Johnson Controls Announces Third Quarter 2026 Earnings Conference Call Webcast

Hello everyone and welcome to the Johnson Controls Q3 2026 earnings conference call. My name is Ryan and I will 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 would now like to turn the call over to Mike Gates, Senior Director of Investor Relations, to begin. Mike, please go ahead.

Good morning, and thank you for joining Johnson Control's fiscal third quarter 2026 earnings conference call. Joining me on the call today are Johnson Control's Chief Executive Officer, Joachim Wittemannes, and Mark Vindipenbeek, our Chief Financial Officer. Before we begin, please note that today's discussion will include forward-looking statements regarding our future performance and financial results. These statements are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings for additional information regarding these risks. We will also reference certain non-GAAP measures. Reconciliations of these non-GAAP measures are included in our earnings release and the appendix to today's presentation, both of which are available on the investor relations section of our website. I will now turn the call over to Joachim.

Thanks, Mike, and good morning, everyone. Thank you for joining us on today's call. Johnson Controls delivered another solid quarter, extending the momentum we established in the first half and reflecting continued strength across the business. Let's begin with slide four. Customer demand remained healthy across our portfolio, driven by the increasing need for high-performance, precise, and energy efficient operating conditions order momentum sustained above 25 percent revenue grew 10 percent adjusted ebit margin expanded 260 basis points to 17 percent adjusted eps increased 35 and backlog grew more than 30 percent to a record 21 billion dollars based on this performance we are raising our full year guidance mark will cover the numbers in detail but before he does I want to discuss what is driving these results and why we believe Johnson Controls is increasingly well positioned to deliver sustained profitable growth over time. The answer starts with the customers we serve and the role they play in the global economy and greater society. Every era is defined by the infrastructure it demands and this is the age of thermal management. AI factories, advanced and biopharma manufacturing, large research hospitals and universities require thermal management solutions capable of delivering performance, precision, and energy efficiency at unprecedented scale. As AI infrastructure scales, customers are increasingly focused on maximizing computing capacity from available power. Yesterday, we introduced our AI Factory Absorption Chiller Reference Design Guide, which demonstrates how advanced thermal management can reduce cooling electrical demand by approximately 44% by converting waste heat into productive cooling. These efficiency gains support additional AI computing capacity without increasing on-site power generation, creating the potential for billions of dollars of additional revenue over the life of a one gigawatt facility. While this represents a new approach for many data centers, it builds on more than 65 years of York absorption innovation and decades of experience deploying the technology in demanding environments. This is yet another example of how Johnson Controls is helping customers get more value from existing power infrastructure while addressing one of the most significant constraints to scaling AI capacity. It also expands our capabilities as we continue to innovate across the entire thermal management chain, enabling us to play an even greater role in next-generation AI facilities. We are winning with customers by focusing where our technology differentiation matters the most, turning manufacturing into a competitive advantage, and meeting our customers' need for flawless, uninterrupted operations. Our Lifecycle Service franchise continues to benefit from the increasing importance of uptime, reliability, protection, and energy efficiency, supported by an unmatched global field presence that allows us to serve customers wherever they operate and throughout the life of their assets. our proprietary business system that defines how we work and deliver is beginning to translate into more predictable execution giving us an increase in confidence in our long-term potential let me walk you through this on slide five johnson controls was built for this time because of two competitive advantages for 140 years we've shaped and protected indoor environments where the world's most important work gets done. That track record is built on two strengths that are difficult to replicate. First, our deep proprietary technology know-how, and second, an unmatched global field presence with sales solution architects and field technicians that are roughly twice the scale of our nearest competitor. Together, those capabilities give us a differentiated position in markets where performance, precision, and speed increasingly matter. We amplify these strengths through three growth accelerators. First, our strategic pillars provide clarity on where we focus our resources. Our solutions directly address the growing need for high performance, precision, and energy efficiency across some of the fastest growing areas of the economy. AI, mission-critical environments, and decarbonization. By aligning our organization around these opportunities, we can direct innovation, commercial, and operational resources toward the segments where we see the greatest potential to create value. Second, our proprietary business system, which we continue to embed throughout the organization. This is how we run the company. It provides a common language and methodology for how we communicate, collaborate, and continuously improve. The objective is straightforward. win more customers by solving their biggest problems faster and more consistently than anyone else. That requires both winning behaviors as well as standard approaches that elevate and continuously improve the way we work. It is how we accelerate rate and speed of innovation, turn manufacturing into competitive advantage, and improve execution across our commercial and field operations. And third, we bring together our strategic pillars and business system to translate these advantages into growth productivity and shareholder value is about accelerating speed by limiting waste and processes focusing resources on the highest value opportunities and driving better outcomes for customers and shareholders alike moving to slide six on june 1st we hosted going to gemba day providing a first-hand look at how strategy is translating into execution across Johnson Controls. You heard directly from the teams closest to our customers and day-to-day operations, and saw how the business system is better enabling those colleagues to deliver for customers in targeted areas of the business. Our first stop was JDEC, our Advanced Development Engineering Center and home of York, where 150 years of leadership in HVAC and thermal management demonstrated the increasing importance of innovation, performance, and precision. you saw how our technology depth and r d talent combined with the business system are unlocking a new level of speed and innovation capacity in one example the team accelerated the speed to market on a key product by 40 helping us win a major customer opportunity second we went to our airside center of excellence or ace where for more than 50 years we've manufactured critical airside technologies. ACE is one of approximately 40 manufacturing facilities around the world where we are turning manufacturing into a competitive advantage. At ACE, we showcased how the team applied the business system to more than quadruple capacity on the computer room air handler line without significant capital investment, achieving 100% on-time delivery, reducing customer lead times by half, shrinking required manufacturing floor space by more than 30%, and cutting inventory by 50 percent our final stop was our local market office in baltimore where for the last hundred years the team has built deep relationship with owners contractors and consultants you saw how these same business system approaches and mindsets are improving customer facing execution across system sales system project execution service sales and service operations the team demonstrated how they're doubling customer facing selling time accelerating project engineering, improving service attachment rates, and reducing non-value added activities, helping strengthen long-term relationships across the customer lifecycle. These examples demonstrate what is possible as we continue to deploy our business system across the enterprise. While scaling takes time, we're already seeing improvements in performance and the customer experience on targeted areas of business, highlighting what's possible as this becomes how we work everywhere. That opportunity reinforces our confidence in the updated long-term algorithm we introduced that day. We outlined a clear path to high single-digit revenue growth, operating leverage of more than 30%, double-digit adjusted EPS growth, and adjusted free cash flow conversion of approximately 95% to 100%. In summary, we are building momentum across the business. our capabilities are critical to the high growth sectors we serve which are becoming more demanding more energy intensive and more consequential customers increasingly require thermal management solutions that deliver performance precision and energy efficiency while helping them manage cost capacity and energy usage our ability to meet these evolving customer requirements will be a key driver of sustainable growth our business system is helping us translate our competitive advantages into better customer outcomes more predictable execution and improved productivity together our technology innovation manufacturing capability global field presence customer relationships and business system position us to create value for customers and shareholders for years to come. With that, Mark will now walk you through the details.

Thanks, Joachim, and good morning, everyone. We delivered another solid quarter with broad-based growth, continued margin expansion, and stronger earnings. Our third quarter results reflect the momentum we have built throughout the year, supported by healthy customer demand, discipline in execution, and continued productivity gains across the business. Let's turn to result on slide 7. Organic sales increased 10% in the quarter, led by strength in applied HVAC and continued growth across both systems and service. System sales increased 11%, service increased 7%, and And Applied JVAC delivered high TIN growth supported by data center demand. This performance drove meaningful margin expansion. Adjusted segment EBIT A margin expanded 220 basis points to 20%, while adjusted EBIT margin expanded 260 basis points to 17%. Adjusted EPS was $1.42, up 35% year-over-year, and ahead of our guidance. Let's discuss our regional performance in more details on slide 8 and 9. Orders increased 27%, extending the strong order momentum we have seen throughout fiscal 2026. Systems order grew 40%, service order increased 4%, and customer activity remained healthy across our key end markets. From a regional perspective, the Americas continue to lead our performance, with orders increasing 37%, led by sustained demand from data centers and other mission-critical environments. EMEA orders increased 6%, driven by high single-digit system growth. In APAC, orders grew 12%, reflecting growth across several regions, including Northeast Asia and India. Across O-end markets, demand remained healthy as customers continued to invest in high-performance, reliable and energy-efficient operating environments. Turning to revenue performance by region. In the Americas, organic revenue increased 11%, led by high teens growth in applied HVAC and solid double-digit growth in service. In EMEA, sales increased 1%, despite the ongoing conflict in the Middle East. APAC grew 15%, led by 20% growth in system and continuous strength in applied HVAC. Turning to margins by region. In the Americas, adjusted segment EBITDA margins expanded 260 basis points to 21%, driven by strong operating leverage on higher revenue. In EMEA, margin expanded 20 basis points to 14%, as growth was largely offset by the impact of a recent divestiture. In APAC, margin expanded 180 basis points to 21%, supported by productivity improvements, favorable business mix, and higher revenues. Backlog increased 32% year-over-year to a record $21 billion. The strength in Backlog supports our confidence in both our near-term outlook and our ability to deliver against the long-term growth algorithm we outlined at Going Together by Day. Turning to our balance sheet and cash flow on slide 10, we ended the quarter with approximately $600 million of cash on hand. Net debt declined to 1.9 times, below our long-term target range. Year-to-date, adjusted free cash flow increased to $2.1 billion, driven by earnings growth and disciplined cash conversion. We are now better positioned to invest in the business while maintaining balance sheet flexibility. Let's now discuss our fiscal fourth quarter and full year guidance on slide 11. For the fourth quarter, we expect organic revenue growth of 9 to 10%, operating leverage of 45 to 50%, and adjusted EPS of approximately $1.55. Our strong third-quarter result and record backlog gives us the confidence to raise our fiscal 2026 guidance. We now expect organic revenue growth of approximately 8%, up from our previous expectation of approximately 6%. We expect fully operating leverage of 45% to 50%, consistent with our focus on profitability and discipline execution while delivering stronger revenue growth. As a result, we are raising our adjusted EPS guidance to approximately $5.05, representing hopefully 35% growth and $0.50 higher than our original guide at the beginning of the year. We continue to expect adjusted free cash flow conversion of approximately 100% for the full year, Demonstrated that the higher earnings we are delivering continue to translate into strong cash flow generation. As Joachim mentioned, while we remain early in our business system journey, we are beginning to see benefits in targeted areas of the organization.

As we continue to embed our business system across the enterprise, we expect further opportunity to improve productivity, execution, and customer responsiveness over time. operator we are now ready for questions 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 yourselves to one question and one follow-up we'll wait one moment to allow the queue to form. Our first question will come from Nigel Koh with Wolf Research. Your line is unmuted. Good morning, everyone.

Great. Thank you. Good morning. So I just wanted to maybe randomly start off with supply chain, just given it seems to be a growing issue for some of the data center infrastructure suppliers.

I'm just curious, Joachim, how are you feeling about uh the resilience of the supply chain um any bottlenecks you're experiencing and confidence on sort of delivering on on plan uh from here yeah so supply chain is always an issue when you're in a high growth environment and um that's the headline but then let's dig into that uh if you remember from the go to gemba day we were talking about how uh our deep technological know-how spans the five subsystems that make up an hvac chiller but we also talked about the fact that we control the manufacturing and the cogs of those five subsystems so we are more vertically integrated than some in our industry and in a high growth environment that of course means that we control more of our own supply chain and so i feel very good about where we are on many of our product lines. And then, of course, we don't make every single thing. We don't dig iron ore out of the parking lot. So, of course, we depend on external vendors as well. Occasionally, there are some bottlenecks. We try to get ahead of that very occasionally. I will have to get involved myself personally. And that is just, I think, an element of operating being in a higher growth environment.

Okay, that's great. Thanks, Joaquim. And then, obviously, it's really encouraging to see the double-digit organic growth, minus 10% in the fourth quarter. I know it's a little bit early for FY27, Kala, but you've got really good visibility to the backlog. I'm just curious how you're thinking about kind of top-line growth in FY27.

Yeah, as you mentioned, Nigel, it's a bit too early to provide real specific fiscal year 27 guidance um but i'll tell you we remain extremely confident in the way we've laid out the long-term algorithm at at going to game by day um of high single digit um growth top line growth uh and at least 30 percent of of incremental um you will see quarters that that perform at or above that that level over the next couple quarter and that's really supported by our our record backlog and the fact that our pipeline continue to grow in a very healthy manner and the business system allows us to kind of improve the execution uh on that time the backlog and and position as well for the future but uh we'll provide you details on on how we look at 27 at at the next earnings call that's great thank you our next question will come from amit Mirocha from UBS.

Good morning, gentlemen. Appreciate the question. I wanted to ask about the outlook for growth in applied HVAC. Obviously, huge step up in the quarter from sort of high single digits to high teens growth. But orders are sort of running well ahead of that. And so I guess the question is, could you just offer any thoughts on sort of where we go?

Can we further accelerate or you know are there just capacity or supply chain constraints and you know high teams is very good and and sort of that's the expectation going forward um hey good morning Amit uh well the way we think about it you know we look at our pipeline uh our pipeline continues to grow at a very healthy rate and uh as you would suspect data centers is an important part of that but the non-data center pipeline actually is growing almost double digits so we're we feel very good about the continued strength here in our business from the demand side and then from a supply chain and capacity point of view we made meaningful physical plant investments about two years ago i think we had mentioned on a prior call earlier this year that we were ramping in those new facilities or expanded facilities. And we continued to do that. And we actually had a very good quarter. So we're ramping a little bit ahead of what we thought. And that's really our proprietary business system at work, combined with some strengthening of the leadership that we have that's in charge of that part of the company. And the business system is going to continue to, as you saw, since you were there at the Gota Gembide, help us create more capacity in the physical space that we already have. But of course, with this kind of growth, we're also going to have to add some new physical capacity. But the business system will help us stay ahead of that so we have some time to ramp other physical capacity expansions. So we feel pretty good at where we're at right now.

Okay, got it. So it just, I mean, just trying to understand what you're saying beneath the surface, it doesn't seem like there's any impediment to sort of further accelerate growth and apply to HVAC. And I guess my follow-up question on that is around margins and operating leverage, because you have this long-term framework of 30% plus, obviously you're punching way above that this year as you start this business model kind of evolution. As we think about 27, 28, I mean, the backlog, I assume, as it converts is accretive to margins. Do we have another year or two where we're sort of punching above that 30 percent plus long term target?

How do we think about the slope of the operating leverage as we sort of further progress through this evolution? yeah i mean as you see the growth accelerating beyond the mid single digits um you've seen that we've been able to maintain this year um what i would call a very healthy operating leverage uh between 45 and 50 percent and that incremental revenue that we see is converting at rates that is extremely healthy but is closer to the long-term operating leverage framework we had laid out of 30 plus percent so dynamically you will see still higher than 30 operating leverage over the next 12 18 maybe 24 months but the way you need to think about that is that the margin that we see in that incremental growth comes mostly from our data center revenue which becomes a very large portion of our mix and that means systems or systems business is growing ahead of our service business in the near term and that creates a small equipment mix margin a small headwind i would call it um but nothing uh that would prevent us from continuing to to commit um well above the the 30 incremental we laid out in uh in go to game by day uh uh as part of our long-term algorithm got it okay that makes a lot of sense thank you very much appreciate it thanks our next question will come from scott davis with melius research hey good morning fellas Hey, Scott.

Congrats again on putting together some solid numbers here. Not looking to blow sunshine up your tail, but these are good results. So anyway, I wanted to ask you guys a little bit about market share shifts and potential. I mean, how do the hyperscalers think about working with you guys and your peers? Do they think in terms of de-risking and kind of peanut butter spreading around kind of their supply base? Do they think in terms of who has the best capabilities and, you know, capacity delivery and, you know, quality? I mean, how are they thinking about it?

And are you seeing any supply chain shifts that either benefit you guys or maybe perhaps don't benefit you guys yeah i think the the way it works scott is um our large data center customers uh they design or architect their data centers in in certain ways they make certain uh equipment choices uh as part of that overall architecture and uh and then and they are engaging with uh vendors as they they do that so i think you've heard that many times our alert data center customers will send groups of engineers to sit with our engineers for for a week 10 days um so so think of that as you're designed uh in and they will really just pick one uh partner that they design in with there might be more two there might even be three and then when it comes to this particular version this architecture of a data center that they might build let's just pick a number 10 of over the next two to three years they will then ask for or sit down with with these couple of vendors that they've decided to to work with from a design point of view and typically what happens is someone will get no one will rarely get all of it it's usually split but someone will get a little more of their purchases and even if initially you were awarded a certain amount by executing better for example lead times having less supply chain issues and so on you might actually in reality secure more than over time than you thought initially in the dialogue with the customer so that's that's kind of broadly how how it works so um you need to be so uh the conclusion is you need to be very actively involved uh on the design side when they're architecting the overall data center and to and that's a very collaborative approach and obviously you need to then be competitive uh in their initial selection and then you need to execute competitively to perhaps punch a little bit beyond the the initial award if you if you will and is the service inside of it a similar kind of situation yeah it's the service a good point so that's usually part of the initial selection is your capability to be able to support the customers in the locations where the data centers are being built. And typically what we do is as we get closer to actual selection of equipment for a particular site, of course, we will make sure that we make the customers very well aware of our local footprint. And as I think many of you know, our footprint is comprehensive across the United States and many countries around the world. And because historically, we've we've uh had a focus of having our own people serve our customers you know we we have a few more feet on the ground than than some of the other players in the industry so so we have multiple opportunities here to to to win but you need to win on the design side to be to have a value prop that's strong you need to of course part of the value prop benefits versus cost be competitive. You need to execute well from a, let's call it supply chain and delivery side, and then you need to have the ability and then later on the proof point that you can execute on service. And so when you can orchestrate all of that together, that's when you start to see market winning growth.

And the question I guess really was our net net. I mean, that was a fantastic answer. But Ned, do you think you are gaining share then, Joachim?

We think we are for the categories that we focus on. Absolutely. Okay, fair enough.

Okay, thank you. Best of luck. I'll pass it on.

Thank you. Our next question will come from Andrew Obin with Bank of America. Good morning.

Good morning, Andrew.

Just a question. I think you were highlighting at a recent industry event you were highlighting your product together with Armada the modular product I was just wondering if you could comment on how much interest you're getting from the customers and what kind of TAM it represents and also when and if it starts flowing through your revenue is it margin accreted or is it margin diluted because of past through. Thank you. That's the first question.

Yeah, great. Great question, Andrew. So we believe that the future data centers are not all going to be these mega data centers, the one gigawatts and maybe larger. We believe that what we have seen when other human systems leveraging new technologies have been deployed across society, that there's not just one approach and that there will be a decentralization there will be a world where there are smaller closer to to the edge to closer to the end users different kinds of models of data centers and it's really in that context that we collaborate with armada and and as you know we we also have an investment in that company that application it's not brand new these are by the way think of them as data centers in a shipping container that we build in our factories and essentially has everything all the products that we we sell and the Austin controls in in that shipping container and and these are a couple megawatts and they get deployed and megawatts are increasing as we continue to innovate and they are forward deployed the traditional applications would think of oil and gas very remote locations and but there are also defense applications and so we believe but we believe that those decentralized close to the edge types of applications are going to continue to grow and so we're very excited about the the potential here the the TAM this is an earlier stage of the market, so the TAM is significant, but it's in formation, so I hesitate to throw numbers out there. There are people who speculate around very significant numbers. We're working on a number of opportunities as we speak, very meaningful ones, and I think within the next couple of quarters, we'll be able to talk a little bit more about this opportunity. but think of it as an example as as as i mentioned on the call you know where we've taken a step back and we've basically as a company said look what's happening and in human society and where can we bring our technological know-how to bear to advance human society and so we're taking a broader look at the uh ai opportunity and how we can help human society accelerate the advancements there thank you and just a follow-up question where are we on a sort of strategic review for some of their portions of your portfolio any update on timing where we could hear something from you thank you so we continue the work on that and as you've heard before the guiding principle here is is to create shareholder value and but we continue to make progress and we will keep you posted uh but uh progress is good and you've seen we've taken some portfolio action in the quarter we continue to divest our residential subscriber business around the world um quite successfully we have a few more to go and uh we are making a lot of progress on on

actioning the the commitment we've made in prior quarter in in readjusting our portfolio adequately thank you very much our next question will come from Chris Snyder with Morgan Stanley thank you I want to follow up on some of the commentary around data center and specifically I wanted to talk about your content within the data center um I think on the last conference call you know you guys said that your net content would go higher but there was moving parts under the service I think you said chillers could go down but air handling goes up and then the CDU business certainly goes up um i was just you know maybe hoping to get a little bit more of a magnitude of those respective moves um and really the heart of the question is like is the legacy content going higher when we think about chillers and air handlers and and just first how much of it is coming from you know cdu being a new product where you guys are gaining share thank you i think you know broadly as we've commented before as rack densities increase new chips are launched and put put into use the amount of heat generated in data centers continues to increase.

And by the way, there are other things that generate heat, too. Think the 800 volt DC, but not only. So the amount of heat that needs to be extracted out of a data center will continue to increase. And so therefore, thermal management becomes even more critical for the data center. And obviously, to do that energy efficiently is essential. So we really see the speculation around the reduced demand for chillers. That's going to be a very, very nominal impact, if any. We see the need for air handling units. Our silent air franchise, for example, continues to increase. The CDUs, as you pointed out, will become more important as more and more liquid cooling is implemented. And of course, we have our alloy investment here from a couple of quarters ago that where we're making great progress in pilots and some early orders now. And then our controls. And then, as you heard earlier today or the announcement we made yesterday, we now have an absorption chiller portfolio geared to the data center space that will allow our customers who generate power locally to capture a meaningful part of that excess heat and put it to use within the thermal management architecture, allowing them to reduce the power needed for thermal management by up to more than 40%. So actually a very, very meaningful value problem. And we're going to continue to work on increasing our dollars per megawatt, if you will. I mean, even the Armada example that Andrew was asking about, as I mentioned, you know, that container, a data center in a container, I mean, it is loaded with everything that we make in this company. So we are going to continue to drive the dollar value up per megawatt here. That's an essential part of our strategy.

Thank you. You know, one thing that you've also talked about more is bringing a more comprehensive solution to market rather than maybe you know having the the data centers piecemeal um you know kind of the various equipment together um you know i imagine that that would lead to better energy efficiency for the data center um you know is there any like numbers or data or anything you could talk about about the level of efficiency savings and then maybe the second point is do the hyperscaler customers care more about energy efficiency than they did a year ago it's very obvious they should care given how much electricity they consume but i know is there any difference between the type of customers and is there any do they care more than they used to thank you you know i think chris they've always

cared and um and i i think uh they care a little more now um i mean you you read the same news that we read right around the headlines you hear about the local communities being concerned about the impact on power prices and things like that so which really leads the data center customers to to make more careful choices about where they go build data centers as we haven't actually seen any impact on demand at all from what you see in the news it's more a matter of where they get deployed. But the where has a lot to do with how much power is available. And there are constraints around power availability today. So of course, when they design a new data center that they're going to build 10 of over the next couple of years, it's easier to find more locations, the less power you need. And then obviously the value prop of operating a data center uh and if you're on thermal management but today uses uh maybe think of it as a third of all the power that goes into a data center so whoever can uh eke out you know multiple percentage points of savings of energy not needed for thermal management um i mean the value prop for that for our customers is very very meaningful and uh what we're working on is well beyond a couple of percentage points. And we'll talk to you more about that when we're ready to launch some of the solutions that we're working on right now. But really exciting. It's going to be very meaningful what we're working on.

Thank you. I appreciate that.

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

Thank you. Good morning, everyone. Let me ask even a bigger picture one, if I can, probably just more your opinion, Yoakam, as opposed to something that could be truly answered. But obviously, there's a lot of hand-wringing out here in the market and investor sentiment about whether your end customers can really earn a acceptable return on all this investment looking out a ways. And against that, obviously, you've got to commit capital and you're adding capacity and the like um just where do you stand um on kind of the sustainability of this demand and do we have sustainable demand looking out you know two or three years that really supports you know um the investments you're making and the and the confidence that we see apparent in the orders etc yeah so so you asked for an opinion so i'll give an opinion uh so as as you know uh i spent the the five plus years before taking on this assignment in medical diagnostics and what's holding back the acceleration of the development of new

therapies, vaccines, medicines, and diagnostics, is our ability to make sense of all the data that exists already around human biology. And those industries are using AI already. But if you think about versus what they could be using it, how they could be using it, um i mean we're still in in the very very early innings of usage so i i think the the demand and and it's not just that there are more researchers and this is a longer discussion now than there were 20 years ago doing research on human biology but it's the availability of compute the cost of it and so on the economics are very different which means that more researchers have more access to ai and so that's so but super early innings and then i just look at a corporation like our own um for what we're using ai today and i think we're making some good progress internally here i mean it's part of our proprietary business system that we're rolling out but you know we're still single digits percent usage versus what we could be using it for and what i anticipate we'll be using it for over the next couple of years so so i think the demand uh for the output of the data centers uh is going to continue to grow meaningfully i mean we're just starting to to understand and many large organizations how how we can really use um this this capability at scale so i'm i'm optimistic um i um i know there's a lot of speculation about capex and so on but i think about it from a demand point of view and where it's going to be put to use

and so i'm optimistic yeah no helpful and then just looking at uh maybe another little bit bigger picture question, but just looking at kind of the rising power demand and heat loads and the like, you know, it would seem sort of the thermal and electrical solution need to, you know, clearly work in concert. Not that they're not today, but just looking at your portfolio, you know, or who you partner with on the electrical side, is there an avenue for JCI to play more on the electrical side Or would this be sort of just a continued partnering relationship with whoever your hyperscale customer may choose to, you know, pick up that part of the equation?

Yeah, I mean, I'd ask you that. It's a good question. I'd answer that in a couple of ways. If you look at our materials from the GoToGemba day where we talked about the five subsystems of the chiller that we are part of our core proprietary technological know-how. I mean, there are electrical aspects there, one of the subsystems, right? So we've clearly chosen there to own a subsystem that creates a whole system that performs at a higher level. And we have looked at that beyond the five subsystems that make a chiller. You could make some arguments around synergies, power and thermal. I think one has to think very carefully about that. And we're not very interested in, let's call it, creating procurement synergies for customers. I mean, that might be helpful for customers, but it's actually not going to advance how data centers perform. So the way we think about it is, how can we help improve the performance of the data centers? And so we're in multiple explorations trying to see what we could do there. So it's possible that we will very surgically expand our capabilities there. And that could be through partnership or it could be surgical and inorganic moves. um but uh i think uh on a big picture today you know i think more of the synergies from a customer point of view are probably on the procurement side and um uh so we will choose to focus our our efforts more on the technology development than a value prop side thanks for that perspective appreciate it our next question will come from joe ritchie from goldman sachs uh hey guys good Good morning.

I was hoping that you guys could help level set embedded in your guidance, your revenue guidance for the year. How much is embedded for data center revenues this year, and then also as you think about the backlog build and the visibility that you have for FY27, how much is already guaranteed that you would expect to kind of ship in the FY27 timeframe?

Yeah, so data center revenue is probably going to land in the high teens as a mix of percentage of revenue for fiscal year 26. We continue to see that subsegment grow much faster than the rest of the portfolio. um very healthy double digit uh for some sort segment even higher than that in terms of growth as we as we shape out the the following years and as we discussed it that going to gemba we see that that mix over the next three to five years becoming a third of the the company from a revenue standpoint uh and and continue to be extremely accretive to the overall enterprise I think Joachim mentioned it a little bit earlier on another question. As we continue to expand our install base because of the system growth we've seen the last couple of years and we're going to see the next three or four years, we continue to improve our service attachment rate. And that install base will generate a very nice service growth mix over the next few years that will continue to fuel that data center mix and do it very, very profitably.

That's helpful. Thanks, Mark. And then I guess just to follow on maybe sticking with data centers, how big is your CDU backlog today?

And then have you guys gotten through, you know, some of the key, like, final milestones in terms of testing and validation to start shipping your CDUs? yeah we we we're going to start shipping actually this quarter um uh most of the testing and validation is true we're still working through some of the the high scale uh validation the pipeline for that business uh is well beyond the hundreds of millions and and and has now reached a billion dollar we we think the opportunity here is enormous again it's it's uh allowing gci to continue to expand the total addressable market we have per megawatt and it will continue to do so

part of a bigger broader solutioning for for thermal management in the data center yeah and we had the recent nvidia certification as well just a little while ago so good good progress here great thanks guys thank you our next question will come from Nicole DeBlas with Deutsche Bank.

Yeah, thanks. Good morning, guys.

Good morning, Nicole.

Just good morning.

Just wanted to start on if you guys could talk a little bit about what you're seeing with respect to the Middle East and how much of an impact that had on the third quarter and I guess what you've embedded from a fourth quarter perspective for EMEA growth and maybe when that business can return to more material growth um yep great so uh we can't predict the middle east any better than you can i think uh it's uh it's about 10 of our amea business and um as you can imagine it's very challenging uh the business environment in the middle east right now um but building pent-up demand uh for sure um so we we have we have assumed that there will be no material

change here in the next uh next quarter to what we've seen here in in the recent quarters and build up enough you'll see emia land you know in very low single digit to flat in q4 and that's a couple of points of pressure vis-a-vis a normal run rate if the middle east would would have returned to normal which i i think we know for for this quarter it's not going to happen this fourth quarter is not going to happen but beyond it's it's all about crystal ball sure yeah it makes total sense and then apac um came in above your expectations pretty significantly in 3q i think both revenue and margins pretty robust i guess can you dive into

what drove that and thought any thoughts on you know if that's sustainable into the fourth quarter Yeah, I think there are a number of markets, geographical markets, that are quite healthy, you know, Indian in particular, but not only. And there are some data center markets, but also significant investments. And for example, what we call referred to as advanced manufacturing, um biopharma um semi-con etc and so even a country like japan you know that you think is more a slow growing market is actually very strong right now on the back of investments in more advanced industries beyond data centers um and then we've made some good progress we've we've been able to fortunate to strengthen our team in in asia pack and uh so we're seeing uh i think some traction here from uh uh these uh you know very talented leaders who uh we're super happy to have on board now uh who are doing a good job and and i think we're still in the early innings of that thank

you i'll pass it on thanks nicole our next question final question will come from andy kaplowitz with city group so service uh plus seven percent revenue growth and orders at plus four percent in q3 i think we're both slightly better than Q2, but I'm sure you think Johnson Controls could still do better than that 4% orders in North America that you have. So maybe just update us on where you are in your initiatives to improve service, particularly in areas such as security, which you've talked to us about before, and should we expect a bigger turn in service growth as you go into 27?

No, you're right. We remain very confident in kind of the long-term service opportunity and how profitable that business has been. Returning to mid to higher single-digit growth is the focus. HVAC and FHIR are performing well within that range. But as you mentioned it, we saw a bit of a decline in the American service backlog. They're mostly associated with the security business. It's not at all a profitability issue. It has to do really with a pivoting on towards growth and the dynamic of price in that market. And as you know, our security business is a little bit less differentiated than, for example, our HVAC business. And that has created a little bit of a competitive volume pressure. And we're taking very targeted action. You saw an improvement in the quarter and you're going to continue to see improvement in the performance as we drive a little bit of greater consistency across the business. both in uh both in america's and emia um we still think there's a large opportunity to continue to drive our install base especially when you see the system growth being in in the double digit and one of the big priority we talked about at going to gemba day is the productization of our service offering and and doing a better job at taking a differentiated go-to-market approach to be able to drive really better value proposition for our customers. So it's a small bump right now, but we think we've seen an inflection point.

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

Yeah, we're keeping up with markets, right? So the underlying market globally is flat the way we have been. We intend to do better than the market. And so a refocus of that organization, both from fire detection, fire suppression, as well as our core security businesses, as we pivot into next year is going to be a core focus to kind of lift up the growth of that business. Now, in all transparency, Andy, this is not going to be a high single-digit, a double-digit growth market, but we think we can drive performance in that business in a more high single-digit to mid-single-digit kind of level over time.

Appreciate it, Geller.

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

Thank you. Thank you for all your questions today. We delivered another strong quarter, driven by sustained order momentum, broad-based growth, and continued margin expansion. The combination of our differentiated technology, unmatched field presence, and the early proof points we're seeing from our proprietary business system reinforce our confidence in the opportunities I want to thank our more than 90,000 colleagues around the world for their dedication to our customers and for embracing new ways of working that help us serve them better every day. I look forward to continuing my conversations with all of our stakeholders. Thank you for joining us today.

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