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

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 FNS 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 cool plate company that we're not 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 $4 million of expense to yield to $7 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 air? 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. So relationship with Armada is we are really the infrastructure provider of those containerized modular hedge compute sovereign AI pads. 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.