Johnson Controls International Plc Q4 FY2025 earnings call

• Strong fiscal 2025 results: sales grew 6%, segment margins expanded 100 basis points, adjusted EPS increased 17%, free cash flow conversion 102%, orders grew 7%, backlog at record $15B.
• Proprietary business system: Built on 3 pillars (simplify, accelerate, scale) with over 700 colleagues engaged in 50+ kaizens. Examples include HVAC sellers increasing customer engagement time by >60% and chiller manufacturing in NA improving on-time delivery to over 95%.
• Technology and sustainability: Leadership in advanced thermal management, launch of coolant distribution unit, data center solutions aligned with AI trends. In Europe, a project in Zurich for green heat using ammonia-based heat pumps.
• Talent and leadership: New leaders appointed in Americas and manufacturing. Focus on talent development to accelerate progress.

Fiscal 2025 saw sales grow 6%, segment margins expand by 100 basis points, and adjusted EPS increase 17%. Free cash flow conversion reached 102%. Orders grew 7% for the year, and backlog expanded 13% to a record $15 billion. By segment: Americas - orders grew 9% in the quarter, organic sales up 3% with strength in HVAC and Controls; adjusted segment EBITDA margins improved 50 basis points to almost 20%. EMEA - orders increased 3%, organic sales up 9% with strong double-digit growth in system and high single-digit in service; margin expanded by 30 basis points to 15.6%. APAC - orders down 1%, organic sales declined 3% due to lower volumes in China; margin declined 190 basis points to 17.8%.

Fiscal 2026 guidance: Mid-single-digit organic revenue growth, operating leverage ~50%, adjusted EPS ~$4.55 (over 20% growth), 100% free cash flow conversion. First quarter organic sales growth ~3%, operating leverage ~55%, adjusted EPS ~$0.83. Full year expects mid-single-digit organic sales growth, ~50% operating leverage, and ~$4.55 adjusted EPS with 100% free cash flow conversion.

Q: Marc, the 50% operating leverage target for 2026, can you just walk that the segment EBITDA margins?

A: Yes, sure. Thanks, Amit. Yes, you're pretty close on margin. I would say by segment, EMEA and APAC will be the main driver of margin improvement this year. Not that Americas will not contribute, but if you look at that incremental, they've shown a decent improvement this year and the level of ramp year-on-year will be probably a little bit more muted than the other segment. But overall, we feel very comfortable that our operating leverage will be in the 50s or above.

Q: Amit Mehrotra: And then, Joakim, just on the opportunity going forward. I mean, there's a lot of stuff here. There's a cost opportunity. There's maybe a portfolio opportunity. You talked about M&A, maybe rank those. It just seems like there's maybe a huge G&A opportunity, but then also there's a lot of questions about maybe slimming down the portfolio further. But can you -- obviously, you're 237 days into the job now. So maybe just offer a little bit more color on prioritizing all those buckets of opportunity.

A: Amit, thanks for keeping count on the number of days I've been with the company. Well, let's start with where you left off with Marc. So the operating leverage. There's a reason there's a plus behind the guidance and how we're thinking about operating leverage. And that really comes back to what we're doing with the business system, where we are going after driving productivity in our field operations and our factory footprint and then -- field operations and service. And then in SG&A, we see leverage opportunities, i.e., getting more out of the SG&A investment that we have, more the S of the SG&A with the help of the business system, and I gave you an example here in the prepared remarks. So I'm very excited about the continued progress that we're going to be able to make there and hence, the plus behind the leverage in the guidance. And then as we've talked about before, we have and we're working away at reducing the G&A cost and our corporate costs. So we continue to do that. There's no change in our ambition level there at all. And then on the M&A side, we continue to work away at the portfolio that we have together with the Board, and we have evolved a little bit more clarity on our future strategies here. But as I said last time, that's a multi-quarter effort together with the Board, and that effort is really guided by creating shareholder value. That's the #1 principle, right? And then in terms of acquisitions, we have started to apply some of the discipline that I have learned in prior roles, prior to joining Johnson Controls. So I can tell you that our acquisition pipeline is vibrant. And we are engaged in multiple situations. And we are being very, very disciplined about doing the proper strategy work, the proper target work and not falling in love with anything in particular and being just very, very disciplined about capital allocation.