JCI - NYSE

Hello, everyone, and welcome to the Johnson Controls Q4 2025 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 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 in 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 with 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 Grabowski. 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 in 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 serves 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 or 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 YVAM 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

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 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, orders saw a small decline of 1% as decrease in system 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. This result reflects 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 evolved. 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 acquisition 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 the segment EBITDA margins? There's some 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 our 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.

Amit, thanks for keeping count on the 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 in 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 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 incremental margin for FY '26. And if I take 30% as your baseline operating leverage, it suggests there's about $250 million of benefits over and above that 30%. Number one, is my math okay on that? And maybe just talk about that $250 million, and you 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? Or could there be benefits beyond this year?

Marc 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.

Nigel, directionally, your numbers are there or thereabout, yes.

The next question goes to Steve Tusa of JPMorgan.

Hello?

Yes, can you hear us?

So just on this -- yes, I can hear you now. Just this 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 wasn't the amort, what was -- what's kind of like in that charge? What does that relate to?

Yes. It's not around the restructuring. It's more on 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 divestiture 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 takeout is incremental today.

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 upcoming quarter as well.

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

That's right.

With your pipeline?

Correct.

Yes. And maybe 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 amort, 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 -- reduction in 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 the customer when we do and how we collect and the quality of that process. There's obviously continuous improvement we can bring there, and 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're going to drive a lot of value moving forward from a 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. That just hasn't been a focus in the past, Jeff. That's an opportunity for us.

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 -- and 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 a 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 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? I'm 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 and chiller, we see continued demand for both. And regardless of the -- how the chip themselves are cooled, you have solution liquid to air and liquid to liquid, and liquid to air continues to see very strong momentum and matches well our offering. And obviously, we have a very strong developing solution on liquid to 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 staff. But -- and then it's also share gain against various third parties that service our equipment as well as every other OEM in this industry. But as we deploy the technology, we also reduce our cost to serve. So it's both a share gain and a margin improvement effort 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 outcome. 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 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 a couple of very big ones in one 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 center is very healthy. And then you have verticals such as pharmaceutical -- or biologics, rather, manufacturing where new campuses are being built since the pharmaceutical campuses of the past cannot manufacture the drugs of the future here that are biologics based. So that's a vertical that's very healthy for us. And then in general, large campuses where a significant amount of research is conducted. So I 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 generally the areas where we see the healthiest growth.

Okay. Got it. That makes sense. And then just maybe a little nitpickier 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 to 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 compares 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 it's a 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 isn't accountability and -- to the right KPIs. Have you changed compensation structures meaningfully down into the organization, Joakim? Or do 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 are 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 changed 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 mods 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.

Joakim, so 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 a 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, 1 plus 1 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 has your thinking evolved 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 to create shareholder value. And then there are some other parts of the portfolio that I've 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. And over the next couple of quarters, we'll draw some conclusions and decisions. And they will all be guided by driving shareholder value is goal #1, and we'll keep you posted.

The next question goes 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, what's 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 organic 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 the -- 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 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 or 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 of 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 vertical 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-growth 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 moved that to 90% and now have achieved up 100%. So you can see that benefit probably close to the $350 million to $450 million run rate, as we exit '25 and printed into our guide for '26. As we look at further opportunity that the business system will provide that our Monaco 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 are 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 mag-bearing 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? You're a 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 variable on-time delivery and too long lead times. So with the focus 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 -- an 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, like 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 augmented 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 -- of -- 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.

Thank you. 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 centered 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 calls.