tight tolerances that you need to keep that indoor operating condition. And the requirements are much, much higher in biologics, which sort of plays to some of our strengths, not just in HVAC and controls, but of course, what they manufacture is very valuable, too. So they need to protect it both from fire and security. So that's strategic pillar #2.

And strategic pillar #3 is basically help the world decarbonize or if you choose to think of it that way with increasing energy costs, the payback on upgrading to a new HVAC unit or a control system or a digital system that helps you optimize how you run your sophisticated system is of interest to a lot of our customers. So in those 3 strategic pillars, we've then gone and developed road maps that are now showing up in all of our R&D work. So we've reprioritized what we're doing, and we're aligning along these 3 vectors here.

And I think that's going back to this point about clarity. If you're running a large organization, we have 100,000 people around the world, you can't be running after 15 things. And so just by making quite a bit of progress, not just on the PowerPoint, but translating this into, like I said, the product road maps and where we start to shift, how we focus our commercial efforts and so on, is gradually in our leading indicators starting to show that we're going to continue to be able to improve the performance of this company.

It's having a clear mission at the very high level and then everything else flows from there?

Yes, exactly.

Okay. And then I don't want to spend too much time on decarbon ESG and -- but is that still a really important part of the conversation? Because from a Wolfe perspective, ESG, there's no question, it's kind of gone into the shadows at this point in time. But is it still a very real conversation with customers?

Yes, and no. So I mean, increasingly -- and it was -- by the way, it was always about cost reduction. It was -- in addition to that, it could be -- people could improve their ESG performance. But if you think about it, in most countries, around the world, I'm not talking about us as private consumers of electricity in our homes, but industrial consumers, have seen electricity cost increases of up to 30% over the last couple of years. And the projections are, I'm sure many of you study that, is that, that is going to continue.

And if you're -- well, I gave you the data center example, right? But even the biopharma manufacturing is -- the biologics manufacturing is 7x as energy intensive as the traditional pharmaceutical manufacturing. So as part of their COGS, energy cost is suddenly a line item that is visible. It used to not be. And so therefore, if you're able to offer solutions that will help people to use 30%, 40% less energy for what they're trying to do, there's a good payback on that. And the payback is improving with the increasing energy costs. So that's one aspect.

And then, of course, in Europe, in particular, there's a big need to shift away from gas, in particular, which comes from somewhere Far East and get away from fossil-fueled heating, for example. So heat pumps, so it's more an electrification question where people are trying to get away from certain types of fuels. So there's a lot of different aspects of our decarbon strategy that is not about ESG.

Okay. And I do want to get into some of the sort of maybe just an update on trading conditions. But before we do that, you talked about services. I'd be curious how the services strategy is evolving. And we tend to think of all services as good, aftermarket recurring revenues, et cetera. You called out some changes to the U.S. security services. So just maybe touch on that as well.

Yes. So services are about 30% of what we do. And in the domains, the product areas where we play, HVAC, controls, fire and security. There's a healthy service business in each one of those areas. From a top line point of view, we continue to do very well in HVAC controls and fire. Here, over the 2 recent quarters, we've been a lot softer in security. Really, what we're doing is we're going through our portfolio of contracts that we have, and we're making sure that pricing, margins, et cetera, are in good balance, and there was a need to rebalance. And so that came with a little bit of sacrificing of top line growth, but no EBIT dollars.

In general, I'm super excited about, in particular, in HVAC controls, the service opportunity. In our -- as an industry, HVAC, not just us, but as an industry, the OEMs have much lower attach rates -- service contract attach rates to their equipment than in most of the industries I've come from. And we're also at a much lower attach rate than take Atlas Copco, Ingersoll Rand air compressors that, in many cases, are installed sort of 10 feet to the right. Attach rates are sometimes 2x the rates. And there are different reasons for that, which may be a discussion for another day, but it's how you productize your services, make sure they're differentiated, differentiation anchored in what you can do in your system, different kinds of data, algorithms and things like that help the differentiation. So our industry hasn't done quite as much of that.

And then there's a commercialization piece, how you do that, where we're sort of early stages, but it's no magic, or it's not a mystery of what needs to be done. And then you have the execution side, which, of course, with the increasing number of connected devices that we have out there, the economics of serving our customers are changing here rapidly. And as the cost of connectivity has come down, too, that's increasing rapidly.

And is the primary driver of services increasing the attachment rates on the chillers? Or is it more kind of just evolving the revenue model into other things?

It's not so much the revenue model yet. We're working on some stuff there, but that's too early to discuss. I think it's going to be attach rates. But then as we're pointing the company more towards some of the verticals that we were discussing before that have, for them, uptime and because of what we do is more mission-critical both from an uptime point of view and a cost point of view, the service opportunity is bigger for data centers than it is for a building like we're sitting in right now, for the obvious reasons, right?

So I'd say it's driving the attach rates overall. And then as a result of where we're pointing the company, the attach rates are going to come up, and the service opportunity is going to be bigger.

Okay. Joakim, I want to save your voice. I know you're struggling a little bit with virus. But Marc, maybe just give an update...

I sincerely hope it's not a virus.

Okay. Well, me too, by the way.

I spent 6 years in medical diagnostics. So if I thought it was something like that, I wouldn't sit here.

Bad word. Okay.

Yes.

Marc, back to maybe the guidance for 3Q. You're guiding for 6% organic, 6% in 4Q as well. Obviously, a lot of questions around the huge backlog strength, order strength versus the conversion of that into revenues. Maybe just touch on that in terms of what we've seen during the quarter and how that backlog versus revenues?

Yes. First, the continued growth in our backlog will support an acceleration in our revenue growth. And the underlying question is, why not just right now? And why is it taking a little bit longer? There's 2 elements to that. The first one is simply our ability to convert some of that backlog in the very, very short term, meaning in the next quarter or so, is hindered by 2 things, not so much capacity, but the ability for our customer to take delivery. What we see a lot in the data center world is that the chaos around the construction site that's pushed to the right, sometimes deliveries a quarter or 2, we think that's not a permanent issue, and we have the ability to keep up there.

The other thing is, naturally, we have a very large business in North America in data center. We are ramping up the production of that output. The timing of that ramp-up is really back-end loaded this year. We have opportunity to do better than the 6% we've kind of guided for Q3 and therefore, Q4 as well, based on both that ability for a customer to take delivery and our ability to ramp up quicker. And then very transparently, we have a large business in the Middle East that's been impacted by the conflict. Europe will have probably a soft quarter in Q3 and Q4, probably very low single digit. And for an annualized business, that's about $4 billion, $4.5 billion of revenue. That's a bit of a [ boring cause ], the enterprise growth. But if you look at North America, we're expecting that to grow in the high single digit starting now and probably accelerating into '27. If you remember, for us, '27 will start in October.

Yes. That's right. So you think that as we get -- kick into early 2027, we'll see that acceleration in North America?

Particularly North America.

Yes. Okay. And the Middle East, you touched on that. It seems like that's being contained at this point. Is it -- how do you characterize that?

So transparently, the amount of disruption we saw in March and April has started to taper down a little bit as the quarter unfolds. But it's not back to normal by any stretch of the imagination. And not a lot of what we sell and service in the Middle East is actually manufactured in the region, except for a factory -- with our joint venture partner in Saudi Arabia. But a lot of those products are purchased from our factories in either in Europe or in Asia. And the logistics of transportation right now in the region are affected by what's happening with the conflict. And there's also an enormous backlog of shipping that needs to happen.

So even when things reopen, getting your ticket in line to be able to deliver to the customer on time has remained a challenge. The team has done an outstanding job navigating the conflict right now, but it's disrupted that business still in Q3 and then our ability to predict what the summer will bring is a little bit difficult at this stage.

But that's pushing -- that just pushes demand to the right, I suppose?

It pushes demand. It's not demand disappearing. It's not demand destruction. Quite the opposite, actually. You saw the order in the quarter didn't slow down in EMEA at all. So that high single-digit order growth rate for the quarter included some solid orders in the mid-single digit in the Middle East. That means really the business confidence is still there. It's really just a pause. And people are rightfully so being careful about when they deploy resource and where to deploy resource in an environment that's a little evolving.

Yes. Okay. And then just a quick touch on China. It's a chunky market. It's not that huge, but it's mid-single digits of its total sales. Any rays of light in that market right now?

I would say it's massively improved from probably 12, 18 months ago where we were still struggling. But I think the expectation that China will come back to a high single or double-digit grower, like we've been able to benefit over the past decade, is probably behind us. It doesn't mean it's going to be a bad market. It's going to be a very healthy market. The strategic pillar that Joakim laid out a few minutes ago very much applied to the Chinese market. And it took us a little bit of time to pivot both our product team and our commercial team against some of those end markets, but we've made some progress over the last couple of quarters, and we feel we are very well positioned to capitalize on some of those opportunities in the Chinese market.

Okay, sure. That's great. Any questions from the audience? So raise your hand. Otherwise, I'll continue. Order flow has been extraordinarily strong, Joakim. In terms of the pipeline opportunities you see out there right now, I mean, how would you characterize that?

Yes. Our pipeline, in general, continues to grow. So even if we've had 2 quarters of exceptional order entry, our pipeline is still growing. And I mean, the story is just simply aligned with the 3 strategic pillars. And of course, we're following where the world is going, right? So it's not that we invented some unique verticals here. They were there all the time, and we're just over-indexing our effort on those.

So there's -- of course, data centers is probably the -- data centers and biologics are the 2 verticals that offer us the best visibility into the future because that's where customer -- it takes a year, 2 years, sometimes 3 years to stand up these massive campuses that they're building. And in particular, in those 2 areas, we see the pipeline strength. But you also have -- there are massive hospital build-outs in a number of countries. And of course, China, that race is over. But in India, I was just in India here recently, I mean, India is sort of firing on all cylinders when it comes to the strategic pillars that we have, that we're focusing on.

It does feel like India might have its moment here.

Yes, finally. My whole career, I've heard that.

India, the next China.

Yes.

A couple of topics in the last 10 minutes I really want to touch on here. One is a mark-to-market on where we are with the margin improvement story. Obviously, tremendous momentum in the last 12 months, especially in Europe and Asia. Just wondering where we are on the sort of the simplification and restructuring program and sort of that time line towards normalizing margins?

Yes. Yes. So let's just discuss overall what our margin opportunity -- where it is in relative terms. So -- so I see -- I think we were talking about it last year, but I see no reason for us not being able to catch up to some of our direct competition. And as a matter of fact, our EBIT margins were the same in this past quarter as the one we were talking about. Now they have, I think, some challenging headwinds. So it was not one of their best quarters on margins, to be humble about that.

But -- so I see -- still see no reason at all for us to not to catch up and even continue to go past. And that's basically based on if you -- if we stay on gross margin first, we have 40-plus factories out there. We do not need 40 factories. We just simply didn't do that consolidation work that I've been used to doing in past roles. So we have a very nice opportunity to continue to consolidate our footprint. We've started a little bit. We also have, in manufacturing, plenty of examples already of how we're able to increase capacity in existing factories. And for those of you who will join us for our Investor Day that's coming up in 2, 3 weeks, you'll see an example of where we've quadrupled the capacity in one site without adding any more floor space. As a matter of fact, we're using 30% less space. This is the direct result of the application of our business system. These are just good old-fashioned lean projects that we've started to work on. So those kinds of things on the manufacturing side will lead to margin improvements.

Then on the service side of things, I think we kind of touched upon that. But if you look at Atlas Copco, for example, an air compressor company, their service margins are hundreds of basis points better than our industry's gross margins and where I think ours could go. Then if you go into SG&A, we're working away at just basically cutting costs because as a result of the residential divestment, of course, there's some stranded costs. So we're making some good progress on that. That was a good chunk of what's showing up on EBIT already. But we have tremendous opportunities to break the connection between our growth rate and how our SG&A cost has grown over the years. And I think you've -- Mr. Nigel has heard me talk about how we've doubled the amount of selling hours in a couple of our sales teams, and that's now being deployed. That takes time, by the way, to roll out globally, of course. But if you can double the amount of selling hours with customers and a sales team without adding people, it takes time to recruit people, to train people and so on. We'll still be adding some people. But basically doubling the amount of selling hours is going to give us a really nice S cost leverage.

And then on the R&D side of things, we are going to continue to increase our dollars in R&D because there's more opportunity to differentiate with technology in the areas where we're pointing the company. But you will see, for those of you who join us in 2, 3 weeks, examples of how we've taken the time to get certain new products to market down significantly with applying our business system. And when you can, for example, take one project and say, instead of it's going to take 24 months to deliver same scope, same cost, all of that, and do it in 14 months, you didn't quite double your capacity, but it's pretty darn close, right? So we're going to see some R&D cost leverage there as well.

And none of this is magic. It's just tried and proven principles applied in other places, and the opportunities are plenty. And that's why I'm -- one of several reasons why I'm so enthusiastic about our future here.

Yes. I'm sure our founder, Ed Wolfe would be intrigued on how you double the number of selling hours. So maybe we'll talk to you after that.

Yes. Some of it's about management getting out of the way.

On the -- just quickly on the kind of the margins across the segments. Europe and Asia are now within spitting distance of North America. Do you think that convergence continues going forward? Or do you think North America will always be the most profitable region? And when do you expect to see the real acceleration in operating leverage for North America?

Yes. Starting with the last one. North America will see most of its operating leverage improve, thanks to volume. The base cost, there's some opportunity there, of course, and the rationalization and consolidation of our manufacturing footprint plays an important role in the margin improvement in North America. But it's more of a question of how quickly can we get that operating leverage from the volume that will -- that is coming and unwinding that backlog as quickly as we can. That's where, over the next year, you will see North America margin rate accelerate that improvement.

Now when it comes to North America versus -- sorry, Americas versus its regional peers, you've heard me saying that multiple times, there's really no reason for Europe to be materially different from a margin rate standpoint than where North America is today, except for the fact that we probably underinvested a little bit in Europe over the years in product, leadership and in some capacity and technology. We have made tremendous progress over the last 12 months in starting to close that gap, but there's more work to be done. But over time, there's absolutely no reason for Europe not to be very close to the Americas margin as they stand today.

And then APAC, we have made a good investment in product management, leadership. It's about continued growth. And that business has seen ebbs and flows of what was happening in China and different parts of the region. But if you look at the opportunity we have in India, as Joakim laid it out, Southeast Asia, and then Japan remains one of our most attractive, not from a growth standpoint, but from a margin rate standpoint, markets. I think there's a lot to like about APAC from a margin rate and honestly, a growth profile as well.

Okay. Thanks, Marc. And then, Joakim, you said the normalization of margins last year was 3 to 5 years. If I do my genius math, it's now 2 to 4 years. Is that...

I think you were the one who said 3, right?

Did I say that?

It turned out you were right.

Okay. There you go. And then in the 2 minutes we got left. So is that a yes?

Yes.

Thanks. And then in the last 2 minutes, just what's the latest message on the portfolio? There's been some Bloomberg articles about potential divestments.

Yes. Yes. So we -- and that's kind of -- I skimmed over it here earlier. But -- so in my first couple of quarters with the company, we took the Board through each part of our portfolio and looked at how are we positioned tactically -- how are we executing rather tactically, versus competitors or versus what we think we could do? And then we looked also at the business strategically, how are we positioned strategically? What are the competitive moats? And as in every company this size, no one has the perfect portfolio and not every single business is incredibly differentiated or as much differentiated as you would like.

And then as a result of that, we drew certain conclusions on what we would like to do with the portfolio. But the overarching goal here is, of course, to create shareholder value or at least absolutely minimize dilution if we were to exit certain pieces, which we had communicated before I even joined the company, that about 10% of the revenues was something we were considering to seek other ownership for. So we are going to be looking at a little bit more than the 10%. We'll keep you posted on the progress on that. And -- but the goal here is to create shareholder value.

That's fantastic. So we're out of time. Thanks, Joakim. Thanks, Marc. Thanks for the discussion.

Thanks, Nigel.

I'm looking forward to the Investor Day coming up soon.

Yes. Great.

Great. Thank you.

Hello, everyone, and welcome to the Johnson Controls Q2 2026 Earnings Conference Call. My name is Ryan, and I'll be coordinating the call today. [Operator Instructions] I will now hand the call over to Mike Gates, Senior Director of Investor Relations to begin. Mike, please go ahead.

Good morning, and thank you for joining our conference call to discuss Johnson Controls Fiscal Second Quarter 2026 results. Joining me on the call today are Johnson Controls' Chief Executive Officer; Joakim Weidemanis; and Marc Vandiepenbeeck, our Chief Financial Officer.

Before we begin, let me remind you that during our presentation today, we will make forward-looking statements that reflect our current views about our future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Please refer to our SEC filings for a list of these important risk factors that could cause actual results to differ from our predictions.

We will also reference certain non-GAAP measures throughout today's presentation. Reconciliations of these non-GAAP measures are contained in the schedules attached to our press release and in the appendix to this presentation both of which can be found on the Investor Relations section of Johnson Controls' website.

I will now turn the call over to Joakim.

Thanks, Mike, and good morning, everyone. Thank you for joining us on today's call. Before I begin, I want to acknowledge our more than 2,500 colleagues in the Middle East. Against the backdrop of ongoing conflict and an increasingly complex geopolitical environment, they continue to show commitment to our customers and to one another. Our thoughts are with them and their families and we remain focused on their safety and well-being.

Let's begin with Slide 4. We entered the year with strong momentum, and this quarter demonstrates continued progress. Demand for our products, solutions and services remains strong, led by data centers where we're holding a leading position. In these environments, customers need high-performance cooling, delivering precise operating conditions while requiring better energy efficiency. Meeting those requirements depends on how well we execute across the business.

While early in the journey, our proprietary business system is beginning to strengthen how we lead and execute throughout parts of the organization. I continue to be encouraged as leaders spend more time focusing on customers, and as teams begin to adopt more common language and approach to problem solving together at Gemba.

Against that backdrop, yesterday, we announced the release of our second AI factory reference design guide focused on air cooled chiller architectures and providing customers with globally repeatable blueprints for cooling gigawatt-scale AI factories. This builds on our water-cooled guide released earlier this year. It's the next step in a comprehensive set of global design guides mapping the full data center thermal chain, providing clear design parameters to enable high-performance, efficient operation as customers plan and scale AI with greater clarity.

Turning to the results. Orders increased 30% this quarter, building on the nearly 40% growth we delivered last quarter. That consistency reflects sustained customer demand in the markets where our technology-based innovation and strong field footprint differentiates us. And with our pipeline remaining strong, it gives us confidence as we move forward. Revenue grew 6%. Adjusted EBIT margin expanded 310 basis points to 15.5%, and adjusted EPS was up 45% and exceeded our guide. Backlog grew 26% to a record $20 billion, providing an improved visibility and confidence in the trajectory of the business.

This quarter reinforces our ability to convert demand strength into consistent growth, margin expansion and earnings performance. Given our strong start in the first half and the visibility we have across the business, we are raising our full year guidance. Marc will walk through the details later in the call. Before that, I want to step back and talk about why we're seeing this consistency.

Please turn to Slide 5. The breakthroughs our customers are pursuing are advancing society. Take, for example, biologics, semiconductor and advanced battery manufacturing and data centers where the need for indoor operating conditions within tight tolerances is driving greater reliance on high-capacity, high-precision application-specific thermal management systems. At the same time, these industries are much more energy intense than their previous generation. Biologics are 7x as energy intense as traditional pharma manufacturing. And in light of material energy cost increases, energy-efficient solutions are essential. Let's take, for example, our high-performance York chillers. To simplify, this is about customers getting rapid, high-capacity cooling precisely when it's needed, enabling mission-critical operating conditions that deliver their targeted outcomes.

As you can see on Slide 5, our differentiation operates both at the subsystem level and at the overall system level. Our York chillers leverage 5 core subsystems enhanced by our Metasys proprietary intelligent controls and further strengthened by our OpenBlue proprietary digital AI capabilities. Because we own the underlying technology platforms as well as design, develop and manufacture these subsystems, we're positioned to innovate faster and deliver application-specific higher performance with structural cost advantages. That capability has been built over decades and includes more than 1,000 patents each focused on higher performance, reliability and energy efficiency for our customers. With that context, let me briefly walk through the 5 subsystems in our high-performance York chillers because this is where the differentiation really comes to life. And this is exactly what many of you will see in action during our upcoming in-person investor visit starting at JADEC, our Advanced Development Engineering Center in Pennsylvania.

Let me start with the aerodynamic innovation centered on our compressor design. We hold over 270 patents, specifically related to the compressor technology. Simply put, the compressor is the heart of the engine of the chiller. It does the heavy lifting, and it's one of the biggest drivers of performance and efficiency. We design our compressors specifically for applications that require high capacity, precision and reliability, like data centers, advanced manufacturing and large health care facilities.

What differentiates us is ownership. While much of the industry relies on third-party compressor platforms, we design and manufacture our own application-specific compressor architectures. That gives us greater control over speed of innovation and the ability to optimize performance for our target applications.

Next is power electronics. Our variable speed drives, or VSDs, where we hold over 220 patents. Innovative VSDs allow the chiller to precisely adjust output in real time rather than running at a fixed speed. That precision helps customers achieve and sustain tight operating tolerances while reducing energy consumption under real-world operating conditions.

The third subsystem is oil-free compression or magnetic bearings, where we hold over 65 patents. By eliminating physical contact inside the compressor, we reduced friction, wear and noise while improving reliability and energy efficiency. Because we design and manufacture our own magnetic bearing compressors, we can fully integrate [ sensing and controlled ], enabling higher uptime and predictive maintenance.

Fourth is thermal transfer where we hold over 260 patents. Our heat exchanger designs are engineered end-to-end as part of the full system, helping minimize material and refrigerant usage. This allows customers to get consistent, dependable performance in demanding environments.

And finally, our embedded intelligent chiller controls. We hold over 300 patents in this area. These controls optimize the overall system performance in real time. Because the controls are designed with proprietary insights of our subsystems, they allow us to clearly understand how each part of the system is performing and turn that into a more precise and reliable operation and better service outcomes over the customer life cycle.

The result of that subsystem ownership and overall system integration starts with thermal performance, delivering precise, reliable operations in the most demanding environments and extends to higher energy efficiency and flexibility across applications. That comes from deep technical expertise across each subsystem and the ability to design them together as one system. This gives us confidence that we can continue to drive further differentiated performance and margin improvement. Now let me connect that system-level technology advantage to how we're ensuring it shows up consistently for our customers.

Our technology platforms are a clear strength, and we continue to invest. The opportunity ahead is translating that strength more reliably through both rate and speed of innovation, meaning reductions in speed to market through innovation, manufacturing, delivery and field execution. Our proprietary business system is how we do that. Please turn to Slides 6 and 7.

Our business system is how we win with customers, how we empower our frontline colleagues, including our innovation teams, to perform their very best for our customers and how we run the company. It is anchored in a global cross-functional language and methodology for how we communicate, collaborate and drive strong continuous improvement momentum to win. As a reminder, our business system is built on 3 pillars: simplify, apply 80/20 principles to focus on what matters most; accelerate, use lean methodologies to remove waste to speed up execution, improving productivity and reducing assets such as working capital tied up in the process. In short, I think of it as helping us accelerate work from weeks to days. Amplify, leverage digital and AI approaches to amplify impact across the enterprise. In short, I think of it as taking that same work and reducing it from days to hours and minutes.

Real change in culture sustainment doesn't happen over a single quarter's time line. It takes time to put the right practices in place, learn what works and then scale it with discipline. Slide 7 shows how this journey looks in practice. The starting point is adoption and alignment. Think of it as connecting head, heart and hands. What you know, what you believe and how you show up differently. That begins with leaders, and we're seeing real momentum here. Today, approximately 1,400 colleagues are actively engaged in this work and about 1,000 leaders have been trained on the business system. More importantly, we're beginning to see early shifts in how work gets done and prioritize the narrow areas as leaders and teams apply these behaviors and use the business system approaches more consistently.

While doing that, we start narrow and go deep in a few areas of opportunity. As we've highlighted in the previous quarters, we have early and strong examples of cross-functional teams concentrating on specific priority areas, getting to root causes and implementing countermeasures leading to a significant performance improvement. To date, we've completed more than 150 kaizens across roughly 20 priority areas around the world. Only after that work is proven, do we scale. And this must be done by deliberately replicating what works and standardizing it across the organization.

Earlier, I commented on an opportunity we have to extend our technology-based strengths through the entire customer life cycle by better enabling our people to deliver for our customers. A strong example is our service sales work stream which helps ensure we establish a service engagement shortly after our new chillers are commissioned. Unnecessary internal processes weigh down our sellers' ability to proactively engage with customers for service needs, assessments and proposals.

Starting in West Florida, a cross-functional team used business system approaches like problem solving, value stream mapping, kaizen and daily management to redesign the process end to end, taking the process for an individual customer from weeks and days to a matter of hours. The focus on the customer and the frontline enablement led to tripling service agreements immediately following new chiller start-up commissioning. After proving success in one market, we scaled the same playbook to two additional local markets with strong follow-on progress. This is also what many of you will see at our upcoming investor event in real operating environments at Gamba where the value is created.

At JADEC, we will illustrate how the business system accelerates innovation, both rate and speed from development to new product launch. At our Airside Center of Excellence, or ACE, and in our Baltimore local market office, we will show the same system driving scalable manufacturing, commercial execution and service delivery using common tools, language and leadership behaviors to deliver more consistently and predictable outcomes.

With that, Marc will walk you through the details.

Thanks, Joakim, and good morning, everyone. We delivered another quarter of solid execution, building on the momentum from a strong first quarter with healthy demand across our core markets. Performance this quarter reflects continued progress across the enterprise as operational discipline and commercial focus are translating more consistently into results. This reinforces our focus on disciplined execution, margin performance and operating rigor.

Let's turn to the results on Slide 8. Organic revenue grew 6%, led by continued strength in applied HVAC and mid-single-digit growth across both service and systems. Segment margin increased 180 basis points to 18.5%, and EBIT margins expanded 310 basis points to 15.5% driven by better operating leverage and productivity improvements. Adjusted EPS of $1.19 increased 45% year-over-year and exceeded our guidance. These results highlight the operating momentum building across the business as we enter the second half of the year.

Let's now discuss our segment results in more detail on Slide 9 and 10. Orders increased 30% this quarter, building on a strong first quarter, reflecting sustained demand led by large data center activity, while demand across our other key end markets remain stable. Customers continue to value Johnson Controls for our ability to deliver integrated mission-critical solution at scale, backed by liability, deep domain expertise and life cycle services.

By region, orders in Americas grew 40%, led by nearly 60% growth in systems supported by large-scale data center projects. In EMEA, orders increased 11%, led by strong growth in data center-related projects. In APAC, orders grew 4% led by Southeast Asia, while system delivered mid-single-digit growth at the segment level.

Turning to revenue performance by region. In the Americas, organic revenue increased 7% led by continued strength in applied HVAC and solid double-digit growth in service. In EMEA, sales increased 1% as system growth offset disruption caused by the Middle East conflicts, and lower service volumes. APAC grew 13%, led by over 20% growth in applied HVAC. Across the portfolio, revenue performance showed continued momentum underpinned by strong execution from our teams.

Moving to margins by region. In the Americas, adjusted segment EBITDA margin improved 100 basis points to 19.5% driven by higher volume and price realization. In EMEA, margins expanded by 370 basis points to 14.9%, reflecting productivity gains and improved leverage on higher revenue. In APAC, margin expanded 350 basis points to 19.8% with improved volumes and productivity gains. Our record backlog grew over 25% to $20 billion, providing confidence in our growth rate over the next 12 months.

Turning to our balance sheet and cash flow on Slide 11. On the balance sheet, we ended the quarter with approximately $700 million of available cash and total liquidity remained strong. Net debt declined to 2x remaining within our long-term target range. Overall, the balance sheet continues to support disciplined capital allocation and financial flexibility, giving us the ability to invest in the business, maintain balance sheet strength and return capital to shareholders.

Let's now discuss our fiscal third quarter and full year guidance on Slide 12. As we look to the third quarter, our guidance incorporates the momentum we've established year-to-date. We anticipate organic sales growth of approximately 6%, operating leverage of approximately 45% and adjusted EPS of approximately $1.28. For the full year, improved performance and backlog strength support our expectation of organic sales growth of approximately 6%. We continue to expect operating leverage of approximately 50% for the full year, reflecting continued progress in cost management and productivity. As a result, we are raising our adjusted EPS guidance to approximately $4.85, representing roughly 30% growth and $0.30 higher than our original guide at the beginning of the year. We continue to expect adjusted free cash flow conversion of approximately 100% for the full year, demonstrated that improved profitability is translating directly into cash. This is supported by disciplined working capital management, while early progress in our business system is beginning to reinforce more consistent execution in targeted parts of the organization.

Operator, we are now ready for questions.

[Operator Instructions] The first question comes from Scott Davis from Melius Research.

Great. Everything looked pretty consistent with what we would expect the services order is still a little sluggish. Is there some timing issues there or any dynamic? And I guess what I'm asking is when do you expect that to pick back up again because it clearly should given the installed orders you have.

Scott, yes, correct. Those were a little softer than some of the other numbers that we published. So just as a reminder, service is about 1/3 of our revenue. And in our case, we do not include retrofit in the service revenue as some other companies do. Now our service fundamentals remain solid and particularly in HVAC, where we continue to perform very well, but it was offset in the quarter by weaker performance, particularly in security. And we have, over the last couple of quarters, been digging into our security business as a service business deeper and have found that over the years, the balance between volume and price probably hasn't been appropriately been managed. So during the -- and it's also, by the way, the part of our service business that's a little less differentiated. HVAC applied being the most differentiated. So we're rebalancing in the security service business between price and volume. So as a result of that, we were down in security service in the quarter. Margin-wise, we were up. So we're just managing and finding a better balance between price and volume in that part of the business.

Okay. That's helpful. And then just to back up a little bit on the business system stuff because it obviously matters a lot. Walk us through, when you talk about -- and I'm on Slide 7, the 7 lighthouse sites projected in 2 years, I think you're starting with a couple of lighthouse sites now. How does that kind of -- does that go exponential after that? Do you go from 2 to 7 to 40. I mean what -- how does that kind of work? Because I'm just trying to get a sense of how long it might take you to get just across the organization, really the business system deployed to a level of excellence.

Yes. So lighthouse sites are internal sites where new leaders, for example, can go and spend a week or a few days to experience what really, really good looks like. So think of these as Olympic gold medal sites. So we're unlikely to add a lot more than 7. I think that's probably a good number. And the 7 just simply comes from that we need a couple on commercial and service, a couple on manufacturing and a couple on innovation. And the lighthouse sites is one part of how you roll out a business system more widely. It doesn't mean that those are the only places where we roll out the business system, not at all. Those are the Olympic gold medal sites that others will aspire to as we roll out more broadly. And at the Investor Day, you will see -- that's upcoming in the Baltimore and the Pennsylvania area. You're going to see, as we're standing up lighthouse sites, a couple of them.

Our next question will come from Amit Mehrotra from UBS.

I wanted to ask about orders. Obviously, 30% growth is very strong, but it did plateau from the prior quarter, at least on an absolute basis. So I guess, one, are we at peak orders in your opinion? And any additional color on sort of your thoughts on how long and wide the runway is from here on orders and new business opportunity just after this huge, almost unprecedented increase we've seen both with you and across the board?

Yes. Order is plateauing. I think when you're talking about 30% to 40% rates, I think both of these quarters, we're very, very happy about. Our pipelines remain strong, growing at a double-digit rate. And so we expect continued strong orders. It's not just, of course, the data center market is fueling part of that, but we're also very pleased with the stability in so many of our other verticals. And I mentioned some of them in the prepared remarks here, for example, within pharma, biologics as well as advanced manufacturing. And as you know, we don't guide on orders specifically. But as I said, the pipeline remains very strong, and we're very confident and happy about our record backlog here.

Okay. And just maybe a quick follow-up. I wanted to ask about the strategic direction of the business. There were some reports on asset sales. I'm sure you can't specifically talk about that. But maybe just talk about how you're thinking about the moving pieces sort of both strategically and financially. I assume maybe some of these sales may be dilutive in the near term and how you're thinking about sort of the near-term and long-term strategic dynamics?

Yes, very good. I think unchanged, our job here is to make sure we maximize shareholder value. And over the last year, we've had a chance to go through, with fresh eyes, the whole portfolio. And of course, as every company I've worked, no one ever has the perfect portfolio at any one point in time. But then the way I think about it is the different parts of the portfolio, it's kind of like a sports team, different parts to play, different roles. For example, we're playing more offense with Applied and other parts of the business, I would think as being more of defense players contributing very, very nicely to profitability and cash flow, for example. But we continue to review our portfolio. And with the goal of strengthening shareholder value, and we'll keep you posted as we make progress on that.

Our next question will come from Joe O'Dea with Wells Fargo.

Some really hopeful color about a product portfolio and technology as well as business system. Can you just talk about the time line on kind of business system implementation. When you talk about 1,400 colleagues being engaged today, any mile markers you have out there for how you expect that to move forward? It certainly seems to be translating on the margin expansion that we're seeing here. But would expect as that continues to move forward, you continue to unlock other opportunities?

Yes. So the way I've grown up, I've been applying business system throughout most of my careers. You never really measure your progress in terms of numbers of kaizens or people engaged internally. The only reason we're offering that on these calls is just to give you a sense of the momentum. Internally, we're really focused on the outcomes that this effort is generating. And we'll talk a little bit more about that at the upcoming investor event. But we're doubling down on a number of improvement opportunities or growth blockers, unlocking growth blockers. And in terms of results showing up, on the P&L. I mean we're still very, very early stages, right? I mean as I explained, you always start narrow and go really deep and then before you cascade and so on. So we're still in the very early innings here. And it's really over the next year and two years that we're going to start to see more meaningful results show up on the P&L.

And then on the Alloy Enterprises acquisition, could you talk about what that brings to you from a differentiation advantage what it means for your CDU offerings and when those advantages will be in the market?

So Alloy, which is a fantastic company with so many capable PhDs from reputable academic institutions in the Boston area really brings to us unique, highly proprietary thermal management capabilities which is both anchored in Material Sciences as well as manufacturing capabilities. And we might share a little bit more about them at our investor event. But think of it as adding capabilities in the heat transfer area, which is our thermal transfer area, which is one of the elements that I discussed around our chillers. But of course, there are heat transfer elements to CDUs as well. There are heat transfer elements to cold plates in -- within liquid cooling systems. And so we're going to be looking to apply Alloy's technology in all those areas, chillers, CDUs and eventually cold plates. And -- we -- I don't think we will disclose here exactly when we're going to apply it in the CDUs, but it will be shortly. Very excited about that acquisition.

Our next question will come from Chris Snyder with Morgan Stanley.

I wanted to ask about June quarter margins. It seems like there's not much sequential margin embedded in the guide. But typically, the company sees pretty nice sequential expansion alongside the higher volumes into the June quarter. So I guess are there any headwinds coming through or mixed tailwinds in Q2 that is not driving that sequential step up to the third quarter?

Yes, Chris. So if you look at the volume and growth we anticipate in the third quarter, it's very similar to what we saw in the second quarter. So that's all integrating till the 6% growth for Q3 which means from a volume leverage standpoint quarter-over-quarter, you're not going to see as much of a step-up that you might have seen in prior period. However, I'd point to the fact that the way we've guided, it's a pretty impressive operating leverage year-on-year of 45%. If the volume would come out a little bit higher, based on certain risk and opportunities we have in the quarter, could we see a little bit of a better sequential improvement in margin? Yes. But at this stage, I think embedded in our guide with that 45% operating leverage year-on-year improvement. I think we are pretty much locked and loaded.

I appreciate that. Maybe if I could follow up on a longer-term question. You referenced working with the hyperscalers on the future data center architecture. I guess when you look out into the future, how do you see underlying content shifting between the CDU, which I think would be on the positive side versus air handlers and chillers on the other side perhaps? And then even within chillers, are you seeing any shifts between air cooled, where you guys have a very strong market position versus the water chilled side?

Yes. Great question. I think the big picture -- and by the way, I've spent the last few weeks in the field, of course, I spent a lot of time in the field all the time. But I visited 7 data centers in the last 3 weeks on site, both up and running and data centers under construction on 2 continents. So fresh input from the field.

So there are more things that generate heat in the data center than the actual chips and I'm sure you've read about some of the things that are happening outside of thermal management on the electrical side, for example. And so what that does is that even though liquid cooling is being implemented, I think there was maybe a concern about a year ago that there would be less need for air handling units. And I think we're seeing the opposite at this point in time. So our Silent-Aire franchise is enjoying very healthy growth, and we expect that to continue because of other things than the chip generating heat. So our content, I think, is going to actually continue to increase a little bit as a result of that.

And then I know there was some speculation about chiller content. And I think we discussed that in prior quarters. I think those fears were overstated. Maybe on the margin over the next couple of years, there might be a slight headwind, but the upside versus what we originally thought on air handling units will nicely offset that.

And then, of course, our CDU business has just started to ramp. And we have hundreds of millions of dollars in the pipeline and expect about $100 million worth of business this year. And why not more? And it's just simply because naturally, many of our customers, they want to pilot and test them and so on before they place the big orders. So -- but we're very bullish about our opportunities. And in all those different franchises for data centers. So both chillers, air cooled, water cool as well as our air handling units, our Silent-Aire franchise and now with the addition of the Alloy technological capabilities, I think will only strengthen our positioning.

Our next question will come from Julian Mitchell with Barclays.

Maybe starting with the Americas kind of operating leverage there. You've touched on margins a little bit. You started the year a bit muted on that second quarter, a nice pickup in Americas operating leverage. How are you thinking about the operating leverage for that segment in the back half? And I wondered really if there's been any change to your assumption around sort of gross cost headwinds because of Section 232 changes or broader inflation within that Americas business, please?

Yes. So if you look at the margin improvement year-on-year this quarter of Americas, about 100 basis points. A lot of that came from pure growth and leverage. That means we had a little bit of a productivity headwind in the quarter and that came from mostly the ramp-up in our capacity. If you recall, a couple of years ago, we made substantial investment to increase hard capacity within our factories in North America to keep up with the demand. We are likely going to continue making investment in capacity. But as that capacity continues to accelerate and ramp, you have the natural production ramping in efficiency that comes with that as you train and onboard a whole lot more people as the processes get practice over time. You have a little bit of a short-term dynamic happening in productivity. That ramp and productivity opportunity will remain probably for the balance of the year as you're thinking about the operating leverage of the Americas. But there's enough kind of juice in the backlog for us to continue to see year-on-year margins to improve, and that's entirely embedded in our guide as an enterprise of an operating leverage of around 50%.

On the 232, as you know, and consistently with how we've dealt with tariff for the past year or two, we've been able to navigate those both through long-term and short-term countermeasures. But given our current product mix and the way it's been classified under the different regulations, we've not seen a material impact specifically to 232, thanks to the fact that chiller are a category that are -- that is not including in that Section 232. There are some other parts of the business that have been affected by that, but it's rather minimal, and we feel very comfortable that's similar to what we've done in the prior 12, 18 months, we'll be able to pass on that -- some of that risk to pricing dynamics in the market.

And then my second question around shorter-term top line dynamics in the Middle East, I realize it's a very dynamic environment to put it politely. I think you saw a little bit of an impact in the second quarter, maybe just flesh that out on what it meant and what it means for your EMEA business and anything that you've assumed for improvement or deterioration or what have you there in the second half, please?

Yes. So we actually have an important business in the Middle East. We have about 2,500 colleagues on the ground. And our priority short term is very much about their safety and well-being. But of course, what we do is mission-critical for our customers and actually for some communities there as well. So we're trying to strike the balance between taking care of our customers and our people here.

The Middle East, overall, for context, is about 2% to 3% of our overall revenue. But for EMEA, it's almost 10% or a little bit more than 10%. And in the quarter, about 1/3 of that business was really impacted, delayed, if you will, by the conflict here. So we're not anticipating a full return here in the quarter that we're actually in right now. But over time, we hope that, and if you're as good of a predictor of that as we are, but we hope that over time, things will go back to normal here in the last quarter of the year.

Our next question will come from Andrew Obin of Bank of America.

Can we talk about -- I know lots of times spent on HVAC, but clearly, we're also hearing is putting a lot more focus on [ buyer ] and control business. Can you just talk about the initiatives that are taking place in terms of market pricing? And also, can you remind us the impact of data center business on growth profile of those verticals?

Yes. So obviously, HVAC has been one of the great growth benefit of what you've seen in the market particularly on data center, but other vertical as well, as we've mentioned them in the open remarks. A data center, just like any other infrastructure requires specific fire detection and fire suppression application as well as controls, both building controls and then, of course, equipment control associated to that. We have made a substantial investment over the last few quarters in creating specific applications for this vertical and we continue to see a lot of momentum building within these businesses, both fire detection, fire suppression, but also, of course, our Metasys building control solution. And we see that as a great opportunity moving forward. They have not yet gained the same level of opportunistic growth that the HVAC business has, but we believe the opportunity on a relative basis is probably as high.

And maybe can you just share with us outside of data centers sort of growth initiatives at fire and control? Because as I said, the feedback is that they're doing quite a bit better.

Well, we have the same opportunities there, Andrew, as we have been applied. If you recall in prior calls, I talked about the early progress with the business system and commercial application. I talked about selling hours and a week for our salespeople or our solution architects where we -- for HVAC, it went from less than 10 hours a week selling to now above 20 hours in the areas where we've implemented that work. That exact same approach. We're now applying in controls, for example, in a number of places. And we're finding that we have the same opportunity, if not a bigger opportunity in terms of giving back more hours to our people, our solution architects in the Street. And the same -- we haven't gotten started yet as much on fire detection because we've prioritized Applied and Controlled, but fire detection, which is -- has some similarities with the selling motion and control, meaning that it's a system. I think we have very, very similar opportunities as in Controls and HVAC and Applied. That's on the selling side and on the service side, and I think you will see this a little bit in the Investor Day that's coming up, similar opportunities. Again, we're -- in terms of giving hours back to our field colleagues, there's significant opportunity on capacity. And it's not just capacity, it's of course if you have more capacity, you're able to respond faster and you're also in a position where you can have more choice around which -- on the service side of things, for example, choice around which field colleagues to send, not all field colleagues are, as an example, as competent on all parts of our offerings, right? So by having more capacity, you can both respond faster and you have greater choices around who to send. So some very, very good opportunities in those businesses.

And so the margin opportunity associated with these initiatives is commensurate with what we have on the HVAC side, right?

Yes, exactly, yes. Because what we -- as we've discussed in prior calls, what -- the consequence of what I just described is that we can continue to grow without adding people. And at some point in time, of course, we'll also add people. But we're really trying to decouple the top line growth from the cost growth or head count growth, and that's going to drive margin expansion.

And overall, the margin profile of our controls franchise is very accretive to fleet average, has been and will continue to be for [indiscernible] controls.

Our next question will come from Patrick Baumann with JPMorgan.

I had one on the EMEA margin trajectory. It looks like second quarter was a really good result there. And I'm just wondering if you could give any context on where you think margins in that area can get to in the second half and then longer term, what the vision is? And then along those lines, you mentioned that earlier in the call, like the 80/20 focus. And it sounds like maybe that's playing out in security service as an example. Maybe that's in Europe. Just curious how much of a revenue headwind do you expect from this type of activity across the portfolio?

Yes. So first on margin. If you look at EMEA for the year, it's improving nicely, give or take 100 basis points, and we are really happy with the big ramp we had this particular quarter because of the headwind we are seeing associated with the different macro challenges [ that we are seeing ]. The balance of the year, depending on how volume will shake out, you will see a, I wouldn't say, pressure on margin, but you will see a slowdown in the progression of that margin over time, maybe with a little bit of pressure in the third quarter and then some recovery in the fourth quarter. Net-net for the year, I think EMEA will come out very strongly and really helping for us to achieve that operating leverage. Longer term, I think we remain consistent. EMEA has been an area with a bit underinvested historically on both capabilities and products. We've been working diligently over the past 12, 18 months in fixing and addressing some of those gaps and making the right level of investments to have the same level of quality, differentiation and competitive products for EMEA. And as that comes, we feel very strong that EMEA has the opportunity to continue to raise and catch up to its regional peers within the segments of JCI. It's still a business as you can tell that operates at 300 to 400 basis points lower margin than its regional peers. It will probably remain slightly lower, but not to that level in the long run.

And on the 80/20 stuff, is that -- like what's the revenue headwind you expect from these type of actions across the portfolio? Have you provided context on that before?

Yes. When 80/20 is applied, well, you should not see a massive long-term revenue impact because you actually free up room for the team to focus on the product where you have the most differentiation, the greater ability to drive value. Now obviously, in the short term, in sort of the pocket of the market, you will see some softness as we reposition the portfolio against higher runner. But I wouldn't anticipate any activity from the business system to impact whatsoever our ability to grow and compete.

Got it. And then on the backlog, have you -- can you quantify the shape in terms of the percentage you expect to deliver over the next 12 months?

Yes. As the demand continues to ramp for our solution and as customers put orders ahead of really their ability to take delivery. We think easily 70% of our backlog can be turned into revenue over the next 12 months. The balance remains a little bit challenged right now. The main driver for that is power, electrical infrastructure for some of our data center customers that continues to kind of put a damper on their ability to commit on deliveries within the next 12, 18 months, and some of that have pushed a little further than we'd like.

Yes. And maybe just to add to that, we're also seeing customers place orders earlier for those reasons that Marc mentioned then. A little bit earlier than perhaps a year ago. So there has been a slight timing shift in our backlog here for that reason. Meaning beyond [indiscernible].

Our next question will come from Andy Kaplowitz with Citigroup.

So I just wanted to follow up on that last comment. Obviously, you're growing nicely here, but you've had orders accelerated over the last couple of quarters. Your capacity to be able to sort of ramp up in '27, obviously, the timing of these big data center orders is key. But do you have the capacity you need considering that you will be delivering more of those bigger projects next year and beyond?

Yes. The short answer is yes, over the next 12-plus months. And because we built hard capacity that Marc was referring to, the actual factories, the buildings some time ago before I joined the company. And what's going on right now is we're ramping within those new buildings, if you will. And so we will have capacity for the next 12, let's call it, 18 months. And there's also plenty of productivity improvement opportunities, as I've talked about on previous calls.

Now as we've all seen, the order entry has been very healthy here over the last couple of quarters. And our pipeline, as I referred to, remains very strong. And so of course, we're continuously looking at where we would need to add more hard capacity, meaning more footprint. And so that's an ongoing effort. And I think as long as we stay 12 to 18 months ahead of that, which we can right now based on what I said, we're going to be in good shape here.

And then maybe just a bit more color on sales by geography. I know that you've had a bit of disruption in the Middle East as you talked about, but orders in EMEA have been accelerating lately on data center strength. Does that start to reflect into stronger sales growth in that segment as well as you go into '27? And then I think you said sales up 13% in Asia Pac, backlog is up double digits. Is China turning around? Or has it turned the corner for you?

So starting with EMEA, I mean, we had a really strong 11% order growth on a compare of almost 13% last year. So it's a double stack that's pretty strong. That's a sign that some of our solutions are really starting to resonate, particularly in the data center vertical, but there's other aspects of the business that we see very positive there in the market in EMEA. And that's despite the disturbance we saw associated with the conflict in the Middle East.

As far as APAC goes, that order rate of about 4% was on an easy compare, right? And transparently, we barely had any growth in order last year. It was, I think, flat. And so I would say, yes, we've bottomed out. We have passed that point. I think we passed that one probably a quarter or two ago. Now it's not a big return to growth, particularly in China. However, the same vertical where we see great opportunities, I'm thinking data center, semi car manufacturing as well as the biologics that we talked about in prior quarter. That continues to be a big tailwind, particularly for China. Our ability to convert there is not the same as maybe the rest of the world, but those opportunities are so large that we see an opportunity to continue to build some momentum in APAC and drive some growth.

Our next question will come from Nicole DeBlase with Deutsche Bank.

Just wanted to follow on to Pat's question about backlog cadence. I guess it seems to suggest then that we're kind of exiting the year with 6% organic in the second half that you guys would expect to see a pretty big step-up in organic growth in the first half of '27 based on that backlog lead time that you provided. Just wanted to confirm that that's not a crazy assumption to be making?

It's a little bit early for us to start forecasting next year, but it's not a crazy assumption. Yes, we're going to have a very strong backlog entering the year. I think the reason I'm pausing a little bit is some of the headwind Joakim talked about around our service business and some of more mundane parts of the portfolio where differentiation is a little bit harder to achieve. It depends how quickly we can turn that around to help support the level of growth you just mentioned.

Understood. That makes sense. And then I guess just -- I don't think the question has been asked yet on Asia Pac margins also up really nicely year-on-year despite the tough organic environment in that region that you just spoke to. So Marc, can you just talk about the expectation for Asia Pac margins as we progress into the back half of the year?

Yes. So they still had a pretty good revenue quarter. Their book and bill within the quarter was very strong. So 13% top line growth, really allow them to both drive net growth leverage as well as very strong productivity. We talk about around $20 million of productivity for that segment on $150 million or so of segment margin. That's a very material uplift.

As you look at the balance of the year, we think Q3 is going to be probably closer to flat year-on-year associated with the fact that the level of growth that you saw this quarter will probably not repeat in the third or fourth quarter, and it's going to be closer to mid-single-digit type of growth for that period. But we still see some full year margin improvement for that segment, probably reaching the high 18% type of margin for full year for that particular segment.

This concludes our question-and-answer session. I will now hand the call back to Joakim Weidemanis for any closing remarks.

Thank you. and thank you for all your questions. This quarter's results reflect the momentum that's building across Johnson Controls as our teams operate with greater clarity, discipline and consistency. We're seeing those improvements show up in how we serve our customers and in the strength of our results, and there's more to come.

I want to thank our 90,000 colleagues for their commitment and passion in delivering a strong quarter and their energy and embracing our new way of working with our business system. This is how we're going to win. While we're early in our journey, we're excited by the momentum we see.

Finally, today is National Skilled Trades day. So I want to extend a special thank you to our more than 40,000 field colleagues for all they do every day for our customers. You are such an important part of our competitive advantage. I look forward to continuing my conversation with all of our stakeholders. Thank you for joining us today.

This now concludes today's call. Thank you all for joining. You may now disconnect your lines.

Fantastic. Well, next up, it's my pleasure to introduce Johnson Controls, Marc Vandiepenbeeck the CFO. So thanks very much for being here, Marc.

Thanks for having us. Yes.

Of course. And I think JCI had some news on an acquisition. So maybe just start off with the background on that and kind of what it brings to JCI's portfolio?

Yes. So this is really a capability acquisition. Alloy is quite an incredible firm with a team of engineering folks in Boston that really have created a differentiated technology to really combine manufacturing process and material technology to create differentiated solution for data center, but also for other mission-critical environment.

The way that technology is going to apply to JCI product line is specifically and to start with our CDU. We have a great product we launched about 4, 5 months ago. The reception has been incredible. Our pipeline has now grown to almost $1 billion. We've booked order almost immediately after announcing the product.

But today, if you look at the environment of CDU, there is some differentiation, but it's not as high as you would anticipate with 100 different players providing solutions. We think the Alloy technology with their stack forging capabilities will create a completely differentiated CDU offering and allow us to gain potentially a leadership position similar to what we have in the rest of the thermal chain.

There's some application of what Alloy does that goes also into our chiller and the rest of our technology. And then, of course, being able to create those micro geometries has some clear interest within the cold plate. And so we are looking at that opportunity as well. Their own pipeline of opportunity. It's a very small revenue company, but they have an enormous pipeline that we intend to capitalize on.

Fantastic. And you mentioned the ability to drive a differentiated CDU offering. So maybe if we think about the commercial HVAC business there overall at JCI, very, very high order growth second half of the calendar year, particularly fourth quarter that you saw. Any kind of onetime factors driving that? How do you see the sustainability of high orders growth into this year? And what are the main sort of verticals, data center and beyond driving that?

Yes. The momentum is really coming from multiple factors, the increased demand coming from hyperscaler and colos that you see the CapEx commitment continues to increase.

Yes.

And then also the technology differentiation we've been able to achieve, particularly on chillers, has allowed us to take kind of a leadership position, and we think we gained more than our fair share last quarter and gain a higher share of wallet with most of the customers we have.

The timing is very hard to predict. We could have seen that a quarter earlier. We could see a quarter later. In terms of momentum, we entered the quarter with a pipeline of opportunities that was growing double digit. And on any normal quarter, if you see a double-digit print in orders, your pipeline gets so depleted that it's very hard to maintain momentum in the order growth beyond because your pipeline gets depressed.

What's incredible about last quarter is we entered with strong double-digit pipeline growth. We printed 40% and our exit pipeline still grew double digit on the back end, which honestly, in my 21-year at JCI, we've never seen. But that is really a testament to that continuous demand and kind of the customer intimacy and the effort the teams have done to really build the understanding and the road map for our customers to understand where they're investing, what product needs they have and how can we make an impact in their whole buildup of that incredible data center construction that's happening here.

Great. And when you think about the backlog is there. When we think about conversion of that into revenue, I suppose, help us understand kind of timing of that first off and just the mechanics on the lead and the lag and so forth into sales?

And then also the capacity of JCI to manage that conversion efficiently. I think some other companies with high data center growth has been uneven, let's say, the incrementals on that revenue.

So multiple parts of your question, right? There's capacity, there is our ability to keep up with revenue growth, and then there's really the timing on when our customers are able or willing to take that revenue based on the orders they pushed.

First on capacity, about 2 years ago, we almost tripled the hard capacity roof line manufacturing lines within our North American footprint to keep up with the demand we were seeing and the size of the pipeline.

Through the transformation of our enterprise and the adoption of a business system, we are now working on increasing to a certain extent, the same level of capacity through soft capacity. What I mean by that is when you have a production line that can maybe output a chiller or 2 a week, can we dial that up to 3 or 4 chiller a week? And what does it take from a supply chain, from an automation, from a process management to just increase that output with the existing hard capacity we have.

The way the demand has been shaping up is accelerating transparently faster than what our capacity planning was originally. We are working on trying to keep up with that demand. But if it continues to accelerate, it -- there will be a point where it outpace our ability to create that capacity.

And from a revenue translation, a lot of those orders you saw in the first quarter, some of them are going to start renewing in the fourth quarter in August or September for us. But the vast majority are 2027 deliveries.

Then the last part is the customer has to also be able to receive material. For the most part, because those orders have entered directly or backlog, that means most of those customers are willing to take delivery of the vast majority of those orders within 12 months.

Yes.

Are they able is a question. The biggest gating item that we are seeing in the short term, we don't know if that's going to continue, but in the short term, is the electrical infrastructure generally comes up 4 to 6 months ahead of us on a build-out of a data center. And it looks like the delivery either because of installation challenges or delivery challenges from the electrical infrastructure is being pushed out 3, 4 months at times.

And so while we worked really hard on improving our on-time delivery, it looks like there are some challenges within that infrastructure that is pushing some of that ability to receive order early. Some of our customers are willing to actually take orders to stock. So they are happy to warehouse some of that equipment, but not all of them. And so we need to map out with greater clarity in '27, what that's going to mean. But from a pure HVAC equipment order, it means -- right double-digit growth for that particular part of the business.

And on that point, when you're looking at the overall, say, Americas business and assuming that a lot of that data center activity is domestic in the U.S. in terms of order intake.

It is.

Is it sort of fair to assume that, that segment should see for some period, we'll see but should see kind of double-digit organic sales growth few quarters out when this backlog starts to get the P&L.

So the dynamic of that segment is it's not all HVAC data center yet. But over time, it will. That business is about 50% HVAC and 50% fire security and some other businesses that are not directly seeing the support growth of the data center. These businesses are performing okay. We think we can operate better there, and we can help them accelerate growth. It will take time, but these businesses grow low single digit.

And so it's a question of relative performance. But you're right, the HVAC will probably drive at least a high single-digit net-net growth and potentially moving that segment to the double digit depending on the timing of that revenue and that ramp I was talking about and the ability of those customers to take revenue. Everything perfect, absolutely. This growth is in the double digit, but I don't live in a perfect world, I live in the real world.

And I think one of your industry peers mentioned that they have not as large as yours, but they have a presence in building management systems, and that's helping them win share in Applied HVAC in data centers as well. So maybe you obviously have a very strong position in both commercial HVAC plus BMS. You've always been good there. Help us understand kind of that linkage. And is there more of that systems purchasing effort now by the larger data center customers?

The market is evolving from a pure play-by-play component kind of buying behavior to a more ecosystem approach. Some players within the market have taken a system integration kind of approach, encompassing not just thermal, but sometimes electrical as well. But we're seeing the buying behavior of a lot of our customers shifting towards a more integrated system. So they want to understand not just the chiller performance, but how does that correlate to the CDU performance? How does that correlate to the air handler and how those 3 assets are being controlled and managed by the BMS -- the BMS infrastructure?

And is there a way to eke out more performance or reducing the overall energy usage. It's an evolving market. I would tell you, it's probably -- it's a smaller fraction of our orders that are really all encompassing the absolutely end-to-end value chain. But over time, you can see more and more as we start engineering the next generation of data center, it's starting to become the standard. They will want to understand how does the chiller and the CDU are going to interact, how does that capacity play out? How can you optimize the performance of the 2 by having optimized BAS.

At some point, certain data center player had moved towards more PLC solution because they wanted that immediate reaction. Think of a PLC of able to react in tens of seconds or microseconds. The BMS reacts in a few seconds. So there was a sense that you needed that extremely quick speed to reaction because the demand management was so complex to plan for. Now that they've sold a lot of that demand management, they're really thinking more as a traditional BAS, how do you get all of those assets to actually talk to each other, interact more rapidly and more efficiently with each other. It's a journey, but we are extremely well positioned, especially with our Metasys solution that has a dedicated kind of platform to support the data center vertical.

And there's been a lot of debate in the last 2 months around data center cooling architectures and how that -- it will evolve. I guess help us understand kind of when you think about liquid cooling and the whole sort of CDU and cold plates and so forth, that growth rate the next few years in data center cooling versus, say, more traditional chillers and air handlers. How wide is that growth gap? And how confident are you that JCI will have also very high share in the liquid cooling side?

So it's a complex equation, but let me try and simplify it overall. The entire tide is rising very rapidly, right? So the total gigawatts or the size of those data center continues to increase. The -- over time, not this year, not next year, probably not the year after, but over time, in probably the next 3 to 7 years, the performance that you can get out of the chiller to manage the entire value chain -- cold chain, I'm sorry, of the data center, that performance will continue to improve, meaning over time, reduce the amount of dollar per megawatt that the chiller plays in the overall stack.

The total addressable market for a company like ours is actually going to not decrease because of that, but increase because the CDU, the air handler, the control to generate that energy efficiency will continue to rise. Ultimately, the goal of the data center is really achieve that PUE, that energy performance level to reduce the amount of power that the data center is using to run those chiller and get to thermal load and bring that energy back to compute, which is what is generating revenue for them.

So over time, yes, the chiller -- they're likely going to be chiller needs for a very, very long time. That chiller need with efficiency will come down per megawatt, the number of megawatts is moving so much quicker that the growth is there. It's just the mix within that growth that's going to evolve over time. That's why we made investment into developing our own CDU. That's why we made the Alloy investment to be -- to continue to be able to improve our total addressable market per megawatt of data center that's being built out.

And in terms of kind of market share, the liquid cooling world, you can get different types of players there, Asian tech hardware companies, that type of thing. So a very different type of competitor to what JCI or York has been used to dealing with. So help us understand kind of how you'll compete against them and the confidence in the market share in that liquid cooling portion?

So not everything is about competing. There are ways to partner. If you look, for example, at the cold plate market, the top 3 to 5 players are mostly Asian component manufacturer with incredible output. There's one U.S. player that is now owned by an electrical player. But the scale player in that market for the vast majority, very large output component manufacturer in Asia that operate at fairly limited margin because it's just about a volume game.

If you look at it from the outside, it's a difficult market to find attractive because of the lack of differentiated between those different cold plate and just the mechanics of what a component manufacturer model brings. Where the market is evolving is towards more differentiated solution at the cold plate, at the CDU, at the chiller and throughout the ecosystem. That differentiation will take time because the level of engineering complexity as the thermal load of each CPU and GPU continues to increase, becomes rather complex. That's where an Alloy transaction comes into play in that technology. But that evolution is very important.

So we do not perceive the need to be a player in every single part of that market and finding the right partner to play and support an end-to-end solution for our customer is where we think that approach. But you have seen when the demand is so high and the supply is constrained, you naturally see unnatural player coming into the market. And that's our fault as an industry to have not kept up sufficiently those players at bay. But naturally, they bring differentiation, different approach and different concept, but we think that the 140 years of experience in thermal management and the 3,000 engineers that back up that history will far outpace innovation and capabilities that some newer entrants may bring.

But we are very cognizant of the dynamic of the market is playing. You can see that we're keeping a very tight pulse on where the technologies are moving and Alloy is a great example of that of -- I can pretty much guarantee that 90% of the people in the room have never heard about that technology and what they have to propose and offer. And it's a testament to how our engineering and R&D team and our corporate development team like are really thinking 3, 5, 10 years ahead and where the puck is moving and not looking at where it is right now.

Great. And then maybe switching to some of the sort of self-help around the productivity and the margins and so forth, huge focus there. One thing that is in the very short term, some questions since the very strong set of results for the last quarter around kind of the Americas margins not outsized expansion today, but is expected to step up later in the year. So kind of help us understand what the drivers are of that step-up, please?

Yes. So starting at the enterprise and then maybe going down the Americas comment you made.

So from an enterprise level, the self-help come from the large restructuring program we announced about 18 months ago. And you've seen the return on that benefit. There's like 3 different aspects to that program. It's addressing the base cost in some of our functions; that's just brutal cost elimination and restructuring. Second is kind of the adoption of the business model and simplifying how the different team works with each other and reducing the cost to serve, whether it's the IT function, the procurement function, the finance function. You simplify your operating model. You need less people to actually support that operating model. You actually end up saving money, making decisions faster and stronger.

And then thirdly is we have an incredible level of complexity from a product and manufacturing footprint standpoint. We have a little over 40 factories and distribution centers around the world. On paper, it looks like a great network of factories. But ultimately, if you design the ideal endpoint, given the demand we have today and in the future, it's probably a couple of handful to many factories.

What that drives is if you consolidate those factories, you find a way to reduce your fixed overhead, you increase your speed, you reduce the whole functional support around supporting those 10 or so factories that you're going to consolidate, and you make the supply chain that much easier to manage for the enterprise. So we continuously see an opportunity to improve that self-help has driven a lot of value.

Now when it comes to the dynamic of what's happening in North America, it's twofold. The first one is North America is benefiting from that extremely fast growth of the equipment business because of data center, life science and other complex manufacturing have also helped them quite substantially over the last couple of quarters.

And our equipment sales margin, while really healthy, call it, 35%, 36%, they're about 10% lower than our service margin. And when you have a business at 35% margin that grows twice as fast as a business that has 45% margin, you have a mix headwind. So we have driven a lot of cost optimization within that team. We still have more to do within that segment. But in the short term, a lot of that improvement has been eaten up by that mix.

In parallel, parts of the portfolio is struggling a little bit. Our security business is performing; it is not performing to expectation. It's not improving as fast as the rest of the portfolio. So there are things we need to do to really turn around that team and help them focus on better operation.

And finally, when you build a franchise the size of our service franchise, one of the biggest challenge you have is you have an enormous base of contracts. And that base of contract has a natural attrition to it. Customers decide from time to time to shut down or find another provider to help them or decide to bid the project and somebody else ends up winning it. The more contracts you have, the bigger your attrition, the more challenging it is to grow in double digit, your revenue base.

There's a solution for that, and we are working on those. But in North America, that size of the service growth means that there's a bit of a ceiling in the short term for that business to grow much more than a high single digit on service. We're working on breaking that ceiling. It means service productization. We can talk maybe about it a little later.

But that means our ability to accelerate the growth of service to keep up the margin rate of service at the same pace as the rest is a little challenging in the short term. I'm not saying there's margin rate headwind, but it's all of the work we're doing from a self-help is not fully translating in Americas into a full bottom line translation yet, but it will come.

Got it. That's very comprehensive. And maybe, Marc, sort of corporate line, not the most interesting subject, but JCI is a fairly big lever coming down sort of relentlessly since the RLC (sic) [ R&LC ] divestment. How much more room is there for that corporate line to get you shrinking?

I mean we've come from $450 million to, call it, $350 million or so. It's not going to go down to 0. Otherwise, I won't have a chance to spend time with you guys because I'm in that line, unfortunately.

But at some point, there is obviously a limit of the infrastructure, but we think there's still a whole lot more work to do. We've talked a little bit about it over time. What we have done is we've moved costs from the segment into the corporate structure to kind of eliminate and simplify a lot of that work. And then we move back a much lower base back into the segment from a service standpoint, and we're going to continue to do that way.

So it means the corporate cost moves up and down, like it's moving towards a downward trend, but there's -- it's not a linear curve downwards. There's plateauing and then acceleration, plateauing and acceleration. And that's where it comes from. It's -- and it's part of really that business system transformation where you really create better clarity on your ways of working, who's responsible for one. What it means to be a function that supports the P&L, that supports the business, that supports the people, that help our customer every day. It's a change in approach mentality, but it drives real value from a corporate cost standpoint.

Fantastic. And then lastly, I guess, let's touch on the portfolio for a second. In terms of -- you mentioned parts of security are struggling. Like when do you take a decision to say, okay, it's better in parts of it or parts of any segment at JCI that's not performing well when is it time to maybe find a different owner for that and the scale of it?

And separately on the acquisition front, you mentioned the acquisition announced in the last 24 hours. But what's the appetite to do something larger, say, in liquid cooling to really cement your position there?

So first on the overall portfolio, our job is to operate those assets the best we can. And so selling an asset because we're not managing it well is not a good enough reason to separate from it.

Our decision on portfolio really come from our strategy. It's a focus on AI data center, mission-critical vertical where we can actually create differentiation and then energy efficiency or decarbonization. We think about those 3 pillars, there's assets that we own that that fit squarely there, like the HVAC Applied, the Controls business very clearly.

And there's assets that are a little bit more challenged, either because they don't serve the right vertical. We've seen a couple of announcements. We've divested 2 of our residential security business over the last 2 quarters, and we're going to continue to divest more. We have businesses that serve end markets where there's no real mission-critical approach. There's no real AI view. There is no the decarbonization play. I'm thinking some of our retail end markets, some of our more residential end market.

We are on a path to continuously improve those businesses and how they perform, but also looking at, is there a better owner? And even if there is a better owner, can we get sufficient value so we can create a shareholder-friendly transaction. Some of those transactions because the tax basis is so low, will remain dilutive because we'll pay a lot of tax. But there is a value to simplifying or finding a better owner for that asset than spending all of our time and energy fixing a business that really doesn't fit the overall strategy.

Now when it comes to a greater acquisition, a big change, we do not believe it is required at this stage for us to be winning. I'm not saying it's not in the card. I'm saying it's not required for JCI to maintain the leadership position we've established in data center within our markets. We're opening up a little bit of aperture on what that market really means. And we'll keep you updated as we assess potential targets and what ultimately that strategy around data center really leads from what belongs to the portfolio and doesn't.

Fantastic. Well, with that, let's switch quickly to audience response questions, please. So the first question is around current ownership of JCI?

If you're not burning, you're missing out.

Right. So I don't know, 50%, no...

50-50.

Slightly below the average. I think most of them are in the 60s, no. Second question is sort of general attitude to the stock today?

[indiscernible]

So overwhelmingly positive. Third is around EPS growth through cycle kind of versus the multi-industry average.

The truth 3 have really done a terrible job today. I'll take the feedback. But...

There you go. 0%. So yes, very clearly above peers. Fourth is around cash usage. We just touched on that at the end of the discussion.

So generally sort of smallish acquisitions. Next question is valuation related. What's the PE JCI should trade at on year 1?

Can I vote?

Next time.

So in the 20s comfortably. And last question, what's the biggest kind of gating factor or valuation anchor?

All right.

So mishmash, but -- yes. Well, that's it. Thank you so much, everyone, for contributing. Thanks so much, Marc, for being here again. Lovely to see you.

Thank you.

Thank you.

Again, we're very excited to start day 3 of our conference with Johnson Controls. We've got Marc Vandiepenbeeck with us, who is the EVP and CFO of Johnson Controls.

Marc, as I walk over, a lot's been going on over the last year for you guys. I want to start with JCI's transformation over the last couple of years because I think it's been pretty remarkable. You have a much leaner portfolio. The team has been working on cost actions. You've been CFO for some time, and Joakim has been CEO for almost a year now. So maybe you could just highlight for us earlier wins that you've had? And what would you say you and Joakim have had the most impact on so far?

Yes. So the early wins are obviously the portfolio simplification that we embarked 2 years ago with the disposition of ADTi as well as our residential and light commercial business and addressed the stranded costs that came from shedding off about 30% of our revenue. But beyond that, the execution discipline that came on the back end of that simplification really showed and translated into our financial performance, both from a margin improvement standpoint and then our cash flow generation has continued to perform well and to drive kind of a quality of earnings over time. That's for the early win.

Now over the past year, particularly, the acceleration of that transformation came with Joakim joining in and bringing a rigor to standard work and into the way we approach the business system. We were a fairly weak business system enterprise prior to him joining. And a strong business system is not something you put on a piece of paper and communicate through the enterprise. It's a way leadership behaves and engage with the teams. It's a way leadership and the rest of the organization aligns on critical ways of working. And we are seeing the early stage of that transformation and some of those benefits.

It's a multiyear journey. So it's not something that's going to revolutionize JCI over the next quarter or 2. But as we embrace that business system and as those ways of working become really the standard of how we deploy our resources internally, that will really transform and simplify and create more consistency how we operate. And then obviously, kind of accelerate our path or journey towards margin improvement and accelerate growth. It's not just a margin play. It's also a growth play because it really focuses the enterprise against the parts of the market that are the most attractive. And it really simplifies what success looks like.

We have deployed what we call the critical enterprise KPI, a few KPIs for customers, a few KPIs for our people, a few KPIs for our shareholders. And if you think of those 3 dimensions, those KPIs are the same across the enterprise from the leadership team of the CEO all the way down to the market. So the clarity of what success looks like for our customers, for our people, for our shareholders is clear across the enterprise and how you address when you see challenges in any one of those KPIs, that's where the business system comes into play and how you problem solve, how you address opportunities or challenges, how you keep pushing yourself and improving on your financial performance. So that's the journey we're on.

It's been a great 2 years. I think we are set up for an acceleration of that success. And I think the strategy is now starting to define itself with greater clarity, and we are starting to deploy that strategy further down the organization as we look at how we invest against different product lines and different geographies.

So Marc, I know we're going to talk about data centers a little bit more later, but it's very topical that you announced the deal last night. So I just want to talk about it briefly. You announced that you're going to buy Alloy Enterprises, which specializes in next-gen thermal management. Maybe you can talk about what next-gen thermal management means. You've been very active in this space, obviously, lately, introducing a CDU and so on. So maybe talk about how it augments your business.

Yes. So this is really a capability acquisition. Let me start with that right off the bat. The team at Alloy, which is about a 5-year-old company, has really created a differentiated technology through proprietary IP and proprietary process to actually manufacture what they call Stack Forging, which is a combination of laser cutting and diffusion bonding, allowing you to create pretty complex micro geometries with metals that are critical for creating differentiated thermal solution. Those thermal solutions are applicable to the data center world and will create an enormous advantage as we continue to develop new differentiated CDUs and thermal solution for data centers. But it also has application beyond the data center against mission-critical vertical where solution and precision thermal management is important. And we're really excited to have those folks joining the company.

I think from a culture standpoint, it's going to be a fantastic fit. And we really see that capability adding to our end-to-end thermal solution capabilities in data center and other verticals.

Is this something that the customers ask for from you? Or like how did it...

This is part of a road map to create differentiated technology solution, mostly right now for the data center vertical, where there is a lot of demand for the customer to kind of improve on the capabilities. Right now, the prepackaged CDU solution you find in the market is not very differentiated. We think we've brought a product to market 5, 6 months ago that is differentiated, but it's not to the level that you would anticipate given the demand and the problem hyperscaler and colocators are trying to solve in terms of thermal management. And so as you start thinking about not the next year, but the next 5 years, that demand constrained dynamic you see in the market where players that just have capacity managed to win share in the market, we believe that, that will even out over time. And best technology, best capability will win out, and we want to be prepared for that shift in the market, and we want to create differentiated technology that actually provide clear value proposition to the customer.

And what Alloy brings in terms of like value proposition to the customer, it's about that end-to-end solution from a thermal standpoint is about 35% more efficient than what you find currently on the market on a direct-to-chip cooling technology. That's a substantial differential versus what exists in the market, and that's a clear demand coming from the hyperscaler and trying to find [ e-cult ] every possible percentage of efficiency through the cold chain.

Yes, it's helpful color. So maybe back to sort of the business system, Joakim talked about being in the early stages of sort of implementing the business system and mentioned 80/20, predominantly I thought. So as you said, JCI has been complex historically. So can what you're doing have more immediate impacts on JCI? And how far are you along in the process?

Yes, yes. So the business system is not just 80/20 or it's not just lean. It starts with simplifying, taking complexity away from processes, complexity away from organizational design, complexity away from like priorities from a day-to-day basis is critical to success. So we start with simplifying. 80/20 is a great tool to think about that, and we're teaching the team to deploy that.

The second aspect is how do we accelerate? Now that we focus on the right thing, how do you accelerate that capability? Speed is a critical element to success and differentiation when you're trying to compete in the market. And that's where the lean journey really will shape the way we accelerate that transformation.

And then there's the digital transformation that allows us to take the benefit of the first 2 items and really amplify it further throughout the enterprise. The capability that AI brings or basic digitization or leveraging digital tools to actually do the work easier, faster within the company that allows you to take those lean principle and 80/20 principle and really amplify it quickly. Where we are on that journey is I think it's early stage, but you see a clear ignition within the organization of what the business system can do because we've taken very narrow, very specific parts of the organization, and we fully deploy the capabilities.

And we've shown the team what it can do, what it can do from a speed of transformation, what it can do to help our frontline colleagues to be more productive, have a more enjoyable ways of working, have better clarity on who does what where, on reducing the red tape or the number of handover on eliminating waste in the way we approach that. So we've started to really demonstrate, but it's very deep, very narrow, and it's now starting to like expand and trickle to the rest of the organization.

And then there's a big element to cultural change and training that comes with that. And we've deployed what we call Growth Summit. Those are large gathering of, call it, about 100 people. And we've done probably 3 or 4 of those by now, where we've taken all those colleagues and we spent 3 days first really explaining what this is all about in theory and then do on hands train by leader. So Joakim directly training people on how you run an ops review, how do you efficiently look at solving the problem, how do you speak the truth, think the truth within those challenges. I was personally involved with one of those zones, but we have all of the leaders training other leader and showing them the path to success. It's not like an e-learning or these are the 10 steps of how to be successful. It's real hands-on training. And those training have now deployed to the rest of the organization.

We have about 1,000 colleagues now that have not only been trained, but are starting to fully embrace and deploy that business system. And that will, over time, come to the rest of the organization. And you see that dynamic that's exciting as a leader when you see that you have people that are begging for the training, like why did this team get a chance to get that training. I see what's happening in business A, I want this to happen to my business as well. Can we participate? Can we join? Can we spend time on understanding how to better problem solve and how to manage our critical KPI in a more efficient way? It's exciting that cultural transformation, but it takes time. This is not a 1, 2 quarter and done. This is a multiyear journey. Many have tried and have not always successfully done so. We are extremely committed to do this right, effectively and efficiently, but it will take time.

That's helpful. And then maybe one more big picture question. I think Joakim talked about improving JCI's pricing muscle through 80/20 in the business system. So maybe talk about how that could evolve. And then obviously, the commodity inflation environment is pretty dynamic. How should investors think about JCI's ability to stay in the green in this environment?

So pricing is a multidimensional challenge. First of all, it starts with strategy, meaning are you bringing to market products that you can actually command price against a margin. Are you addressing end market verticals that are willing to pay for your product? Do you have a good value proposition, because your strategy was sound? Do you have solution and outcome that the customer are feeling the value for and, therefore, willing to pay? Where historically, sometimes we've had challenges at diffusing ourselves to addressing parts of the market that we were not looking for differentiation or we're not looking for outcome-based type of solution. We have now much more focus against those end markets. And that creates 2 dynamics from a pricing standpoint.

When the environment around you change, you can more easily command price with the customer, whether it's tariff, commodity prices. Whatever headwind you're facing, you can more easily explain and justify that. If you're in a more transactional part of the market, it's going to be who's the first one to blink type of effect. And what often happens is nobody blinks and the price are now eroding margin or everybody blinks and now you have a downward spiral on pricing. We've been able to pivot a large part of our portfolio, not the entirety, but a large part of our portfolio against end markets where we feel that given the customer intimacy, the type of solution we've created and kind of the outcome-based package that comes in, it's easier to have those conversations with customers.

I'm not telling you pricing is perfect. As we've navigated through tariffs, our ability to command margin when we pass on really large tariff bills to some of our larger customers. But back to data center, large hyperscaler receive tens of millions or sometimes $100 million bill from us, for which there's a $5 million or $6 million tariff surcharge associated to that. It's very hard to justify to that customer that I deserve a 50% margin on that particular tariff line. But over time, we've priced in the tariff to our normal pricing backlog. And therefore, over time, we are going to be able to kind of protect margin better than we've been able to over the past probably 6 months. I'm not saying this hurts from a financial standpoint dollar for dollar because we recoup the vast majority of what the tariff and then some, but we've not been able to maintain margin rate because recovering margin rate on top of those tariff surcharge has been a bit of a challenge.

Yes. That's helpful, Marc. And so maybe just to get out of the way, just in sort of the current environment, you reported order growth last quarter of 40%, a big number. Backlog growth of 20%, that was in your fiscal Q1. So it seems like judging though from your comments from the call, right, you talked about a healthy pipeline that was basically filled even after the orders. So it tends to mean that we can expect another healthy quarter of orders in Q2. Like how should we think about that?

So 2, 3 things I would say. You know I don't like...

You probably shouldn't tell me exactly what's the order rate. Yes.

And I'll tell you exactly why. We knew a very large order quarter was in the hub. We can see the shape of the pipeline. We can see the maturity of those opportunity moving down the pipeline. That level of order we saw in Q1 could have very well happened in Q4 of last year. And me predicting with great precision whether it's going to happen in August or September versus October or November doesn't drive any value for us or for anybody else. We just know it's coming. So predicting order because of timing elements and also the size of what's coming down the pipe, there's so much variability to it. I don't think it's worth doing it.

We sent a signal, and we are now almost halfway through the quarter here. I can tell you that on a normal double-digit order quarter, what would naturally happen is you have an opening pipeline that's probably up double digit and then you book all your orders and then your closing pipeline has been impacted, and therefore, your ability to print orders the following quarter is probably limited and you're managing to a single digit, maybe low single-digit level.

What we saw over the last quarter is, and it's not just a good old double-digit quarter, 40% order rate in the U.S., in the Americas, 56% order rate, we opened the quarter double digit. We booked 40% of order. My pipeline is still up double digit after that. And that's the level of demand we're seeing in the market. That's the level of work we see and churn of new opportunity that are coming in. And so I don't want to outlook the quarter, but the next couple of quarters, it wouldn't surprise me if we would have again, double-digit orders in some quarters, and it's not going to be flat to single digit the rest of the year. And we just banked the whole pipeline in the first quarter. It's not at all what happened. It's a testament to the work that the commercial team has been doing, and it's a testament to the demand and the capabilities that JCI brings to that demand in the market because it's exciting to see double-digit order with double-digit pipeline exit growth within a given quarter. This -- in my 21 years at JCI, we've never seen that.

It's very, very interesting. So Marc, like, obviously, we're going to talk more about data centers in a second. But I just want to ask you about ex data center order strength for a second because I think you've talked to us about other large markets such as pharma, bio, advanced manufacturing. So where do you think those other sectors are in their cycle? And how much are they contributing to the strength in orders?

Yes. So if you look at the incredible order rate we had in the first quarter and you change the world and assume data center wasn't a thing, you look at what pharma and particularly biologics manufacturing has done in the quarter, this would be the entire conversation we would have right now. This was a very healthy double digit. And it's also, by the way, a vertical where we saw double-digit orders and an exit backlog that's also double digit.

And the dynamics that are happening there is I think we are really at the corner of bringing capabilities, solutions and account management at a different level. What I mean by that is we are one of the few providers in the market that can provide a solution for air handling, air management within the building, chiller, meaning temperature and then the controls aspect that comes with the demand. You got to understand that within pharma and particularly biologics, the size and scale of those new factories is just mind boggling, but also the thermal precision of the environment within that building is far greater than it's been historically in the pharma industry because we have live matter within that building that moves around. The precision of the temperature, the air pressure, the air quality, the relative humidity is far, far greater than it's been historically. At scale, that's also greater at the same time.

And so you need a player that can provide differentiated solutions that are very particular for that end market that can cover AHU, chiller and controls at the same time. And while there are certain system integrators in the market that are able to do, we are the one OEM that brings that full value to that particular vertical. And I think we've benefited to the boom you've seen. There was a big boom a year or 2 ago around the GLP-1 capability. But now you have new drugs that are coming in for other diseases like Alzheimer's and that capacity building that is happening in the U.S. and in Europe is extremely exciting for us.

Interesting. So I'm going to open up to the audience in a second. But Marc, let me ask you, like your already -- so I want to talk about data centers, but you I think already answered my question about where we are in the cycle. It seems like we still have ways, right? So maybe like Alloy is actually interesting from a -- because I wanted to ask you about sort of maybe dollars per megawatt in terms of like it seems like your content is going higher on data centers as you've introduced CDUs and now you have Alloy. So is there any sort of thoughts around that as to what is Johnson Controls dollars per megawatt in data centers? Or how are you progressing on that?

So depending on the end markets, the -- and because we all think data center are one being blob, but there's a great variation per customer, per application, per geography on what the addressable market for JCI is. It's between $2 million and $3 million per megawatt on every opportunity. There is a little bit of a dynamic that is happening between the old air cooled solution, which was cracks and craw solution within the white space and the liquid CDU cold plate, et cetera, opportunity that are coming into play. So there's a little bit of cannibalization. So it's not like 1 plus 1 equal 3. It's more 1 plus 1 equal 2.2, 2.3. It's still growing from an addressable market per megawatt, but it's also growing because the amount of demand and megawatt itself is growing at the same time. But it's not like we are doubling our addressable market per megawatt, but it's improving slightly.

I think what we are trying to do is change the dynamic of our ability to win within the data center by having truly differentiated solution. We've had enormous success in the air cooled chiller. We've taken a leadership position and have had that leadership position for quite some time, and we are continuously innovating to try and catch up to that. Now we are trying to recreate the same success with CDUs, with some of our control solution, with our air handling solution and ultimately, with the full thermal suite that comes for an AI factory like the modern data center that are being built for the next 3 to 5 years.

Yes, very helpful. Any questions from the audience? Any questions? Luckily, we have a question.

Just you touched on the Alloy acquisition, what -- so can you give us any more specifics on that, like what that means in terms of like potential revenues down the line and what that -- how that changes your business?

So it's capability-driven. So I want to be transparent with you. We've not acquired a whole bunch of revenue that's going to convert next year or next month. What we've done is acquired capabilities and technologies that are going to allow you to create differentiated product solution. That differentiated product solution will come into the road map of our product probably within 6 to 12 months of us closing the transaction, which is likely sometime in our third fiscal quarter, second calendar quarter of the year. And so as we integrate this capability, as we scale that manufacturing capability throughout our processes, we are going to be able to increase our win rate and provide differentiated solution at much greater margin for parts of the market that were, I would say, a little bit more mundane, for example, in the CDU part of the market.

We launched that CDU about -- I said about 5, 6 months ago. Our pipeline of opportunity right now on CDU is multiple hundreds of millions, almost reaching $1 billion with just 5 or 6 months of existence of a product line that's really unheard of from our capability standpoint. The goal is to bring that technology, combine it together and make the win rate on that pipeline much, much greater than what we think we have been able to do without it.

So I want to shift, Marc, to margin for a second. I think you've been open about having pretty significant gross margin and SG&A opportunities. You have a long-term algorithm of 30% plus, but you're going to do 50% this year. Some of that is unusual, as you've talked about. But you're still in the second half of the year, I think you're supposed to be above 50%. And so as you said, right, you're still kind of in the early going of ramping up savings. So why would you do 30-plus long term? Why couldn't it be more like 40% or what have you? Any more color would be helpful as you go into '27 and beyond.

30% is not good enough, Andy, in the second part of the question?

Yes. I mean back in the day, it was like 30% would have been good for JCI. So it's kind of amazing.

No. So I understand over the last couple of years, we've been able to achieve 40% plus. And so why wouldn't we commit ultimately to 40% all the way? Well, first of all, let me explain to you what the size of the price and the opportunity is and then let me dimensionalize how quickly we can actually achieve that and what the pace of progress is. If you look at the face of our financials, right, and you start at gross margin, we have overall better gross margin than our peers. But I would say we are far from being at entitlement from a gross margin standpoint.

Why are we far from entitlement? We are the one player with a real service franchise. And what I really define as service is a recurring revenue based on a service contract, not a retrofit, not an overall of a machine, really just servicing that machine. We've been able to achieve margins in our service business of about 45%, which is -- I mean, it's good margin, it's solid. But if you look at other mechanical product industries, think about oil and gas, think about air compressor, industrial tools, some of those players by productizing their service offering and create a better service delivery model than we have been able to, but overall, our industry in the HVAC universe has been able to do. You can see their margins are probably between 50% and 60%. And so how they got there is very clear. And so we have a road map to try and improve that service margin over time.

Now we talk about data center and we talk about that incredible growth. What comes with that growth is long term, an incredible opportunity on service, but short term, a mix challenge for us, because our sale of new units is going to far outpace the growth of our service contract because those units are coming well ahead online as the ability for us to start service contract. It's just the natural dynamic of how that market operates. And so that mix shift will create a little bit of headwind on gross margin. And so it's critical for us to improve our service margin to find ways to offset that.

The other thing is the business system and the 80/20 lean journey will bring some simplification on the type of costs that are absorbed within our gross margin. A good example is our manufacturing footprint. We have about 42, 43 factories, distribution centers around the world. It seems like an exciting number, but it's -- if you look at what an ideal footprint would look like, it's probably a little heavy. And so can we consolidate some of that capability, reducing the fixed overhead that's in gross margin and improve margin over time from a manufacturing standpoint? Absolutely. And so is that opportunity on margin like 100, 200, 300 basis points, maybe a little early for me to say. But I think long term, the opportunity is probably moving from that mid-30s to high 30 potentially over the long term, 40%.

Now you come down that income statement and you look at our SG&A, we've had a pretty heavy SG&A load over the past few years. We've addressed it quite a bit. We came from about 24%, 25% down above 22%, but the entitlement, what good looks can be found with others, and it's vastly below 20%. We have a road map to address that. Some of it has to do with pure rural cost restructuring and cost takeout. Some of it has to do with the business system and simplifying our ways of working. Our cost to serve some of the functions are a little too high because the complexity of how our operating model was, our business system, lack of maturity created like redundancy and complexity, that really created cost within the enterprise and we are mapping out the road map to simplifying that cost. So there's a few hundred basis points there of opportunity. So a few hundred basis points of opportunity on the gross margin, a few hundred basis points on the SG&A comes obviously pretty substantial incremental from where we are right now.

I'm comfortable with the 30 plus. There's a plus percent ahead of it because we know what the size of the price is. It's the timing and the road map that comes with that and the effect that the mix I just described has over the short period of time versus the longer period of time. And like most companies, we are scorecard on a quarterly basis. And so could we get quarter in the 50s and then quarter back in the 30s or 40s? It's possible depending on where the growth really came in and where the leverage through the P&L really translated.

Maybe there should be a plus, plus instead of plus.

All right. I had another plus.

All right. There you go. So I did want to ask you about getting service up is also part of that opportunity, right? And so I think you grew high single digits in revenue in Q1 in service, but Joakim has talked about sort of freeing up your salespeople to have more time sort of selling and all that kind of stuff. So it's probably a good time to ask you service resiliency to grow high single digits or more? And how are you infusing AI? And do you worry at all about disruption in OpenBlue from AI?

Let me address that very last part first because that's the attractive part of really the service delivery model and has a lot to do with the amplify I was talking about earlier on the business system. The way our tools are right now being deployed for technicians to be able to operate in the market and serve the customer, that's where AI has and will continue to play a critical role, not only in their productivity, but in their capability, a.k.a., upskilling the capabilities of those technicians.

The number of type of chillers, a chiller technician has to address in a given market like Miami here is mind-boggling. It's thousands and thousands of pages of specification. There's different particular application. Some customers have had customization of that chiller. So the level of complexity is absolutely hard to comprehend. And historically, those technicians would have a bunch of books, go online at 500 PDFs that they would have to navigate through between our connected solutions and an AI-infused chatbot that technician can use to actually ask normal language question around a particular unit. They can arrive at the job site pretty much knowing what 85% of the problem is going to be and already have the parts and items that are needed to fix that problem.

And for whatever is left that they cannot solve right there, there's an AI agent that really allows them to instead of spending hours going through the booklet to really ask a natural question of what is -- like I see this compressor #1 and there is this particular issue, what could be the root cause? And you have the system like going through all of those -- all of that information and bringing an answer. So that's the AI opportunity and journey.

The adoption is far from 100% right now. And it's not like we have connected the entirety of the fleet that exists right now. Everything that's coming out of our factory right now is connectable, but a lot of what has been installed historically is obviously a legacy system. We still service chillers that have a 40-year life that came well before connections were even a thing that people could talk about.

Now the opportunity in service is twofold, improving our attachment rate for every unit we sell. We've started to make progress there, but it's very early stage. And then second is, I was mentioning that earlier, is that productization of our capability, meaning when you come to a customer, right now, we are really selling terms and contracts, time and labor, if you want. Is there a way, and we know there is to actually create a more attractive value proposition to the customer that is more geared towards the outcome they're looking for, whether it's uptime, budget, quality, a problem-solving turnaround time, whatever that could be and selling that capabilities instead of time and material.

The last thing I would tell you is the biggest impediment to service growth for a company that has a service franchise of our size is the attrition of the existing customer base. When you've built such a large base of contracts around the country, you naturally lose some of those customers for many different reasons. Most of the time, by the way, we lose those customers not to the other OEM, but more towards the mid-market independent service provider. And we need to address that attrition over time.

Now that productization I was talking about, that is something only an OEM can deliver. And we think addressing that productization will also address over the longer term, the attrition we've seen within our contract where somebody comes in and say, the JCI labor is X, I can do X minus 10% and please choose me and naturally, some more price-sensitive customer will end up opting out. But we're still very excited about the service opportunity. We still think that the high single-digit long-term algorithm growth is the right one. As soon as we see that productization, that service delivery model that I'm talking about really taking roots, then maybe we'll update that algorithm around service. But right now, high single digits is where we see it.

That's helpful, Marc. So we only have a couple more minutes. So let me just ask you a couple of quick questions. Portfolio management, you mentioned in the beginning, one of the things that you guys have done, but you still talked about divesting up to 10% of the portfolio. So maybe just any sort of progress update there? What do you think the appetite is in the market for your assets?

So portfolio is generally an outcome of strategic reviews. And Joakim brought an extreme level of clarity as to what our strategy needs to be and how do we deploy it across the enterprise. And like many companies, there are parts of our portfolio that have a hard time fitting like squarely within the strategy. And it's a spectrum, right? Some assets fit perfectly and then some assets clearly don't fit at all because the end market they serve or the ability to create product differentiated is just more challenged or lower.

And then you have a bunch of assets that sit in between. Yes, you can make a case one way or another. There are some dynamics that are at play. Sometimes it's about have we performed and managed those assets the way they should have been. Have we really deployed the full power of the strategy against those end markets? Have we like mismanaged them or left them alone for too long? So as we look at the whole portfolio, you have parts of the portfolio that are clearly belong to our strategy, think about HVAC and controls and obviously, everything that comes with the data center.

And then on the other side, you have things that address end market that are less attractive to us that don't fit our long-term strategy, whether it's addressing -- we still have some residential and light commercial parts of the market through our security portfolio and other part of the portfolio where we need to find what's the best outcome strategically for those assets. We've been very diligent at looking at our portfolio and taking action that are not overtly dilutive over time. And when they're dilutive, and the best example was the residential and light commercial, we only execute that transaction if there's a clear road map to addressing that dilution over a short to medium term. And so it's not just about like can we sell these assets that we're not interested in because of their strategic impediment, but can we create a road map of shareholder value creation against those assets and not a pure like we don't like it, let's simplify, let's sell and deal with the dilution. There's a real thoughtfulness around how we prioritize those transactions and address them.

Well, we're out of time. So we appreciate it. Thank you very much, Marc.

Thank you, Andy.

Hello, everyone, and welcome to the Johnson Controls' Q1 2026 Earnings Conference Call. My name is Nadia, and I'll be coordinating the call today. [Operator Instructions].

I will now hand the call over to Mike Gates, Senior Director of Investor Relations to begin. Mike, please go ahead.

Good morning, and thank you for joining our conference call to discuss Johnson Controls' Fiscal First Quarter 2026 Results. Joining me on the call today are Johnson Controls' Chief Executive Officer; Joakim Weidemanis; and Marc Vandiepenbeeck, our Chief Financial Officer.

Before we begin, let me remind you that during our presentation today, we will make forward-looking statements that reflect our current views about our future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Please refer to our SEC filings for a list of these important risk factors that could cause actual results to differ from our predictions. We will also reference certain non-GAAP measures throughout today's presentation. Reconciliations of these non-GAAP measures are contained in the schedules attached to our press release and in the appendix to this presentation, both of which can be found on the Investor Relations section of Johnson Controls' website.

I will now turn the call over to Joakim.

Thanks, Mike. Good morning, everyone. Thank you for joining us on today's call. I'd like to begin by recognizing our 90,000 colleagues around the world for their commitment to our customers and for the contributions they've made to a strong start to the year.

Let's begin with Slide 4. Johnson Controls enters 2026 with a solid foundation and more disciplined execution across the portfolio. Our first quarter performance reflects the progress we've been making with strong revenue growth, meaningful margin expansion and broad-based strength across the enterprise. We are still in the early stages of this work, but I'm encouraged by the progress we've seen to date. As we begin deploying our proprietary business system more broadly, leaders are displaying better candor and assessments regarding where we have opportunity and how we address those opportunities through our business system approaches. We are seeing this firsthand in Gemba walks in our manufacturing plants in our field offices and operating areas across the business and even in corporate.

Turning to the results. The quarter delivered ahead of expectations. I'm proud to share that orders increased nearly 40%, building on a very strong 16% last year compare. Revenue grew 6%. Adjusted EBIT margins expanded 190 basis points to 12.4% and adjusted EPS was up nearly 40% and exceeded our guidance. Our record backlog gives us strong visibility and reinforces the demand environment we're seeing. These results reflect the strength of our leading technology portfolio, combined with more disciplined execution across the company. Given the strong start to the year and the momentum we're seeing across the business, we are raising our full year guidance. Marc will walk through the details in just a few minutes.

This quarter marked an important step as we continue to provide much greater clarity on our direction and introduced our evolving enterprise strategy and priorities to leaders across the company. We cascaded and aligned goals across the organization to a focused set of enterprise-wide metrics. This gives every team a clear line of sight of their priorities aligned with our definition of winning, one that is rooted in winning more customers and better enabling our colleagues, especially those on the front line. This alignment is essential to how we operationalize our strategy, where we focus our commercial resources, where we direct our R&D investment and where we concentrate execution resources to create the most impact and win with customers.

We are building a faster-growing, more profitable and more disciplined company that is easier to run. We do that by focusing our efforts to parts of the market where our strengths in technology and field presence aligned with our passion to advance human society. You can see that impact clearly in the places where technology demonstrates its value today, energy efficiency and decarbonization where factories, large campuses and buildings are some of the largest consumers of energy and amongst the biggest contributors to global emissions. In an increasingly energy-constrained world where energy costs continue to rise, our customers are under pressure to manage energy more productively, reduce their carbon footprint, but also need strong operational returns.

Turning to the next slide. This couldn't be more evident than in the fast-growing, most technology-intensive environments such as data centers. As compute becomes more powerful, rack densities rise, hybrid architectures evolve and control systems become more advanced, data centers now require increasingly energy-efficient and precise operating conditions. Across AI and high-density compute environments, architectures will continue to change, but they all share the same fundamental requirement, significantly greater thermal and energy management supported by more sophisticated controls, managing energy consumption while sustaining performance is essential, and that is exactly where our technologies remain critical.

Against that backdrop, our data center momentum reflects not only strong demand from existing customers but also success in reaching new customers as our differentiated solutions gain traction. We continue to work closely with NVIDIA, applying our thermal management and controls expertise to support next-generation AI compute environments. Johnson Controls recently released a new reference guide that maps the full thermal chain and outline scalable, high-performance cooling architectures for an emerging class of AI factories. The guide outlines an integrated solution that leverages technology to accelerate data center deployment and increase their overall performance.

Going beyond just supplying equipment, we are architecting the thermal backbone for the next generation of AI computing. It also reinforces the strength of our innovation road map, reflected in the products we introduced earlier this week. We announced 2 new chiller platforms that extend our leadership in high-density data center cooling. The YDAM delivers up to 3.5 megawatts of cooling in a compact footprint providing approximately 20% higher capacity density than competing options and enabling warm water cooling for advanced GPUs. The YK-HT brings the industry's widest operating range and supports waterless heat reduction, which can eliminate up to 9 million gallons of cooling-tower water annually and typical deployments.

Complementing these data center platforms, we also expanded our digital service capabilities with the introduction of the Smart Ready Chiller, which provides 10x the insights over a standard remote connected chiller. This gives us and our customers deeper insights from day 1, allowing us to shift more customers into proactive recurring service relationships that improve reliability, reduce unplanned downtime and lower life cycle costs. Together, these launches build on an already strong and comprehensive portfolio, making it even more capable and more differentiated for our customers.

In addition to the data centers, we see similar demands for energy efficiency, precision and reliability across other mission-critical sectors. Advanced manufacturing where, for example, next-generation pharmaceutical manufacturing relies on precise environmental conditions, meaning strict control of temperature, humidity, pressurization and air purity and large complex research campuses and universities where similar requirements exist as researchers discover new insights and translate science into real-world applications and where students are learning, exploring and preparing to make their own impact.

Our customers have real unmet needs for technology innovation and service-based solutions that help them manage energy more efficiently and deliver outcomes in their mission-critical operating conditions. This is where our strengths set us apart and where we concentrate our investment in innovation. And this is exactly what gives me the confidence in the opportunity we have here at Johnson Controls and the ability to support our customers.

When I went to Gemba, I saw breakthrough innovation happening at JADEC, our advanced development engineering center in Pennsylvania. Work built on York's 150 years of legacy of pushing the boundaries of HVAC and thermal technology for today's data centers. And after also spending time with our field professionals, it became clear how much potential we can unlock by making their daily work easier and better leveraging their expertise and proximity to our customers.

Turning to Slide 6. This is where our proprietary business system will help us unlock that opportunity. As a reminder, our business system is built on 3 pillars: simplify, apply 80/20 principles to focus on what matters the most; accelerate, use lean methodologies to remove waste to speed up execution, improving productivity and reducing assets such as working capital tied up in the process; and amplify, leverage digital and AI approaches to amplify impact across the enterprise. I think of it as accelerate or lean helps us accomplish work in days and hours versus weeks and days.

And amplify or digital and AI enables us to take that same work and accomplish the same in hours and minutes. And it's anchored in a global cross-functional language and methodology for how we communicate, collaborate and drive strong continuous improvement momentum to win. We're already seeing evidence of the business system in the way teams operate, stronger alignment, clear ownership and greater process and tool consistency. And our talent system also plays an incredibly powerful role in this. We've brought in select external talent with deep business system expertise while also teaching and equipping our internal colleagues to lead in this new way of working and beginning to embed across our end-to-end talent processes.

To date, we have hosted growth summits with hundreds of leaders diving deep into our enterprise strategy and hands-on teaching, leaders teaching leaders, our business system. This includes a global summit with our most senior leaders and we're now spending time in each region to ensure full understanding, clear expectations and accountability for this new way of working, all focused on enabling our frontline colleagues to deliver more for our customers.

As part of this, we started the new year in APAC with all the regional leaders. I spent significant time in that region in my professional life and see great opportunity, particularly aligned with our strategy and where we have strengths. To further accelerate our progress and strengthen global execution, we recently appointed Susan Hughes as our APAC President. Susan brings more than 20 years of deep experience in the region and I'm excited for the impact she will have as we align our teams and sharpen our execution.

Let's now turn to Slide 7 to show how our business system is taking hold and the progress we're making across the company. By working together across teams and leveraging 80/20 and Lean tools, we're seeing real measurable progress. Last quarter, I shared some examples, but I'm proud to illustrate continued improvement. Our conventional HVAC sellers in one of our local markets went from 60% improvements in time spent with customers to 100% improvement. And as we bring AI into these workflows, we see the potential for another meaningful step change, one that simply wouldn't be achievable without AI.

In one of our key manufacturing facilities for chillers, our factory on-time delivery went from 95% to now sustaining 95% to 100% for the past couple of months. This level of performance combined with our now competitively advantaged lead times is driving higher win rates with our customers, especially in data centers as we can reliably commit to help them meet their rapidly growing needs. These are just 2 examples where we go narrow and deep on an area of opportunity. Our teams are going deep and addressing other areas of opportunity from cutting service repair time to improving quality and addressing billing disputes. The benefit only continues as we scale these learnings more broadly in the organization over time.

I'm inspired by the energy, the urgency and the enthusiasm with which our leaders and teams are embracing this new way of working. More than 1,000 colleagues have actively engaged across several priority areas. Over 80 kaizens have been completed and 350 senior leaders have been trained in the new ways of working. And while many of our early focus areas started in the U.S., as we teach and equip our leaders, we have now activated efforts in both EMEA and APAC. This way of working gives us confidence in our ability to execute and deliver on our commitments.

With that, Marc will lead you through the details.

Thanks, Joakim, and good morning, everyone. We delivered a strong start to the year, reflecting continued momentum in the business. Our teams converted sustained customer demand into record orders while delivering solid operating performance. We are also seeing early benefits from the operating discipline we've been embedding across the company, which is helping us execute faster, improve consistency and strengthen profitability. With this foundation, we are well positioned to deliver on our priorities and achieve on our full year commitments.

Let's turn to Slide 8 to walk through the financial highlights for the quarter. Organic revenue grew 6% with broad-based contribution across the portfolio, and we delivered solid margin expansion. Segment margins increased 70 basis points to 15.7%, and EBIT margin expanded 190 basis points to 12.4%, reflecting continued benefits from productivity, price realization and improvement in our cost structure. Adjusted EPS of $0.89 increased nearly 40% year-over-year and exceeded our guide. Our ongoing work to simplify priority, strengthen alignment and sharpen operational discipline is driving faster decisions, stronger pricing and tighter cost control, supporting both growth and margins.

Let's now discuss our segment results in more detail on Slide 9 and 10. Orders grew nearly 40% in the quarter, a strong performance on top of a tough 16% compare. Demand was led by data center projects where customers are accelerating investment to support higher density workloads and AI-driven growth. Activity across our other key end markets remain stable, and customers continue to prioritize Johnson Controls differentiated mission-critical solutions.

By region, this demand strength translated into solid order across all 3 segments. The Americas delivered 56% growth led by large-scale data center projects that continue to scale across the region. EMEA grew 8% with balanced high single-digit growth in both service and system. In APAC, orders increased 10%, driven by double-digit growth in systems and high single-digit growth in service. At the enterprise level, organic sales growth was led by continued strength in service, which grew 9% year-over-year. In the Americas, sales were up 6% organically, with solid double-digit growth in service. EMEA grew 4%, led by high single-digit growth in service. APAC delivered 8% growth led by strong system performance and steady demand in service. These results reflect strong execution across the portfolio despite a challenging 10% year-over-year comparison.

We delivered another quarter of steady margin expansion, reflecting disciplined execution across pricing, productivity and project delivery. Our team strengthened operating leverage in both service and systems through higher throughput, tighter cost control and more consistent execution. These actions reinforce the continued strengthening of our operating model and our ability to sustain meaningful margin progress.

By region, adjusted segment EBITA margins in the Americas improved 20 basis points to 16.4%, supported by productivity gains and improved mix. In EMEA, margins expanded 120 basis points to 13%, reflecting favorable pricing and productivity gains. In APAC, margins expanded 290 basis points to 16.9% as volumes increased and factory absorption improved. Our record backlog grew 20% to $18 billion, highlighting the continued strength of our pipeline as revenue conversion accelerated this quarter.

Turning to our balance sheet and cash flow on Slide 11. On the balance sheet, we ended the quarter with approximately $600 million in available cash. Total liquidity remains strong, supported by our available credit facilities and disciplined working capital management. Net debt remained within our long-term target range, declining to 2.2x. Our capital allocation priorities remain consistent: investing in the business, maintaining balance sheet strength and returning capital to shareholders.

Let's now discuss our fiscal second quarter and full year guide on Slide 12. As we enter the second quarter, operational momentum remains solid, supported by disciplined execution and continued strength in our backlog. We anticipate organic sales growth of approximately 5%, operating leverage of approximately 45% and adjusted EPS of approximately $1.11. For the full year, we are maintaining organic sales growth of mid-single digits, supported by solid execution and the visibility provided by our backlog. We continue to expect operating leverage of approximately 50%, which is above our long-term algorithm as last year's trended cost savings materialize in this year's performance.

With a strong start to the year, we are raising our adjusted EPS guidance to approximately $4.70 per share, which is roughly 25% growth. With the increase in our EPS guidance, we continue to expect approximately 100% free cash flow conversion for the year, underscoring the quality of our earnings and the discipline of our working capital processes. Our guidance reflects the progress we're making across our operating priorities and provide a solid foundation for delivering strong results throughout the remainder of the year.

Operator, we are now ready for questions.

[Operator Instructions]. The first question goes to Nigel Coe of Wolfe Research.

Yes. So I think a good place to start would be on the orders. I don't know if this is a record order but a quarter, but I'm sure it's pretty darn close. Anything that you'd call out because we've seen extraordinary strength in other places in data center and -- but this is like another level higher. So just curious, are we seeing more kind of longer duration orders, multiyear orders? Anything you'd call out driving the strength in orders?

Nigel, we are seeing record orders, as you saw. We have a record backlog, and we'll try and keep it like that going forward, too, by the way. I'm super happy that it's not only data centers that's driving the strength of our order entry. We had a very healthy life science order entry during the quarter, and that's not the first quarter that we see that strength. And that's really a result of all the effort being put into the innovation pipeline over the years as well as the field coverage for what we call our mission-critical verticals, where thermal management and the indoor operating conditions really matter for our customers.

Now data centers was very strong, and so I'm very proud of the team, what they accomplished during the quarter. Pipelines remain healthy. And as a reminder, we really play in 3 categories broadly in data centers, not just on the chiller side but on the craws, the air handling units through our Silent-Aire franchise, which is the leading franchise in air handling. And as you know, a couple of quarters ago, we announced that we entered the CDU space, where we're making some good progress. So very pleased overall with the order entry, but data centers is definitely not the only vertical that's showing really, really good strength here.

Great. And then my follow-on is, I believe the backlog reflects orders that are shippable over the next 12 months. So the -- obviously, the backlog increase, I think 20% was the number, if I'm not mistaken, versus the unchanged mid-single digits for this year. So just wondering how to think about that inflection in backlog versus non-inflection in organic growth. I'm just wondering if we're starting to see a line of sight towards high single-digit organic growth.

I think the organic growth will continue to strengthen over time. Our guide currently reflects what we see for this year. Many of those larger orders that we're taking also in the life science field, but in data centers, are not necessarily shippable within the next 9 months or so. But we'll keep you updated on the guide here as we see opportunities to do better here potentially.

The next question goes to Amit Mehrotra of UBS.

I just wanted to follow up on the orders question, if I could. And just to understand how much of this order strength is the market coming to you as opposed to maybe how you're evolving, how you go to market? And I know last time we chatted, there was maybe some initiatives underway to kind of go after what you guys call the belly of the market. Is there -- is that indicative of the orders? And then just related to that, any numbers you can provide around the non-data center growth, just so we can understand a little bit how broad based this is?

Yes. So I think the data center market is growing in many different parts of the world and in different applications as well. So our growth is pretty broad-based. So like I said, we plan 3 different application categories, the chillers, across the air handling units and now starting to grow nicely here on the CDU side as well.

So historically, we had a good position with our hyperscalers as well as many of the large colos, in particular in the United States. But over the last couple of quarters, we're very happy to see the growth in Europe and Asia also start to become very meaningful for us. And like I said in my previous comments, our order strength in the quarter here is, of course, helped by data centers, but we're also very happy about, in particular, the life science oriented growth that we're seeing.

And just to put a little bit more color on that, what's happening in the pharmaceutical industry is that with the rise of biologics-based therapies, the manufacturing environments are materially different than the historical manufacturing environments. And that's why large pharmaceutical manufacturers are building new plants in many parts of the world and the indoor operating conditions that they require to be able to effectively manufacture these biologics-based drugs really require very strong thermal management, which is not just the HVAC but also controls and because these are large campuses with thousands and thousands of employees moving in and out every day and the value of what they manufacture is very high. It also requires other solutions in our portfolio. So very encouraged by our continued progress in Life Sciences.

That makes sense. And then just my follow-up, Marc, I wanted to ask about second half versus first half incremental margins. Obviously, you have a full year of 50% plus. You'll achieve or have achieved in the first quarter, second quarter, maybe about 40%, 45%. It does imply kind of this nice step-up in the second half above 50%. Can you just talk about that? And maybe what are the drivers of that step-up are in the second half?

For sure. We can maintain the full year roughly 50% operating leverage outlook because the structural driver of our leverage build materially around the year and are supported by, of course, the backlog and the backlog margin, the visibility we have that and the margin expansion that come, but also the work associated with the trended cost and it's all inflecting in the second half of the year and that leverage continues to improve.

That 50% is based on our mid-single-digit perspective on top line growth, if we can accelerate that top line growth, not all of that incremental growth will come at an operating leverage in the 50s, it will probably come closer to our long-term algorithm well above 30%, but maybe not at the 50% range.

The next question goes to Steve Tusa of JPMorgan.

Hello? Can you hear me okay?

Yes. Yes, we can hear you, Steve.

Great. Just on the North America margin was just a little bit lighter. I hate to nitpick because they were really good results on -- especially on orders. The North America margin was a little bit lighter. There was a $15 million headwind from other. Maybe that was something we're missing from the comp from last year or something like that. Maybe just touch on how you see North America margin trending in the next couple of quarters, anything there from the quarter?

So if you look at the growth in North America, right, very strong system growth, strong service growth as well, that makes -- normally would be lifted by much, much better growth in the service, thanks to the rate. And we saw some benefit associated to productivity. Overall, the opportunity in North America is accelerating our service growth and the margin rate that comes with that.

You know that there was a few smaller headwind in the quarter in North America, about $15 million we tag as other. That more has to do with some periodic small adjustments we do on product liability. Those are just reserves. We adjust over time, not something material, not something recurring. We think North America margin potential continues to be strong and will probably come slightly better than what you saw in the quarter in the second half.

Great. And then just one on data center, where do your lead times stand today?

The next question goes to Scott Davis of Melius Research.

Scott, I...

Steve is still in here?

Yes, we are. Operator, can we please ask you to take command here? Steve was asking his follow-up question. So let's allow Steve to do that, and then Scott we'll go to you right after.

No worries, guys.

Thank you. Operator, can you please step in? Okay. Scott, if we have you on the line, please go ahead. I will act as the Interim operator.

I could call Steve and ask him what his question is, but...

Go ahead, Scott.

No, sorry about that. But look, I'm kind of curious, the entrance into CDUs, is the goal here to kind of bundle this into a total solution? I would imagine it's still a separate purchase order right now and perhaps even a separate process altogether. But where do you kind of see that market going for you guys?

Today, it's a mix, Scott. So there's certainly a lot of business that transacts CDUs only, but we do see plenty of opportunity for combined offers. And obviously, we have a number of very important key accounts. And so we work on more than one application together with them.

Over time, as the thermal architecture for data centers evolve, as is normal, I think, in a complicated system like that, you might see some slight changes in the overall architecture. And so the roles that certain devices play today might evolve a little bit over time. And I think that's, of course, why we chose to add CDUs to our portfolio to be able to lead in that and be able to be a player that helps our data center customers with the most optimal and highest performing thermal architecture, not just for today but in the future as well.

Okay. Fair enough. And then Joakim, you mentioned that you were just in Asia Pac, I'm sure it's a big broad region, so not exactly sure where you were. But perhaps since you were there recently, you could just tell us what you're seeing on the ground because clearly, we're seeing a broad set of different results. You guys were a little better than most people this quarter.

Right. Yes. Yes. So I was -- I'm not going to say I was all over the region, but I was in all the major markets and number of countries. So in our case, we are seeing continued stabilization in China. And part in our business, and part of that, of course, is that we have worked hard on shifting a little bit on what the mix of which verticals we focus on in China. And so I think we're in a better place now. Our commercial teams are more aligned with where there is still growth and our service business there. We have continued to invest in, and so we see that as a continued good opportunity.

So we see stabilization in China, but unlikely that China is going to return to the kind of growth rates we saw in past years. But what's exciting is that, of course, it's no secret that there are some other major economies in the region that have continued to strengthen overall. And so we think we have a really strong, good team on the ground in a number of countries in Southeast Asia as well as India.

And in some of these countries, of course, they're all looking at data centers and there are several emerging players in these markets. But in terms of, for example, investments in healthcare, hospitals and pharmaceutical manufacturing, that's also a growth driver for us in a number of those countries there. So I'm super excited about our prospects here in Asia. So stabilization in China and then growth opportunities in major economies elsewhere.

Moving back to Steve Tusa of JPMorgan.

Yes. That's a quality move. Thank you for letting me back in. I appreciate that. Just the data center lead times, where are you now? And then, Marc, can you just could give us a little bit of color on what BMS did in the quarter. We're trying to tease out kind of the like-for-like applied orders growth the BMS kind of orders, I would think, be lower than what Applied was maybe not, but maybe those 2 follow-ups.

Yes. Sure. Lead times, I gave the example in the prepared remarks here. So we're making good progress on the on-time delivery, and that's on-time delivery as requested by customers, right? So by definition, that is then being predictable within the lead times that the customers are asking for.

We continue to sustain. I talked in previous calls about how we cut lead times in half for one of our product lines in a factory. And that work is now being cascaded out to the other product lines in that factory and other factories. And we did hire a new VP of operations a couple of months ago. And he and his team are now ramping very, very nicely. And I'm actually -- and we were reviewing it just the other day. I'm really excited about what I'm seeing from our operations teams, not just in terms of short-term results, but the aspirations and where we think we can get to, not next year, but this year. And so more to come on that.

And I think in a little bit of an environment like we have in the data center market right now, the ability to be able to deliver not as predictably, but fast is part of one of many things that contributes to our competitive advantage. So BMS, go ahead, Marc.

BMS. So the BMS growth in the quarter was -- I would characterize very solid in the high single-digit rate. We feel very strong about the backlog of that business because it's continued to improve. The pipeline of opportunity is also accelerating, aligned a little bit with the strategy we laid out at the beginning of the opening comments around our mission critical and how a strong BMS controls offering for those particular specific vertical is really resonating well with the customer, and we think we can continue to improve that business nicely over the next few quarters.

The next question goes to Jeff Sprague of Vertical Research.

I want to come back to the new products, Joakim. It's just kind of interesting how sensitive this market is, right? You might argue your stock as it has been weak year-to-date because NVIDIA scared people about warm water cooling and here you are with an offering, right? So clearly, you're in the loop on product development. You mentioned reference designs. Maybe just for the benefit of all of us, just a little bit of more detail on where you sit in sort of the technology path, the forward planning, understanding what's coming down the pike and how you're -- we're not surprised by this, but in fact, we're prepared.

Yes. So I can't -- I won't comment on specific product launches in the future. But the reference designs that -- and there are 2 documents that we guides, that we issued to the market. And these reference designs for those of you who don't know, they're really for the benefit of data center designers and operators as they're working on designing the next generation of data centers. And that kind of work -- we did a lot of work with NVIDIA and so some of the guys that we published here is in collaboration with NVIDIA.

Of course, beyond those documents that we publish, an element of how we work in this industry is we essentially every other week, have large engineering teams from our largest customers, colos and hyperscalers who sit with us in our innovation center in JADEC in Pennsylvania to collaborate on what the next generation of designs should be based on the learnings so far and that helps feed our innovation pipeline. And it's really an excellent way where we can combine our deep technological know-how and thermal management represented by our very talented people in that innovation center with the people who are actually using the products from our customers and then apply the technologies that we have in more and more competitive solutions.

And so you saw a couple of launches here earlier this week at the big show that's ongoing as we speak here. And we have a significant road map behind that. And as you remember, we play in 3 categories in data centers when it comes to thermal management. Chillers and handling units mainly through our Silent-Aire franchise, but beyond that as well. And then we entered CDUs. And then, of course, we're in the controls system as well. And so there's a lot more to come, Jeff, and we'll keep you posted as we launch these new products.

Great. Appreciate that. And then maybe just a different thread here. Just on the kind of the portfolio review, Joakim, that I would assume that's still ongoing. But it also looks like the retail business did not close yet. I thought that was sort of pending and close to being done. Maybe the stuff that you've already publicly identified to go? Where are we in those processes? And any other update would be appreciated.

Yes. So we continue -- I think I've commented on that in the past, but we have undertaken a thorough strategic review of our entire portfolio. We've worked with the Board and calibrated and aligned on what we think is appropriate and to do. And that includes both how we can execute better as well as potential alternative futures. And we've commented on a little bit how big part of the portfolio that might entail. And the main driver here is to create shareholder value. And so we continue to work on both improving execution and on the portfolio moves that we flagged in the past, and we'll keep you posted as we make progress on that.

And I'm not going to comment on particular ongoing transaction. We have not announced anything particular on retail. We are very happy that we closed the disposition of one of our residential monitoring security system as we continue to walk away, if you'd like, from that particular subsegment of the market.

The next question goes to Chris Snyder of Morgan Stanley.

I wanted to talk about the longer-term margin opportunity for the company. I think when we look at the model, we can see the SG&A as a percentage of sales is quite high compared to the competitors. So I think it's understandable opportunity there. But can you talk about the opportunity on gross margin just because the company is already running above the industry, it seems like on the gross margin line. So can you just kind of talk about entitlement there? What is the opportunity to kind of grow that into the coming years?

Yes, that's a topic we've discussed in the past. And yes, our gross margins are running a little higher than some of our direct peers. I see opportunities there. I think we've discussed with -- at least with some of you in some of your events, the opportunity, for example, in footprint consolidation in our manufacturing setup. And there's also an opportunity to continue to drive better productivity in our field on the service side of things.

You should think of the example that we've talked about in our -- the work we've done with the business system with our HVAC sellers, where we've been able to more than double the amount of time they spend with customers and selling. We have that kind of opportunity that we're already working on in a couple of our markets with our service team. So I still see a healthy runway to improve our gross margins.

And then on SG&A, maybe on the A side of that, I mean, we are working away at just simply reducing our costs. We are a smaller company than we were when we owned retail. And there are -- there continues to be cost reduction opportunities on the administrative cost of the SG&A. On the S side and the R&D spend, within SG&A. On the S side, I'll refer to the example with the HVAC sellers. We think we can decouple the future growth from top line growth from the growth of the S cost by applying the business system and exactly the way we outlined it in the example that we gave, basically help our sellers help them do their job, double the amount of time they can spend with customers.

And meanwhile, though, on the R&D cost, our ambition is to significantly, and we have already this year in our plan, and it's embedded in the guide, started to ramp up our spend in R&D, and that's going to continue to increase at a very healthy rate here going forward. And -- but we'll still be able to drive margin expansion because of the types of things that we're working on that I gave you examples of here.

So still unchanged view versus what we've talked about in the past. I see no reason for us not being able to achieve the segment EBIT margins that our best-performing peers have. And I think over time, we should be able to even go beyond that. And obviously, they are not sitting still, we recognize that, and they are extremely capable. So we know that's a moving target. But our opportunities are plenty here.

I really appreciate that. And then if I could maybe follow up on labor availability in the market and particularly how it impacts the service business. I mean -- obviously, labor seems like it's still tight out there. When we see these orders and growth numbers, it feels like it will continue to get tight. Have you -- has there been any change from your perspective in the ability to kind of either recruit or retain service professionals? And is this becoming a growing competitive advantage for a company like JCI who already has such a big technician based compared to some other smaller competitors or upstarts in the market?

Sure. I think the availability of service labor has been a topic for the last 15 years. So it's hardly a new phenomenon. And that's why so many companies, including ours, have been working on for several years, but now we've accelerated on looking at how we can make our teams that we already have in the field, much more productive.

And again, think the example of how we can double the amount of time and the salespeople spend with customers, we can do the same thing, and we're working on a similar thing with our service team. And that's process work, but it's also in a much better way, leveraging the connected installed base that we have and you reconfigure a little bit how work is done on field versus the office. And so there's plenty of opportunity, lots to go out there.

Now we do have -- like you pointed out, a significantly larger field force than many of our peers. And that is an advantage. So we want to make sure that we make them more capable and more productive, but we're also wanting them to provide even more value to our customers. So over the next couple of quarters, we're working on a number of service products offerings that we don't have today that we'll be launching to the market. And you'll hear more about that in the future. So we're happy to have that advantage to be able to leverage, but we have to leverage it in a much better way of doing the kinds of things that I was talking about here.

The next question goes to Julian Mitchell of Barclays.

I just wanted to start off with Slide 9 and 10. Just to try and understand, I guess, the tie-in of the systems orders to the systems revenue? Because again, with that very high order growth and your lead times of -- you've made good progress bringing those down. I would have thought you'd get some translation of that into revenue this fiscal year. So is it the case that the customers are specifically placing orders that are very long dated. And I also wanted to understand what you used to call products. Is that still not in the order numbers on Slide 9? And anything to call out with what's happening with products?

Yes. Thanks, Julian. So yes, the backlog strength is very encouraging. But the mix of that backlog and the timing of the broader portfolio dynamic, today only supports the mid-single-digit guide we're providing. I would say we started the year on the lower range of that mid-single-digit range. And I think we are going to print the second half on the higher half of that range, the better half of that range. And if you look at the content of that backlog, all of it could be shippable, right, in the next 12 months. But a lot of it depends on customer availability and customer ability to accept that orders.

And the way the dynamic works with some of our larger relationship is it's an ongoing conversation with those customers. The quicker they can take it, the quicker we can turn revenue. There's obviously at a certain level of growth, capacity constraint, but we don't believe we've reached that capacity constraint just yet. There's opportunity to improve there. But overall, we think that backlog continues to support a solid mid-single-digit revenue guide. What I would say is if you continue to unfold that backlog beyond the next 12 months, I think we'll be very comfortable to start talking about a slightly better growth than what we've seen maybe in the prior quarter.

The next question goes to Andrew Obin of Bank of America.

Can you hear me?

Andrew, yes, we can. Thank you for asking.

Of course. Just a question. I mean, clearly, improving throughput has been a key KPI for you. And I think I'm trying to figure out this order thing as well. Should we think that there is a relationship with freeing up more capacity and your ability to take more orders in the near term?

Yes. Absolutely. So -- and on the capacity, we made significant investments in physical plant and machinery before I joined the company. And so we more than tripled our physical capacity. And then with the lean work, the business system work, there's an opportunity to keep expanding that capacity materially, very materially without having to spend the same amount of capital, we may need a little bit of capital here and there, but nowhere close to what we spent in the past.

When larger customers are negotiating or looking at placing larger orders for a number of data centers that they're planning over the next couple of years, one of the factors they do look at in vendors is their ability to deliver and it's the reliability, proof points and the ability to turn things around quickly. That doesn't mean that they need things in 6 weeks from now.

They're simply very super realistic about their own ability to plan ahead and manage all the construction work and so on. So they know that their plans may change as the project progresses and then they need a partner who can react quickly and be flexible on the factory side. So that's kind of where both the capacity, the lead times and the reliability of the on-time delivery come in. So yes, it's definitely part of a competitive advantage in this game that we're playing.

And just a follow-up question on Slide 6. I mean, clearly, you're highlighting this product introduction. I think a lot of us were in Vegas and saw specifically YK-HT product, which I think is very important for you in leapfrogging the competition. Are you starting to -- are we seeing the impact of these product introductions on your orders this quarter? Or is this still on to come?

I think there's -- it's very minor in the orders that we've taken so far. So it's more about what's to come. And by the way, those launches, I did get a note from the team. So thanks for stopping by and spending time with our team there. All those new products, I mean, they are a result of the work that we do together with our customers. I alluded to it earlier this morning.

We have large engineering teams coming in from our customers and that sit with us for a week, 10 days, and so we're creating the new road map, product road maps, basically off of what they have learned by applying ours and other people's products. And so that's why we're so excited about the launches that we have because we know that these precise needs are there, and we will be able to see that in our order entry. I expect already here ramping in the quarter we're in already.

The next question goes to Joe O'Dea of Wells Fargo.

Just on the capacity expansion and the tripling of physical capacity. And is that specific to chillers or includes air handlers, just any specificity around it in kind of global versus Americas? And then really just in terms of the fixed cost impact that, that has today any quantification of a burden today and sort of how you see that improving over the next 12 months or so?

Good question. The answer is that we have had invested in capacity across the board, meaning chillers, air handling units and because of the investments in the air handling units capacity, we also made room for the CDU business that we launched into here a couple of quarters ago. The fixed cost aspects of those investments have already been in our run rate for more than a year.

And presumably, that's a tailwind kind of each quarter in terms of utilization?

It creates leverage opportunity as the volume comes in. Absolutely.

Yes. Yes. And as we continue to work on the lean work to eke out more capacity without adding fixed cost.

The next question goes to Andy Kaplowitz of Citigroup.

I think Fire & Security markets, I think you said were up like low single digits in the quarter. But as you know, a lot of those businesses are short cycle. So are you seeing an improvement in sort of more of your short-cycle markets these days, given where the global economy is and specifically the U.S. economy looking a little better?

I'd say there's no material change in the markets. I think the change that we are working on operationally is what you heard me talk about. I talked about the HVAC seller capacity time with customers and so on. That kind of work we've embarked on in the other parts of the company as well.

And then for those -- the Fire & Security businesses, we're also looking over how are we -- where are we specifically pointing the effort at what parts of the market and trying to help that team just be more clear about our priorities and making sure that we're behaving in the way and pointing the effort at the most attractive parts of the market. So like I mentioned before, when I got the portfolio question, we're regardless of what the outcome is on the portfolio, we're making sure that we improve the execution, the operational performance of all parts of Johnson Controls.

I think that's helpful. And then maybe I just want to ask the sort of capacity question in a different way. Like obviously, you're getting larger orders now to become a bigger part of the portfolio. I assume they're competitive on pricing, but what's your ability to scale these projects themselves. I mean maybe you have 50 chillers or 100 chillers in each of these orders, can you get better margin on these individual projects moving forward?

In terms of our ability to scale, there are no -- we have no major bottlenecks at this point in time, at least. And to some extent, larger orders have always been part of if we talk about data centers, but by the way, on the pharma side that I commented on in some of the prepared remarks here, too, some of those factory build-outs are also significant projects.

So that's not a new phenomenon. And the capacity build that I talked about, it isn't just physical facilities. It's also the resources around that, project engineering teams, project management teams and capabilities like that. So we have made those investments as well and are working on improving our ability to get more out of those teams. And it's the same lean principles we're applying in those teams as we're planning in the factories.

On the margins, I mean, these are of course, discussions where, obviously, their customers ask for multiple bids. But then also, there is an ongoing discussion, as you heard of based on their engineering teams, they sit with our engineering teams, and we try and come up with solutions that really offer real tangible value, cost less energy consumption, more cost savings and things like that. And as we do that work, we, of course, look at opportunities for us to also be very, very cost competitive. So there's no particular margin headwind coming out as if -- if that's the question, we don't see that at this point in time.

The next question goes to Joe Ritchie of Goldman Sachs.

So look, Joakim, you sounded obviously very happy about the record order quarter. It sounds like you're pretty sanguine on the pipeline as well. If you could maybe just characterize what the pipeline of orders looks like today versus maybe 3 to 6 months ago? And then also, as you kind of think about your data center customers, has there been any real discernible shift in like colos versus hyperscalers and where you're seeing demand growth today?

Pipeline continues to remain very healthy and healthier. We are also doing -- I should -- and it's not that things are just falling in our laps. We are working with our sales teams around the world. So in addition to the example I gave you about the double the amount of time that our HVAC sellers in 1 region are spending with customers. We are also in the process of rolling out a very practical, pragmatic pipeline management approach, which basically aims to help and teach our sales leaders and our sales -- individual sales contributors on how to more effectively plan and spend their time. And in my experience, having done that a number of times, what tends to happen is that you just get better pipeline growth. And over time, you are positioning yourself for even better order growth.

So that's on the pipeline. So -- and of course, the result of, as I alluded to in my prepared comments here, being much, much more deliberate with our teams about which parts of the market we want to go after versus maybe not as important, that has an impact as well. So as you shift your effort more to parts of the market that have healthier growth rate -- growth rates, your mix of your pipeline and order entry, of course, changes as well.

And then colos versus hyper, yes.

Yes. I mean there are incremental changes and how certain hyperscalers or colos approach how they do business and how they buy and who they partner with and so on. But there -- look, there are no real material changes in how the big players are behaving. I think as a result of our growth in the future, it started to, but more in the future will come from also from Asia Pac and Europe. And the mix there of hyperscalers versus, let's call them local players, colos is a little different than in the United States, not materially different. So I think, if anything, our data center business is going to broaden. And I think that's a good thing.

Thank you. This concludes our Q&A session. I will hand the call back over to Joakim Weidemanis for any closing comments.

Thank you, and thank you for all your questions today, and thank you for those of you who visited our booth at AHR. You certainly kept our team on their toes there. So great to have you and host you there. This quarter's results reflect the momentum that's building across Johnson Controls as our teams operate with greater clarity, discipline and consistency. And we're seeing those improvements show up in how we serve customers and in the strength of our results, as you can see.

I want to thank our 90,000 colleagues for their commitment and energy. Your focus and ownership are what gives me such confidence in our opportunities ahead. I look forward to continuing my conversations with all of our stakeholders. Thank you for joining us today.

This now concludes today's call. Thank you all for joining, and you may now disconnect your line.

Hello, everyone, and welcome to the Johnson Controls Q4 2025 Earnings Conference Call. My name is Nadia, and I will be coordinating the call today. [Operator Instructions]

I will now hand the call over to Jim Lucas, Vice President, Investor Relations, to begin. Jim, please go ahead.

Good morning, and thank you for joining our conference call to discuss Johnson Controls' Fiscal Fourth Quarter 2025 Results. Joining me on the call today are Johnson Controls' Chief Executive Officer, Joakim Weidemanis; and Marc Vandiepenbeeck, our Chief Financial Officer.

Before we begin, let me remind you that during our presentation today, we will make forward-looking statements that reflect our current views about our future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Please refer to our SEC filings for a list of these important risk factors that could cause actual results to differ from our predictions.

We will also reference certain non-GAAP measures throughout today's presentation. Reconciliations of these non-GAAP measures are contained in the schedules attached to our press release and in the appendix to this presentation, both of which can be found on the Investor Relations section of Johnson Controls' website.

I will now turn the call over to Joakim.

Thanks, Jim, and good morning, everyone. Thank you for joining us on today's call. As we close out our 140th year as a company, I want to begin by recognizing the extraordinary efforts of our 90,000 colleagues around the world. Their dedication to our customers and their commitment to our mission have been the driving force behind our progress and the results.

Since joining Johnson Controls, I made it a priority to spend time where value is created in the field with customers and our teams at our innovation centers and on the factory floors around the world. It's important to be right alongside our team as they do the work to deliver for our customers. These experiences have given me a firsthand appreciation for the passion and expertise that define our culture. Our customers and my colleagues on the front lines give me valuable insights on how we work and where we can improve processes and uncover new opportunities together. Learning about our capabilities and seeing our teams drive our company forward by problem solving to better serve our customers, has reinforced my belief in the strength of our foundation and the significant opportunities we're beginning to capture.

Before I dive into the specifics, I want to summarize where we stand today and our path forward. First, we delivered strong results this quarter and for the full year, exceeding our free cash flow target and continuing to build a record backlog. Second, our proprietary business system is taking shape as our growth engine, combining 80/20 and Lean principles with digital and AI approaches to create a more customer-centric and continuous improvement oriented organization. Third, we are updating our long-term growth algorithm to reflect improved mid-single-digit top line growth, enhanced operating leverage, double-digit adjusted EPS growth and continuing to target 100% free cash flow conversion, demonstrating that the opportunity in front of us is clear, significant and achievable.

Turning to our results. Fiscal 2025 was a year of strong execution and momentum. Sales grew 6%, segment margins expanded by 100 basis points and adjusted EPS increased 17%. Notably, we offset the dilution from the residential and light commercial divestiture in 1 year, ahead of our original expectations. Free cash flow conversion reached 102%, reflecting our disciplined execution and financial strength. Orders grew 7% for the year, and our backlog expanded 13% ending at a record $15 billion. This sustained demand highlights the value our customers place in our solutions and the strength of our portfolio. This quarter's performance reflects our disciplined execution and operational focus. While our evolving business system is still in its early stages, we're already seeing encouraging signs of progress.

Let's turn to Slide 6. Last quarter, we introduced our proprietary business system, a proven approach to building a stronger, more disciplined company. It is rooted in winning and retaining customers through differentiated products, services and exceptional experiences. It's about enabling frontline colleagues, engaging all teams and building a better Johnson Controls and being a magnet for talent. Our system is built on 3 pillars: simplify, apply 80/20 principles to focus on what matters the most. Accelerate, use lean methodologies to remove waste and accelerate execution. And scale, leverage digital and AI approaches to amplify impact across the enterprise. And it's anchored in a global cross-functional language and methodology for how we communicate and collaborate to win. The approach is practical identify barriers to growth and remove them quickly. We start narrow and go deep, get the root causes, pilot countermeasures, adjust and secure frontline buy-in before scaling broadly.

While it's still early days and business systems take time to mature in large organizations, I'm energized by our progress. More than 700 colleagues are actively engaged across several priority areas and have conducted over 50 kaizens to date, but many more to come. We have already trained 200 leaders worldwide through activation boot camps. Leadership plays a pivotal role in the progress of our business system and our opportunity to build an even stronger company that is more capable, more focused and more disciplined. A company that executes with consistency and delivers for customers where it matters most. To further strengthen our leadership capabilities and align talent with strategic priorities, we recently announced a new leader of our Americas segment, Todd Karbowski. He brings over 30 years of experience in the commercial part of our business and product management within our largest franchise, our global applied business. His industry knowledge and customer orientation will be instrumental as we accelerate growth and sharpen our customer focus in this important region.

Earlier this week, we announced to our colleagues the hire of a global leader of manufacturing, a key role accountable for performance across our factory footprint, driving improvements in safety, quality, delivery and cost, SQDC, using our business system to build competitive advantage and winning performance for our customers as well as drive overall productivity, creating more funding for reinvestments. As we continue to strengthen our talent development, it will enable us to accelerate our progress.

Last quarter, we highlighted 2 areas with clear potential, sales capacity and productivity and factory on-time delivery. Today, I want to show you how our proprietary business system is already delivering measurable progress. By working together across teams and leveraging 80/20 and Lean tools, our conventional HVAC sellers in one of our local markets increased the time they're able to spend engaging with customers by over 60% and our team manufacturing key chillers in North America improved on-time delivery to over 95%. These examples reflect our commitment to going narrow and deep, focusing on specific areas to uncover the true sources of waste and avoid surface-level fixes. This approach enables faster piloting, stronger frontline engagement and eases broader deployment later across the organization.

As is typical and continuous improvement, we see even more opportunities as we dig deeper. In the example of selling time with a customer, the team streamlined the sales process by eliminating non-value-added process steps and upgrading tools to accelerate the sales cycle. These improvements simplified workflows and led to more than a 60% increase in time spent engaging directly with customers. We're now applying AI to the overall sales process of estimation and selection to codify scale and amplify several process steps that will yield even more time with customers on top of that. We've also been focused on improving the on-time delivery in one of our key chiller plants that serve the rapidly growing data center vertical. While we have a leading position in advanced thermal solutions for data centers, historically, our on-time delivery was inconsistent and our lead times were longer than what customers demand. Leveraging 80/20 and Lean approaches, we have dramatically improved on-time delivery and are now over 95% and lead times are on the way of being cut in half.

I'm confident we can maintain this standard, which only strengthens our competitive advantage and our ability to win in this fast-growing vertical. This isn't about putting a playbook on a shelf. It's about fundamentally changing how we work. These improvements come from going narrow and deep, countermeasuring root causes and engaging the teams impacted, ensuring sustainable change and easier scaling across the enterprise. Simplify, accelerate, scale. That's how we win together.

As we move to Slide 7, you'll see how our focus on technology innovation and sustainability is powering our future growth and reinforcing our leadership in mission-critical verticals. Johnson Controls continues to strengthen its leadership in advanced thermal management. With AI-driven demand for high-density data centers, pushing cooling technology to new limits, we are well positioned across the thermal management for cooling chain as well as with our integrated offering of digital monitoring and controls. During the quarter, we successfully launched our Coolant Distribution Unit offering, a major milestone in our differentiated data cooling center strategy. CDUs are critical enablers of liquid cooling, which is rapidly becoming essential as AI chips are becoming more powerful and generating more heat.

Traditional air cooled systems are reaching physical limits, driving a transition toward liquid and hybrid cooling architectures that improve thermal management performance in addition to energy and water efficiency. This launch, combined with our award-winning [indiscernible] magnetic bearing chillers, absorption chillers and now our strategic investment in Accelsius positions Johnson Controls to deliver a comprehensive and integrated portfolio that addresses the full thermal management spectrum from chip to [ Ambient ], covering the entire heat capture removal and regen journey.

We are receiving strong early interest from hyperscale customers who are prioritizing energy efficiency and sustainability, core pillars of our innovation strategy. Our data center solutions are aligned with global trends in AI and increasing compute density, where thermal performance is now a strategic differentiator. With our cooling technologies reducing non-IT energy consumption by more than 50% in most North American hubs, we are delivering substantial energy savings. This reinforces our role as a strategic partner to the world's leading data center professionals at a time when the vertical is poised for significant growth over the next decade.

In Europe, we recently made a major announcement that underscores our leadership in decarbonization. Johnson Controls will provide green heat to the city of Zurich through a landmark waste incineration project. While we have delivered similar solutions across the region, this deployment more than doubles the heat capacity of our previous largest project and ranks amongst the largest heat pump installations globally to utilize the 0 DWP refrigerant ammonia. Our advanced heat pump technology will recover energy from flue gases and feed it into the district heating network, supplying heat to approximately 15,000 homes, about 15% of the city's whole district heating demand. This project is another powerful example of how Johnson Controls is enabling critical industries, institutions and now cities to transition to sustainable heating solutions while maintaining reliability and performance, and it highlights the tremendous opportunity to harness excess heat, reduce operating costs and accelerate decarbonization.

In 2024 alone, our heat pumps enable customers to cut energy costs by 50% and emissions by 60%. The partnership we have with Zurich and other cities as well as with hundreds of others from global manufacturers and pharmaceuticals, chemicals, food and beverage and more solidifies our leadership position in the European energy and heat transition, where we can capture our share of these opportunities submit regulatory tailwinds and accelerating customer demand. These initiatives reinforce our leadership in thermal management, decarbonization, digital solutions and mission-critical environments, supported by our commercially advantaged embedded service capabilities and relationships. The strength of our service model lies in the combination of customer intimacy, technical depth and global reach. With direct service operations across the globe, Johnson Controls delivers consistent high-quality support to customers over the life cycle in mission-critical verticals such as data centers, advanced manufacturing, life science manufacturing and large hospital and university research centers.

Our ability to deliver consistent service across the global footprint of hyperscalers is a unique differentiator. As data centers multiply, our service model is helping maintain the pace, positioned to deliver reliability wherever our customers build. Our view is that customers will always demand high touch, high availability service, and that is an unparalleled differentiator for Johnson Controls. Now as we look ahead, our guidance for fiscal 2026 builds directly on the momentum we've established this year. I already previewed our updated long-term growth algorithm, and Marc will discuss the details shortly. But I want to highlight how excited we are about the opportunity in front of us.

In short, our strategy to leverage our strengths, particularly in HVAC controls and digital to deliver differentiated value and long-term growth underpins our success. Our ability to meet global demand for mission-critical systems, whether in data centers or decarbonization projects is backed by an exceptional service organization and positions us to capture significant opportunities ahead.

With that, I will now turn it over to Marc.

Thanks, Joakim, and good morning, everyone. We closed fiscal 2025 on a strong note, delivering another quarter of solid financial performance. This consistent execution throughout the year has strengthened our foundation and position us well as we enter the new fiscal year. Our ongoing focus on stronger operational discipline, customer satisfaction and continuous improvement is driving results, and we remain committed to generating sustainable long-term value for our shareholders.

Now let's take a closer look at fourth quarter results on Slide 8. In the quarter, organic revenue grew 4% and segment margin expanded 20 basis points to 18.8%, driven by our ongoing focus on cost discipline, favorable mix and the tangible benefit of our productivity programs. Adjusted EPS of $1.26 increased 14% year-over-year and exceeded the high end of our guidance range. On the balance sheet, we ended the quarter with approximately $400 million in available cash. The net debt remained within our long-term target range of 2 to 2.5x declining to 2.4x compared to the prior year. For the year, adjusted free cash flow improved by approximately $700 million to $2.5 billion. Our strong earnings performance and rigorous approach to working capital management enabled us to achieve a 102% free cash flow conversion for the year. This reinforces the strength of our execution and the quality of our earnings.

Let's now discuss our segment results in more detail on Slide 9 and 10. We are seeing strong customer engagement and healthy demand for our solution across key verticals. Orders grew 6% in the quarter, highlighted by 9% growth in the Americas, supported by strength in data centers. In EMEA, orders increased 3% despite a challenging comparison to 14% growth in the prior year, with double-digit growth in service. In APAC, although saw a small decline of 1% as decreasing systems more than offset mid-single-digit growth in service. At the enterprise level, organic sales growth was led by mid-single-digit growth in service. In the Americas, sales were up 3% organically on a tough compare, supported by continued strength in both HVAC and controls. EMEA delivered 9% organic growth with strong double-digit growth in system and high single-digit growth in service. In APAC, sales declined 3% organically, due primarily to lower volumes in China. These results reflect strong execution, particularly in the Americas and EMEA against a backdrop of challenging year-on-year comparisons.

Margin performance improved steadily throughout the year as we capture greater operating leverage and continue to optimize our cost structure. Our resilient operating model enabled us to align pricing, productivity and mix to support consistent profitability even as market conditions evolve. This translated into notable fourth quarter performance. By region, adjusted segment EBITDA margins in the Americas improved 50 basis points to almost 20%, supported by productivity gains and operational efficiency. In EMEA, margin expanded by 30 basis points to 15.6%, reflecting positive operating leverage from top line growth. In APAC, margins declined 190 basis points to 17.8% as lower volumes in China created pressure on factory absorption.

Our backlog remains at a record level, growing 13% to $15 billion. System backlog grew 14% and service backlog grew 9%. With this momentum in mind, let's discuss our long-term outlook and capital allocation priorities on Slide 11 and 12. We are updating our long-term growth algorithm to incorporate the principles of our value creation framework and the momentum we have built this year. As we look ahead, we expect to deliver mid-single-digit organic revenue growth operating leverage of 30% or better double-digit adjusted EPS growth and approximately 100% free cash flow conversion. This algorithm is supported by 3 key factors: first, the sustained demand for decarbonization and mission-critical solutions. Second, the continued evolution of our proprietary business system to drive operational efficiency. And third, the ongoing technological innovation through new product launch and a disciplined approach to portfolio management by channeling resources into our most attractive growth areas.

On capital allocation, our priorities remain unchanged. We are investing in organic growth. We are focusing on returning capital to shareholders through dividend and share repurchases. And finally, we are pursuing selective acquisitions to strengthen our portfolio. Our strong balance sheet and consistent cash flow generation gives us ample flexibility to execute on these priorities with confidence.

Let's now discuss our fiscal first quarter and full year guidance on Slide 13. Momentum remains strong as we begin the first quarter, supported by operational efficiencies and a record backlog. We anticipate organic sales growth of approximately 3%, operating leverage of approximately 55% and adjusted EPS of approximately $0.83. For the full year, we are confident in our ability to deliver our long-term growth and profitability commitments. We expect organic sales growth of mid-single digits and adjusted EPS of approximately $4.55 per share, which is over 20% growth. We anticipate operating leverage to be approximately 50%, which is above our long-term algorithm as our efforts to remove stranded costs are recognized faster in the new fiscal year. Our guidance reflects continued operational discipline, strong customer demand and the visibility provided by our record backlog. Our ability to navigate evolving market conditions reflect the strength of our enterprise capabilities and the resilience of our operating model. We expect approximately 100% free cash flow conversion for the year, consistent with our long-term financial framework. This reflects our focus on earnings quality, working capital discipline and efficient capital deployment, all of which support our ability to invest in growth while returning value to shareholders.

We have built a strong foundation for the years ahead. As we enter fiscal 2026, our focus remains on advancing sustainable growth, expanding margins and creating lasting value for our shareholders. We look forward to keeping you updated on our journey. Operator, we are now ready for questions.

[Operator Instructions] The first question goes to Amit Mehrotra of UBS.

Marc, the 50% operating leverage target for 2026. Can you just walk that to segment EBITDA margins. There's the moving parts on corporate expense amortization, but it looks like it implies about 90 basis points of expansion from the 17.1%. Correct me if I'm wrong, but if you can just kind of double-click on that, that would be helpful.

Yes, sure. Thanks, Amit. Yes, you're pretty close on margin. I would say by segment, EMEA and APAC will be the main driver of margin improvement this year. Not that Americas will not contribute, but if you look at that incremental, they've shown a decent improvement this year and the level of ramp year-on-year will be probably a little bit more muted than the other segment. But overall, we feel very comfortable that the operating leverage will be in the 50s or above.

And then Joakim, just on the opportunity going forward. I mean there's a lot of stuff here. There's a cost opportunity. There's maybe a portfolio opportunity. You talked about M&A. Maybe rank those. It just seems like there's maybe a huge G&A opportunity. But then also, there's a lot of questions about maybe slimming down the portfolio further. But can you -- obviously, you're 237 days into the job now. So maybe just offer a little bit more color on prioritizing all those buckets of opportunity.

Thanks for keeping count on a number of days I've been with the company. Well, let's start with where you left off with Marc. So the operating leverage. There's a reason there's a plus behind the guidance and how we're thinking about operating leverage. And that really comes back to what we're doing with the business system, where we are going after driving productivity in our field operations and our factory footprint. And then field operations and service.

And then in SG&A, we see leverage opportunities, i.e., getting more out of the SG&A investment that we have more the S of the SG&A with the help of the business system, and I gave you an example here in the prepared remarks. So I'm very excited about the continued progress that we're going to be able to make there and hence, the plus behind the leverage and the guidance. And then as we've talked about before, we have and we're working away at reducing the G&A cost and our corporate costs. So we continue to do that. There's no change in our ambition level there at all. And then on the M&A side, we continue to work away at the portfolio that we have, together with the Board. And we have evolved a little bit more clarity on our future strategies here. But that -- as I said last time, that's a multi-quarter effort together with the Board. And that effort is really guided by creating shareholder value. That's the #1 principle, right?

And then in terms of acquisitions, we have started to apply some of the discipline that I have learned in prior roles prior to joining Johnson Controls. So I can tell you that our acquisition pipeline is vibrant, and we are engaged in multiple situations, and we are being very, very disciplined about doing the proper strategy work, the proper target work and not falling in love with anything in particular and being just very, very disciplined about capital allocation.

The next question goes to Nigel Coe of Wolfe Research.

I just want to go back to the 50% incremental margin -- sorry, 50% plus in the margin for FY '26. And if I take 30% of your baseline operating leverage, it suggests that there's about $250 million of benefits over and above 30%. Number one, is my math okay on that? And maybe just talk about that $250 million. You've suggested delayering and a number of other initiatives. Is there anything in there for process improvements, et cetera? Just want to get a bit more details on that. And should we think about this as confined to FY '26? So could there be benefits beyond this year?

Marc, I can help you on the exact math here. I'm sure we'll be talking about that in follow-up calls as well. But -- we are just getting started with our business system. And so some of the examples that I shared with you today, my objective was to share an SG&A example and an above gross margin example. And we are just getting started. And as you saw from the examples I gave, the opportunities are significant here. So that operating leverage is going to continue to improve over time.

And the main reason we're actually shifting the guidance to include that and have a strong element of that is it's really reflecting what we're trying to do here. We're trying to build a higher-performing company that's more focused on profitable growth. And -- but both driving top line by pointing at higher growth opportunities, verticals, applications, but also doing the solid productivity work that I talked a little bit about as well as the responsible cost reductions that we've discussed in other quarters.

Then Nigel, directionally, your numbers are -- they are there about, yes.

The next question, go to Steve Tusa of JPMorgan.

So just on this -- just on amort coming down this year, can you just talk about the drivers? And is that related to this $400 million restructuring charge you guys took in the quarter, also kind of like what -- if it was in the amort, what was kind of like in that charge? What does that relate to?

Yes. It's not around the restructuring. It's more among the impairments we took in the quarter, Steve. It reflects the different portfolio actions also we've taken over the year, obviously, but there's further reduction possible. If we do act on some of the divestitures we've been contemplating for a while on the fringe of the portfolio, the vast majority came from those onetime actions you saw in the quarter.

Okay. Got it. So that decline in amort is sustainable is what you're saying? And is that part of like your stranded cost takeout? Or is that something outside?

No, completely outside. The stranded cost [indiscernible] is incremental to that.

Okay. And then just one last one on orders. I know you had a really tough comp in the first quarter of last year, but you beat this quarter. Is there -- what would you expect for the first quarter? Will you be up despite the tough comp? Or will that be down on the tough comp in 1Q? Order-wise?

Yes. As you know, we generally don't guide around orders. I can tell you that the health of our pipeline continues to improve. And we see opportunity to continuously see growth on our order this quarter and the oncoming quarter as well.

Well, so you can grow off that comp in orders?

That's right.

With your pipeline?

Correct.

Yes. And maybe to just to reinforce that. We're -- as part of building a faster-growing, more profitable company here. It's not just about the productivity work and the business system work that I talked about. It's also about pointing our efforts from verticals, applications and so on at parts of the market that are growing at a faster rate.

The next question goes to Jeff Sprague of Vertical Research.

Maybe just a couple of modeling nits for me, too. Interesting on the amortization, obviously, lifting the earnings, but I was maybe actually a little bit more surprised that with lower work. You've got this comfort level on 100% cash conversion going forward? And I guess that cash flows from everything you're talking about from productivity. But maybe you could just give us a little bit more color on maybe what the target-rich environment might be on free cash flow and how that might unfold over the next year or 2?

Yes. So you're right. Amort is not -- the reduction in the amort is not going to help, but we see opportunities to continue to outperform on our working capital management overall, but free cash flow conversion, particularly. This year, fiscal year '25, we've seen strong improvement in our receivable management, just the way we build a customer when we do and how we collect and the quality of that process. There's obviously continuous improvement we can bring there. There's a lot more we can do there. But I don't think moving forward, it will be the core pocket of opportunities where we think we are going to drive a lot of value moving forward free cash flow conversion comes a lot from our inventory management and the amount of inventory we need to continue to grow the company. And that's where the business system will bring tremendous clarity and visibility into where we can continuously improve and reduce that reliance and therefore, improve our cash flow conversion.

Yes, on that -- this hasn't been a focus in the past. So that's an opportunity for us here.

Yes. And then Joakim, could you just address a little bit more color, Marc alluded to the upside in EMEA and APAC margins for 2026. Are there some -- I get the comps easier in Europe especially. But are there some clearly targeted actions that support that? Or are you counting on sort of stronger revenue recovery in those businesses? Maybe just a little bit more color on what's going on there.

Yes. I think the short answer is we're not counting on one single big thing. So it's a combination of things that we have largely proof of already that we're able to execute on. So it includes some elements of our pricing discipline that has become much better here over the recent couple of quarters. But it also includes a better discipline around where we point our efforts. But then also, again, the -- some of the examples that I gave here around how we're deploying the business system. That work is ongoing and in EMEA and Asia as well. So we see opportunities on multiple parts of the P&L here.

The next question goes to Chris Snyder of Morgan Stanley.

I wanted to ask about the content opportunity into data center. So maybe moving aside the CDU that you guys announced. If we look at the legacy business, just kind of wondering how content changes on the move from air cooling to liquid cooling. I imagine the chiller opportunity is still as strong as ever. Could we lose some content in air handling? Just trying to figure out how that nets out as we look towards the future.

I think the simple answer to that is because newer chips require more power and therefore, generate more heat. So in general, more cooling is needed. So the scope of our offering and the performance required from the chillers only increases over time here. And the -- you heard me talk in the past about how -- when I first joined the company, how I thought our technological capabilities, in particular, in HVAC are impressive. And some of the needs here of the data center market here going forward for higher precision, higher capacity cooling actually plays to our strengths when it comes to the chillers.

But if you think about the different offering we have between airside solution in Chile, we see continued demand for both. And regardless of the -- for the chip themselves are core, you have solution liquid to air and liquid to liquid and liquid to air continues to see very strong momentum and match as well our offering. And obviously, we have a very strong developing solution liquid.

I really appreciate that. I wanted to then follow up on some of the investments that the company is making in the aftermarket. It seems like the investments in technology are both lowering the cost to serve the aftermarket for JCI while also providing efficiency savings to the customer. So I guess my question is, is this more of a driver of share gain through the value add you're bringing to the customer? Or is it more of an opportunity to improve the incremental margin profile of services by lowering that cost to serve by using more technology and less labor, I would presume?

It's both. It's really both. You could say it's share gain because we're able to, with the technology investments serve customers at a price point, which allows them to -- so we become more competitive in certain mission-critical applications so that they will actually give us that business versus having to maintain some of their own service staffs. But -- and then it's also a share gain against various third parties that service our equipment as well as every other OEM in this industry. But as we deploy the technologies, we also reduced our cost to serve. So it's both a share gain and margin improvement of right here.

And I'd say we're in the early innings of that. In general, as an industry, when it comes to deploying more sophisticated technology-based approaches and life cycle services. So that's an exciting area for us, both from a growth and a margin improvement outcomes. So we'll be talking more about that over the next couple of quarters.

The next question goes to Nicole DeBlase of Deutsche Bank.

Yes, maybe just starting with the nice acceleration you guys saw in order growth this quarter. Can you talk a little bit more about maybe what you saw from a vertical perspective within Applied in particular? And any color on the magnitude of data center order growth that you'd be willing to give?

Yes. So we typically don't comment on order numbers by vertical. But I can talk -- I can say that in general, we have a shorter list of vertical that's driving outsized growth of our backlog. Backlog is up 13%. We have an ingoing backlog of almost $15 billion going into this year, record backlog. We've never had that kind of backlog in this company, which is phenomenal. So data centers, as you mentioned, is a vertical we're very excited about. Our pipelines remain very healthy. Those orders are variable. We get couple of very big ones in 1 quarter and -- but maybe not every quarter, but overall, over a couple of quarters, you can see the results here. So 13% up in backlog.

So data set is very healthy. And then you have verticals such as pharmaceutical or biologics rather, manufacturing, where new campuses are being built since the pharmaceutical campus is of the past cannot manufacture the drugs of the future here that are biologics based. So that's a vertical that's very helpful for us. And then in general, the large campuses where a significant amount of research is conducted. So think both universities, general research institutions, but also hospitals that, of course, are places of significant research. Those kinds of verticals are very, very healthy for us. And then finally, what we typically would call advanced manufacturing. So semicon and other types of manufacturing where very precise indoor climates need to be created because they're mission-critical for the manufacturing. So those are general the areas where we see the healthiest growth.

Okay. Got it. That makes sense. And then just maybe a little pick your one around the quarterly cadence of organic growth. I think you guys have embedded a little bit of decel in the first quarter. If you could maybe speak what's driving that? And then the way you see organic growth kind of progressing throughout the year to get back to mid-singles.

Yes. It's really a compare issue, Nicole. So think of the first half being lower than the second half. And like I said, it's mostly a compares issue. The backlog that we have gives us good visibility to what we can do in the individual quarters. And then, of course, we -- our service business, there's such a heavy recurring element there. So we have pretty good predictability there as well. And so we're excited about the outlook for the year here, and we'll keep you updated as we make progress here. But the tale of compares first half and second half.

The next question goes to Scott Davis of Melius Research.

So look, you're doing a lot of stuff here. 80/20, Lean, you've changed a bunch of leaders and stuff, and it's a lot of change. And none of that works if there is an accountability to the right KPIs, have you changed compensation structures meaningfully down into the organization, you'll come or you need to based on what you've seen so far?

I would say in terms of accountability, first, you have to define what you're going to measure to hold people accountable for. So we're in the process of establishing and rolling out what we call our enterprise KPIs. There are 9 of them, which we could probably come back and talk about at some other point in time. And how we do that and drive them through the organization is as important as the compensation part to drive a higher level of accountability for holistic results. And as we're deploying that throughout the organization, we are looking at the different compensation approaches and models that we have. And I would largely say there's some tweaks here and there, Scott, but not fundamentally any big changes that are necessary.

Okay. And Joakim, have you pretty much unwound any remaining matrix within the management within the structure of the organization. I mean I haven't heard you talk about running a certain number of P&Ls, but maybe you can address that and just talk about how you change that part of the organization.

So that's work in progress, Scott, together with the team, and we made a couple of changes like you pointed out here. So trying to put in place a championship team that can help us build a champion of a company here. And as we staff up here, of course, we have more capabilities, higher caliber in our senior miles teams, we are reflecting and looking at structures and so on. We made a couple of tweaks since I joined, but no major moves, not at this point.

The next question goes to Joe Ritchie of Goldman Sachs.

So Joakim, I want to focus on the strategic investment in Accelsius. And ultimately, with the launch of your CDU, just can you maybe just like double-click on like how complementary the investment is like whether you'll be going to market together. I just want to try to understand what the opportunity is as I think about this over the course of the next 12 to 24 months.

Yes. Yes, good question. So we continue to invest beyond the chillers and the various HVAC solutions that we have, right? So -- and the way we think about it is what's the end-to-end thermal solution that is needed for data centers. And the CDU investment or launch rather, is to capture a market that's significant and there right now. And that product was really a result of very close collaboration with a number of our existing hyperscaler customers. And it's actually a platform with several different products available in all the regions of the world already. So we're super excited about that.

Accelsius is about -- really about looking ahead. And this is a 2-phase cold plate technology platform. And so here, we're looking ahead, what are the chip launches that NVIDIA and others will be making over the next 4 to 5 years. And therefore, what kind of cooling solutions end-to-end thermal solutions will be needed. And so Accelsius is about anticipating what will be needed in 4 to 5 years from now. But of course, applications for this technology are available already today. And we are going to be working on both commercial collaboration as well as technology and product integration, one plus one equals more than 2 here over time. So we're excited about both. One is short term, drive revenue now. And the second one is more strategic, anticipating where the puck is going and what will be needed over the next 4 to 5 years.

Very helpful. And then just a follow-on there. Just around the portfolio, you've mentioned a little bit on the fringes on the divestitures. Just how does your thinking evolve just in terms of addition by subtraction across the portfolio?

Yes. So there's no change. We had mentioned already well before I joined, actually, that about 10% of the portfolio, we're looking at alternatives for and better ownerships. And the driver here is create shareholder value. And then there are some other parts of the portfolio that I mentioned before that we've been looking into strategically how we're positioned, what one could do with the businesses operationally, how much do we think we can improve them and this is a dialogue we're having with the Board over the next couple of quarters. We'll draw some conclusions and decisions. And they will all be guided by driving shareholder value. That is goal number one, and we'll keep you posted.

The next question go to Julian Mitchell of Barclays.

Maybe I just wanted to circle back to the discussions on commercial HVAC because I guess in the Americas, for example, I think the last few quarters, you've grown at a sort of high single-digit rate. In Applied, I think some of your competitors are growing at a much faster pace in revenues right now. And I suppose, when I look at your guidance for '26, it doesn't suggest an acceleration in the applied business. I just wondered if that was correct on '26 and how we should think about that applied HVAC growth in revenue vis-a-vis the market growth rate?

I have read those scripts as well. We are not losing share on applied and the part of Applied that we are playing in. I'm very confident of that. And so -- and I also -- I know what we have in the backlog with coming in, in orders and in the pipeline. So for the verticals where we are pointing our company, we are -- we can always do better, but we're doing pretty well.

Understood. And then just my follow-up, I suppose, would be just circling back to clarify on that incremental margin or operating leverage, sorry, guide for fiscal '26. Is the right way to think about it, that you've got a sort of traditional segment EBITA operating leverage of sort of high 20s percent, let's say, similar to that 30% long-term algorithm? And then the augmentation to get to 50% for the year is the amortization reduction largely and some stranded cost takeout. Is that the sort of framework for margin expansion this year ahead?

No, I would say the traditional operating leverage you'll get out of the segment is solidly in the [ 30s ], excluding some of the benefit from amortization. And then the effect of our restructuring and transformation will come on that number, and that's how we think we're going to get well beyond that 30-plus percent algorithm we shared. So for '26, more than 30. And then over time, obviously, this will naturally go back to a 30-plus kind of average as you go beyond '27.

The next question goes to Joe O'Dea of Wells Fargo.

Can you unpack the mid-single digit for fiscal '26 a little bit? Talk about the price, if that price is already in place. Any color on kind of volume by regions, HVAC versus Fire & Security. Just give us a little bit of a sense of how it all comes together. And sort of what is already there with respect to price and kind of backlog and what you would still need to go get to achieve it?

Yes. So I'll start, and then Marc will fill in with some additional detail. Our backlog grew by 13%. We have a record backlog going into our fiscal year that we're in right now, $15 billion. Of course, not all of that is shippable in this year, but the vast majority is on top of that, we have a very significant large part of our service business that is not in the backlog is recurring. So we actually have pretty good predictability for the year already.

And as I alluded to here, our growth guidance here is not counting on anything that we haven't been proven to be able to execute on already such as price, but also in terms of what growth we're able to drive in the different regions for the different businesses that we are in. So I'd say that's sort of the headline here, and that's why we have such great confidence in the guide here.

And then, Marc, I'm still so new, so I don't know exactly how -- what detail or guide we provide here to the colleagues on the call.

Joe, overall, if you think first regionally, I would say across the board, everybody is going to be within that mid-single digit with EMEA might be just slightly above the average, but Americas and APAC just at the enterprise level. So each segment think about it overall, wherever the company guide overall lands. And then by domain, yes, our traditional applied and HVAC business will grow probably a little faster than the mid-single digits, supported by the strength in some of the core verticals we talked about, including data center. And then Fire & Security will be probably on the lower end of that enterprise guide and probably bring some contribution, obviously, to growth. But not as much as the domain that are highly supported by those high gross verticals.

That's helpful color. And then on the restructuring side of things and coming back to the $500 million over a multiyear period of time. Can you just update us on what you achieved in 2025, what's baked into the '26 guide with respect to that $500 million?

Yes. So if you look at that $500 million benefit, and we had mentioned when we launched the program, kind of 2- to 3-year program, $400 million on restructuring expenses, we probably spent about $200 million in fiscal year '25, a little bit ahead of where we anticipated when we started the program. But the run rate benefit of that $200 million is reflected both in our guide here for '26, but also in the upside of results we saw in '25.

As you know, we came into the year with expecting segment margin up 50 plus, and we then move that to 90, and now we've achieved up 100. So you can see that benefit probably close to the $350 million to $450 million run rate as we exceed '25 and printed into our guide for '26. As we look at further opportunity that the business system will provide that are [indiscernible] focus on reducing our footprint, there may be some incremental restructuring that's going to be needed above and beyond the original program, but I don't think we're there yet. And as we look at opportunity, obviously, we expect the return on any incremental restructuring beyond that program we've announced to actually translate into the operating leverage kind of profile we laid out as part of our new algorithm.

The next question goes to Andrew Obin of Bank of America.

Yes, just to dig in a little bit more on the data center market. Generally, you guys, I believe you invented the [indiscernible] and chiller A lot of your competitors are adding capacity to go after this market. Do you think over the next 3 years, given your capacity additions, given sort of the efforts to improve the throughput on time delivery, do you think you can keep your market share? Or do you think it's just naturally as incremental capacity comes in from other players, your natural market share donor just given what everybody else is doing?

That's a great question, Andrew. We are going to take share. We made a significant investment in capacity before I got here. But now with the example that I gave you, leveraging our business system, where we had one of our high sellers and data centers was not running at a very variable on-time delivery and to long lead times. So with the focused work that we've done here over the last couple of months, we brought on-time delivery up to 95%, and we're on track to cut the lead time in half. And that lead time will be market leading, and we know that already because we've taken orders as a result of having capacity earlier and faster than some others in some cases. And of course, you shouldn't generalize all the time, right?

But our goal is to build a capability here and innovation capability to stay on the forefront of what's needed by the data centers, not just on the chillers, but as we talked about here, the end-to-end thermal solution or the cold chain, including CDUs and anticipating what will be needed in the future, Accelsius and other investments and then to be -- and have a manufacturing position that is very agile and fast with market-leading lead times and then augment that finally with our proprietary and differentiated 40-plus thousand people in the field around the world. And because field service, life cycle services is such an important part for the -- in the data center market because downtime or unexpected downtime is just so incredibly more valuable to avoid, if you can, in data centers than in most other verticals. So we are definitely building -- continuing to build off of the capabilities that we already have, but strengthen those to make sure that we stay on the forefront here. We are not going to donate market share.

This concludes our Q&A session. I will hand the call back to Joakim Weidemanis for any closing comments.

Thank you. We have an exciting future ahead of us here at Johnson Controls, and the important work we have underway will position us to capitalize on compelling opportunities ahead, not just in data centers, as I was just commenting on, but more broadly. With a culture focused on customers and center around our proprietary business system, I'm confident we'll continue winning with our customers and delivering value to our shareholders.

I'd like to take another moment to thank our 90,000 colleagues around the world. You are the foundation of our company, and I'm energized by the prospect of what the future has in store for us. I look forward to continuing my conversations with all of our stakeholders. Thank you all for joining today and see you on the follow-up call.

Thank you. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.