Hello, everyone, and welcome to the Johnson Controls Q2 2026 Earnings Conference Call. My name is Ryan, and I'll be coordinating the call today. If you would like to ask a question at the end of the presentation, please use the following method based on how you are joining us today. If you are attending via the webinar, please click the raise hand icon at the bottom of your screen to be added to the question queue. If you are dialing in by phone, please press star followed by five on your telephone keypad. I will now hand the call over to Mike Gates, Senior Director of Investor Relations, to begin. Mike, please go ahead.

Good morning, and thank you for joining our conference call to discuss Johnson Control's fiscal second quarter 2026 results. Joining me on the call today are Johnson Control's Chief Executive Officer, Joachim Winamenez, and Mark Van Diepenbeek, 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 expectation 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-gap measures throughout today's presentation. Reconciliations of these non-gap 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 Control's website. I will now turn the

call over to Joachim. Thanks, Mike, and good morning, everyone. Thank you for joining us on today's call. Before I begin, I want to acknowledge our more than 2,500 colleagues in the Middle East. Against the backdrop of ongoing conflict and an increasingly complex geopolitical environment, they continue to show commitment to our customers and to one another. Our thoughts are with them and their families, and we remain focused on their safety and well-being. Let's begin with slide four. We entered the year with strong momentum, and this quarter demonstrates continued progress. Demand for our products, solutions, and services remains strong, led by data centers where we're holding a leading position. In these environments, customers need high-performance cooling, delivering precise operating conditions while requiring better energy efficiency. Meeting those requirements depends on how well we execute across the business. While early in the journey, our proprietary business system is beginning to strengthen how we lead and execute throughout parts of the organization. I continue to be encouraged as leaders spend more time focusing on customers and as teams begin to adopt more common language and approach to problem-solving together at Gemba. Against that backdrop, yesterday we announced the release of our second AI Factory Reference Design Guide, focused on air-cooled chiller architectures and providing customers with globally repeatable blueprints for cooling gigawatt-scale AI factories. This builds on our water-cooled guide released earlier this year. It's the next step in a comprehensive set of global design guides mapping the full data center thermal chain, providing clear design parameters to enable high-performance, efficient operation as customers plan and scale AI with greater clarity. Turning to the results. Orders increased 30% this quarter, building on the nearly 40% growth we delivered last quarter. That consistency reflects sustained customer demand in the markets where our technology-based innovation and strong field footprint differentiates us. And with our pipeline remaining strong, it gives us confidence as we move forward. Revenue grew 6%. Adjusted EBIT margin expanded 310 basis points to 15.5%. And adjusted EPS was up 45% and exceeded our guide. Backlog grew 26% to a record $20 billion, providing an improved visibility and confidence in the trajectory of the business. this quarter reinforces our ability to convert demand strength into consistent growth margin expansion and earnings performance given our strong start in the first half and the visibility we have across the business we are raising our full year guidance mark will walk through the details later in the call before that i want to step back and talk about why we're seeing this consistency. Please turn to slide 5. The breakthroughs our customers are pursuing are advancing society. Take, for example, biologics, semiconductor, and advanced battery manufacturing and data centers, where the need for indoor operating conditions within tight tolerances is driving greater reliance on high-capacity, high-precision, application-specific thermal management systems at the same time these industries are much more energy intense than their previous generation biologics are seven times as energy intense as traditional pharma manufacturing and in light of material energy cost increases energy efficient solutions are essential let's take for example our high performance york chillers to simplify this is about customers getting rapid high-capacity cooling precisely when it's needed, enabling mission-critical operating conditions that deliver their targeted outcomes. As you can see on slide 5, our differentiation operates both at the subsystem level and at the overall system level. Our York chillers leverage five core subsystems enhanced by our Metisys proprietary intelligent controls and further strengthened by our OpenBlue proprietary digital AI capabilities. Because we own the underlying technology platforms, as well as design, develop, and manufacture these subsystems, we're positioned to innovate faster and deliver application-specific, higher performance with structural cost advantages. That capability has been built over decades and includes more than 1,000 patents, each focused on higher performance, reliability, and energy efficiency for our customers. With that context, let me briefly walk through the five subsystems in our high-performance York Chillers, because this is where the differentiation really comes to life. And this is exactly what many of you will see in action during our upcoming in-person investor visit, starting at JADEC, Art Advanced Development Engineering Center in Pennsylvania. Let me start with the aerodynamic innovation centered on our compressor design. We hold over 270 patents specifically related to the compressor technology. Simply put, the compressor is the heart of the engine of the chiller. It does the heavy lifting and it's one of the biggest drivers of performance and efficiency. We design our compressors specifically for applications that require high capacity, precision, and reliability, like data centers, advanced manufacturing, and large healthcare facilities. What differentiates us is ownership. While much of the industry relies on third-party compressor platforms, we design and manufacture our own application-specific compressor architectures. That gives us greater control over speed of innovation and the ability to optimize performance for our target applications. Next is power electronics, our variable speed drives, or VSDs, where we hold over 220 patents. Innovative VSDs allow the chiller to precisely adjust output in real time, rather than running at a fixed speed. That precision helps customers achieve and sustain tight operating tolerances while reducing energy consumption under real-world operating conditions. The third subsystem is oil-free compression, or magnetic bearings, where we hold over 65 patents. By eliminating physical contact inside the compressor, we reduced friction, wear, and noise while improving reliability and energy efficiency. Because we design and manufacture our own magnetic bearing compressors, we can fully integrate sensing and controls, enabling higher uptime and predictive maintenance. Fourth is thermal transfer, where we hold over 260 patents. Our heat exchanger designs are engineered end-to-end as part of the full system, helping minimize material and refrigerant usage. this allows customers to get consistent dependable performance in demanding environments and finally our embedded intelligent chiller controls we hold over 300 patents in this area these controls optimize the overall system performance in real time because the controls are designed with proprietary insights of our subsystems they allow us to clearly understand how each part of the system is performing and turn that into more precise and reliable operation and better service outcomes over the customer lifecycle. The result of that subsystem ownership and overall system integration starts with thermal performance, delivering precise, reliable operations in the most demanding environments, and extends to higher energy efficiency and flexibility across applications. That comes from deep technical expertise across each subsystem and the ability to design them together as one system. This gives us confidence that we can continue to drive further differentiated performance and margin improvement. Now, let me connect that system level technology advantage to how we're ensuring it shows up consistently for our customers. Our technology platforms are a clear strength and we continue to invest. The Opportunity Head is translating that strength more reliably through both rate and speed of innovation, meaning reductions in speed of market, through innovation, manufacturing, delivery, and field execution. Our proprietary business system is how we do that. Please turn to slides six and seven. Our business system is how we win with customers, how we empower our frontline colleagues, including our innovation teams, to perform their very best for our customers and how we run the company. It is anchored in a global cross-functional language and methodology for how we communicate, collaborate, and drive strong, continuous improvement momentum to win. As a reminder, our business system is built on three pillars. simplify apply 80 20 principles to focus on what matters most accelerate use lean methodologies to remove waste to speed up execution improving productivity and reducing assets such as working capital tied up in the process in short i think of it as helping us accelerate work from weeks to days amplify leverage digital and ai approaches to amplify impact across the enterprise in short I think of it as taking that same work and reducing it from days to hours and minutes. Real change and culture sustainment doesn't happen over a single quarter's timeline. It takes time to put the right practices in place, learn what works, and then scale it with discipline. Slide seven shows how this journey looks in practice. The starting point is adoption and alignment. Think of it as connecting head, heart, and hands. what you know, what you believe, and how you show up differently. That begins with leaders, and we're seeing real momentum here. Today, approximately 1,400 colleagues are actively engaged in this work, and about 1,000 leaders have been trained on the business system. More importantly, we're beginning to see early shifts in how work gets done and prioritize the narrow areas as leaders and teams apply these behaviors and use the business system approaches more consistently. while doing that we start narrow and go deep in a few areas of opportunity as we've highlighted in the previous quarters we have early and strong examples of cross-functional teams concentrating on specific priority areas getting to root causes and implementing countermeasures leading to a significant performance improvement to date we've completed more than 150 kaizens across roughly 20 priority areas around the world only after that work is proven do we scale and this must be done by deliberately replicating what works and standardizing it across the organization. Earlier, I commented on the opportunity we have to extend our technology-based strengths through the entire customer lifecycle by better enabling our people to deliver for our customers. A strong example is our service sales work stream, which helps ensure we establish a service engagement shortly after our new chillers are commissioned. Unnecessary internal processes weighed down our seller's ability to proactively engage with customers for service needs, assessments, and proposals. Starting in West Florida, a cross-functional team used business system approaches like problem-solving, value stream mapping, Kaizen, and daily management to redesign the process end-to-end, taking the process for an individual customer from weeks and days to a matter of hours. The focus on the customer and the frontline enablement led to tripling service agreements immediately following new chiller startup commissioning. After proving success in one market, we scaled the same playbook to two additional local markets with strong follow-on progress. This is also what many of you will see at our upcoming investor event in real operating environments at Canva where the value is created. At JDAQ, we will illustrate how the business system accelerates innovation, both rate and speed, from development to new product launch. At our Airside Center of Excellence, or ACE, and in our Baltimore local market office, we will show the same system driving scalable manufacturing, commercial execution, and service delivery using common tools, language, and leadership behaviors to deliver more consistently and predictable outcomes. With that, Mark will walk you through the details.

Thanks, Joachim, and good morning, everyone. We delivered another quarter of solid execution, building on the momentum from a strong first quarter, with healthy demand across our core markets. Performance this quarter reflects continued progress across the enterprise, as operational discipline and commercial focus are translating more consistently into results. This reinforces our focus on discipline execution, margin performance and operating rigor. Let's turn to the results on slide 8. Organic revenue grew 6%, led by continuous strength in applied HVAC and mid-single-digit growth across both service and systems. Segment margin increased 180 basis points to 18.5% and EBIT margins expanded 310 basis points to 15.5%, driven by better operating leverage and productivity improvements. Adjusted EPS of $1.19 increased 45% year over a year and exceeded our guidance. These results highlight the operating momentum building across the business as we enter the second half of the year. Let's now discuss our segment result in more detail on slides 9 and 10. Orders increased 30% this quarter, building on a strong first quarter in reflecting sustained demand led by large data center activity, while demand across our other key end markets remained stable. Customers continue to value Johnson Controls for our ability to deliver integrated, mission-critical solution at scale, backed by liability, deep domain expertise, and lifecycle services. By region, orders in Americas grew 40%, led by nearly 60% growth in systems, supported by large-scale data center projects. In EMEA, orders increased 11%, led by strong growth in data center-related projects. In APAC, orders grew 4%, led by Southeast Asia, while systems deliver mid-single-digit growth at the segment level. Turning to revenue performance by region In the Americas, organic revenue increased 7%, led by continuous strength in applied HVAC and solid double-digit growth in service In EMEA, sales increased 1%, a system growth offset disruption caused by the Middle East conflicts and lower service volumes APAC grew 13%, led by over 20% growth in applied HVAC Across the portfolio, revenue performance showed continued momentum, underpinned by strong execution from our teams. Moving to margins by region. In the Americas, adjusted segment EBITDA margin improved 100 basis points to 19.5%, driven by higher volume and price realization. In EMEA, margins expanded by 370 basis points to 14.9%, reflecting productivity gains and improved leverage on higher revenue. In APAC, margin expanded 350 basis points to 19.8% with improved volumes and productivity gains. Our record backlog grew over 25% to $20 billion, providing confidence in our growth rate over the next 12 months. Turning to our balance sheet and cash flow on slide 11. On the balance sheet, we ended the quarter with approximately $700 million of available cash, and total liquidity remained strong. net debt declined to two times remaining within our long-term target range overall the balance sheet continues to support discipline capital allocation and financial flexibility giving us the ability to invest in the business maintain balance sheet strength and return capital to shareholders let's now discuss our fiscal third quarter and full year guidance on slide 12. As we look to the third quarter, our guidance incorporates the momentum we've established year-to-date. We anticipate organic sales growth of approximately 6%, operating leverage of approximately 45%, and adjusted EPS of approximately $1.28. For the full year, improved performance and backlog strength support our expectation of organic sales growth of approximately 6%. We continue to expect operating leverage of approximately 50% for the full year, reflecting continued progress in cost management and productivity. As a result, we are raising our adjusted EPS guidance to approximately $4.85, representing roughly 30% growth and $0.30 higher than our original guide at the beginning of the year. We continue to expect adjusted free cash flow conversion of approximately 100% for the full year, demonstrated that improved profitability is translating directly into cash. This is supported by disciplined working capital management, while early progress in our business system is beginning to reinforce more consistent execution in targeted parts of the organization. Operator, we are now ready for questions.

we will now begin the question and answer session as a reminder to ask a question please click the raise hand icon at the bottom of your screen if attending via the webinar or press star followed by five if dialing in by phone please also ensure your phone is unmuted locally when preparing to ask your question we ask you please limit yourself to one question and one follow-up we'll wait one moment to allow the queue to form the first question comes from Scott Davis for Mellius research your line is unmuted hey good morning guys there's

God yeah can you hear me hey good morning um great everything looked pretty consistent with what would expect to accept the services orders still a little a little sluggish is there some timing issues there or any dynamic and I what i'm asking is when do you expect that to pick back up again because it clearly should given the

the install orders you have uh good morning scott um yes correct those were a little softer than some of the other numbers that we published so just as a reminder you know service is about a third of our revenue and in our case we do not include retrofit in the service revenue as some other companies do um now our service fundamentals remain solid and particularly in hvac where we continue to perform very well but it was offset in the quarter by weaker performance particularly in security and we have over the last couple of quarters been digging into our security business as a service business deeper and uh have found that over the years the balance between volume and price probably hasn't been appropriately been managed. So during the, and it's also, by the way, the part of our service business that's a little less differentiated, HVAC applied being the most differentiated. So we're rebalancing in the security service business between price and volume. So as a result of that, we were down in security service in the quarter. margin wise we were up so we're just managing and finding a better balance between price and volume

and that part of the business okay that's helpful and and then just to back up a little bit on the business system stuff because it obviously matters a lot walk us through you know when you talk about it and I'm on slide seven you know the seven lighthouse sites projected in two years I think you know you're starting with a couple of lighthouse sites now how does that kind of does that go exponential after that do you go from two to seven to you know 40 I mean what how does that kind of work is I'm just trying to get a sense of how long it might take you to get you know just just across the organization really you know that the business system deployed and you know to a level of excellence

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

couple of them okay great clarification appreciate it best of luck guys we'll

see you in Baltimore thank you Scott our next question will come from Amit

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

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

maybe a quick follow-up I wanted to ask about the strategic direction of the business there were there were some reports on asset sales i'm sure you can't specifically talk about that but maybe just talk about how you're thinking about the moving pieces sort of both strategically and financially i assume maybe some of these sales may be dilutive in the near term and how you're thinking about sort of the near term and long-term strategic dynamics um yep very good i think

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

Okay. Thank you very much. Congrats. See you in June. Appreciate it.

Yeah. Thank you. See you.

Our next question will come from Joe Odea for the Wells Fargo.

Hi. Good morning. How are you? Hi. Good morning, Joe. Some really helpful color, both in a product portfolio and technology as well as business system. Can you just talk about the timeline on kind of business system implementation when you talk about 1,400 colleagues being engaged today? Any mile markers you have out there for how you expect that to move forward? It certainly seems to be translating on the margin expansion that we're seeing here, but would expect as that continues to move forward, you continue to

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

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

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

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

Thank you. I wanted to ask about June quarter margins. It seems like there's not much sequential margin embedded in the guide, but typically the company sees pretty nice sequential expansion alongside the higher volumes into the June quarter. So I guess, are there any headwinds coming through or you know mixed tailwinds in q2 that is not you know driving that sequential step

up to the third quarter thank you yeah chris so if you look at the volume and growth we anticipate in the third quarter it's very similar to what we saw in the second quarter so so that's all integrating you know um you know till the six percent growth for q3 which means from a volume leverage trend point quarter over quarter you're not going to see uh as much of a step up as you might have seen in prior period however at point to the fact that the way the way we've guided it it's a pretty uh impressive operating leverage year on year of 45 percent um you know if the volume would come out a little bit higher uh based on certain risk and opportunities we have in the quarter, could we see a little bit of a better sequential improvement in margin? Yes. But at this stage, I think embedded in our guide with that 45% operating leverage on the improvement,

I think we're pretty much locked and loaded. Thank you, Mark. Appreciate that. Maybe if I could follow up on a longer term question. You referenced working with the hyperscalers on the future data center architecture i guess when you look out into the future how do you see underlying content shifting between the cdu which i think would be on the positive side versus air handlers and chillers on the other side perhaps and then even within chillers are you seeing any shifts between air cooled where where you guys have a very strong market position um versus the water

chilled side thank you yep great question i think the big picture and i by the way i've spent uh the last few weeks uh in the field of course i spent a lot of time in the field all the time but i think i visited seven data centers in the last three weeks uh on on site uh both up and running and data centers under construction uh on two continents so uh fresh uh input from the field um so you know there are more uh things that generate heat in a data center than the actual chips and uh and i'm sure you you've read about some of the things that are happening outside of thermal management on the electrical side for example and so what that what that does is that even though liquid cooling is being implemented, I think there was maybe a concern about a year ago that there would be less need for air handling units. And I think we're seeing the opposite at this point in time. So our silent air franchise is enjoying very healthy growth and we expect that to continue. because of, you know, other things than the chip generating heat. So our content, I think, is going to actually continue to increase a little bit as a result of that. And then I know there was some speculation about, you know, chiller content. And I think we discussed that prior quarters. I think those fears were overstated, maybe on the margin over the next couple of years. there might be a slight headwind but but the upside versus what we originally thought on hair air handling units will will nicely offset that and then of course our cdu business has just started to round and uh and uh you know we have uh uh hundreds of millions of dollars in in the pipeline and and expect uh you know about a hundred million dollars worth of business you know this year and uh why not more and it's just simply because you know that naturally you know many of our customers you know they want to pilot and test them and so on before they placed a bit the big order so um but we're very very um bullish about uh our opportunities and in all those different franchises uh for data centers so both chillers um air cooled water cooled as well as our air handling units our silent air franchise and and now with the addition of uh the alloy technological capabilities um i think we'll only strengthen you know our position thank you i really

appreciate that our next question will come from julian mitchell with barclays hi good morning

um thanks very much for the question um maybe um starting with the america's kind of operating leverage there you've touched on margins a little bit um you started the year a bit muted on that second quarter a nice pickup in america's operating leverage um how are you thinking about the operating leverage for that segment in the back half and wondered really if there's been any change to your assumption around sort of gross cost headwinds because of section 232 changes or broader inflation within that america's business please yeah so if you look at the the

margin improvement year on year this quarter of america's about 100 basis points a lot of that came from pure um growth and and leverage um that that means we had a little bit of a productivity headwind in the quarter and that came from from mostly the um ramp up in our capacity if you recall a couple of years ago we made substantial investment to increase our capacity within our factories in north america to keep up with the demand we are likely going to continue making investment in capacity but as that capacity continues to accelerate and ramp you have the natural production ramping inefficiency that comes with that as you train and onboard a whole lot more people as the processes get practice over time you have a little bit of a short-term dynamic happening in productivity that that ramp um and productivity um opportunity will remain probably for the balance of the year as you're thinking about the operating leverage of the americas but there's enough um kind of juice in the backlog for us to continue to see year-on-year margins to uh to improve and that's entirely embedded in our guide as an enterprise of of an operating leverage of of of around 50 percent on the 232 um as you know uh and consistently with how we've dealt with tariff for the past year or two um we've been able to to navigate those both through long-term and short-term countermeasure but but given our current product mix and the way it's been classified under the the different regulations we've not seen a a material impact specifically to 232 thanks to the fact that chiller are a category that are that is not including in that section 232 there's some other parts of the business that have been affected by that but it's rather minimal and we feel very comfortable that's similar to what we've done in the prior 12-18 months will be able to pass on some of that risk to pricing dynamics in the market. Thanks very much for that Mark and then my second

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

second half, please. Yep. So we actually have an important business in the Middle East. We have about 2,500 colleagues on the ground. And our priority short term is very much about their safety and and well-being but of course what we do is is mission critical for our customers and and uh and actually for for some communities there as well so so we're trying to strike the balance between taking care of our customers and and our people here um the middle east overall for context is about two two to three percent of our overall revenue um but for me it's it's almost 10 or or a little bit more than 10 percent and uh in the quarter um about a third of that business was was really uh impacted delayed if you will uh by the by the conflict here so uh we're not anticipating a full return uh here in the quarter that we're actually in right now but over time we hope that and you're as good of a predictor that as we are but we hope that over time things will go back to normal here in the last quarter of the year thanks very much

our next question will come from andrew obin of bank of america yes good morning hi good morning

andrew uh can we talk about i know lots of times found on hvac but you know clearly we're also hearing is putting a lot more focus on buyer and control business uh can you just talk about the initiatives that are taking place uh in terms of uh markets pricing uh and also can you remind us the impact of data center business on growth profile of those verticals thank you yeah so

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

and maybe can you just show to share with us outside of data centers uh sort of growth initiatives at fire and control because as i said the feedback is that they're doing quite a bit

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

and so the margin opportunity associated with this uh with these initiatives is commensurate

with what we have on the hvac side right yes exactly yeah because what what we as we've discussed in prior calls you know what what the consequence of what i just described is that we can continue to grow, you know, without adding people. And, you know, at some point in time, of course, we'll also add people. But we're really trying to decouple the top line growth from the cost growth or headcount growth. And that's going to drive margin expansion.

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

Thank you very much.

Thank you.

Our next question will come from Patrick Bauman with J.P.

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

yeah so first on on margin if you look at emia for the year it's it's you know improving nicely uh give or take a 100 basis points and and we're really happy with the big ramp we had this particular quarter um because of the headwind we're seeing uh associated with the different macro challenges and yeah seeing the balance of the year depending on how volume will shake out you will see a i wouldn't say pressure on margin but you will see a slowdown in in the progression of that mountain over time maybe with a little bit of of pressure in the in the third quarter and then some recovery uh in the fourth quarter net net for the year i i think emia will come out uh very strongly um and and really helping um for us to achieve that operating leverage longer term i think we remain consistent um emia has been an area with a bit under invested historically on both capabilities and products we've been working diligently over the past 12 18 months in fixing and addressing some of those gaps and making the right level of investments to have the same level of quality differentiation and competitive products for EMEA and as that comes we feel very strong that EMEA has the opportunity to continue to raise and catch up to uh to its regional peers within the segments of gci it's still a it's still a business as you can tell that that that operates at three to four hundred basis points lower margin than than its regional peers it will probably remain slightly lower but not to that level in the long

run and and on the 80 20 stuff is that like what what's the revenue head when you you expect from type of actions across across the portfolio have you provided context on that before

yeah when 80 20 is applied um well you you should not see a a massive long-term revenue impact because you actually free up room for the team to focus on the product where you have the most differentiation the greater ability to drive value now obviously in the short term insert the pocket of the market you will see some some some softness as we reposition the portfolio against higher runner but i wouldn't anticipate any activity from the business system to impact whatsoever our ability to grow and compete thank you um and then on the backlog um have you can

you quantify the shape in terms of the percentage you expect to deliver over the next 12 months

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

We're also seeing, yeah, and maybe just to add to that, we're also seeing customers place orders earlier for those reasons that Mark mentioned, then a little bit earlier than perhaps a year ago. So there has been a slight timing shift in our backlog here for that reason, meaning beyond.

Yep, we're hearing that from others as well. Makes sense. Thank you.

yeah yeah okay thank you our next question will come from andy kaplowitz with citigroup

hey good morning everyone good morning andy so i just wanted to follow up on that last comment um you know obviously you're you're growing nicely here but you've had orders accelerate over the last couple quarters um you know your capacity to be able to sort of ramp up uh in 27 obviously you know the timing of these big data center orders is key but do you have the capacity you need uh considering that you will be delivering more of those bigger projects uh next

year and beyond uh yes the short answer is yes over the next 12 plus months and uh because we built hard capacity that mark was referring to the actual factories the buildings um some time ago before I joined the company. And what's going on right now is we're ramping within those new buildings, if you will. And so we will have capacity for the next 12, let's call it 18 months. And there's also plenty of productivity improvement opportunities, as I've talked about on previous calls. Now, as we've all seen, the order entry has been very healthy here over the last couple of quarters. And our pipeline, as I refer to, remains very strong. And so, of course, we're continuously looking at where we would need to add more hard capacity, meaning more footprint. And so that's an ongoing effort. And I think as long as we stay 12 to 18 months ahead of that, which we can right now, based on what I said, you know,

we're going to be in good shape here. Thanks for that. And then maybe just a bit more color on sales by geography. I know that you've had a bit of disruption in the Middle East, as you talked about, but orders in EMEA have been accelerating lately on data center strength. Does that start to reflect into stronger sales growth in that segment, as well as you go into 27? And then I think you said sales up 13% in Asia pack, backlogs up double digits. Is China turning

around or has it turned the corner for you? So starting with EMEA, I mean, we had a really strong 11 percent older growth on a compare of almost 13 last year so it's a double stack that that's pretty strong that that's a sign that some of our solutions are really starting to resonate uh particularly in the data center vertical but there's other aspects of of the business that we see uh that we see uh very positive there in in the market in emia um and that's despite the the the disturbance we so associated with the conflict in the middle east as far as this ipad goes um that order rate of about four percent was on an easy compare right and the uh transparently we barely had any growth in order last year it was i think flat and so um i would say uh yeah we've bottomed out um we've passed that point i think we passed that point probably a quarter or two ago Now, it's not a big return to growth, particularly in China. However, the same vertical where we see great opportunities, I'm thinking data center, semiconductor manufacturing, as well as the biologics that we talked about in prior quarter, that continues to be a big tailwind, particularly for China. Our ability to convert there is not the same as maybe the rest of the world, but those opportunities are so large that we see an opportunity to continue to build some momentum in APAC and drive some growth. Appreciate the color.

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

Yeah, thanks. Good morning, guys.

Morning, Nicole.

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

uh it's a little bit early for us to start you know forecasting next year but uh it's not a crazy assumption uh yeah we're gonna have a very strong backlog um uh entering the year i think the the reason i'm pausing a little bit is some of the headwind joachim talked about around of service business and and some of more mundane part of the portfolio where differentiated differentiation is little bit harder to achieve it depends how quickly we can turn that around to help support the level

of growth you just mentioned understood that makes sense um thanks mark and then i guess just i don't think the question's been asked yet on asia pack margins also up really nicely year on year um despite the tough you know organic environment in that region that you just spoke to so you know mark can you just talk about the expectation for asia pack margins as we progress into the back off of the year

yeah so they still had a pretty good revenue uh quarter their book and bill within the quarter was very strong so 13 top line growth really allowed them to both drive net gross leverage as well as very strong productivity uh we talk about around 20 million dollar productivity for that segment uh on 150 million dollar or so of segment margin that that's a very uh very material uplift as you look at the balance of the year um we think q3 is going to be probably closer to flat here on here um associated with the fact that the level of growth that you saw this quarter will probably not repeat in the third or fourth quarter and it's going to be closer to a mid single digit type of growth for for that period but we still see some fully a margin improvement for that segment, probably reaching, you know, the high 18% type of margin for fully for that particular segment. Thank you. I'll pass it on.

This concludes our question and answer session. I will now hand the call back to Joachim for any closing remarks. Thank you. And thank you for all your questions. This quarter's results

reflect the momentum that's building across Johnson Controls as our teams operate with greater clarity, discipline, and consistency. We're seeing those improvements show up in how we serve our customers and in the strength of our results, and there's more to come. I want to thank our 90,000 colleagues for their commitment and passion in delivering a strong quarter and their energy in embracing our new way of working with our business system. This is how we're going to win. While we're early in our journey, We're excited by the momentum we see. Finally, today is National Skill Trades Day, so I want to extend a special thank you to our more than 40,000 field colleagues for all they do every day for our customers. You are such an important part of our competitive advantage. I look forward to continuing my conversation with all of our stakeholders. Thank you for joining us today.

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