Earnings Call Transcript
Johnson Controls International plc (JCI)
Earnings Call Transcript - JCI Q2 2025
Operator, Operator
Good morning and welcome to the Johnson Controls Second Quarter 2025 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Jim Lucas, Vice President of Investor Relations. Please go ahead.
Jim Lucas, Vice President of Investor Relations
Good morning and thank you for joining our conference call to discuss Johnson Controls' fiscal second 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. I'm just about two months into the job and I appreciate the very warm welcome I've received from the Johnson Controls team. I'd like to start by thanking our 100,000 colleagues around the world for their dedication to our customers and the work they do every day. As you can see from our strong second quarter results, we continue to execute better across the portfolio. Organic sales grew 7%. Segment margins expanded 180 basis points to 16.7%, and adjusted EPS increased 19%. During the quarter, orders were up 5%, led by continued strength in our leading applied and resilient service businesses. Overall, we grew our record backlog by 12% to $14 billion. At a fundamental level, these results show broad-based and sustained demand for our differentiated solutions. And now, as a more focused company and with strength in execution, we're driving value for all of our customers and shareholders. Our strong performance in recent quarters, combined with the continuous momentum in our recurring businesses and record backlog gives us the confidence to today raise our guidance slightly for the full year. Marc is going to provide more details on this later in the call. Now, I will share how I've been spending my initial weeks as CEO of Johnson Controls and some of my early observations. I will also touch on the benefits of our new organizational model and reporting segments. Before I start, my main takeaway is that I see great potential in this iconic 140-year-young technology-based and service-enabled company. I have a good sense, even in these early days, of the opportunity to further enhance value for shareholders. First, what am I seeing? Prior to my role at Johnson Controls, I spent 13 years at Danaher, profitably scaling global businesses by building stronger capabilities and operational execution and accelerating organic growth as well as making strategic acquisitions. I learned from that experience that the best way to get to know a business fast and in-depth is to spend a considerable amount of time at Gemba. This means joining our team on the front lines, where the action is and where the value is created. Over the last eight weeks, I have visited eight countries, many customers, hundreds of our field colleagues, all of our main R&D centers and walked the floor in 15 factories. I am becoming ingrained in the business, getting up to speed on the needs of our customers, markets, competitors, technologies, services and assessing our capabilities in operational and growth execution, talent and strategy. So where are we now? It's clear to me that Johnson Controls has considerable strengths. First, our market-leading franchises, such as our YORK HVAC business and our Metasys Building Automation Controls platform. Second, our talent in the field is a true differentiator. We have over 40,000 dedicated and customer-oriented employees. Finally, our technological capabilities and our product domains are impressive. Our capabilities are evidenced by our many industry firsts and nearly 8,000 patents, with more coming. Johnson Controls has come a long way over the last several years, but as I said, there is still great potential to unlock in this iconic technology-based and service-enabled company. An important step in achieving this is our new structure. Let me discuss our new organizational model. Johnson Controls has been undergoing a lot of change the past few years, including the pending sale of our residential and light commercial HVAC business. We have now evolved our operating model, which is an important first step to make us a more customer-centric organization. As you can see on Slide 5, we have reorganized into three geographical, customer-oriented reporting segments, which are supported by leading global functional capabilities. Our goal is to achieve market-leading performance and build a faster-growing and more profitable company by strengthening how we serve our customers, improving our operational performance and accelerating innovation. Our three geographical segments serve as our consolidated commercial engine regardless of channel strategy, responsible for improving customer intimacy and market reach while delivering profitable systems and life cycle solutions growth. The geographical segments are supported by two global centers of functional excellence. The products and solutions group is tasked with accelerating our rate and speed of innovation and improving our operational performance in supply chain and manufacturing. Our commercial and field operations team is tasked with building capabilities in all commercial areas by deploying best practices and tools, which enables our regions to grow faster by finding and winning more customers while improving how we serve them over the life cycle. This organizational model clarifies and delineates roles and responsibilities in a much better way and it is the right next step for Johnson Controls. We're looking forward to realizing its benefits. With that, as I said, I have a few initial impressions to share. First, throughout my travels, I can see that there are opportunities for us to focus a lot more on our customers and our competition in all functions and layers in our organization. I'm encouraging everyone at Johnson Controls from customer-facing to senior leadership to prioritize winning with our customers and to act with speed and urgency. This emphasis, coupled with our new operating model, will allow us to build a more agile, faster-executing, and thereby faster-growing and more predictable execution engine. Second, our operational and innovation execution is slowed by complexities in our current product offerings, number of SKUs, footprint, and operating methods. This can be unlocked with tried and proven lean and business system approaches. As some of you know, lean is about orienting and aligning an entire organization around our customers, involving all employees in waste elimination and continuous improvement to build capabilities, better processes and speed. In short, a winning execution engine. Third, I'm taking an objective, fresh look at our strategy and how to best further optimize our portfolio. I will share more at a later point in time about what I think is good for Johnson Controls as I deepen my understanding of our businesses, end markets, and customer needs. I still have a lot of listening and learning to do. I want to continue to do it where the real value is created at Gemba. We are building on a solid foundation, and I believe with more relentless focus on customers across our organization as well as on lean-enabled execution fundamentals, we will be able to drive accelerated value creation. We have a unique offering and an enviable service capability that is driven by our culture of innovation. Johnson Controls will continue to redefine building performance, driving the next era of smart, safe, sustainable, and autonomous buildings and powering our customers' missions. And with that, I'll turn it over to Marc to cover the quarter.
Marc Vandiepenbeeck, CFO
Thanks, Joakim, and good morning, everyone. Please turn to Slide 6. Our fiscal second quarter was strong across the board. Our team has worked diligently to navigate dynamic market conditions and capitalize on opportunities in front of us. We remain focused on driving consistent, predictable growth and delivering value to our shareholders. Organic revenue grew 7% and segment margin expanded 180 basis points to 16.7%, led by enhanced operational efficiencies and higher volumes. Adjusted EPS of $0.82 was up 19% year-over-year and exceeded the high end of our guidance range. The strong first half of the year reflects our team's ongoing dedication and strategic execution. On the balance sheet, we ended the second quarter with approximately $800 million in available cash, and net debt decreased to 2.4 times, which is within our long-term target range of 2 times to 2.5 times. Adjusted free cash flow for the quarter was strong, resulting in an impressive increase of approximately $1.1 billion year-to-date. This improvement, supported by strong working capital fundamentals, underscores our effective financial management and solid operational performance. Let's now discuss our segment results in more detail on Slides 7 through 9. Beginning on Slides 7 and 8 our Building Solutions region delivered another solid quarter. Orders grew 5% in the quarter despite facing a tough comparison and the impact of accelerated orders in the prior quarter due to global uncertainties. This growth underscored the sustained customer demand for differentiated solutions and services. Geographically, orders in North America increased 4% in the quarter, with mid-single-digit growth in both systems and service. In EMEA/LA, orders were up 10%, with 13% growth in service and 8% growth in systems. In Asia Pacific, orders were flat as we continue to implement our strategy in China, prioritizing the booking of profitable system projects with upfront payments. Meanwhile, service orders grew nearly 20%. Organic sales increased 7% with solid high-single-digit growth in both systems and service. Sales in North America were up 7% organically with continued strength in both HVAC and Controls. In EMEA/LA, organic sales grew 5%, led by 9% growth in service. In Asia Pacific, sales grew 13% organically with strong double-digit growth on both systems and our resilient service business. Margins for Building Solutions have been steadily improving over the past few quarters and we continued our trend this quarter. Our focus on operational efficiencies and an optimized service mix has significantly boosted profitability. By region, EMEA/LA adjusted segment EBITDA margin expanded 410 basis points to 12.5% driven by improved productivity and a positive mix of service growth. In APAC, adjusted margin expanded 360 basis points to 14.6% as productivity and mix improved. In North America, adjusted margin declined 20 basis points to 13.4% as system growth outpaced service growth. The higher system growth was a positive contributor to the overall margin expansion within Global Products. Building Solutions' backlog remains at record levels, growing 12% to $14 billion. System backlog grew 12% and service backlog grew 9%. Turning to Slide 9. Global Products continued to build momentum and delivered another strong quarter of growth and margin improvements. Organic sales grew 8% as price remained positive, and we delivered six points of volume growth. Applied HVAC grew more than 20% with strong double-digit growth in North America and EMEA/LA. Adjusted segment EBITA margin expanded 600 basis points to 30.3% as our improved operational efficiencies drove considerable margin enhancements. Let's discuss our fiscal third quarter and full-year guidance on Slide 10. Our second quarter performance and continued growth in our orders and backlog position us for continued success in the second half of fiscal 2025. For the third quarter, we anticipate organic sales growth of mid-single-digits, adjusted segment EBITA margin of approximately 17.5% and adjusted EPS in a range of $0.97 to $1. For the full year, we are maintaining our guidance for organic sales growth of mid-single-digit, as our continued strength in orders and our resilient backlog provide visibility into the second half. With our strong start to the year and continued improvement in our operational efficiencies, we are raising our full-year guidance for margins, adjusted EPS, and free cash flow conversion. We now anticipate adjusted segment EBITA margin to expand roughly 90 basis points and adjusted EPS to approximate $3.60 per share, representing roughly 12% growth. Our working capital metrics have consistently improved, and our free cash flow performance has been strong year-to-date. As a result, we now anticipate achieving free cash flow conversion of approximately 100% for the full year. We continue to target returning 100% of our free cash flow to shareholders through dividends and share repurchases. Lastly, our updated guidance considers the current geopolitical environment, including tariffs. Based on the regulatory environment as we know it to date, we believe our annualized exposure to tariffs before mitigating actions is approximately 2% of sales or 3% of cost of goods sold. As you can see on Slide 11, we have activated many levers to enhance our resiliency and mitigate the expected impact from tariffs. This includes strengthening our in-region, four-region manufacturing strategy, dynamically transforming our supply chain by pivoting to local sourcing, accelerating our pricing action, and asserting our contractual right to the change orders. We believe by leveraging these strategies, coupled with our long-cycle business and resilient service mix, we have the capability to navigate the complexities of the current geopolitical landscape and continue to deliver strong performance. Before opening the lines for questions, I would like to turn the call back over to Joakim for a few additional comments.
Joakim Weidemanis, CEO
Thanks, Marc. I'm truly excited to lead this iconic company into this next chapter. As a more focused company, we have a great foundation to build upon. Looking ahead, my initial priorities are to increase our team's focus on customers and continue to develop and strengthen our ability to execute for the customer. I would like to take a moment to recognize and thank Marc for his continued impact on Johnson Controls, not just over his nearly 20-year career, but in particular as our CFO since January 2024. While we've only worked together for just shy of two months now, he is a strong partner and has helped me get up to speed. I enjoy partnering with him and look forward to continuing to do so. I also want to recognize George Oliver for his support as I stepped into the role as CEO and for his significant contributions over the last eight years. He has set us up well for our next chapter. Finally, I'm looking forward to engaging with many of you, the investors and analysts that I have crossed paths with since earlier in my career at Mettler Toledo and then during my 13 years at Danaher. I expect to continue to seek your input and perspectives as part of my effort to build transparent and constructive relationships. My goal is to help our team unlock the true potential and build a winning, sustainable, high-performance company as measured by all of our stakeholders. With that, operator, please open the lines for questions.
Operator, Operator
We will now begin the question-and-answer session. Our first question will come from Scott Davis of Melius Research. Please go ahead.
Scott Davis, Analyst
Hey, good morning, guys.
Joakim Weidemanis, CEO
Good morning, Scott.
Scott Davis, Analyst
Welcome to your first call.
Joakim Weidemanis, CEO
Thank you, Scott.
Scott Davis, Analyst
I understand this might be a bit of a conceptual question, but how do you plan to implement lean practices in such a large organization? A more relevant question might be, how prepared is the organization for this? Has there been any lean implementation already, and how extensive has it been? I'll leave it open for discussion.
Joakim Weidemanis, CEO
Thank you for your question, Scott. I know you're quite familiar with lean principles. Just to remind everyone, lean is about aligning the entire organization with customer needs and engaging all employees in eliminating waste and enhancing process capabilities. This approach allows us to execute faster and become more competitive while reducing costs and capital. Interestingly, there are some remnants of lean from previous automotive connections within the company, though the foundational practices are not very strong. However, there's an openness to these concepts, which is encouraging. To implement lean, we normally select a value stream, such as a product line, and take an end-to-end approach from the customer through installation, the factory, and back to suppliers and order entry. We identify issues and opportunities for improvement through value stream mapping. In my first eight weeks, I've already identified a couple of value streams to prioritize, and we've begun working on one. It’s important to focus on one value stream at a time rather than trying to do everything at once. I'm genuinely excited about the significant opportunities we have in applying lean execution fundamentals.
Scott Davis, Analyst
So, Joakim, just to follow up on that, I mean, you mentioned too many SKUs or too much complexity in the SKUs kind of either way. Do you expect those value streams to kind of lead you down the path of SKU rationalization or is that a separate kind of hurdle?
Joakim Weidemanis, CEO
No. You do it together. As you explore the value stream, you'll uncover the challenges within it. In my experience, you often encounter complexities early on, and we will address those. Additionally, we have initiated a separate effort to tackle the SKU proliferation we have. There is some easy work we can focus on before we begin addressing each value stream.
Operator, Operator
The next question comes from Steve Tusa of JPMorgan. Please go ahead.
Stephen Tusa, Analyst
Hi. Good morning.
Joakim Weidemanis, CEO
Hey, Steve.
Marc Vandiepenbeeck, CFO
Good morning, Steve.
Stephen Tusa, Analyst
Congrats. And I guess just thinking about that a little bit of a step further on the entitlement of these businesses, I think we've looked at it in the past as perhaps JCI has a lower margin entitlement due to its business model of a bit more kind of field labor projects. How do we think about the entitlement of this business? Can we look at some of the publicly traded peers and think about your margins of being able to go there or is there some sort of ceiling due to the business model that you see?
Joakim Weidemanis, CEO
The way I see it, Steve, is that in addition to the product side, we have tremendous opportunity on the margins in the field as well. And this value stream mapping that I was talking about applies to how we can approach both unlocking further growth as well as margins in the field. And of course, there are also not just process, but there are digital tools and approaches available to us that could enable us to grow the margins very nicely in the field. So I don't see that we would have a bigger limit on the margin expansion here than any of our peers, not at all.
Stephen Tusa, Analyst
Okay. Got it. And then, as far as portfolio is concerned, how do you think about this portfolio? Do you like the construct with fire and security and HVAC and controls integrated or is that something that you're poking around at as well?
Joakim Weidemanis, CEO
Yes. So, I mean, I'm here to create shareholder value. And then the first thing you have to do when you're looking at a portfolio, which is looking at what you have or potential acquisitions, you need to start with strategy, of course. So as I mentioned in the introduction here, I am taking a pretty deep and fresh look at our strategy for the entire business as well as the individual pieces. And I'm just eight weeks in, but of course, you see some patterns and you draw some conclusions already. Now you need to be a little careful because I am only eight weeks in. So at the appropriate time, I'll come back and share more of what I've learned and what I think is the right thing for Johnson Controls.
Operator, Operator
The next question comes from Nigel Coe of Wolfe Research. Please go ahead.
Nigel Coe, Analyst
Thanks. Good morning. And Joakim appreciate the open remarks. Very helpful. I wanted to actually start off with free cash flow because you raised the guidance to about 100% with obviously very strong performance in the first half of the year. So I'm just wondering, obviously, that's been a big initiative for you, Marc, to improve the free cash conversion. So what is the right level going forward? Are we now at a point where free cash conversion can be at a 100% level in '26 and beyond?
Marc Vandiepenbeeck, CFO
Hey, good morning, Nigel. You're right, we very confidently raised our guidance from the 90% plus to now about 100% this year. We had a very strong start of the year, generating that $1.1 billion in the first half. You followed us for a long time. Historically that first half used to be flattish to slight free cash flow generation. $1.1 billion is a very strong start and it's really a demonstration that our operating model, the strength of our working capital structure, and how we've continuously improved our processes really start generating value across the entirety of the working capital, whether it's receivable, ability to build and collect on time, managing or payable, but particularly working on our inventory and not having to build too much inventory as we continue to grow fairly rapidly. And those working capital metrics continue to improve. We have those fundamental headwinds that we've talked about that are not changing in the coming couple of years. So I think it's a bit early for me to tell you, like, we are going to be 100% all the way forever, but I think I see good signs for us to be solidly in the 90s and probably better as we continue to improve those operational efficiencies through the working capital.
Nigel Coe, Analyst
That's great to hear. And then Joakim, I know it's early days and you've been in the seat for eight weeks, but Danaher is obviously a company that devotes more like 100% of the free cash flow to acquisitions. And JCI's commitment is more on returning capital to shareholders. So where do you stand on capital allocation going forward? Do you think the scope for JCI to be more acquisitive or are you committed to that shareholder return?
Joakim Weidemanis, CEO
So I think the work I'm doing on the strategy together with the team here is going to help us answer that question. Now I do think there are opportunities with some of our franchises to continue to differentiate with a technology angle. And so part of the strategic work that I'm doing is to explore how to do that at pace. But like I said I'm digging into the strategy right now. I'm taking a fresh, independent look from the past, if you will. And then, based on that, when I'm ready, I will come back and talk more about what that means for the capital allocation strategy.
Operator, Operator
The next question comes from Amit Mehrotra of UBS. Please go ahead.
Amit Mehrotra, Analyst
Thanks. Good morning. Welcome, Joakim.
Joakim Weidemanis, CEO
Thank you.
Amit Mehrotra, Analyst
Joakim, as you consider positioning the business for higher returns, I want to understand the factors involved in cost reduction and leveraging costs. Is there a chance for significant cost savings that could be implemented relatively quickly, or is it more about utilizing the current service network and cost base through increased service attachment, which may take longer to achieve? As Wall Street analysts, we tend to be impatient, and we want to adjust our expectations on what the organization can do in the near term to enhance margins.
Joakim Weidemanis, CEO
Yes. The reality is that we will be doing both. I have seen similar situations in the past. In terms of our field service capabilities, we have 40,000 people in sales. There's a significant emphasis on cost leverage. It takes decades to establish the field position we currently have, which is truly enviable. Therefore, our focus will be on improving process efficiencies, maximizing the capacity of our existing workforce, utilizing digital approaches, and enhancing our service offerings. We will be applying lean principles, which involve eliminating waste, increasing speed, and ensuring more predictable execution. Through this process, we will undoubtedly identify opportunities for cost reduction and capital savings. Beyond our field operations, it's a mix of leveraging our strengths, but we are likely to see more cost reduction efforts there.
Amit Mehrotra, Analyst
Okay. And then just maybe one for Marc, if I could. So just with the pending divestiture of residential and light commercial, I just think the business is obviously evolving into a much more longer cycle business. And I'd be curious to kind of understand, as you enter into new contracts and orders, how you manage the pricing of those contracts, just given the backdrop of inflation and obviously tariffs. Basically how do you just ensure the pricing of the backlog reflects some of those uncertainties and kind of moving parts?
Marc Vandiepenbeeck, CFO
Yes. So for the past couple of years, we've implemented very strong contractual terms that allow us both to reprice as we see potential inflation but also manage better change orders. As you might have gone through the history, we had some delay in our ability to execute on our pricing strategy earlier on during the high inflation periods. And we've now completely overhauled our approach there. And it's not just our contractual terms, but it's our ability to execute on those change orders and get after the benefit you're entitled under your contractual agreement and all of the processes that come behind on being able to actually price cost and defend to the customer the value you've generated for them.
Operator, Operator
The next question comes from Joe Ritchie of Goldman Sachs. Please go ahead.
Joe Ritchie, Analyst
Hi. Good morning, and welcome, Joakim. Looking forward to working with you.
Joakim Weidemanis, CEO
Thank you. The same.
Joe Ritchie, Analyst
Yes. So, look, I know it's early days and I also recognize that the lean journey is one of continuous improvement. The company right now is signed up for some really nice margin expansion this year, right, the 90 basis points. I'm curious, as you're thinking about kind of like the medium-term opportunity, I know, again, early days, should we be expecting some similar level of margin expansion beyond this year? Just any way that you can either help quantify or maybe come back to us at a later date on how you're seeing the opportunities develop?
Joakim Weidemanis, CEO
Yes. So I see very interesting opportunities to both accelerate growth and improve margins. And I talked a little bit about how I think, by shifting how we work, being much more customer- and competitor-oriented and implementing lean approaches to improve our operational execution. So I think we're going to see both, as we discussed here, opportunities from leverage of resources, assets that we already have, as well as cost reductions. I'm actually really excited about what we could do here over the next couple of years. And I really see no reason for why we couldn't reach or surpass over time and I will come back to the timing of that where some of our competitors are at today. And I will have to think about how quickly we can get to some of the profitability levels that prior businesses that I've run, and I'll have to come back to that at a later point in time, but I see us as having really, really compelling opportunities here.
Joe Ritchie, Analyst
Great. Yes, that sounds great. We'll be looking forward to that update. And then maybe just on the fundamentals of the business today. I'm curious just there's been still a lot of consternation around data center growth. We ended up visiting you guys at Data Center World a few weeks ago. It also sounded like you were in the process of potentially coming out with a liquid cooling product. And so can you just maybe just provide an update how that business is trending, what the expectations are for just investments in new product rollout? Thank you.
Joakim Weidemanis, CEO
Yes, I've had the opportunity to delve deeply into this area and have met with many of our largest customers. Our approach in the data center business has been more customer-focused compared to other parts of our operations. I don't mean to imply that we're lacking in customer orientation overall, but we have room to enhance our focus here. In the data center sector, we've collaborated with major clients and their engineering teams over the past few years to assist in designing the architecture of their data centers. This close collaboration has been facilitated by our high-performance YORK Chiller platform, which offers distinct advantages in efficiencies and water consumption. We hold a strong position in this market, and demand remains robust, as many of you have noted, with no indication of a slowdown in growth in the coming years. We're very enthusiastic about our growth prospects in this area and our competitive strengths. To provide more context, a significant portion of this market is in North America, but we're also seeing growth in the Asia Pacific region, while Europe is lagging somewhat in market development. As our large global clients expand into Asia, they recognize our existing presence and service capacities in North America, which are vital due to the critical nature of these applications. We are leveraging this, along with our investments not only in manufacturing but also in enhancing our field operations with specific expertise tailored to data centers. I'm genuinely excited about what lies ahead for us in the Data Center World.
Operator, Operator
The next question comes from Julian Mitchell of Barclays. Please go ahead.
Julian Mitchell, Analyst
Hi. Good morning, and welcome, Joakim. Maybe the first question is just on the margin outlook in the short-term. So your operating margins were up, I think, close to 200 bps in the first half year-on-year. Second half looks like it's guided sort of flattish year-on-year. Just wondered how much of that is a tariff margin rate headwind, how much is maybe something going on with mix. And BSNA, certainly, the margins were down in the second quarter. Any sort of thoughts on how that plays out from here, please?
Marc Vandiepenbeeck, CFO
Yes, great question, Julian. Regarding the BSNA aspect, as I mentioned earlier, some of the leverage you see with the margin improvement in Global Products is due to the volume that BSNA has generated. As we re-segment, this is a significant reason for doing so; it will provide a more unified perspective of the Americas. We have shown some historical patterns, and soon we will present a more defined view for the second quarter under this new segmentation, highlighting the benefits and ongoing margin improvements in the Americas segments. In terms of our guidance for the remainder of the year, you are correct that we have adopted a strategy where we are recovering most of the impact from the tariffs, but we are not applying margin on much of that. This limits our short-term ability to improve margins, but it does not alter the long-term momentum. As we continue to simplify our operating model and reduce costs, I believe we will see some initial benefits as we navigate the tariff situation in the coming year.
Julian Mitchell, Analyst
That's great. Thank you. And then maybe one for Joakim. Maybe just sort of fire and security market, it has undergrown HVAC for some time. I think this quarter sort of flattish sales in BSNA, up only low-single in Global Products. You called out the franchise strength at the beginning in YORK and Metasys. So just wondered, sort of, what are your initial impressions of the fire and security portfolio? I imagine there's a very broad range of performance and metrics within it, but any sort of broad-brush perspectives and how easy do you think it is to rejuvenate growth there?
Joakim Weidemanis, CEO
Yes. I believe that the fire and security franchises are strong for us. However, I need to better understand the potential for growth acceleration in that area. It's somewhat early for me to draw any conclusions. Part of my strategy work involves assessing what we can realistically expect from each franchise. I'll need to revisit this topic later. As many of you are aware from Danaher, not all franchises grow at the same rates, nor do they all have the same levels of profitability or cash flow contributions. I'm considering how different segments of our portfolio might play various roles for us, not just regarding what we should pursue or divest. I'm examining our strategy and the market potential with what we currently have, and I will share my insights on the appropriate course of action at the right time.
Operator, Operator
The next question comes from Noah Kaye of Oppenheimer. Please go ahead.
Noah Kaye, Analyst
Hey, thanks. Marc, I just want to follow up on Julian's question around the margin impacts. So is it possible to kind of dimension for us the assumption around the gross cost inflation or even the net cost inflation as a margin headwind?
Marc Vandiepenbeeck, CFO
Yes, I would think about it not so much as a headwind but as a dampener in our ability to continue to expand margin. If you look at the second half, our anticipation is the Americas segment was going to be able to drive further margin expansion. And as we have to pass through some of that impact of tariff, whether it's a $1 for $1 or sometimes just changing a little bit of supply chain and incurring some short-term costs as we pivot some of that supply chain to a more localized or regionalized product solution. We end up with some costs that we can recover dollar for dollar, just not apply our gross margin rate, and not making an earnings opportunity. As you know, for a lot of our businesses, we enter into relationships that last multiple decades as that piece of equipment gets serviced throughout the life cycle, and we want to be remembered as a team that manages and navigates it through the tariff situation in a manner that our customer will continue to perceive as a fair balance, but where we had to recover dollar for dollar or cost impact without trying to get margin on top.
Noah Kaye, Analyst
Thank you. I appreciate that strategy. And then, Joakim, you talked at the beginning about the streamlined operating model really going through the regions. You also mentioned the data center business as a very good example of where JCI is strong. And I think back to a little under a year ago when there was basically a global organization formed around sort of excellence in go-to-market and data center. So just thinking about that as an example is there a blueprint here for creating any kind of new infrastructure within the company from a sort of product or go-to-market perspective at a global level? And where might that focus be, if so?
Joakim Weidemanis, CEO
I don't have any new structures to announce beyond what I've previously discussed. However, we have dedicated resources on the regional side for major verticals, and data centers are a key focus. On the product and solutions side, we have R&D engineers and teams specifically for data centers, and some manufacturing lines are also devoted to them. Within this framework, there will be more dedicated teams for verticals or customer groups when necessary. While I expect to see vertical teams emerge beyond data centers, the strategy will evolve over time. We'll focus on verticals where we see significant growth opportunities. The overall structure is in place, and we will decide how to allocate resources for specific growth opportunities, similar to how we've approached data centers. This structure is logical and proven, based on my experiences in other industries with multi-vertical operations that require global coverage and targeted R&D. It's essential to organize these teams differently to apply technologies effectively in vertically oriented products, and this is a method I'm very familiar with.
Operator, Operator
The next question comes from Chris Snyder of Morgan Stanley. Please go ahead.
Chris Snyder, Analyst
Thank you. I wanted to follow up on some of the data center commentary. Obviously, a market that you guys have been in for a long time, but just given the, I guess, more rapid growth than history, it does feel like there are maybe new entrants or new competitors more focused on the market. Has there been any change in the competitive environment in data center versus two or three years ago? And what could that mean for JCI? Thank you.
Joakim Weidemanis, CEO
So here I'm going to have to defer to Marc because I'm eight weeks in, so I've done a lot of studying of who is in it now. But Marc?
Marc Vandiepenbeeck, CFO
Yes. And the way you need to think about the data center market is, yes, of course, it's a very attractive market. Commercially, it's the fastest-growing market, and so a lot of adjacent industries have started to look at cooling as an opportunity for them to expand. I think that's where the 140-year experience in creating differentiated solutions for customers and our technological advantage plays a critical role. So, yes, you've seen new entrants over the last two years, three years coming in with products that are very attractive, but don't create the technological advantage that we have been able to get to. We have a particular YORK product that has a very wide operating range and that provides to our customers a global single platform where they can expand and standardize their infrastructure and that ability to continuously engineer, iterate, and improve on the leading product, I think, provides a real differentiated value for customers.
Joakim Weidemanis, CEO
I recently visited our global R&D center for high-performance HVAC chillers and took a close look at our technology capabilities. With the emergence of new competitors and new ways to configure data centers, we see increased opportunities ahead. However, it’s crucial to efficiently remove heat from server rooms, and our chillers are comparable to aircraft engines. They need to perform exceptionally without consuming unnecessary power, which is essential for chip performance. Designing and manufacturing a high-performance chiller similar to an aircraft engine is a complex task that requires decades of specialized knowledge. This expertise extends beyond just know-how to the unique configurations of our products. Unlike new entrants who often rely on standard parts, we create application-specific modules that enhance the performance of our chillers. This specialization means there will always be a strong demand for high-performance chillers, which aligns with our strengths. While the market continues to evolve, I believe we are very well positioned to meet these demands.
Operator, Operator
The next question comes from Andrew Obin of Bank of America. Please go ahead.
Andrew Obin, Analyst
Hi, guys. Good morning.
Marc Vandiepenbeeck, CFO
Hey, Andrew.
Joakim Weidemanis, CEO
Good morning.
Andrew Obin, Analyst
Good morning. Welcome.
Joakim Weidemanis, CEO
Thank you.
Andrew Obin, Analyst
Just a question on applied. You definitely called out strength in data centers. What are the other verticals driving applied growth, and are there any verticals sort of creating headwinds that you're worried about?
Joakim Weidemanis, CEO
Overall, most of our verticals are performing quite well. I've looked at some of the same industry reports that you might have seen, like those from Dodge and ABI. Recently, I began to examine not just our past performance by verticals, which is somewhat retrospective, but also leading indicators to gauge what may be ahead for us. The takeaway is that we're seeing generally strong growth across the board, and currently, the leading indicators do not suggest any slowdown in areas where one might expect it based on the reports from Dodge and ABI. However, as we transition out of residential light commercial, this divestment needs to be considered, and I won't comment on that aspect in these remarks.
Operator, Operator
The next question comes from Nicole DeBlase of Deutsche Bank. Please go ahead.
Nicole DeBlase, Analyst
Yes, thanks. Good morning, guys, and welcome to the call, Joakim.
Joakim Weidemanis, CEO
Hi. Thanks, Nicole.
Nicole DeBlase, Analyst
I guess maybe just starting with a question on price versus volume, presumably with tariffs coming into the fray in the back half, you guys have probably raised your expectation for pricing, I'm guessing. Did you embed any sort of contingency with respect to volume just because of all the macro uncertainty or are you taking the view, hey, we have a really robust backlog, as you mentioned, the leading indicators look good? And so there's no expectation of significant volume decel in the back half.
Marc Vandiepenbeeck, CFO
Now if you look at, first of all, how we think about price versus products, particularly in our Building Solutions business, the scope of that business, each job varies year-on-year. And so it's not so much about the number of units you sell, and the volume price dynamics become a bit complicated. It's more about the value you're providing to the customer. And if we are pricing appropriately then you see the margin continuously benefit from that. In terms of what we see from a macro level, the level of macro uncertainty remains pretty high after all of the tariff impacts. And while we are mostly a long-cycle business, whether it's on our systems or our service businesses, we still have, call it, 25% or so of the company that's shorter cycle in nature. And we have built in some perspective on what could potentially happen to some of our end markets and verticals, as some of that uncertainty is built into our guide.
Operator, Operator
The next question comes from Andrew Obin of Bank of America. Please go ahead.
Andrew Obin, Analyst
Hi, guys. Good morning.
Marc Vandiepenbeeck, CFO
Hey, Andrew.
Joakim Weidemanis, CEO
Good morning.
Andrew Obin, Analyst
Good morning. Welcome.
Joakim Weidemanis, CEO
Thank you.
Andrew Obin, Analyst
Just a question on applied. You definitely called out strength in data centers. What are the other verticals driving applied growth, and are there any verticals sort of creating headwinds that you're worried about?
Joakim Weidemanis, CEO
Overall, most of our sectors are performing quite well. I've also seen some of the industry reports that many of you have, like those from Dodge and ABI. Recently, I began to examine not just our past performance by sector, which reveals historical orders and sales, but also leading indicators to better understand future trends. The conclusion is that there's generally strong growth across the board, and currently, we don't observe any slowdowns in areas where there might typically be concerns based on Dodge and ABI. However, we are transitioning out of residential light commercial, and I won't comment on that aspect in these remarks.
Operator, Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Joakim Weidemanis for any closing remarks.
Joakim Weidemanis, CEO
Great. Thank you for that. And before I start with the closing remarks, it was great to reconnect with several of you over the last couple of weeks and on this call. I believe the partnership, the interaction, the questions you ask helped make us better and think about things in a better way. So thank you for that. But to quickly recap, we're pleased with our strong second quarter results. Our record backlog and strength in orders show broad-based demand for our differentiated solutions. And we have continued momentum underway. And now, with a more focused portfolio and simpler organizational model and, over time, stronger customer orientation and lean-enabled execution, we're well positioned to accelerate value for all of our customers and shareholders. And I want to really thank our dedicated team around the world and to all of you for joining today's earnings call. I look forward to continuing the discussion over the next quarters. And with that, operator, that concludes our call.
Operator, Operator
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.