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DATE

Wednesday, May 6, 2026 at 8:30 a.m. ET

CALL PARTICIPANTS

  • Chief Executive Officer — Joakim Weidemanis
  • Chief Financial Officer — Marc Vandiepenbeeck

TAKEAWAYS

  • Orders -- Increased 30% building on nearly 40% growth in the previous quarter, with management citing continued strength in the data center vertical and sustained double-digit pipeline growth.
  • Backlog -- Grew 26% to a record $20 billion, giving the company the highest backlog visibility to date; management expects 70% of backlog to convert to revenue within the next 12 months.
  • Revenue -- Organic revenue rose 6%, led by applied HVAC strength and mid-single-digit growth in service and systems segments.
  • Adjusted EBIT Margin -- Expanded 310 basis points to 15.5%, reflecting productivity improvements and better operating leverage.
  • Adjusted EPS -- Rose 45% year over year to $1.19, exceeding the prior guidance for the quarter.
  • Segment Margin -- Increased 180 basis points to 18.5% overall, with Americas up 100 basis points to 19.5%, EMEA up 370 basis points to 14.9%, and APAC up 350 basis points to 19.8%.
  • Available Cash & Net Debt -- Approximately $700 million in available cash; net debt at 2x, within the long-term target range, maintaining strong liquidity.
  • Adjusted Free Cash Flow Conversion -- Expected to be approximately 100% for the full year, aligning with strong profitability and working capital management.
  • Full Year Guidance Raised -- Adjusted EPS outlook increased to approximately $4.85, up $0.30 from the original guide, representing about 30% growth.
  • Third Quarter Guidance -- Organic sales growth anticipated at roughly 6%, operating leverage near 45%, and adjusted EPS around $1.28.
  • Service Revenue -- Softness continued particularly in security service, as management rebalances price and volume; "Margin-wise, we were up" despite weaker performance in security services.
  • Acquisition of Alloy Enterprises -- Acquisition brings proprietary thermal management capabilities expected to enhance chillers, CDU, and cold plate offerings, though timing of integration into CDU pipeline not disclosed.
  • Business System Implementation -- 1,400 colleagues now engaged, with about 1,000 leaders trained; over 150 kaizens completed across 20 global priority areas, supporting operational improvements and early signs of P&L impact.
  • Middle East Impact -- About one-third of EMEA’s Middle East business delayed by conflict; management does not anticipate a full return to normal operations in the short term.
  • EMEA Margin -- Full-year EMEA segment margin expected to improve about 100 basis points, with longer-term margin convergence targeted but likely to remain 300-400 basis points below other regions.
  • Capacity Outlook -- Sufficient factory and production capacity in place to service expected demand over the next 12-18 months; management monitors hard capacity needs as additional order strength continues.
  • Data Center Vertical -- Management highlighted robust demand across chillers, air handling units, and CDU systems, with significant expansion in air handling and increased pipeline for CDUs expected to contribute around $100 million in revenue this year.
  • Fire and Controls Growth Initiatives -- Targeted investments in fire detection, fire suppression, and Metasys building controls to capitalize on data center and broader infrastructure demand; management sees potential for margin expansion akin to HVAC.

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RISKS

  • Management reported ongoing disruption in the Middle East causing about one-third of that region’s business to be delayed, with limited expectation of near-term recovery.
  • Services revenue remained soft, especially in security, with CEO Weidemanis stating the company is still "rebalancing in the security service business between price and volume."
  • EMEA segment margins, while improving, are expected to remain slightly lower than regional peers over the long term, according to CFO Vandiepenbeeck.
  • Conversion of backlog to revenue is partly constrained by data center customers’ power infrastructure delays, which "continues to kind of put a damper on their ability to commit on deliveries within the next 12, 18 months."

SUMMARY

Management emphasized a record $20 billion backlog and robust pipeline momentum, projecting confidence in sustained growth and operational execution. The call disclosed substantial order and margin expansion, particularly in data center and applied HVAC markets, driving above-guidance earnings and prompting an upward revision of full-year adjusted EPS outlook. Strategic investments, including the Alloy Enterprises acquisition and ongoing deployment of a proprietary business system, were detailed as factors enhancing product differentiation, cost efficiency, and future scalability. Services revenue in security remains challenged, and geopolitical events, especially in the Middle East, continue to hinder EMEA business, though leadership reports strong cash flow and capital flexibility supporting ongoing investment and shareholder returns.

  • Joakim Weidemanis described proprietary York chiller subsystem innovation, emphasizing more than 1,000 patents across compressor design, variable speed drives, oil-free compression, heat exchange, and embedded controls.
  • Segment-level guidance and commentary identified ongoing productivity headwinds in North American production ramps, likely to persist through the year but offset by backlog-driven volume leverage.
  • Management specified that data center-related growth is forecast to drive ongoing content expansion—including air handling, chillers, CDU, and control systems—across successive quarters.
  • EMEA segment highlighted double-stacked order growth in data center verticals, with a notable turnaround in APAC orders, particularly in China, attributed to biopharma, semiconductor, and auto manufacturing projects.
  • CFO Vandiepenbeeck clarified that Section 232 tariffs have had minimal material impact due to product-specific regulatory classifications.
  • The proprietary business system emphasizes simplify, apply 80/20 principles to focus on what matters most; accelerate, use lean methodologies to remove waste to speed up execution, improving productivity and reducing assets such as working capital tied up in the process. In short, I think of it as helping us accelerate work from weeks to days. Amplify, leverage digital and AI approaches to amplify impact across the enterprise. pillars, delivered through kaizen events and lighthouse sites aimed at long-term, standardized operational excellence and margin enhancement.

INDUSTRY GLOSSARY

  • CDU (Cooling Distribution Unit): Specialized equipment for managing thermal loads in advanced data center and industrial cooling applications, often incorporating liquid cooling technology.
  • Kaizen: Continuous improvement events focused on specific operational processes for measurable efficiency or quality gains.
  • Lighthouse Site: Designated best-practice facility used as an operational model for wider rollouts of core business systems within the organization.
  • Metasys: Johnson Controls’ proprietary building automation and intelligent control platform for integrated facility management.
  • OpenBlue: Johnson Controls’ suite of proprietary digital and AI-powered solutions for smart building operation and system optimization.
  • Variable Speed Drive (VSD): Motor controller used to adjust the speed and output of compressors and related systems, improving operational efficiency in HVAC and industrial applications.

Full Conference Call Transcript

Joakim Weidemanis: Thanks, Mike, and good morning, everyone. Thank you for joining us on today's call. Before I begin, I want to acknowledge our more than 2,500 colleagues in the Middle East. Against the backdrop of ongoing conflict and an increasingly complex geopolitical environment, they continue to show commitment to our customers and to one another. Our thoughts are with them and their families and we remain focused on their safety and well-being. Let's begin with Slide 4. We entered the year with strong momentum, and this quarter demonstrates continued progress. Demand for our products, solutions and services remains strong, led by data centers where we're holding a leading position.

In these environments, customers need high-performance cooling, delivering precise operating conditions while requiring better energy efficiency. Meeting those requirements depends on how well we execute across the business. While early in the journey, our proprietary business system is beginning to strengthen how we lead and execute throughout parts of the organization. I continue to be encouraged as leaders spend more time focusing on customers, and as teams begin to adopt more common language and approach to problem solving together at Gemba. Against that backdrop, yesterday, we announced the release of our second AI factory reference design guide focused on air cooled chiller architectures and providing customers with globally repeatable blueprints for cooling gigawatt-scale AI factories.

This builds on our water-cooled guide released earlier this year. It's the next step in a comprehensive set of global design guides mapping the full data center thermal chain, providing clear design parameters to enable high-performance, efficient operation as customers plan and scale AI with greater clarity. Turning to the results. Orders increased 30% this quarter, building on the nearly 40% growth we delivered last quarter. That consistency reflects sustained customer demand in the markets where our technology-based innovation and strong field footprint differentiates us. And with our pipeline remaining strong, it gives us confidence as we move forward. Revenue grew 6%.

Adjusted EBIT margin expanded 310 basis points to 15.5%, and adjusted EPS was up 45% and exceeded our guide. Backlog grew 26% to a record $20 billion, providing an improved visibility and confidence in the trajectory of the business. This quarter reinforces our ability to convert demand strength into consistent growth, margin expansion and earnings performance. Given our strong start in the first half and the visibility we have across the business, we are raising our full year guidance. Marc will walk through the details later in the call. Before that, I want to step back and talk about why we're seeing this consistency. Please turn to Slide 5. The breakthroughs our customers are pursuing are advancing society.

Take, for example, biologics, semiconductor and advanced battery manufacturing and data centers where the need for indoor operating conditions within tight tolerances is driving greater reliance on high-capacity, high-precision application-specific thermal management systems. At the same time, these industries are much more energy intense than their previous generation. Biologics are 7x as energy intense as traditional pharma manufacturing. And in light of material energy cost increases, energy-efficient solutions are essential. Let's take, for example, our high-performance York chillers. To simplify, this is about customers getting rapid, high-capacity cooling precisely when it's needed, enabling mission-critical operating conditions that deliver their targeted outcomes.

As you can see on Slide 5, our differentiation operates both at the subsystem level and at the overall system level. Our York chillers leverage 5 core subsystems enhanced by our Metasys proprietary intelligent controls and further strengthened by our OpenBlue proprietary digital AI capabilities. Because we own the underlying technology platforms as well as design, develop and manufacture these subsystems, we're positioned to innovate faster and deliver application-specific higher performance with structural cost advantages. That capability has been built over decades and includes more than 1,000 patents each focused on higher performance, reliability and energy efficiency for our customers.

With that context, let me briefly walk through the 5 subsystems in our high-performance York chillers because this is where the differentiation really comes to life. And this is exactly what many of you will see in action during our upcoming in-person investor visit starting at JADEC, our Advanced Development Engineering Center in Pennsylvania. Let me start with the aerodynamic innovation centered on our compressor design. We hold over 270 patents, specifically related to the compressor technology. Simply put, the compressor is the heart of the engine of the chiller. It does the heavy lifting, and it's one of the biggest drivers of performance and efficiency.

We design our compressors specifically for applications that require high capacity, precision and reliability, like data centers, advanced manufacturing and large health care facilities. What differentiates us is ownership. While much of the industry relies on third-party compressor platforms, we design and manufacture our own application-specific compressor architectures. That gives us greater control over speed of innovation and the ability to optimize performance for our target applications. Next is power electronics. Our variable speed drives, or VSDs, where we hold over 220 patents. Innovative VSDs allow the chiller to precisely adjust output in real time rather than running at a fixed speed. That precision helps customers achieve and sustain tight operating tolerances while reducing energy consumption under real-world operating conditions.

The third subsystem is oil-free compression or magnetic bearings, where we hold over 65 patents. By eliminating physical contact inside the compressor, we reduced friction, wear and noise while improving reliability and energy efficiency. Because we design and manufacture our own magnetic bearing compressors, we can fully integrate [ sensing and controlled ], enabling higher uptime and predictive maintenance. Fourth is thermal transfer where we hold over 260 patents. Our heat exchanger designs are engineered end-to-end as part of the full system, helping minimize material and refrigerant usage. This allows customers to get consistent, dependable performance in demanding environments. And finally, our embedded intelligent chiller controls. We hold over 300 patents in this area.

These controls optimize the overall system performance in real time. Because the controls are designed with proprietary insights of our subsystems, they allow us to clearly understand how each part of the system is performing and turn that into a more precise and reliable operation and better service outcomes over the customer life cycle. The result of that subsystem ownership and overall system integration starts with thermal performance, delivering precise, reliable operations in the most demanding environments and extends to higher energy efficiency and flexibility across applications. That comes from deep technical expertise across each subsystem and the ability to design them together as one system.

This gives us confidence that we can continue to drive further differentiated performance and margin improvement. Now let me connect that system-level technology advantage to how we're ensuring it shows up consistently for our customers. Our technology platforms are a clear strength, and we continue to invest. The opportunity ahead is translating that strength more reliably through both rate and speed of innovation, meaning reductions in speed to market through innovation, manufacturing, delivery and field execution. Our proprietary business system is how we do that. Please turn to Slides 6 and 7.

Our business system is how we win with customers, how we empower our frontline colleagues, including our innovation teams, to perform their very best for our customers and how we run the company. It is anchored in a global cross-functional language and methodology for how we communicate, collaborate and drive strong continuous improvement momentum to win. As a reminder, our business system is built on 3 pillars: simplify, apply 80/20 principles to focus on what matters most; accelerate, use lean methodologies to remove waste to speed up execution, improving productivity and reducing assets such as working capital tied up in the process. In short, I think of it as helping us accelerate work from weeks to days.

Amplify, leverage digital and AI approaches to amplify impact across the enterprise. In short, I think of it as taking that same work and reducing it from days to hours and minutes. Real change in culture sustainment doesn't happen over a single quarter's time line. It takes time to put the right practices in place, learn what works and then scale it with discipline. Slide 7 shows how this journey looks in practice. The starting point is adoption and alignment. Think of it as connecting head, heart and hands. What you know, what you believe and how you show up differently. That begins with leaders, and we're seeing real momentum here.

Today, approximately 1,400 colleagues are actively engaged in this work and about 1,000 leaders have been trained on the business system. More importantly, we're beginning to see early shifts in how work gets done and prioritize the narrow areas as leaders and teams apply these behaviors and use the business system approaches more consistently. While doing that, we start narrow and go deep in a few areas of opportunity. As we've highlighted in the previous quarters, we have early and strong examples of cross-functional teams concentrating on specific priority areas, getting to root causes and implementing countermeasures leading to a significant performance improvement. To date, we've completed more than 150 kaizens across roughly 20 priority areas around the world.

Only after that work is proven, do we scale. And this must be done by deliberately replicating what works and standardizing it across the organization. Earlier, I commented on an opportunity we have to extend our technology-based strengths through the entire customer life cycle by better enabling our people to deliver for our customers. A strong example is our service sales work stream which helps ensure we establish a service engagement shortly after our new chillers are commissioned. Unnecessary internal processes weigh down our sellers' ability to proactively engage with customers for service needs, assessments and proposals.

Starting in West Florida, a cross-functional team used business system approaches like problem solving, value stream mapping, kaizen and daily management to redesign the process end to end, taking the process for an individual customer from weeks and days to a matter of hours. The focus on the customer and the frontline enablement led to tripling service agreements immediately following new chiller start-up commissioning. After proving success in one market, we scaled the same playbook to two additional local markets with strong follow-on progress. This is also what many of you will see at our upcoming investor event in real operating environments at Gamba where the value is created.

At JADEC, we will illustrate how the business system accelerates innovation, both rate and speed from development to new product launch. At our Airside Center of Excellence, or ACE, and in our Baltimore local market office, we will show the same system driving scalable manufacturing, commercial execution and service delivery using common tools, language and leadership behaviors to deliver more consistently and predictable outcomes. With that, Marc will walk you through the details.

Andrew Obin: Thanks, Joakim, and good morning, everyone. We delivered another quarter of solid execution, building on the momentum from a strong first quarter with healthy demand across our core markets. Performance this quarter reflects continued progress across the enterprise as operational discipline and commercial focus are translating more consistently into results. This reinforces our focus on disciplined execution, margin performance and operating rigor. Let's turn to the results on Slide 8. Organic revenue grew 6%, led by continued strength in applied HVAC and mid-single-digit growth across both service and systems. Segment margin increased 180 basis points to 18.5%, and EBIT margins expanded 310 basis points to 15.5% driven by better operating leverage and productivity improvements.

Adjusted EPS of $1.19 increased 45% year-over-year and exceeded our guidance. These results highlight the operating momentum building across the business as we enter the second half of the year. Let's now discuss our segment results in more detail on Slide 9 and 10. Orders increased 30% this quarter, building on a strong first quarter, reflecting sustained demand led by large data center activity, while demand across our other key end markets remain stable. Customers continue to value Johnson Controls for our ability to deliver integrated mission-critical solution at scale, backed by liability, deep domain expertise and life cycle services. By region, orders in Americas grew 40%, led by nearly 60% growth in systems supported by large-scale data center projects.

In EMEA, orders increased 11%, led by strong growth in data center-related projects. In APAC, orders grew 4% led by Southeast Asia, while system delivered mid-single-digit growth at the segment level. Turning to revenue performance by region. In the Americas, organic revenue increased 7% led by continued strength in applied HVAC and solid double-digit growth in service. In EMEA, sales increased 1% as system growth offset disruption caused by the Middle East conflicts, and lower service volumes. APAC grew 13%, led by over 20% growth in applied HVAC. Across the portfolio, revenue performance showed continued momentum underpinned by strong execution from our teams. Moving to margins by region.

In the Americas, adjusted segment EBITDA margin improved 100 basis points to 19.5% driven by higher volume and price realization. In EMEA, margins expanded by 370 basis points to 14.9%, reflecting productivity gains and improved leverage on higher revenue. In APAC, margin expanded 350 basis points to 19.8% with improved volumes and productivity gains. Our record backlog grew over 25% to $20 billion, providing confidence in our growth rate over the next 12 months. Turning to our balance sheet and cash flow on Slide 11. On the balance sheet, we ended the quarter with approximately $700 million of available cash and total liquidity remained strong. Net debt declined to 2x remaining within our long-term target range.

Overall, the balance sheet continues to support disciplined capital allocation and financial flexibility, giving us the ability to invest in the business, maintain balance sheet strength and return capital to shareholders. Let's now discuss our fiscal third quarter and full year guidance on Slide 12. As we look to the third quarter, our guidance incorporates the momentum we've established year-to-date. We anticipate organic sales growth of approximately 6%, operating leverage of approximately 45% and adjusted EPS of approximately $1.28. For the full year, improved performance and backlog strength support our expectation of organic sales growth of approximately 6%. We continue to expect operating leverage of approximately 50% for the full year, reflecting continued progress in cost management and productivity.

As a result, we are raising our adjusted EPS guidance to approximately $4.85, representing roughly 30% growth and $0.30 higher than our original guide at the beginning of the year. We continue to expect adjusted free cash flow conversion of approximately 100% for the full year, demonstrated that improved profitability is translating directly into cash. This is supported by disciplined working capital management, while early progress in our business system is beginning to reinforce more consistent execution in targeted parts of the organization. Operator, we are now ready for questions.

Operator: [Operator Instructions] The first question comes from Scott Davis from Melius Research.

Scott Davis: Great. Everything looked pretty consistent with what we would expect the services order is still a little sluggish. Is there some timing issues there or any dynamic? And I guess what I'm asking is when do you expect that to pick back up again because it clearly should given the installed orders you have.

Joakim Weidemanis: Scott, yes, correct. Those were a little softer than some of the other numbers that we published. So just as a reminder, service is about 1/3 of our revenue. And in our case, we do not include retrofit in the service revenue as some other companies do. Now our service fundamentals remain solid and particularly in HVAC, where we continue to perform very well, but it was offset in the quarter by weaker performance, particularly in security. And we have, over the last couple of quarters, been digging into our security business as a service business deeper and have found that over the years, the balance between volume and price probably hasn't been appropriately been managed.

So during the -- and it's also, by the way, the part of our service business that's a little less differentiated. HVAC applied being the most differentiated. So we're rebalancing in the security service business between price and volume. So as a result of that, we were down in security service in the quarter. Margin-wise, we were up. So we're just managing and finding a better balance between price and volume in that part of the business.

Scott Davis: Okay. That's helpful. And then just to back up a little bit on the business system stuff because it obviously matters a lot. Walk us through, when you talk about -- and I'm on Slide 7, the 7 lighthouse sites projected in 2 years, I think you're starting with a couple of lighthouse sites now. How does that kind of -- does that go exponential after that? Do you go from 2 to 7 to 40. I mean what -- how does that kind of work? Because I'm just trying to get a sense of how long it might take you to get just across the organization, really the business system deployed to a level of excellence.

Joakim Weidemanis: Yes. So lighthouse sites are internal sites where new leaders, for example, can go and spend a week or a few days to experience what really, really good looks like. So think of these as Olympic gold medal sites. So we're unlikely to add a lot more than 7. I think that's probably a good number. And the 7 just simply comes from that we need a couple on commercial and service, a couple on manufacturing and a couple on innovation. And the lighthouse sites is one part of how you roll out a business system more widely. It doesn't mean that those are the only places where we roll out the business system, not at all.

Those are the Olympic gold medal sites that others will aspire to as we roll out more broadly. And at the Investor Day, you will see -- that's upcoming in the Baltimore and the Pennsylvania area. You're going to see, as we're standing up lighthouse sites, a couple of them.

Operator: Our next question will come from Amit Mehrotra from UBS.

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

Joakim Weidemanis: Yes. Order is plateauing. I think when you're talking about 30% to 40% rates, I think both of these quarters, we're very, very happy about. Our pipelines remain strong, growing at a double-digit rate. And so we expect continued strong orders. It's not just, of course, the data center market is fueling part of that, but we're also very pleased with the stability in so many of our other verticals. And I mentioned some of them in the prepared remarks here, for example, within pharma, biologics as well as advanced manufacturing. And as you know, we don't guide on orders specifically.

But as I said, the pipeline remains very strong, and we're very confident and happy about our record backlog here.

Amit Mehrotra: Okay. And just maybe a quick follow-up. I wanted to ask about the strategic direction of the business. There were some reports on asset sales. I'm sure you can't specifically talk about that. But maybe just talk about how you're thinking about the moving pieces sort of both strategically and financially. I assume maybe some of these sales may be dilutive in the near term and how you're thinking about sort of the near-term and long-term strategic dynamics?

Joakim Weidemanis: Yes, very good. I think unchanged, our job here is to make sure we maximize shareholder value. And over the last year, we've had a chance to go through, with fresh eyes, the whole portfolio. And of course, as every company I've worked, no one ever has the perfect portfolio at any one point in time. But then the way I think about it is the different parts of the portfolio, it's kind of like a sports team, different parts to play, different roles. For example, we're playing more offense with Applied and other parts of the business, I would think as being more of defense players contributing very, very nicely to profitability and cash flow, for example.

But we continue to review our portfolio. And with the goal of strengthening shareholder value, and we'll keep you posted as we make progress on that.

Operator: Our next question will come from Joe O'Dea with Wells Fargo.

Joseph O'Dea: Some really hopeful color about a product portfolio and technology as well as business system. Can you just talk about the time line on kind of business system implementation. When you talk about 1,400 colleagues being engaged today, any mile markers you have out there for how you expect that to move forward? It certainly seems to be translating on the margin expansion that we're seeing here. But would expect as that continues to move forward, you continue to unlock other opportunities?

Joakim Weidemanis: Yes. So the way I've grown up, I've been applying business system throughout most of my careers. You never really measure your progress in terms of numbers of kaizens or people engaged internally. The only reason we're offering that on these calls is just to give you a sense of the momentum. Internally, we're really focused on the outcomes that this effort is generating. And we'll talk a little bit more about that at the upcoming investor event. But we're doubling down on a number of improvement opportunities or growth blockers, unlocking growth blockers. And in terms of results showing up, on the P&L. I mean we're still very, very early stages, right?

I mean as I explained, you always start narrow and go really deep and then before you cascade and so on. So we're still in the very early innings here. And it's really over the next year and two years that we're going to start to see more meaningful results show up on the P&L.

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

Joakim Weidemanis: So Alloy, which is a fantastic company with so many capable PhDs from reputable academic institutions in the Boston area really brings to us unique, highly proprietary thermal management capabilities which is both anchored in Material Sciences as well as manufacturing capabilities. And we might share a little bit more about them at our investor event. But think of it as adding capabilities in the heat transfer area, which is our thermal transfer area, which is one of the elements that I discussed around our chillers. But of course, there are heat transfer elements to CDUs as well. There are heat transfer elements to cold plates in -- within liquid cooling systems.

And so we're going to be looking to apply Alloy's technology in all those areas, chillers, CDUs and eventually cold plates. And -- we -- I don't think we will disclose here exactly when we're going to apply it in the CDUs, but it will be shortly. Very excited about that acquisition.

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

Christopher Snyder: I wanted to ask about June quarter margins. It seems like there's not much sequential margin embedded in the guide. But typically, the company sees pretty nice sequential expansion alongside the higher volumes into the June quarter. So I guess are there any headwinds coming through or mixed tailwinds in Q2 that is not driving that sequential step up to the third quarter?

Marc Vandiepenbeeck: Yes, Chris. So if you look at the volume and growth we anticipate in the third quarter, it's very similar to what we saw in the second quarter. So that's all integrating till the 6% growth for Q3 which means from a volume leverage standpoint quarter-over-quarter, you're not going to see as much of a step-up that you might have seen in prior period. However, I'd point to the fact that the way we've guided, it's a pretty impressive operating leverage year-on-year of 45%. If the volume would come out a little bit higher, based on certain risk and opportunities we have in the quarter, could we see a little bit of a better sequential improvement in margin? Yes.

But at this stage, I think embedded in our guide with that 45% operating leverage year-on-year improvement. I think we are pretty much locked and loaded.

Christopher Snyder: I appreciate that. Maybe if I could follow up on a longer-term question. You referenced working with the hyperscalers on the future data center architecture. I guess when you look out into the future, how do you see underlying content shifting between the CDU, which I think would be on the positive side versus air handlers and chillers on the other side perhaps? And then even within chillers, are you seeing any shifts between air cooled, where you guys have a very strong market position versus the water chilled side?

Joakim Weidemanis: Yes. Great question. I think the big picture -- and by the way, I've spent the last few weeks in the field, of course, I spent a lot of time in the field all the time. But I visited 7 data centers in the last 3 weeks on site, both up and running and data centers under construction on 2 continents. So fresh input from the field. So there are more things that generate heat in the data center than the actual chips and I'm sure you've read about some of the things that are happening outside of thermal management on the electrical side, for example.

And so what that does is that even though liquid cooling is being implemented, I think there was maybe a concern about a year ago that there would be less need for air handling units. And I think we're seeing the opposite at this point in time. So our Silent-Aire franchise is enjoying very healthy growth, and we expect that to continue because of other things than the chip generating heat. So our content, I think, is going to actually continue to increase a little bit as a result of that. And then I know there was some speculation about chiller content. And I think we discussed that in prior quarters. I think those fears were overstated.

Maybe on the margin over the next couple of years, there might be a slight headwind, but the upside versus what we originally thought on air handling units will nicely offset that. And then, of course, our CDU business has just started to ramp. And we have hundreds of millions of dollars in the pipeline and expect about $100 million worth of business this year. And why not more? And it's just simply because naturally, many of our customers, they want to pilot and test them and so on before they place the big orders. So -- but we're very bullish about our opportunities. And in all those different franchises for data centers.

So both chillers, air cooled, water cool as well as our air handling units, our Silent-Aire franchise and now with the addition of the Alloy technological capabilities, I think will only strengthen our positioning.

Operator: Our next question will come from Julian Mitchell with Barclays.

Julian Mitchell: Maybe starting with the Americas kind of operating leverage there. You've touched on margins a little bit. You started the year a bit muted on that second quarter, a nice pickup in Americas operating leverage. How are you thinking about the operating leverage for that segment in the back half? And I wondered really if there's been any change to your assumption around sort of gross cost headwinds because of Section 232 changes or broader inflation within that Americas business, please?

Marc Vandiepenbeeck: Yes. So if you look at the margin improvement year-on-year this quarter of Americas, about 100 basis points. A lot of that came from pure growth and leverage. That means we had a little bit of a productivity headwind in the quarter and that came from mostly the ramp-up in our capacity. If you recall, a couple of years ago, we made substantial investment to increase hard capacity within our factories in North America to keep up with the demand. We are likely going to continue making investment in capacity.

But as that capacity continues to accelerate and ramp, you have the natural production ramping in efficiency that comes with that as you train and onboard a whole lot more people as the processes get practice over time. You have a little bit of a short-term dynamic happening in productivity. That ramp and productivity opportunity will remain probably for the balance of the year as you're thinking about the operating leverage of the Americas. But there's enough kind of juice in the backlog for us to continue to see year-on-year margins to improve, and that's entirely embedded in our guide as an enterprise of an operating leverage of around 50%.

On the 232, as you know, and consistently with how we've dealt with tariff for the past year or two, we've been able to navigate those both through long-term and short-term countermeasures. But given our current product mix and the way it's been classified under the different regulations, we've not seen a material impact specifically to 232, thanks to the fact that chiller are a category that are -- that is not including in that Section 232.

There are some other parts of the business that have been affected by that, but it's rather minimal, and we feel very comfortable that's similar to what we've done in the prior 12, 18 months, we'll be able to pass on that -- some of that risk to pricing dynamics in the market.

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

Joakim Weidemanis: Yes. So we actually have an important business in the Middle East. We have about 2,500 colleagues on the ground. And our priority short term is very much about their safety and well-being. But of course, what we do is mission-critical for our customers and actually for some communities there as well. So we're trying to strike the balance between taking care of our customers and our people here. The Middle East, overall, for context, is about 2% to 3% of our overall revenue. But for EMEA, it's almost 10% or a little bit more than 10%. And in the quarter, about 1/3 of that business was really impacted, delayed, if you will, by the conflict here.

So we're not anticipating a full return here in the quarter that we're actually in right now. But over time, we hope that, and if you're as good of a predictor of that as we are, but we hope that over time, things will go back to normal here in the last quarter of the year.

Operator: Our next question will come from Andrew Obin of Bank of America.

Andrew Obin: Can we talk about -- I know lots of times spent on HVAC, but clearly, we're also hearing is putting a lot more focus on [ buyer ] and control business. Can you just talk about the initiatives that are taking place in terms of market pricing? And also, can you remind us the impact of data center business on growth profile of those verticals?

Marc Vandiepenbeeck: Yes. So obviously, HVAC has been one of the great growth benefit of what you've seen in the market particularly on data center, but other vertical as well, as we've mentioned them in the open remarks. A data center, just like any other infrastructure requires specific fire detection and fire suppression application as well as controls, both building controls and then, of course, equipment control associated to that. We have made a substantial investment over the last few quarters in creating specific applications for this vertical and we continue to see a lot of momentum building within these businesses, both fire detection, fire suppression, but also, of course, our Metasys building control solution.

And we see that as a great opportunity moving forward. They have not yet gained the same level of opportunistic growth that the HVAC business has, but we believe the opportunity on a relative basis is probably as high.

Andrew Obin: And maybe can you just share with us outside of data centers sort of growth initiatives at fire and control? Because as I said, the feedback is that they're doing quite a bit better.

Joakim Weidemanis: Well, we have the same opportunities there, Andrew, as we have been applied. If you recall in prior calls, I talked about the early progress with the business system and commercial application. I talked about selling hours and a week for our salespeople or our solution architects where we -- for HVAC, it went from less than 10 hours a week selling to now above 20 hours in the areas where we've implemented that work. That exact same approach. We're now applying in controls, for example, in a number of places.

And we're finding that we have the same opportunity, if not a bigger opportunity in terms of giving back more hours to our people, our solution architects in the Street. And the same -- we haven't gotten started yet as much on fire detection because we've prioritized Applied and Controlled, but fire detection, which is -- has some similarities with the selling motion and control, meaning that it's a system. I think we have very, very similar opportunities as in Controls and HVAC and Applied. That's on the selling side and on the service side, and I think you will see this a little bit in the Investor Day that's coming up, similar opportunities.

Again, we're -- in terms of giving hours back to our field colleagues, there's significant opportunity on capacity. And it's not just capacity, it's of course if you have more capacity, you're able to respond faster and you're also in a position where you can have more choice around which -- on the service side of things, for example, choice around which field colleagues to send, not all field colleagues are, as an example, as competent on all parts of our offerings, right? So by having more capacity, you can both respond faster and you have greater choices around who to send. So some very, very good opportunities in those businesses.

Andrew Obin: And so the margin opportunity associated with these initiatives is commensurate with what we have on the HVAC side, right?

Joakim Weidemanis: Yes, exactly, yes. Because what we -- as we've discussed in prior calls, what -- the consequence of what I just described is that we can continue to grow without adding people. And at some point in time, of course, we'll also add people. But we're really trying to decouple the top line growth from the cost growth or head count growth, and that's going to drive margin expansion.

Marc Vandiepenbeeck: And overall, the margin profile of our controls franchise is very accretive to fleet average, has been and will continue to be for [indiscernible] controls.

Operator: Our next question will come from Patrick Baumann with JPMorgan.

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

Marc Vandiepenbeeck: Yes. So first on margin. If you look at EMEA for the year, it's improving nicely, give or take 100 basis points, and we are really happy with the big ramp we had this particular quarter because of the headwind we are seeing associated with the different macro challenges [ that we are seeing ]. The balance of the year, depending on how volume will shake out, you will see a, I wouldn't say, pressure on margin, but you will see a slowdown in the progression of that margin over time, maybe with a little bit of pressure in the third quarter and then some recovery in the fourth quarter.

Net-net for the year, I think EMEA will come out very strongly and really helping for us to achieve that operating leverage. Longer term, I think we remain consistent. EMEA has been an area with a bit underinvested historically on both capabilities and products. We've been working diligently over the past 12, 18 months in fixing and addressing some of those gaps and making the right level of investments to have the same level of quality, differentiation and competitive products for EMEA. And as that comes, we feel very strong that EMEA has the opportunity to continue to raise and catch up to its regional peers within the segments of JCI.

It's still a business as you can tell that operates at 300 to 400 basis points lower margin than its regional peers. It will probably remain slightly lower, but not to that level in the long run.

Patrick Baumann: And on the 80/20 stuff, is that -- like what's the revenue headwind you expect from these type of actions across the portfolio? Have you provided context on that before?

Marc Vandiepenbeeck: Yes. When 80/20 is applied, well, you should not see a massive long-term revenue impact because you actually free up room for the team to focus on the product where you have the most differentiation, the greater ability to drive value. Now obviously, in the short term, in sort of the pocket of the market, you will see some softness as we reposition the portfolio against higher runner. But I wouldn't anticipate any activity from the business system to impact whatsoever our ability to grow and compete.

Patrick Baumann: Got it. And then on the backlog, have you -- can you quantify the shape in terms of the percentage you expect to deliver over the next 12 months?

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

Joakim Weidemanis: Yes. And maybe just to add to that, we're also seeing customers place orders earlier for those reasons that Marc mentioned then. A little bit earlier than perhaps a year ago. So there has been a slight timing shift in our backlog here for that reason. Meaning beyond [indiscernible].

Operator: Our next question will come from Andy Kaplowitz with Citigroup.

Andrew Kaplowitz: So I just wanted to follow up on that last comment. Obviously, you're growing nicely here, but you've had orders accelerated over the last couple of quarters. Your capacity to be able to sort of ramp up in '27, obviously, the timing of these big data center orders is key. But do you have the capacity you need considering that you will be delivering more of those bigger projects next year and beyond?

Joakim Weidemanis: Yes. The short answer is yes, over the next 12-plus months. And because we built hard capacity that Marc was referring to, the actual factories, the buildings some time ago before I joined the company. And what's going on right now is we're ramping within those new buildings, if you will. And so we will have capacity for the next 12, let's call it, 18 months. And there's also plenty of productivity improvement opportunities, as I've talked about on previous calls. Now as we've all seen, the order entry has been very healthy here over the last couple of quarters. And our pipeline, as I referred to, remains very strong.

And so of course, we're continuously looking at where we would need to add more hard capacity, meaning more footprint. And so that's an ongoing effort. And I think as long as we stay 12 to 18 months ahead of that, which we can right now based on what I said, we're going to be in good shape here.

Andrew Kaplowitz: And then maybe just a bit more color on sales by geography. I know that you've had a bit of disruption in the Middle East as you talked about, but orders in EMEA have been accelerating lately on data center strength. Does that start to reflect into stronger sales growth in that segment as well as you go into '27? And then I think you said sales up 13% in Asia Pac, backlog is up double digits. Is China turning around? Or has it turned the corner for you?

Marc Vandiepenbeeck: So starting with EMEA, I mean, we had a really strong 11% order growth on a compare of almost 13% last year. So it's a double stack that's pretty strong. That's a sign that some of our solutions are really starting to resonate, particularly in the data center vertical, but there's other aspects of the business that we see very positive there in the market in EMEA. And that's despite the disturbance we saw associated with the conflict in the Middle East. As far as APAC goes, that order rate of about 4% was on an easy compare, right? And transparently, we barely had any growth in order last year. It was, I think, flat.

And so I would say, yes, we've bottomed out. We have passed that point. I think we passed that one probably a quarter or two ago. Now it's not a big return to growth, particularly in China. However, the same vertical where we see great opportunities, I'm thinking data center, semi car manufacturing as well as the biologics that we talked about in prior quarter. That continues to be a big tailwind, particularly for China. Our ability to convert there is not the same as maybe the rest of the world, but those opportunities are so large that we see an opportunity to continue to build some momentum in APAC and drive some growth.

Operator: Our next question will come from Nicole DeBlase with Deutsche Bank.

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

Marc Vandiepenbeeck: It's a little bit early for us to start forecasting next year, but it's not a crazy assumption. Yes, we're going to have a very strong backlog entering the year. I think the reason I'm pausing a little bit is some of the headwind Joakim talked about around our service business and some of more mundane parts of the portfolio where differentiation is a little bit harder to achieve. It depends how quickly we can turn that around to help support the level of growth you just mentioned.

Nicole DeBlase: Understood. That makes sense. And then I guess just -- I don't think the question has been asked yet on Asia Pac margins also up really nicely year-on-year despite the tough organic environment in that region that you just spoke to. So Marc, can you just talk about the expectation for Asia Pac margins as we progress into the back half of the year?

Marc Vandiepenbeeck: Yes. So they still had a pretty good revenue quarter. Their book and bill within the quarter was very strong. So 13% top line growth, really allow them to both drive net growth leverage as well as very strong productivity. We talk about around $20 million of productivity for that segment on $150 million or so of segment margin. That's a very material uplift.

As you look at the balance of the year, we think Q3 is going to be probably closer to flat year-on-year associated with the fact that the level of growth that you saw this quarter will probably not repeat in the third or fourth quarter, and it's going to be closer to mid-single-digit type of growth for that period. But we still see some full year margin improvement for that segment, probably reaching the high 18% type of margin for full year for that particular segment.

Operator: This concludes our question-and-answer session. I will now hand the call back to Joakim Weidemanis for any closing remarks.

Joakim Weidemanis: Thank you. and thank you for all your questions. This quarter's results reflect the momentum that's building across Johnson Controls as our teams operate with greater clarity, discipline and consistency. We're seeing those improvements show up in how we serve our customers and in the strength of our results, and there's more to come. I want to thank our 90,000 colleagues for their commitment and passion in delivering a strong quarter and their energy and embracing our new way of working with our business system. This is how we're going to win. While we're early in our journey, we're excited by the momentum we see. Finally, today is National Skilled Trades day.

So I want to extend a special thank you to our more than 40,000 field colleagues for all they do every day for our customers. You are such an important part of our competitive advantage. I look forward to continuing my conversation with all of our stakeholders. Thank you for joining us today.

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