Johnson Controls International plc (JCI) Earnings Call Transcript & Summary

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?