Earnings Call Transcript
Johnson Controls International plc (JCI)
Earnings Call Transcript - JCI Q4 2025
Operator, Operator
Hello, everyone, and welcome to the Johnson Controls Q4 2025 Earnings Conference Call. My name is Nadia, and I'll be coordinating the call today. I will now hand the call over to Jim Lucas, Vice President, Investor Relations, to begin. Jim, please go ahead.
James Lucas, Vice President, Investor Relations
Good morning, and thank you for joining our conference call to discuss Johnson Controls' Fiscal Fourth Quarter 2025 results. Joining me on the call today are Johnson Controls' Chief Executive Officer, Joakim Weidemanis, and Marc Vandiepenbeeck, our Chief Financial Officer. Before we begin, let me remind you that during our presentation today, we will make forward-looking statements that reflect our current views about our future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Please refer to our SEC filings for a list of these important risk factors that could cause actual results to differ from our predictions. We will also reference certain non-GAAP measures throughout today's presentation. Reconciliations of these non-GAAP measures are contained in the schedules attached to our press release and in the appendix to this presentation, both of which can be found on the Investor Relations section of Johnson Controls' website. I will now turn the call over to Joakim.
Joakim Weidemanis, CEO
Thanks, Jim, and good morning, everyone. Thank you for joining us on today's call. As we close out our 140th year as a company, I want to begin by recognizing the extraordinary efforts of our 90,000 colleagues around the world. Their dedication to our customers and their commitment to our mission have been the driving force behind our progress and the results. Since joining Johnson Controls, I made it a priority to spend time where value is created, in the field with customers and our teams, at our innovation centers and on the factory floors around the world. It's important to be right alongside our team, as they do the work to deliver for our customers. These experiences have given me a firsthand appreciation for the passion and expertise that define our culture. Our customers and my colleagues on the front lines give me valuable insights on how we work and where we can improve processes and uncover new opportunities together. Learning about our capabilities and seeing our teams drive our company forward by problem-solving to better serve our customers has reinforced my belief in the strength of our foundation and the significant opportunities we're beginning to capture. Before I dive into the specifics, I want to summarize where we stand today and our path forward. First, we delivered strong results this quarter and for the full year, exceeding our free cash flow target and continuing to build a record backlog. Second, our proprietary business system is taking shape as our growth engine, combining 80/20 and lean principles with digital and AI approaches to create a more customer-centric and continuous improvement-oriented organization. Third, we are updating our long-term growth algorithm to reflect improved mid-single-digit top-line growth, enhanced operating leverage, double-digit adjusted EPS growth, and continuing to target 100% free cash flow conversion, demonstrating that the opportunity in front of us is clear, significant, and achievable. Turning to our results, Fiscal 2025 was a year of strong execution and momentum. Sales grew 6%, segment margins expanded by 100 basis points, and adjusted EPS increased 17%. Notably, we offset the dilution from the residential and light commercial divestiture in 1 year, ahead of our original expectations. Free cash flow conversion reached 102%, reflecting our disciplined execution and financial strength. Orders grew 7% for the year, and our backlog expanded 13%, ending at a record $15 billion. This sustained demand highlights the value our customers place in our solutions and the strength of our portfolio. This quarter's performance reflects our disciplined execution and operational focus while our evolving business system is still in its early stages, we're already seeing encouraging signs of progress. Let's turn to Slide 6. Last quarter, we introduced our proprietary business system, a proven approach to building a stronger, more disciplined company. It is rooted in winning and retaining customers through differentiated products, services, and exceptional experiences. It's about enabling frontline colleagues, engaging all teams in building a better Johnson Controls and being a magnet for talent. Our system is built on 3 pillars: simplify, apply 80/20 principles to focus on what matters most; accelerate, use lean methodologies to remove waste and accelerate execution and scale, leverage digital and AI approaches to amplify impact across the enterprise. And it's anchored in a global cross-functional language and methodology for how we communicate and collaborate to win. The approach is practical, identifying barriers to growth and removing them quickly. We start narrow and go deep, get to the root causes, pilot countermeasures, adjust and secure frontline buy-in before scaling broadly. While it's still early days and business systems take time to mature in large organizations, I'm energized by our progress. More than 700 colleagues are actively engaged across several priority areas and have conducted over 50 kaizens to date with many more to come. We have already trained 200 leaders worldwide through activation boot camps. Leadership plays a pivotal role in the progress of our business system and our opportunity to build an even stronger company that is more capable, more focused, and more disciplined—a company that executes with consistency and delivers for customers where it matters most. To further strengthen our leadership capabilities and align talent with strategic priorities, we recently announced a new leader of our Americas segment, Todd Grabowski. He brings over 30 years of experience in the commercial part of our business and product management within our largest franchise, our global applied business. His industry knowledge and customer orientation will be instrumental as we accelerate growth and sharpen our customer focus in this important region. Earlier this week, we announced to our colleagues the hire of a global leader of manufacturing, a key role accountable for performance across our factory footprint, driving improvements in safety, quality, delivery, and cost, SQDC, using our business system to build competitive advantage and winning performance for our customers as well as drive overall productivity, creating more funding for reinvestments. As we continue to strengthen our talent development, it will enable us to accelerate our progress. Last quarter, we highlighted 2 areas with clear potential: sales capacity and productivity and factory on-time delivery. Today, I want to show you how our proprietary business system is already delivering measurable progress. By working together across teams and leveraging 80/20 and lean tools, our conventional HVAC sellers in one of our local markets increased the time they're able to spend engaging with customers by over 60%, and our team manufacturing key chillers in North America improved on-time delivery to over 95%. These examples reflect our commitment to going narrow and deep, focusing on specific areas to uncover the true sources of waste and avoid surface-level fixes. This approach enables faster piloting, stronger frontline engagement, and eases broader deployment later across the organization. As is typical in continuous improvement, we see even more opportunities as we dig deeper. In the example of selling time with a customer, the team streamlined the sales process by eliminating non-value-added process steps and upgrading tools to accelerate the sales cycle. These improvements simplified workflows and led to more than a 60% increase in time spent engaging directly with customers. We're now applying AI to the overall sales process of estimation and selection to codify, scale, and amplify several process steps that will yield even more time with customers on top of that. We've also been focused on improving the on-time delivery in one of our key chiller plants that serves the rapidly growing data center vertical. While we have a leading position in advanced thermal solutions for data centers, historically, our on-time delivery was inconsistent, and our lead times were longer than what customers demand. Leveraging 80/20 and lean approaches, we have dramatically improved on-time delivery and are now over 95%, and lead times are on the way of being cut in half. I'm confident we can maintain this standard, which only strengthens our competitive advantage and our ability to win in this fast-growing vertical. This isn't about putting a playbook on a shelf; it's about fundamentally changing how we work. These improvements come from going narrow and deep, countermeasuring root causes, and engaging the teams impacted, ensuring sustainable change and easier scaling across the enterprise. Simplify, accelerate, scale. That's how we win together. As we move to Slide 7, you'll see how our focus on technology innovation and sustainability is powering our future growth and reinforcing our leadership in mission-critical verticals. Johnson Controls continues to strengthen its leadership in advanced thermal management. With AI-driven demand for high-density data centers pushing cooling technology to new limits, we are well positioned across the thermal management or cooling chain, as well as with our integrated offering of digital monitoring and controls. During the quarter, we successfully launched our coolant distribution unit offering, a major milestone in our differentiated data cooling center strategy. CDUs are critical enablers of liquid cooling, which is rapidly becoming essential as AI chips are becoming more powerful and generating more heat. Traditional air-cooled systems are reaching physical limits, driving a transition toward liquid and hybrid cooling architectures that improve thermal management performance in addition to energy and water efficiency. This launch, combined with our award-winning YVAM magnetic-bearing chillers, absorption chillers, and now our strategic investment in Accelsius, positions Johnson Controls to deliver a comprehensive and integrated portfolio that addresses the full thermal management spectrum from chip to ambient, covering the entire heat capture, removal, and regen journey. We are receiving strong early interest from hyperscale customers, who are prioritizing energy efficiency and sustainability, core pillars of our innovation strategy. Our data center solutions are aligned with global trends in AI and increasing compute density, where thermal performance is now a strategic differentiator. With our cooling technologies reducing non-IT energy consumption by more than 50% in most North American hubs, we are delivering substantial energy savings. This reinforces our role as a strategic partner to the world's leading data center professionals at a time when the vertical is poised for significant growth over the next decade. In Europe, we recently made a major announcement that underscores our leadership in decarbonization. Johnson Controls will provide green heat to the city of Zurich through a landmark waste incineration project. While we've delivered similar solutions across the region, this deployment more than doubles the heat capacity of our previous largest project and ranks among the largest heat pump installations globally to utilize the zero GWP refrigerant ammonia. Our advanced heat pump technology will recover energy from flue gases and feed it into the district heating network, supplying heat to approximately 15,000 homes, about 15% of the city's total district heating demand. This project is another powerful example of how Johnson Controls is enabling critical industries, institutions, and now cities to transition to sustainable heating solutions while maintaining reliability and performance, and it highlights the tremendous opportunity to harness excess heat, reduce operating costs, and accelerate decarbonization. In 2024 alone, our heat pumps enable customers to cut energy costs by 50% and emissions by 60%. The partnership we have with Zurich and other cities, as well as with hundreds of others from global manufacturers in pharmaceuticals, chemicals, food and beverage, and more solidifies our leadership position in the European energy and heat transition, where we can capture our share of these opportunities amid regulatory tailwinds and accelerating customer demand. These initiatives reinforce our leadership in thermal management, decarbonization, digital solutions, and mission-critical environments, supported by our commercially advantaged embedded service capabilities and relationships. The strength of our service model lies in the combination of customer intimacy, technical depth, and global reach. With direct service operations across the globe, Johnson Controls delivers consistent high-quality support to customers over the lifecycle in mission-critical verticals such as data centers, advanced manufacturing, life science manufacturing, and large hospital and university research centers. Our ability to deliver consistent service across the global footprints of hyperscalers is a unique differentiator. As data centers multiply, our service model is helping maintain the pace, positioned to deliver reliability wherever our customers build. Our view is that customers will always demand high-touch, high-availability service, and that is an unparalleled differentiator for Johnson Controls. Now as we look ahead, our guidance for fiscal 2026 builds directly on the momentum we've established this year. I already previewed our updated long-term growth algorithm, and Marc will discuss the details shortly, but I want to highlight how excited we are about the opportunity in front of us. In short, our strategy to leverage our strengths, particularly in HVAC, Controls, and Digital to deliver differentiated value and long-term growth underpins our success. Our ability to meet global demand for mission-critical systems, whether in data centers or decarbonization projects, is backed by an exceptional service organization and positions us to capture significant opportunities ahead. With that, I will now turn it over to Marc.
Marc Vandiepenbeeck, CFO
Thanks, Joakim, and good morning, everyone. We closed fiscal 2025 on a strong note, delivering another quarter of solid financial performance. This consistent execution throughout the year has strengthened our foundation and positioned us well, as we enter the new fiscal year. Our ongoing focus on stronger operational discipline, customer satisfaction, and continuous improvement is driving results, and we remain committed to generating sustainable long-term value for our shareholders. Now let's take a closer look at fourth quarter results on Slide 8. In the quarter, organic revenue grew 4%, and segment margin expanded 20 basis points to 18.8%, driven by our ongoing focus on cost discipline, favorable mix, and the tangible benefit of our productivity programs. Adjusted EPS of $1.26 increased 14% year-over-year and exceeded the high end of our guidance range. On the balance sheet, we ended the quarter with approximately $400 million in available cash. The net debt remained within our long-term target range of 2 to 2.5x, declining to 2.4x compared to the prior year. For the year, adjusted free cash flow improved by approximately $700 million to $2.5 billion. Our strong earnings performance and rigorous approach to working capital management enabled us to achieve 102% free cash flow conversion for the year. This reinforces the strength of our execution and the quality of our earnings. Let's now discuss our segment results in more detail on Slide 9 and 10. We are seeing strong customer engagement and healthy demand for our solutions across key verticals. Orders grew 6% in the quarter, highlighted by 9% growth in the Americas, supported by strength in data centers. In EMEA, orders increased 3% despite a challenging comparison to 14% growth in the prior year, with double-digit growth in service. In APAC, orders saw a small decline of 1% as a decrease in system more than offset mid-single-digit growth in service. At the enterprise level, organic sales growth was led by mid-single-digit growth in service. In the Americas, sales were up 3% organically on a tough comparison, supported by continued strength in both HVAC and Controls. EMEA delivered 9% organic growth with strong double-digit growth in system and high single-digit growth in service. In APAC, sales declined 3% organically due primarily to lower volumes in China. This result reflects strong execution, particularly in the Americas and EMEA against a backdrop of challenging year-on-year comparisons. Margin performance improved steadily throughout the year as we capture greater operating leverage and continue to optimize our cost structure. Our resilient operating model enabled us to align pricing, productivity, and mix to support consistent profitability even as market conditions evolved. This translated into notable fourth quarter performance. By region, adjusted segment EBITDA margins in the Americas improved 50 basis points to almost 20%, supported by productivity gains and operational efficiency. In EMEA, margin expanded by 30 basis points to 15.6%, reflecting positive operating leverage from top line growth. In APAC, margins declined 190 basis points to 17.8% as lower volumes in China created pressure on factory absorption. Our backlog remains at a record level, growing 13% to $15 billion. System backlog grew 14%, and service backlog grew 9%. With this momentum in mind, let's discuss our long-term outlook and capital allocation priorities on Slide 11 and 12. We are updating our long-term growth algorithm to incorporate the principles of our value creation framework and the momentum we have built this year. As we look ahead, we expect to deliver mid-single-digit organic revenue growth, operating leverage of 30% or better, double-digit adjusted EPS growth, and approximately 100% free cash flow conversion. This algorithm is supported by 3 key factors: first, the sustained demand for decarbonization and mission-critical solutions; second, the continued evolution of our proprietary business system to drive operational efficiency; and third, the ongoing technological innovation through new product launch and a disciplined approach to portfolio management by channeling resources into our most attractive growth areas. On capital allocation, our priorities remain unchanged. We are investing in organic growth. We are focusing on returning capital to shareholders through dividends and share repurchases. And finally, we are pursuing selective acquisitions to strengthen our portfolio. Our strong balance sheet and consistent cash flow generation give us ample flexibility to execute on these priorities with confidence. Let's now discuss our fiscal first quarter and full year guidance on Slide 13. Momentum remains strong as we begin the first quarter, supported by operational efficiencies and a record backlog. We anticipate organic sales growth of approximately 3%, operating leverage of approximately 55%, and adjusted EPS of approximately $0.83. For the full year, we are confident in our ability to deliver our long-term growth and profitability commitments. We expect organic sales growth of mid-single digits and adjusted EPS of approximately $4.55 per share, which is over 20% growth. We anticipate operating leverage to be approximately 50%, which is above our long-term algorithm, as our efforts to remove stranded costs are recognized faster in the new fiscal year. Our guidance reflects continued operational discipline, strong customer demand, and the visibility provided by our record backlog. Our ability to navigate evolving market conditions reflects the strength of our enterprise capabilities and the resilience of our operating model. We expect approximately 100% free cash flow conversion for the year, consistent with our long-term financial framework. This reflects our focus on earnings quality, working capital discipline, and efficient capital deployment, all of which support our ability to invest in growth, while returning value to shareholders. We have built a strong foundation for the years ahead. As we enter fiscal 2026, our focus remains on advancing sustainable growth, expanding margins, and creating lasting value for our shareholders. We look forward to keeping you updated on our journey.
Operator, Operator
The first question goes to Amit Mehrotra of UBS.
Amit Mehrotra, Analyst
Marc, the 50% operating leverage target for 2026, can you just walk that through the segment EBITDA margins? There's some moving parts on corporate expense amortization, but it looks like it implies about 90 basis points of expansion from the 17.1%. Correct me if I'm wrong, but if you can just kind of double-click on that, that would be helpful.
Marc Vandiepenbeeck, CFO
Yes, sure. Thanks, Amit. Yes, you're pretty close on margin. I would say by segment, EMEA and APAC will be the main drivers of margin improvement this year. Not that Americas will not contribute, but if you look at that incremental, they've shown a decent improvement this year and the level of ramp year-on-year will be probably a little bit more muted than the other segment. But overall, we feel very comfortable that our operating leverage will be in the 50s or above.
Amit Mehrotra, Analyst
Joakim, regarding the opportunities ahead, there are several aspects to consider. There's a potential for cost savings and possibly an opportunity within the portfolio. You mentioned mergers and acquisitions; could you rank these opportunities? It seems there might be significant potential for improving general and administrative expenses, but there are also questions about further streamlining the portfolio. Since you are 237 days into your role now, could you provide more insight into how you plan to prioritize these various opportunities?
Joakim Weidemanis, CEO
Thank you, Amit, for tracking how long I’ve been with the company. Let's follow up on what you discussed with Marc regarding operating leverage. The reason behind our positive guidance relates to our business system, which focuses on improving productivity in our field operations, factory footprint, and service areas. We see opportunities for leverage in SG&A as well, meaning we aim to get more value from our SG&A investments, particularly by enhancing the S component with the help of our business system, as I mentioned in my prepared remarks. I am very enthusiastic about the progress we can continue to achieve in this area, which supports our optimistic guidance. Additionally, we remain committed to reducing G&A and corporate costs, with no change in our ambition there. On the M&A front, we're collaborating with the Board to refine our portfolio and develop clear future strategies. As I noted previously, this is a multi-quarter effort focused on creating shareholder value, which is our top priority. We've also begun to incorporate disciplined practices I learned in previous roles prior to joining Johnson Controls. Our acquisition pipeline is active, and we are involved in several opportunities, approaching them with a disciplined mindset in terms of strategy and target evaluation while ensuring careful capital allocation.
Operator, Operator
The next question goes to Nigel Coe of Wolfe Research.
Nigel Coe, Analyst
I want to revisit the 50% incremental margin for fiscal year 2026. If I consider 30% as your baseline operating leverage, that implies approximately $250 million in benefits beyond that 30%. Can you confirm if my calculations are accurate? Additionally, could you elaborate on the $250 million? You've mentioned delayering and other initiatives; are there any process improvements included? I'm also curious to know if this is limited to fiscal year 2026 or if there may be advantages extending beyond this year.
Joakim Weidemanis, CEO
Marc can help you on the exact math here. I'm sure we'll be talking about that in follow-up calls as well, but we are just getting started with our business system. And so some of the examples that I shared with you today, my objective was to share an SG&A example and an above gross margin example. And we are just getting started. And as you saw from the examples I gave, the opportunities are significant here. So that operating leverage is going to continue to improve over time. And the main reason we're actually shifting the guidance to include that, and have a strong element of that, is it's really reflecting what we're trying to do here. We're trying to build a higher-performing company that's more focused on profitable growth, both driving top line by pointing at higher growth opportunities, verticals, applications, but also doing solid productivity work that I talked a little bit about as well as the responsible cost reductions that we've discussed in other quarters.
Marc Vandiepenbeeck, CFO
Nigel, directionally, your numbers are there or thereabouts, yes.
Operator, Operator
The next question goes to Steve Tusa of JPMorgan.
Patrick Baumann, Analyst
Hello?
Joakim Weidemanis, CEO
Yes, can you hear us?
Patrick Baumann, Analyst
Can you discuss the factors behind the decrease in amortization this year? Is that connected to the $400 million restructuring charge you took in the quarter? If it wasn't related to amortization, what else is included in that charge?
Marc Vandiepenbeeck, CFO
Yes. It's not around the restructuring. It's more on the impairments we took in the quarter, Steve. It reflects the different portfolio actions we've taken over the year, obviously, but there's further reduction possible if we do act on some of the divestitures we've been contemplating for a while on the fringe of the portfolio. The vast majority came from those one-time actions you saw in the quarter.
Patrick Baumann, Analyst
Okay. Got it. So that decline in amort is sustainable is what you're saying. And is that part of your stranded cost takeout? Or is that something outside?
Marc Vandiepenbeeck, CFO
No, completely outside. The stranded cost takeout is incremental today.
Patrick Baumann, Analyst
Okay. Lastly, regarding orders, I understand you faced a challenging comparison in the first quarter last year, but you surpassed expectations this quarter. What do you anticipate for the first quarter? Will you see an increase despite the difficult comparison, or will orders decline due to the tough comp?
Marc Vandiepenbeeck, CFO
Yes. As you know, we generally don't guide around orders. I can tell you that the health of our pipeline continues to improve, and we see opportunities to continuously see growth on our order this quarter and the upcoming quarter as well.
Patrick Baumann, Analyst
Wow, so you can grow off that comp in orders?
Marc Vandiepenbeeck, CFO
That's right.
Joakim Weidemanis, CEO
Yes. And maybe just to reinforce that, we're, as part of building a faster-growing, more profitable company here. It's not just about the productivity work and the business system work that I talked about. It's also about pointing our efforts from verticals, applications, and so on at parts of the market that are growing at a faster rate.
Operator, Operator
The next question goes to Jeff Sprague of Vertical Research.
Jeffrey Sprague, Analyst
Maybe just a couple of modeling nits for me, too. Interesting on the amortization, obviously, lifting the earnings, but I was maybe actually a little bit more surprised that with lower amort, you've got this comfort level on 100% cash conversion going forward. And I guess that cash flows from everything you're talking about from productivity. But maybe you could just give us a little bit more color on maybe what the target-rich environment might be on free cash flow and how that might unfold over the next year or 2.
Marc Vandiepenbeeck, CFO
Yes, you're correct. A reduction in amortization won't provide significant assistance, but we do see opportunities to maintain strong performance in our overall working capital management, especially regarding free cash flow conversion. In fiscal year '25, we've observed substantial improvements in how we manage our receivables, including the timing of customer billing, collection processes, and the overall quality of these processes. There's plenty of room for continuous enhancement in this area. However, I don't believe it will be the main source of opportunities moving forward. The primary value we expect to drive from free cash flow conversion will largely come from better inventory management and understanding our inventory needs as we continue to grow the company. Our business system is set to provide significant clarity and visibility, enabling us to continuously improve and reduce our reliance on inventory, which will enhance our cash flow conversion.
Joakim Weidemanis, CEO
Yes. That just hasn't been a focus in the past, Jeff. That's an opportunity for us.
Jeffrey Sprague, Analyst
Yes. Joakim, could you provide a bit more detail? Marc mentioned the potential for improved margins in EMEA and APAC for 2026. Given that the comparisons will be easier in Europe, are there specific actions planned to support that? Or is the expectation based more on a stronger revenue recovery in those regions? It would be helpful to get additional insights on this.
Joakim Weidemanis, CEO
Yes. I think the short answer is we're not counting on one single big thing. So it's a combination of things that we have largely proof of already that we're able to execute on. So it includes some elements of our pricing discipline that has become much better here over the recent couple of quarters, but it also includes a better discipline around where we point our efforts. But then also, again, some of the examples that I gave here around how we're deploying the business system that work is ongoing in EMEA and Asia as well. So we see opportunities on multiple parts of the P&L here.
Operator, Operator
The next question goes to Chris Snyder of Morgan Stanley.
Christopher Snyder, Analyst
I wanted to ask about the content opportunity into data centers. So maybe moving aside the CDU that you guys announced, if we look at the legacy business, just kind of wondering how content changes on the move from air cooling to liquid cooling. I imagine the chiller opportunity is still as strong as ever. Could we lose some content in air handling? I'm just trying to figure out how that nets out as we look towards the future.
Joakim Weidemanis, CEO
The simple answer is that newer chips need more power, which means they generate more heat, so generally, more cooling is required. Over time, the scope of our offering and the performance demanded from the chillers continues to increase. I've mentioned previously how I find our technological capabilities in HVAC impressive, and the data center market's needs for higher precision and higher capacity cooling align well with our strengths in chillers.
Marc Vandiepenbeeck, CFO
But if you think about the different offerings we have between airside solution and chiller, we see continued demand for both. And regardless of how the chip themselves are cooled, you have solutions liquid to air and liquid to liquid, and liquid to air continues to see very strong momentum and matches well with our offering. And obviously, we have a very strong developing solution on liquid to liquid.
Christopher Snyder, Analyst
I really appreciate that. I wanted to then follow up on some of the investments that the company is making in the aftermarket. It seems like the investments in technology are both lowering the cost to serve the aftermarket for JCI, while also providing efficiency savings to the customer. So I guess my question is, is this more of a driver of share gain through the value add you're bringing to the customer? Or is it more of an opportunity to improve the incremental margin profile of services by lowering that cost to serve by using more technology and less labor, I would presume?
Joakim Weidemanis, CEO
It's really both. You could say there's share gain because our technology investments allow us to serve customers at a price point that makes us more competitive in mission-critical applications, enabling us to win their business instead of them needing to keep their own service staff. Additionally, we're also gaining share against third parties that service our equipment and other OEMs in the industry. As we implement the technology, we reduce our cost to serve. So, it's a combination of share gain and margin improvement. I would say we're just starting out in this area as an industry when it comes to using more sophisticated technology-based methods in life cycle services. It's an exciting opportunity for us in terms of growth and margin enhancement. We will provide more updates on this in the coming quarters.
Operator, Operator
The next question goes to Nicole DeBlase of Deutsche Bank.
Nicole DeBlase, Analyst
Yes. Maybe just starting with the nice acceleration you guys saw in order growth this quarter. Can you talk a little bit more about maybe what you saw from a vertical perspective within Applied in particular? And any color on the magnitude of data center order growth that you'd be willing to give?
Joakim Weidemanis, CEO
We typically do not comment on order numbers by vertical, but generally, we have a shorter list of sectors that are driving significant growth in our backlog, which is up 13%. We start this year with an ingoing backlog of almost $15 billion, a record for our company, which is remarkable. The data center sector is one we are particularly excited about, and our pipelines remain very strong. While orders can vary, we see impressive results overall, with a 13% increase in backlog. The data center sector remains robust. Additionally, sectors like biologics manufacturing are thriving, as new campuses are being developed to produce future drugs, which are biologics-based. This sector is also very strong for us. Large campuses focused on significant research, including universities and research institutions, as well as hospitals, are performing well. Finally, we identify sectors like advanced manufacturing, which includes semiconductors and other manufacturing, where creating very precise indoor climates is essential for critical operations. These are the key areas where we are experiencing the most substantial growth.
Nicole DeBlase, Analyst
Okay. Got it. That makes sense. And then just maybe a little nitpickier one around the quarterly cadence of organic growth. I think you guys have embedded a little bit of decel in the first quarter. If you could maybe speak to what's driving that? And then the way you see organic growth kind of progressing throughout the year to get back to mid-singles?
Joakim Weidemanis, CEO
Yes, it's really about the comparison. The first half is expected to be lower than the second half. The backlog we have provides good visibility into our performance in the individual quarters. Additionally, our service business has a strong recurring element, which gives us good predictability. We are optimistic about the outlook for the year and will keep you updated as we make progress. It's a matter of comparing the first half and second half.
Operator, Operator
The next question goes to Scott Davis of Melius Research.
Scott Davis, Analyst
You've implemented a lot of initiatives, like the 80/20 principle and lean practices, and you've made several leadership changes, which represents significant transformation. However, these efforts won't be effective without accountability and alignment to the appropriate KPIs. Joakim, have you made substantial adjustments to the compensation structures within the organization, or do you feel that changes are necessary based on what you've observed thus far?
Joakim Weidemanis, CEO
I would say, in terms of accountability, first, you have to define what you're going to measure to hold people accountable for. So we're in the process of establishing and rolling out what we call our enterprise KPIs. There are 9 of them, which we could probably come back and talk about at some other point in time. And how we do that and drive them through the organization is as important as the compensation part to drive a higher level of accountability for holistic results. And as we're deploying that throughout the organization, we are looking at the different compensation approaches and models that we have. And I would largely say there are some tweaks here and there, Scott, but not fundamentally any big changes that are necessary.
Scott Davis, Analyst
Okay. And, Joakim, have you pretty much unwound any remaining matrix within the management, within the structure of the organization? I mean, I haven't heard you talk about running a certain number of P&Ls, but maybe you can address that and just talk about how you changed that part of the organization.
Joakim Weidemanis, CEO
So that's work in progress, Scott, together with the team. And we made a couple of changes, like you pointed out here. So trying to put in place a championship team that can help us build a champion of a company here. And as we staff up here, of course, we have more capabilities, higher caliber in our senior management teams. We are reflecting and looking at structures and so on. We made a couple of tweaks since I joined, but no major moves, not at this point.
Operator, Operator
The next question goes to Joe Ritchie of Goldman Sachs.
Joseph Ritchie, Analyst
Joakim, so I want to focus on the strategic investment in Accelsius. And ultimately, with the launch of your CDU, just can you maybe just, like, double-click on how complementary the investment is, like whether you'll be going to market together? I just want to try to understand what the opportunity is as I think about this over the course of the next 12 to 24 months.
Joakim Weidemanis, CEO
Yes, that's a great question. We are continuing to invest not only in chillers but also in various HVAC solutions. Our focus is on creating a comprehensive thermal solution for data centers. The launch of the CDU is aimed at capturing a significant market opportunity that's currently available. This product was developed through close collaboration with several of our existing hyperscaler customers and comes as a platform offering multiple products across all global regions. We're very enthusiastic about this. Accelsius is our forward-looking initiative, featuring a two-phase cold plate technology platform. Here, we are considering upcoming chip launches from NVIDIA and others over the next four to five years, so we can determine what kinds of cooling solutions will be necessary. Accelsius is about anticipating future needs. However, there are already applications for this technology today, and we will pursue both commercial collaborations and technology and product integration, creating greater value over time. We are excited about both initiatives. One aims to drive immediate revenue, while the other is more strategic, preparing for future demands in the next four to five years.
Joseph Ritchie, Analyst
Very helpful. And then just a follow-on there. Just around the portfolio, you've mentioned a little bit on the fringes, on the divestitures. Just how has your thinking evolved just in terms of addition by subtraction across the portfolio?
Joakim Weidemanis, CEO
Yes. So there's no change. We had mentioned already well before I joined, actually that about 10% of the portfolio, we're looking at alternatives for and better ownerships. And the driver here is to create shareholder value. And then there are some other parts of the portfolio that I've mentioned before that we've been looking into strategically, how we're positioned, what one could do with the businesses operationally, how much do we think we can improve them. And this is a dialogue we're having with the Board. And over the next couple of quarters, we'll draw some conclusions and decisions. And they will all be guided by driving shareholder value is goal #1, and we'll keep you posted.
Operator, Operator
The next question goes to Julian Mitchell of Barclays.
Julian Mitchell, Analyst
Maybe I just wanted to circle back to the discussions on commercial HVAC. Because I guess in the Americas, for example, I think the last few quarters, you've grown at a sort of high single-digit rate in Applied. I think some of your competitors are growing at a much faster pace in revenues right now. And I suppose when I look at your guidance for '26, it doesn't suggest an acceleration in the Applied business. I just wondered if that was correct on '26 and how we should think about that Applied HVAC growth in revenue vis-a-vis the market growth rate?
Joakim Weidemanis, CEO
I have also reviewed those scripts. We are not losing our position in the Applied segment we are involved in, and I am very confident about that. Additionally, I understand the backlog and the upcoming orders and pipeline. For the sectors we are focusing on, while we can always improve, we are performing quite well.
Julian Mitchell, Analyst
Understood. For my follow-up, I'd like to clarify the incremental margin guidance for fiscal '26. Should I think of it as having a traditional segment EBITDA operating leverage in the high 20s percent range, similar to the 30% long-term average? The additional increase to reach 50% for the year primarily comes from reduced amortization and some elimination of stranded costs. Is that the right framework for margin expansion this year?
Marc Vandiepenbeeck, CFO
No, I would say the traditional operating leverage you'll get out of the segment is solidly in the 30s, excluding some of the benefit from amortization. And then the effect of our restructuring and transformation will come on that number, and that's how we think we're going to get well beyond that 30-plus percent algorithm we shared. So for '26, more than 30%. And then over time, obviously, this will naturally go back to a 30-plus average as you go beyond '27.
Operator, Operator
The next question goes to Joe O'Dea of Wells Fargo.
Joseph O'Dea, Analyst
Can you unpack the mid-single-digit organic for fiscal '26 a little bit? Talk about the price, if that price is already in place? Any color on kind of volume by regions, HVAC versus Fire & Security? Just give us a little bit of a sense of how it all comes together and sort of what is already there with respect to price and kind of backlog and what you would still need to go get to achieve it?
Joakim Weidemanis, CEO
Sure, I'll begin, and then Marc will add some more details. Our backlog has increased by 13%, reaching a record $15 billion as we enter our current fiscal year. While not all of this backlog will be shipped this year, the majority will. Additionally, a significant portion of our service business, which is recurring, is not reflected in the backlog. This gives us good predictability for the year ahead. Moreover, our growth guidance is based purely on what we have already demonstrated the ability to execute, including pricing, as well as growth in various regions and business segments. This forms the basis of our strong confidence in our guidance. Now, Marc, since I’m still new, I’m not entirely sure about the level of detail we typically share with our colleagues on the call.
Marc Vandiepenbeeck, CFO
Joe, overall, if you think first regionally, I would say across the board, everybody is going to be within that mid-single digit with EMEA might be just slightly above the average, but Americas and APAC just at the enterprise level. So each segment, think about it overall wherever the company guide overall lands. And then by domain, yes, our traditional Applied and HVAC business will grow probably a little faster than the mid-single digits, supported by the strength in some of the core vertical we talked about, including data center. And then Fire & Security will be probably on the lower end of that enterprise guide and probably bring some contribution, obviously, to growth, but not as much as the domain that are highly supported by those high-growth verticals.
Operator, Operator
The next question goes to Andrew Obin of Bank of America.
Andrew Obin, Analyst
Yes, I'd like to explore the data center market further. I believe you were the pioneers of the mag-bearing chiller, and many of your competitors are increasing their capacity to compete in this space. Do you believe that over the next three years, considering your capacity enhancements and efforts to improve throughput and on-time delivery, you can maintain your market share? Or do you think you might lose market share as additional capacity comes from other players?
Joakim Weidemanis, CEO
That's a great question, Andrew. We plan to take market share. We made a significant investment in capacity before my arrival. Recently, we focused on improving our business system, particularly for one of our top sellers in data centers, which was not meeting variable on-time delivery and had long lead times. However, through our efforts over the past few months, we have increased on-time delivery to 95% and are on track to reduce lead times by half. This will make our lead time market-leading, and we have already secured orders due to our ability to deliver capacity faster than some competitors. It’s important to stay focused on building an innovation capability that meets the evolving needs of data centers, not just in chillers but also in comprehensive thermal solutions, including CDUs and future needs like Accelsius and other investments. We aim to have a highly agile manufacturing position with outstanding lead times, supported by our team of over 40,000 people globally. Field service and lifecycle services are crucial in the data center market, where avoiding unexpected downtime is more critical than in most other sectors. We are committed to enhancing our existing capabilities to ensure we remain at the forefront, and we will not lose market share willingly.
Operator, Operator
Thank you. This concludes our Q&A session. I will hand the call back to Joakim Weidemanis for any closing comments.
Joakim Weidemanis, CEO
Thank you. We have an exciting future ahead of us here at Johnson Controls, and the important work we have underway will position us to capitalize on compelling opportunities ahead, not just in data centers, as I was just commenting on, but more broadly. With a culture focused on customers and centered around our proprietary business system, I'm confident we'll continue winning with our customers and delivering value to our shareholders. I'd like to take another moment to thank our 90,000 colleagues around the world. You are the foundation of our company, and I'm energized by the prospect of what the future has in store for us. I look forward to continuing my conversations with all of our stakeholders. Thank you all for joining today and see you on the follow-up calls.
Operator, Operator
Thank you. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.