Johnson Controls International plc 2026 Q4 Earnings Call

Eric, please go ahead. Good morning, and thank you for joining Johnson Controls Fiscal Fourth Quarter 2026 earnings conference call.

Joining me on the call today are Johnson Controls Chief Executive Officer, Joakim Weidemanis, and Marc Vandiepenbeeck, our Chief Financial Officer. As a reminder, today's discussion will include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings for additional information. We will also reference non-GAAP measures. Reconciliations are included in our earnings release and presentation appendix available on our investor relations website. I will now turn the call over to Joakim.

Thanks, Eric, and good morning, everyone. This is Eric's first earnings call since joining our investor relations team last month, and we're excited to have him on board. I want to start by recognizing Johnson Controls colleagues around the world. Over the last 18 months, we've made significant progress toward becoming a more focused thermal technology company, growing at a faster rate with more investment capacity and higher profitability. At the end of the day, it's our people who bring those strategies to life, combining our technology and deep field and manufacturing expertise to deliver for customers. Their commitment to customers and disciplined execution is reflected in the consistency of our performance. Fiscal 2026 was an important proof point for the framework we introduced at our Going to Gemba Day in June.

Our differentiated technological capabilities, unmatched field presence, global manufacturing strength, and proprietary business system are helping us move with speed, win with customers, and strengthen performance. For the full year, we exceeded both our initial fiscal 2026 guidance and the raised outlook we provided during the year. Organic revenue increased more than 8%, adjusted EPS increased 37%, and adjusted free cash flow conversion was 103%. We enter fiscal 2027 with momentum and confidence in our ability to continue creating value for customers and shareholders. That confidence is grounded in a business model built around three reinforcing elements. Our strategic pillars focus resources on the most attractive opportunities, including AI and data centers, mission-critical environments, and decarbonization. Our proprietary business system empowers frontline teams, accelerates problem-solving, and drives continuous improvement everywhere in our company. Our economic engine converts those advantages into differentiated customer value, innovation, manufacturing scale, and frontline productivity.

The result is a powerful value creation engine that helps our colleagues win and deliver for our customers and grow profitably and compound value over time. These capabilities are increasingly relevant as our priority customers are investing in some of the world's most demanding operating environments to deliver the outcomes they aspire to. This is especially evident across AI and data centers, advanced manufacturing, and biopharma. As customers scale capacity in these verticals, the environments supporting their operations are more heat and energy intensive, need to be controlled within tighter tolerances, and are less tolerant of disruption. Our portfolio brings together integrated thermal management and controls with liquid cooling technologies, including cooling distribution units and cold plates for data centers. We combine subsystem technology developed in-house with the ability to design, deliver, and service the broader architecture across the thermal chain, including controls.

As data center architectures continue to evolve, we see additional opportunity in modular data centers. We believe our differentiated capabilities position us well in this emerging segment, and we are investing to win and building a stronger partner ecosystem. Our collaboration with Armada is one example. As announced at the NVIDIA GTC in Berlin, together, we plan to build 500 megawatts of distributed edge compute capacity in 2027, bringing together our thermal management technology, engineering capabilities, and global manufacturing scale to bring capacity online faster. Our advantage comes from bringing together five areas of expertise: a focused portfolio oriented toward high-growth, mission-critical verticals; proprietary technologies built over the last 150 years; an unmatched global field presence of approximately 50,000 sales solution architects and highly skilled technicians; an emerging manufacturing advantage focused on quality, capacity, and delivery; and our proprietary business system.

These five areas of expertise allow us to solve complex customer challenges with greater speed, create differentiated value, and support sustained profitable growth. We are a global thermal technology leader that is built for this time. With that context, Marc will take you through the financial results in more detail.

Thanks, Joakim, and good morning, everyone. We finished the year with strong fourth quarter results. Organic revenue increased 12%, led by strong double-digit growth in Americas and APAC.

Systems grew 13%, reflecting continued strength in data centers, while service continues to deliver with a solid 8% growth. That top-line growth, combined with continued productivity, contributed to margin expansion across all three regions. Americas adjusted segment EBITA margin expanded 210 basis points to 22%. EMEA expanded 80 basis points to 16.4%, and APAC expanded 110 basis points to 19%. Strong operating performance, combined with lower corporate expense, drove significant adjusted EBIT margin expansion of 300 basis points to 18%, aligning our operating leverage well within range despite much higher growth. Adjusted EPS increased 32% to $1.66. The demand environment also accelerated as we exited the year. Orders increased 44%, driven by continued data center demand, along with strong growth across other mission-critical verticals, including battery and semiconductor manufacturing, and large research universities. Backlog grew 43% to a record $23 billion, reflecting sustained demand for our differentiated technology and capabilities.

Our operating performance translated to strong cash flow generation, supported by the disciplined execution and working capital focus embedded in our business system. For the full year, adjusted free cash flow was $3.2 billion, representing 103% conversion. We ended the year with $600 million of cash, while net debt declined to 1.8 times below our long-term target range. We returned $2.5 billion to shareholders through share repurchases and dividends. This performance provides capacity to invest for growth, maintain our investment-grade credit profile, and return capital to shareholders. With customer demand extending well beyond fiscal year 2027 and requirements continuing to scale, customers need a partner with the capabilities and willingness to invest alongside them. Joakim will now discuss how we are investing to meet that demand.

As Marc said, we see customer demand translating into record backlog, a strong pipeline, and increasing visibility into longer-term demand with our largest customers. We are acting decisively on that opportunity, investing ahead to expand capacity and capture a larger portion of the growth in our highest growth markets while simplifying Johnson Controls to reduce complexity, move faster, and increase earnings power. Both are integral to our value creation plan and reflect a consistent and disciplined approach to capital allocation, investing where we see the greatest opportunities for growth while building a simpler, more productive company. We expect approximately $900 million of capital expenditures in fiscal 2027. This investment puts us in a strong position to capture a larger portion of the growth.

It is anchored in the demand we see across our backlog and pipeline, as well as the longer-term requirements we are planning for with our largest customers, particularly in our highest growth markets. This capital will strengthen our ability to win new business and capture the significant opportunity ahead. It will also expand capacity, improve lead times, delivery, and quality, enable us to serve customers as their requirements scale. Our business system is enabling us to add that capacity more efficiently. Without the productivity and capital efficiency we are driving across the company, we estimate the capital requirement would have been more than two times higher. We are applying that same discipline to our restructuring actions, reallocating resources and capacity toward the areas where we see the strongest opportunities for growth.

While our growth investment is focused on thermal technology, our restructuring actions are concentrated primarily in other parts of our portfolio outside our most technology-differentiated mission-critical verticals. There, we are optimizing our manufacturing and warehouse footprint, streamlining the functions that support those operations, and moving accountability closer to customers. We anticipate approximately $400 million of restructuring expense over fiscal 2027 and fiscal 2028 and expect approximately $600 million of gross annualized savings by fiscal 2029. These actions will position us to support the growth we see today and the opportunities ahead. Additional capacity positions us to capture increasing demand. Simplification improves speed and accountability, and productivity creates room to reinvest, expand margins, and increase earnings power. Marc will now review our fiscal 2027 guidance.