Conference Transcript - JCI 2026-05-20

Speaker 3

Great. Okay, so good morning everyone. Just want to say thank you for making it day two of the conference here. We're going to have a trio of industrial companies on stage beginning with Johnson Controls. My real pleasure to welcome back to stage Joachim Vitamins, CEO of JCI and Mark Van Diepenbeek. I'm glad I got that out of the way because these are two of the more challenging systems. I'm glad I didn't, I'm glad I got through that. So perfectly normal where we come from. But Joachim, Mark, thanks for being here. It's always a pleasure. And Joachim, maybe I'll hand over to you for some remarks.

Joakim Weidemanis, CEO

Yeah, thank you, Nigel. Thank you all for being here. So I'm a little bit more than a year into this role. And just to go back to, you know, why did I join and what did I find after I got here? So I always what I learned before I joined the company was that this company has some unique proprietary technological capabilities within thermal management broadly meaning HVAC and controls but also in other areas. The question was whether we have been leveraging that enough to drive outsized performance. The answer is no we have not. And then I saw that we had a company with one of the industry's largest field footprints about 50,000 people in the field and the question is if we had been leveraging that enough historically to drive competitive advantage through for example life cycle services and my hypothesis was that we hadn't fully leveraged that yet and a year in I found those things to be to be true and the but I'm even more excited now about our opportunities to unlock our potential not just in those two areas but in particular in those those two areas and we can talk a little bit more about the progress we're making in doing that event by implementing what we call our business system, which is how we're going to run the company, how we're going to improve the company. And perhaps for those of you who have heard some of our earnings calls, that's really about simplification, acceleration with lean principles that other companies that perhaps some of you follow have applied over many, many years. And then in addition with digital and AI approaches. And so acceleration and lean, I think about that as be able to do work that took weeks to be able to do it in days now and the amplification with digital and AI we have now plenty of examples where we're able to take work that takes days and turn it into hours and even minutes sometimes so so we're making good progress and standing up and implementing our business system and that was important to get going to start to drive some performance improvement while we took a little bit of time to figure out where we are with the different parts of the portfolio and so I'm glad I'm pleased that we made some progress on clarifying for ourselves internally where we are and and that we've distilled down then for each of the businesses what the expectations what we can expect realistically what the expectations are on our leaders as well as probably most importantly clarified for our leaders what our strategic priorities are because I think when you're trying to improve a company at pace that's very important to to offer clarity to people on on where we're going and and what we're going to prioritize versus all the 59 other things that we're not going to work on right now so some good progress there we had a decent quarter our last quarter orders were up 30 percent our backlog is a record backlog 20 billion dollars sales growth now it's six percent we expect that to to that growth rate to improve over time EBIT margins up 200 almost 300 basis points and a decent cash conversion here and a lot lot more to do which is the fun part of being part of this

Speaker 3

team that's great thanks thanks that's that's a great way to set the table and you've touched on a lot of topics that I want to dive into as well but I'll kick off the Q&A I'll come back to the audience uh halfway through with any questions that you have i i think it'd be remiss to not start with you know you talked about the progress but maybe to talk about you know what you've accomplished in the first year uh you know what what where is uh the sort of the the changes most most advanced you know where what you know what needs to be done where do you need to build muscle you know kind of a progress report on where we are yeah i think um so i can i can go deeper into

Joakim Weidemanis, CEO

the business system which is something that just needs to build and and will drive continued improvements and performance and parallel as we work on on implementing and executing on the strategy that we've defined but maybe i'll start with you know the people side of things you know it's important to to make sure you have the the right people on the bus and for those of you follow jim collins uh or read books he's written you know he talks about first the who and and then the what um so we've made a couple of changes in the in the senior most team um we have a new chro we have a new north america leader um who's an internal promotion the chro was an outside uh higher um one of uh the most talented chros in america i would argue uh we have a new asia pack leader and um and we're working on a couple more uh changes that have been announced uh internally So, and we're trying to staff up, of course, with the team that's going to, you know, help us win here in the space. So, that's on the first the who and then the what. And on the what, we've clarified, like I said, our strategic priorities. And, you know, no surprise. We'll come to that, I'm sure. But, you know, we want to help humans unlock their potential with the help of AI. We have important things that we can do for our hyperscaler and Colos customers. I think as many of you know, 30 plus percent of all the energy that they struggle to secure for their data centers has to be diverted to cooling away from compute. We have the capabilities and we've made a couple of moves that improve, strengthen those capabilities to reduce that 30 percent to something materially less, which is a very strong value prop in that space. Second strategic pillar is really about, if you think about some of the innovations, scientific discoveries that have been made over the last couple of decades that are now in full deployment in human society. I'll just take one example. It's the pharmaceutical industry. All the old factories were chemical plants. All the new plants are biologics plants. As you can hear, you need a very different plant to manufacture biology. And the indoor operating conditions, temperature, humidity, control, pressure, particulate in the air, and the very, very tight tolerances that you need to keep that indoor operating condition. And the requirements are much, much higher in biologics, which sort of plays to some of our strengths, not just in HVAC and controls, but of course what they manufacture is very valuable too, so they need to protect it both from fire and security. So that's strategic pillar number two. So strategic pillar number three is basically help the world decarbonize or if you choose to think of it that way with increasing energy costs, the payback on upgrading to a new HVAC unit or a control system or a digital system that helps you optimize how you run your sophisticated system is of interest to a lot of our customers. So in those three strategic pillars, we've then gone and developed roadmaps that are now showing up in all of our R&D work. So we've reprioritized what we're doing and we're aligning along these three vectors here. And I think that's going back to this point about clarity. If you're running a large organization, you know, we have 100,000 people around the world. You can't be running after 15 things. And so just by making quite a bit of progress, not just on the PowerPoint, but translating this into, like I said, the product roadmaps and where we start to shift how we focus our commercial efforts and so on, is gradually in our leading indicators starting to show that we're going to continue to be able to improve the performance of this company. Having a clear mission at the very high level and then everything else flows down from there.

Speaker 3

Yes, exactly. And then I don't want to spend too much time on DCARB and ESG. But is that still a really important part of the conversation? because from a waltzy perspective, ESG is no question. It's kind of gone into the shadows at this point in time. But is it still a very real conversation with customers?

Joakim Weidemanis, CEO

Yes and no. So, I mean, increasingly, and it was, by the way, it was always about cost reduction. It was, in addition to that, it could be people could improve their ESG performance. But if you think about it, in most countries around the world, I'm not talking about us as private consumers of electricity in our homes, but industrial consumers have seen electricity cost increases of up to 30% over the last couple of years. And the projections are, I'm sure many of you study that, is that that is going to continue. And if you're, well, I gave you the data center example, right? But even the biopharma manufacturing is, the biologics manufacturing is seven times as energy intensive as the traditional pharmaceutical manufacturing. So as part of their cogs, energy cost is suddenly a line item that is visible. It used to not be. And so therefore, if you're able to offer solutions that will help people to use 30%, 40% less energy for what they're trying to do, you know, there's a good payback on that. And the payback is improving with the increasing energy costs. So that's one aspect. And then, of course, in Europe in particular, there's a big need to shift away from gas in particular, which comes from somewhere far east, and get away from fossil-fueled heating, for example. So heat pumps, so it's more an electrification question, where people are trying to get away from certain types of fuels. So there's a lot of different aspects of our DECARB strategy that is not about ESG.

Speaker 3

And I do want to get into some of the sort of maybe just an update on trading conditions. But before we do that, you talk about services. I'd be curious how the services strategy is evolving. And, you know, we tend to think of all services as good, you know, aftermarket recurring revenues, et cetera. You called out some changes to the U.S. security, you know, services. So just maybe touch on that as well.

Joakim Weidemanis, CEO

Yeah, so services are about 30% of what we do. And in the domains, the product areas where we play, HVAC, controls, fire, and security, you know, there's a healthy service business in each one of those areas. From a top-line point of view, we continue to do very well, HVAC controls and fire. Here, over the two recent quarters, we've been a lot softer in security. really what we're doing is we're we're going through our portfolio of contracts that we have and we're making sure that pricing margins etc are in good balance and there was a need to to rebalance and so that came with a little bit of sacrificing of a top-line growth but no EBIT dollars but the in general I'm super excited about in particular in HVAC and controls the service opportunity As an industry, HVAC, not just us, but as an industry, the OEMs have much lower attach rates, service contract attach rates to their equipment than in most of the industries I've come from. And we're also at a much lower attach rate than, take Atlas, Copco, Ingersoll, RAND air compressors that in many cases are installed sort of 10 feet to the right. attach rates are sometimes 2x other rates and you know there's there are different reasons for that which maybe it's a discussion for another day but it's how you productize your services make sure they're differentiated differentiation anchored in you know what you can do in your system different kinds of data algorithms things like that help with differentiation so our industry hasn't done quite as much of that and then there's a commercialization piece how you do that where we're sort of early stages but it's no magic you or it's not a mystery of what needs to be done. And then you have the execution side, which, of course, with the increasing number of connected devices that we have out there, the economics of serving our customers are changing here rapidly as the cost of connectivity has come down, too. That's increasing rapidly.

Speaker 3

Is the primary driver of services increasing the attachment rates on the chillers, or is it more kind of just evolving the revenue model into other things?

Joakim Weidemanis, CEO

It's not so much the revenue model yet. We're working on some stuff there, but that's too early to discuss. I think it's going to be attached rates, but then as we're pointing the company more towards some of the verticals that we were discussing before, that have, for them, uptime, and because of what we do, is more mission critical, both from an uptime point of view and a cost point of view. So the service opportunity is bigger for data centers than it is for a building like we're sitting in right now, for the obvious reasons, right? So I'd say it's driving the attach rates overall, and then as a result of where we're pointing the company, the attach rates are going to come up, and the service opportunity is going to be bigger.

Speaker 3

I wanted to save your voice, and I know you're struggling a little bit with the virus, but Mark, maybe just give us an update. I sincerely hope it's not a virus. Okay, well, me too.

Joakim Weidemanis, CEO

I spent six years in medical diagnostics, so if I thought it was something like that, I wouldn't sit here.

Speaker 3

Bad word. Okay, Mark, back to maybe the guidance for 3Q. You're guiding it for 6% organic, 6% in 4Q as well. Obviously a lot of questions around the huge backlog strength, order strength, versus the conversion of that into revenues. maybe just touch on that and in terms of what we're seeing during the quarter and how that backlog

Marc Vandiepenbeeck, CFO

revenues yeah first the continued growth in our backlog will support an acceleration in our revenue growth and the underlying question is why not just right now and and why is it taking a little bit longer there's two elements to that the first one is is simply our ability to convert some of that backlog in the very very short term meaning in the next quarter or so is in there by two things not so much capacity but the ability for customer to take delivery and what we see a lot in the data center world is that the chaos around the construction side that's pushed to the right sometimes delivery is a quarter or two we think that's not a permanent issue and we have the ability to to keep up there the other thing is naturally we have a very large business in north america in data center we are ramping up the production of that of that output that the timing of that ramp up is really back and loaded this year we have opportunity to do better and the 6% we've kind of guided for Q3 and therefore Q4 as well, based on both that ability for the customer to take delivery and our ability to ramp up quicker. And then, very transparently, we have a large business in the Middle East that's been impacted by the conflict. Europe will have probably a soft quarter in Q3 and Q4, probably very low single digit. And for an annualized business, that's about four, four and a half billion dollars of revenue. That's a bit of a boring cause. The enterprise grows. But if you look at North America, we're expecting that to grow in the high single digit starting now and probably accelerating into 27. If you remember, for us, 27 will start in October.

Speaker 3

Yes, that's right. So you think that as we get kick into early 2027, we'll see that acceleration in North America? particularly North America, yes. Yeah, okay. And the Middle East, you touched on that. It seems like that's being contained at this point. How do you characterize that?

Marc Vandiepenbeeck, CFO

So, transparently, the amount of disruption we saw in March and April are starting to taper down a little bit as the quarter unfolds. But it's not back to normal by any stretch of the imagination. And not a lot of what we sell and service in the Middle East is actually manufactured in the region, except for a factory we have with our joint venture partner in Saudi Arabia. But a lot of those products are purchased from our factories either in Europe or in Asia. And the logistics of transportation right now in the region are affected by what's happening with the conflict. And there's also an enormous backlog of shipping that needs to happen. So even when things reopen, getting your ticket in line to be able to deliver to the customer on time has remained a challenge. The team has done an outstanding job navigating the conflict right now, but it's disrupted that business. Still in Q3 and then our ability to predict what the summer will bring is a little bit difficult at this stage.

Speaker 3

But that just pushes demands to the right, I suppose.

Marc Vandiepenbeeck, CFO

it pushes demand it's not demand disappearing it's not demand destruction um quite the opposite actually you saw the order in the quarter didn't slow down in in emia at all um so that high single digit order growth rate for the quarter included um some solid orders in the mid single digit in the middle east um that means really the business confidence is still there it's really just a pause and and people are rightfully so being careful about when the deploy resources and where the deploy resource in an environment that's a little evolving okay and then just a quick uh

Speaker 3

touch on china um it's a chunky market it's not not that huge but it's what mid-single digits total sales yeah any rays of light uh in that market right now i would say um

Marc Vandiepenbeeck, CFO

it's massively improved from probably 12 18 months ago where we were still struggling um but i think the the expectation that china will come back to a high single or double digit grower like we've been able to benefit over the past decade is probably behind us it doesn't mean it's going to be a bad market it's going to be a very healthy market the the strategic pillar that joe kim laid out a few minutes ago very much applied to the chinese market and it took us a little bit of time to pivot both our product team and our commercial team against some of those and market but we have we've made some progress over the last couple quarter and we feel we're very well positioned to to capitalize on some of the some of those opportunities in the chinese market okay

Speaker 3

sure that's great um any questions from the audience so raise your hand otherwise i'll continue. Order flow has been extraordinarily strong Joachim. In terms of the pipeline opportunities you see out there right now I mean how would you characterize that? Yes our pipeline in general

Joakim Weidemanis, CEO

continues to grow so even if we've had two quarters of exceptional order entry our pipeline is still growing and I mean the story is just simply aligned with the three strategic pillars and of course we're we're following you know where the world is going right so it's not that uh you know we we invented some unique verticals here they were there all the time and we're just over indexing our effort on those um so there's of course data centers uh is probably the vertical data centers biologics are the two verticals that offer us the best visibility into the future because that's where customer it takes a year two years sometimes three years to stand up these massive campuses that that they're building and in particular in those two areas we see the pipeline strength but you also have there are massive hospital build outs in a number of countries and of course China that race is over but in India I was just in India here recently I mean India's sort of firing on all cylinders when it comes to the strategic pillars that we have so that we're

Speaker 3

focusing on just feel like India might have its moment here you know yeah finally my whole career I've heard that the next the next China yes a couple of topics in the last 10 minutes I really want to touch on here one is a mark to market on where we are with the margin improvement story yeah obviously tremendous momentum in the last 12 months especially in Europe and and Asia just wondering you know where we are on the sort of the simplification instruction program and to look at that timeline towards normalizing margins yeah yeah so let's

Joakim Weidemanis, CEO

just discuss overall what our margin opportunity where it is in relative terms so so I see as I think we were talking about it last year but I see no reason for us not being able to catch up to some of our direct competition and matter of fact our EBIT margins were the same in this past quarter is as the one we were talking about now they have they have i think some some challenging headwinds so this was not one of their best quarters on margins to be humble about about that but um so i see no still see no no reason at all for us to not to catch up and even continue to go past and that's basically based and if you if we stay on gross margin first you know we have 40 plus factories out there we do not need 40 factories um we we just simply didn't do that consolidation work that I've been used to doing in past roles so we have a very nice opportunity to continue to consolidate our footprint we've started a little bit we also have an in manufacturing plenty of examples already of how we're able to increase capacity in existing factories and for those of you who will join us for our investor day that's coming up in two three weeks you'll see an example of where we've quadrupled the capacity in one site without adding any more floor space as a matter of fact we're using 30% less space this is the direct result of an applicant the application of our business system these are just good old-fashioned lean lean projects that we've started to work on so those kinds of things on the manufacturing side will lead to margin improvements then on the service side of things I think we kind touched upon that but um if you look at you know atlas copco for example an air compressor company you know their their service margins are hundreds of basis points uh better than our industries uh gross margins and where i think ours ours could go then if you go into sgna you know we're we're working away at just uh you know basically cutting cost because as a result of the residential divestment of course there's some stranded cost so we're making some good progress on that that's This was a good chunk of was showing up on EBIT already, but we have tremendous opportunities to break the connection between our growth rate and how our SG&A cost has grown over the years. And I think you've, at least Nigel has heard me talk about how we've doubled the amount of selling hours in a couple of our sales teams, and that's now being deployed. That takes time, by the way, to roll out globally, of course. But if you can double the amount of selling hours with customers and a sales team without adding people, it takes time to recruit people, to train people, and so on. We'll still be adding some people, but, you know, basically doubling the amount of selling hours is going to give us a really nice S-cost leverage. And then on the R&D side of things, we are going to continue to increase our dollars in R&D because there's more opportunity to differentiate with technology in the areas where we're pointing the company. But you will see, for those of you who join us in two, three weeks, examples of how we've taken the time to get certain new products to market down significantly with applying our business system. And when you can, for example, take one project and say, instead of it's going to take 24 months to deliver, same scope, same cost, all of that, and do it in 14 months, you didn't quite double your capacity but it's pretty darn close right so so we're gonna see some R&D cost leverage there as well and none of this is magic it's just tried and proven principles applied and other places and and the opportunities are plenty and that's why I'm you know one one of several reasons why I'm so enthusiastic about our future here yeah I'm sure I found the

Speaker 3

Ed Wolf would be intrigued on how you double the number of cell So maybe we'll talk to you after that.

Joakim Weidemanis, CEO

Some of it's about management getting out of the way.

Speaker 3

Just quickly on the kind of the margins across the segments, Europe and Asia are now within spitting distance of North America. Do you think that convergence continues going forward? Or do you think North America will always be the most profitable region? And when do you expect to see the real acceleration in operating

Marc Vandiepenbeeck, CFO

leverage for North America yeah starting with the last one North America will see most of it operating leverage improve thanks to volume the base cost there's some opportunity there of course and the rationalization and consolidation of a manufacturing footprint plays a an important role in the margin improvement in North America but it's it's it's more of a question of how quickly can we get operating leverage from the volume that is coming and unwinding that backlog as quickly as we can. That's where over the next year you will see North America margin rate accelerate and that improvement. Now when it comes to North America's versus its regional peers, you've heard me saying that multiple times. There's really no reason for Europe to be materially different from a margin rate standpoint than where North America is today, except for the fact that we probably underinvested a little bit in Europe over the years in product leadership and in some capacity and technology. We have made tremendous progress over the last 12 months in starting to close that gap, but there's more work to be done. But over time, there's absolutely no reason for Europe not to be very close to the Americas margin as they stand today. And then APAC, we have made a good investment in product management leadership. It's about continued growth. And you know that business has seen ups and flows of what was happening in China and in different parts of the region. But if you look at the opportunity we have in India, as you accumulated out, Southeast Asia, and then Japan remains one of our most attractive, not from a growth standpoint but from a margin rate standpoint markets I think there's a lot to like about a body pack from a margin rate and and honestly a

Speaker 3

growth profile as well then Joachim you said the normalization of margins last year is three to five years if I do my genius math it's now two to four years

Joakim Weidemanis, CEO

is that I think you were the one who said three right it turned out you were

Speaker 3

right yeah okay there you go um and then and then in the two minutes we got left um so that is that yes yes um thanks and then in the last two minutes um just just what's the latest message on the portfolio there's been some you know bloomberg articles about uh potential investments yeah

Joakim Weidemanis, CEO

yeah so we um that and that's uh kind of skimmed over it here earlier but so in my first couple of quarters with the company we took the board through each part of our portfolio and and looked at how are we positioned tactically how are we executing rather tactically versus competitors or versus what we think we could do and then we looked at also at the business strategically how are we positioned strategically what are the competitive moats and you know as in every company this size you know no one has the perfect portfolio and not every single business is incredibly differentiated or as much differentiated as you would like and then as a result of that we drew certain conclusions on what we would like to do with the portfolio but the overarching goal here is of course to create shareholder value or at least absolutely minimize dilution if we were to exit certain pieces which we had communicated before I even joined the company that about 10% of the revenues was something we were considering to seek other other ownership for so we are going to be looking at a little bit more than that than the 10% we'll keep you posted on the progress on that and but the goal here is to create shareholder value that's fantastic so we're out of time

Speaker 3

thanks Joachim thanks Mark this is a great question I'm looking forward to the yesterday coming up soon yeah great all right thank you