Johnson Controls International Plc Q3 FY2025 earnings call

• CEO Joakim Weidemanis mentioned strong third quarter results, with organic sales growth, margin expansion, adjusted EPS growth, and orders and backlog growth. - The company is building a business system focused on simplifying operations, accelerating growth, and scaling impact, anchored in 80/20 and Lean principles and augmented by digitization and AI. - Examples of progress include increasing sales teams' time with customers in conventional HVAC and cutting lead times for key chillers in North America. - Executive team has been trained on the business system and participated in kaizens, with plans to train top 200 leaders and expand engagement. - The company is evaluating and refining strategy, including reviewing business lines and solutions, and optimizing portfolio, footprint, cost structure, and operations.

In the fiscal third quarter, organic sales grew 6%, segment margins expanded 20 basis points to 17.6%, and adjusted EPS grew 11% and exceeded guidance. Year-to-date, adjusted free cash flow has nearly doubled to $1.8 billion. Orders grew 2%, with strength in the Americas and softness in China. Backlog grew 11% to $14.6 billion. Regionally, orders in Americas increased 5% with mid-single-digit growth in Systems; in EMEA, orders were up 2% with 6% growth in Service offsetting a 1% decline in Systems; in APAC, orders were down 8% with Service double-digit growth offsetting System decline. Organically, sales in Americas were up 7% with strength in HVAC and Controls; in EMEA, organic sales grew 4% led by 8% growth in Service; in APAC, sales grew 6% with strong double-digit growth in Service. Adjusted segment EBITA margin in EMEA expanded 100 basis points to 14.1%, in APAC expanded 70 basis points to 19.4%, and in Americas improved 10 basis points to 18.5%.

• Anticipates organic sales growth of low single digits, adjusted segment EBITA margin of approximately 18.6%, and adjusted EPS in the range of $1.14 to $1.17 for the fourth quarter. - Reaffirms full year guidance for mid-single-digit organic sales growth and approximately 90 basis points of adjusted segment EBITA margin expansion. - Raises adjusted EPS outlook to $3.65 to $3.68 per share, representing 14% to 15% growth, and expects full year free cash flow conversion of greater than 100%. - Anticipates the sale of Residential and Light Commercial HVAC business to Bosch to close in fiscal fourth quarter, with net proceeds mostly returned to shareholders.

Forward-looking statements are based on assumptions and expectations of future events subject to risks and uncertainties, and actual results may differ from predictions. Specific operational risks related to execution of business system and strategic initiatives are not extensively detailed but implied in the context of forward-looking nature.

Q: Amit Mehrotra of UBS asked about key KPIs and tangible progress on return profile.

A: Joakim Weidemanis said he focused on customer focus, innovation, and a new business system anchored in 80/20, Lean, digitization, and AI, with examples like increasing selling time in HVAC and cutting lead times in North America chillers, starting narrow to excite and train the organization.

Q: Scott Davis of Melius Research asked about accelerating growth in Fire & Security and its synergy with HVAC.

A: Joakim Weidemanis said they will gradually deploy the business system into Fire & Security, and are in a strategic review of businesses.

Q: Jeff Sprague of Vertical Research Partners asked about free cash flow opportunities.

A: Marc Vandiepenbeeck said progress in cash flow is due to accounts receivable management and Lean efforts, with opportunities from Lean transformation reducing CapEx and inventory. Joakim Weidemanis added about decoupling CapEx and inventory with lead time reduction and billing improvements.

Q: Nigel Coe of Wolfe Research asked about free cash flow conversion above 100% and portfolio.

A: Marc Vandiepenbeeck said early to commit to above 100%, comfortable with 90s conversion, and portfolio review is ongoing within 10-15% noncore.

Q: Steve Tusa of JPMorgan asked about order trend and long-term outlook.

A: Joakim Weidemanis said core vertical markets are healthy, China has softness but Service growth, and China market is maturing.

Q: Joe Ritchie of Goldman Sachs asked about 2026 framework and investor day.

A: Joakim Weidemanis and Marc Vandiepenbeeck said working on 2026 plan, early to comment, and investor day after strategic review.

Q: Nicole DeBlase of Deutsche Bank asked about EPS seasonality.

A: Marc Vandiepenbeeck said tariff uncertainty and longer cycle due to Residential sale affect seasonality.

Q: Joe O'Dea of Wells Fargo asked about restructuring and tax.

A: Marc Vandiepenbeeck said restructuring savings near dollar-for-dollar, continuing towards $100M benefit by 2026, and tax has small changes.

Q: Andrew Obin of Bank of America asked about Americas order disaggregation.

A: Joakim Weidemanis said data center and Applied HVAC are strong, other businesses grow in low single digits.

Q: Chris Snyder of Morgan Stanley asked about Service business margin expansion.

A: Joakim Weidemanis said opportunities to apply Lean principles in Service to improve margins.

Q: Julian Mitchell of Barclays asked about Service business margin and competitive environment.

A: Joakim Weidemanis and Marc Vandiepenbeeck said opportunities in Service and Fire & Security, with HVAC having bigger near-term opportunity.

Q: Andy Kaplowitz of Citigroup asked about Americas margin improvement.

A: Joakim Weidemanis and Marc Vandiepenbeeck said business system deployment will drive margin improvement in Americas.

Q: Deane Dray of RBC Capital Markets asked about free cash flow sustainability and Residential sale impact.

A: Marc Vandiepenbeeck said Residential was a headwind, sustainability from process improvements, confident in 95%+ conversion.