Johnson Controls International plc (JCI) Q1 2026 Earnings Call Transcript

Johnson Controls International plc (NYSE: JCI) Q1 2026 Earnings Call dated Feb. 04, 2026

Corporate Participants:

Michael Gates — Senior Director, Investor Relations.

Joakim Weidemanis — CEO

Marc Vandiepenbeeck — Vice President and Chief Financial Officer

Analysts:

Nigel Coe — Analyst

Amit Mehrotra — Analyst

C. Stephen Tusa — Analyst

Scott Davis — Analyst

Jeffrey Sprague — Analyst

Christopher Snyder — Analyst

Julian Mitchell — Analyst

Andrew Obin — Analyst

Joseph O’Dea — Analyst

Andrew Kaplowitz — Analyst

Joseph Ritchie — Analyst

Presentation:

operator

Hello everyone and welcome to The Johnson Controls Q1 2026 earnings conference call. My name is Nadia and I’ll be coordinating the call today. If you would like to ask a question at the end of the presentation, please press STAR followed by one on your telephone keypad. I will now hand the call over to Mike Gates, Senior Director of Investor Relations to begin. Mike, please go ahead.

Michael Gates — Senior Director, Investor Relations.

Good morning and thank you for joining our conference call to discuss Johnson Control’s fiscal first quarter 2026 results. Joining me on the call today are Johnson Control’s Chief Executive Officer Jochen Muenimenez and Mark Van Diepenbeck, our Chief Financial Officer. Before we begin, let me remind you that during our presentation today we will make forward looking statements that reflect our current views about our future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Please refer to our SEC filings for a list of these important risk factors that could cause actual results to differ from our predictions.

We will also reference certain non GAAP measures throughout today’s presentation. Reconciliations of these non GAAP measures are contained in the schedules attached to our press release and in the appendix to this presentation, both of which can be found on the Investor Relations section of Johnson Control’s website. I will now turn the call over to Jochen.

Joakim Weidemanis — CEO

Thanks Mike Good morning everyone. Thank you for joining us on today’s call. I’d like to begin by recognizing our 90,000 colleagues around the world for their commitment to our customers and for the contributions they’ve made to a strong start to the year.

Let’s begin with slide four. Johnson Controls enters 2026 with a solid foundation and more disciplined execution across the portfolio. Our first quarter performance reflects the progress we’ve been making with strong revenue growth, meaningful margin expansion and broad based strength across the enterprise. We are still in the early stages of this work, but I’m encouraged by the progress we’ve seen today as we begin deploying our proprietary business system. More broadly, leaders are displaying better candor and assessments regarding where we have opportunity and how we address those opportunities through our business system approaches. We’re seeing this firsthand in GEMBA walks, in our manufacturing plants, in our field offices, in operating areas across the business and even in corporate.

Turning to the results, the quarter delivered ahead of expectations. I’m proud to share that orders increased nearly 40% building on a very strong 16% last year. Compare revenue grew 6%. Adjusted EBIT margins expanded 190 basis points to 12.4% and adjusted. EPS was up nearly 4, 40% and exceeded our guidance. Our record backlog gives us strong visibility and reinforces the demand environment we’re seeing. These results reflect the strength of our leading technology portfolio combined with more disciplined execution across the company. Given this strong start to the year and the momentum we’re seeing across the business, we are raising our full year guidance.

Mark will walk through the details in just a few minutes. This quarter marked an important step as we continued to provide much greater clarity on our direction and introduced our evolving enterprise strategy and priorities to leaders across the company. We cascaded and aligned goals across the organization to a focused set of enterprise wide metrics. This gives every team a clear line of sight of their priorities aligned with our definition of winning one, one that is rooted in winning more customers and better enabling our colleagues, especially those on the front line. This alignment is essential to how we operationalize our strategy.

Where we focus our commercial resources, where we direct our R and D investment, and where we concentrate execution resources to create the most impact and win with customers. We are building a faster growing, more profitable and more disciplined company that is easier to run. We do that by focusing our efforts to parts of the market where our strengths in technology and field presence align with our passion to advance human society. You can see that impact clearly in the places where technology demonstrates its value today. Energy Efficiency and Decarbonization where factories, large campuses and buildings are some of the largest consumers of energy and amongst the biggest contributors to global emissions.

In an increasingly energy constrained world where energy costs continue to rise, our customers are under pressure to manage energy more productively, reduce their carbon footprint, but also need strong operational returns. Turning to the next slide, this couldn’t be more evident than in the fast growing, most technology intensive environments such as data centers. As compute becomes more powerful, rack densities rise, hybrid architectures evolve and control systems become more advanced. Data centers now require increasingly energy efficient and precise operating conditions. Across AI and high density compute environments, architectures will continue to change, but they all share the same fundamental requirement significantly greater thermal and energy management supported by more sophisticated controls.

Managing energy consumption while sustaining performance is essential and that is exactly where our technologies remain critical. Against that backdrop, our data center momentum reflects not only strong demand from existing customers, but also success in reaching new customers. As our differentiated solutions gain traction, we continue to work closely with Nvidia, applying our thermal management and controls expertise to support next generation AI compute environments. Johnson Controls recently released a new reference guide that maps the full thermal chain and outlines scalable high performance cooling architectures for an emerging class of AI factories. The guide outlines an integrated solution that leverages technology to accelerate data center deployment and increase their overall performance.

Going beyond just supplying equipment, we are architecting the thermal backbone for the next generation of AI computing. It also reinforces the strength of our innovation roadmap reflected in the products we introduced. Earlier this week we announced two new chiller platforms that extend our leadership in high density data center cooling. The WIDAM delivers up to 3.5 megawatts of cooling in a compact footprint, providing approximately 20% higher capacity density than competing options and enabling warm water cooling for advanced GPUs. The YKHT brings the industry’s widest operating range and supports waterless heat reduction which can eliminate up to 9 million gallons of cooling tower water annually in typical deployments.

Complementing these data center platforms, we also expanded our digital service capabilities with the introduction of the Smart Ready chiller, which provides 10 times the insights over a standard remote connected chiller. This gives us and our customers deeper insights from day one, allowing us to shift more customers into proactive recurring service relationships that improve reliability, reduce unplanned downtime and lower lifecycle costs. Together, these launches build on an already strong and comprehensive portfolio, making it even more capable and more differentiated for our customers. In addition to the data centers, we see similar demands for energy efficiency, precision and and reliability across other mission critical sectors.

Advanced manufacturing where for example next generation pharmaceutical manufacturing relies on precise environmental conditions meaning strict control of temperature, humidity, pressurization and air purity and large complex research campuses and universities where similar requirements exist as researchers discover new insights and translate science into into real world applications and where students are learning, exploring and preparing to make their own impact. Our customers have real unmet needs for technology innovation and service based solutions that help them manage energy more efficiently and deliver outcomes in their mission critical operating conditions. This is where our strengths set us apart and where we concentrate our investment and innovation.

And this is exactly what gives me the confidence and the opportunity we have here at Johnson Controls and and the ability to support our customers. When I went to Gemba, I saw breakthrough innovation happening at jdec, our Advanced Development Engineering center in Pennsylvania. Work built on York’s 150 year old legacy of pushing the boundaries of H vac and thermal technology for today’s data centers. And after also spending time with our field professionals, it became clear how much potential we can unlock by making their daily work easier and better, leveraging their expertise and proximity to our customers.

Turning to slide six, this is where our proprietary business system will help us unlock that opportunity. As a reminder, our business system is built on three Simplify, Apply 8020 principles to focus on what matters the 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 and Amplify leverage digital and AI approaches to amplify impact across the enterprise. I think of it as Accelerate or Lean helps us accomplish work in days and hours versus weeks and days and Amplify or digital and AI enables us to take that same work and accomplish the same in hours and minutes.

And it’s anchored in a global cross functional language and methodology for how we communicate, created, collaborate and drive strong continuous improvement. Momentum to Win we’re already seeing evidence of the business system in the way teams operate, stronger alignment, clear ownership and greater process and tool consistency. And our talent system also plays an incredibly powerful role in this. We’ve brought in select external talent with deep business system expertise while also teaching and equipping our internal colleagues to lead in this new way of working and beginning to embed across our end to end talent processes. To date, we have hosted Growth Summits with hundreds of leaders diving deep into our enterprise strategy and hands on teaching leaders, teaching leaders our business system.

This includes a global summit with our most senior leaders and we’re now spending time in each region to ensure full understanding, clear expectations and accountability for this new way of working, all focused on enabling our frontline colleagues to deliver more for our customers. As part of this, we started the New Year in APAC with all the regional leaders. I spent significant time in that region in my professional life and see great opportunity particularly aligned with our strategy and where we have strengths. To further accelerate our progress and strengthen global execution, we recently appointed Susan Hughes as our APAC President.

Susan brings more than 20 years of deep experience in the region and I’m excited for the impact she’ll have as we align our teams and sharpen our execution. Let’s now turn to slide 7 to show how our business system is taking hold and the progress we’re making across the company. By working together across teams and leveraging Eighty20 and LeanTools, we’re seeing real measurable progress. Last quarter I shared some examples that I’m proud to illustrate Continued improvement our conventional H Vac sellers in one of our local markets went from 60% improvements in time spent with customers to 100% improvement.

And as we bring AI into these workflows, we see the potential for another meaningful step change, one that simply wouldn’t be achievable without AI. In one of our key manufacturing facilities for chillers, our factory on time Delivery went from 95% to now, sustaining 95 to 100% for the past couple of months. This level of performance combined with our now competitively advantaged lead times is driving higher win rates with our customers, especially in data centers, as we can reliably commit to help them meet their rapidly growing needs. These are just two examples where we go narrow and deep on an area of opportunity.

Our teams are going deep and addressing other areas of opportunity, from cutting service repair time to improving quality and addressing billing disputes. The benefit only continues as we scale these learnings more broadly in the organization over time. I’m inspired by the energy, the urgency and the enthusiasm with which our leaders and teams are embracing this new way of working. More than a thousand colleagues have actively engaged across several priority areas. Over 80 kaizens have been completed and 350 senior leaders have been trained in the new ways of working. And while many of our early focus areas started in the US as we teach and equip our leaders, we have now activated efforts in both EMEA and apac.

This way of working gives us confidence in our ability to execute and deliver on our commitments. With that, Mark will lead you through the details.

Marc Vandiepenbeeck — Vice President and Chief Financial Officer

Thanks Joachim and good morning everyone. We delivered a strong start to the year, reflecting continued momentum in the business. Our teams converted sustained customer demand into record orders while delivering solid operating performance. We are also seeing early benefit from the operating discipline we’ve been embedding across the company, which is helping us execute faster, improve consistency and strengthen profitability. With this foundation, we are well positioned to deliver on our priorities and and achieve on our full year commitments. Let’s turn to Slide 8 to walk to the financial highlight for the quarter. Organic revenue grew 6% with broad based contribution across the portfolio and we delivered solid margin expansion.

Segment margins increased 70 basis points to 15.7% and EBIT margin expanded 190 basis points to 12.4% reflecting continued benefits from productivity, price realization and improvement in our cost structure. Adjusted EPS of $0.89 increased nearly 40% year over year and exceeded our guide. Our ongoing work to simplify priority, strengthen alignment and sharpen operational discipline is driving faster decisions, stronger pricing and tighter cost control supporting both growth and margins. Let’s now discuss our segment result in More detail on slide 9 and 10. Orders grew nearly 40% in the quarter. A strong performance on top of a tough 16% compare demand was led by data centers projects where customers are accelerating investment to support higher density workloads and AI driven growth.

Activity across other key end markets remains stable and customers continue to prioritize Johnson Control’s differentiated mission critical solutions by region. This demand strength translated into solid order across all three segments. The Americas delivered 56% growth led by large scale data center projects that continue to scale across the region. EMEA grew 8% with balanced high single digit growth in both service and system in APAC orders increased 10% driven by double digit growth in systems and high single digit growth in service. At the enterprise level, organic sales growth was led by continued strength in service which grew 9% year over year.

In the Americas, sales were up 6% organically with solid double digit growth in Service. EMEA grew 4% less led by high single digit growth in Service. APAC delivered 8% growth led by strong system performance and steady demand in service. These results reflect strong execution across the portfolio despite a challenging 10% year over year comparison. We delivered another quarter of steady margin expansion reflecting disciplined execution across pricing, productivity and project delivery. Our teams strengthen operating leverage in both service and systems through higher throughput, tighter cost control and more consistent execution. These actions reinforce the continuous strengthening of our operating model and our ability to sustain meaningful margin progress by region.

Adjusted segment EBITDA margins in the Americas improved 20 basis points to 16.4% supported by productivity gains and improved mix in. EMEA margins expanded 120 basis points to 13% reflecting favorable pricing and productivity gains. In APAC margins expanded 290 basis points to 16.9% as volumes increased and factory absorption improved. Our record backlog grew 20% to $18 billion highlighting the continued strength of our pipeline as revenue conversion accelerated this quarter. Turning to our balance sheet and cash flow on slide 11 on the balance sheet, we ended the quarter with approximately $600 million in available cash. Total liquidity remains strong supported by our available credit facilities and disciplined working capital management.

Net debt remained within our long term target range declining to 2.2 times. Our capital allocation priorities remain consistent, investing in the business, maintaining balance sheet strength and returning capital to shareholders. Let’s now discuss our fiscal second quarter and full year guide on slide 12. As we enter the second quarter, operational momentum remains solid supported by disciplined execution and continued strength in our backlog. We anticipate organic sales growth of approximately 5%, operating leverage of approximately 45% and adjusted EPS of approximately $1.11 for the full year. We are maintaining organic sales growth of mid single digits supported by solid execution and the visibility provided by our backlog.

We continue to expect operating leverage of approximately 50%, which is above our long term algorithm. As last year’s trended cost saving materialized in this year’s performance. With the strong start to the year, we are raising our adjusted EPS guidance to approximately $4.70 per share, which is roughly 25% growth. With the increase in our EPS guidance, we continue to expect approximately 100% free cash flow conversion for the year, underscoring the quality of our earnings and the discipline of our working capital processes. Our guidance reflect the progress we’re making across our operating priorities and provide a solid foundation for delivering strong results throughout the remainder of the year.

Operator, we are now ready for questions.

Questions and Answers:

operator

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If you would like to remove your question, please press star followed by two. When preparing to ask your question, please ensure your phone is unmuted locally. We ask you please limit yourselves to one question and one follow up. The first question goes to Nigel Coe of Wolf Research. Nigel, please go ahead.

Nigel Coe

Thanks. Good morning everyone. Thanks for the question. Yeah, so I think a good bit to start would be on the orders. I don’t know if this is a record order but quarter but I’m, I’m sure it’s pretty darn close. Anything that you’d call out because we’ve seen extraordinary strength in other places in data center but this is another level higher. So just curious, are we seeing more kind of longer duration orders, multi year orders, anything to call out, driving the strength in orders?

Joakim Weidemanis

Hey Nigel, we are seeing record orders. As you saw, we have a record backlog and we’ll try and keep it like that going forward too. By the way, I’m super happy that it’s not only data centers that’s driving the strength of our order entry. We had a very healthy life science order entry during the quarter and that’s not the first quarter that we see that strength and that’s really a result of all the effort being put into the innovation pipeline over the years as well as the field coverage for what we call our mission critical verticals where thermal management and the indoor operating conditions really matter for our customers.

Now Data centers was very strong and very proud of the team. What they accomplished during the quarter pipelines remain healthy and as a reminder, we really play in three categories broadly in data centers, not just on the chiller side but on the CROs, the air handling units. Through our Silent Air franchise, which is the leading franchise in air handling and as you know, a couple of quarters ago we announced that we entered the CDU space where we’re making some good progress. So very pleased overall with the order entry. But data centers is definitely not the only vertical that’s showing really, really good strength here.

Nigel Coe

Great, thanks Joaquim. And then my follow on is I believe the backlog reflects orders that are shippable for the next 12 months. So the obviously the backlog increase, I think 20% was the number if I’m not mistaken, versus the unchanged mid single digits for this year. So just wondering how to think about that inflection in backlog versus non inflection in organic growth and just wondering if we’re starting to see a line of sight towards high single digit organic growth.

Joakim Weidemanis

I think the organic growth will continue to strengthen over time. Our guide currently reflects what we see for this year. Many of those larger orders that we’re taking also in the life science field, but in data centers are not necessarily shippable within the next nine months or so. But we’ll keep you updated on the guide here as we see opportunities to do better here potentially.

Nigel Coe

Thank you.

operator

The next question goes to Amit Marotra of ubs. Amit, please go ahead.

Amit Mehrotra

Thanks. Morning everybody. I just wanted to follow up on the orders question if I could and just understand, you know, how much of this order strength is the market coming to you as opposed to maybe how you’re evolving, how you go to market. And I know last time we chatted there was maybe some initiatives underway to kind of go after what you guys called the belly of the market. Is that indicative of the orders and then, and then just related to that, Joakim, any numbers you can provide around the non data center growth just so we can understand a little bit how broad base is.

Joakim Weidemanis

Yeah, so I think the data center market is growing in many different parts of the world and in different applications as well. So our growth is pretty broad based. So like I said, you know, we play in three different application categories, the chillers, the craws, the air handling units, and now starting to grow nicely here on the CDU side as well. So historically we had a good position with our hyperscalers as well as many of the large colas in particular in the United States. But over the last couple of quarters we’re very happy to see the growth in Europe and Asia also start to become very meaningful for us.

And like I said in my previous comment, our order strength in the quarter here is, is of course helped by data centers, but we’re Also very happy about in particular the life science oriented growth that we’re seeing. And just to put a little bit more color on that, what’s happening in the pharmaceutical industry is that with the rise of biologics based therapies, the manufacturing environments are materially different than the historical manufacturing environments. And that’s why large pharmaceutical manufacturers are building new plants in many parts of the world. And the indoor operating conditions that they require to be able to effectively manufacture these biologics based drugs really require very strong thermal management, which is not just H Vac but also controls.

And because these are large campuses with thousands and thousands of employees moving in and out every day and the value of what they manufacture is very high, it also requires other solutions in our portfolio. So very encouraged by our continued progress in life sciences.

Amit Mehrotra

That makes sense. Thank you. And then just my follow up. Mark, I wanted to ask about second half versus first half incremental margins. You know, obviously you have a full year of 50% plus you’ll achieve or have achieved in the first quarter. Second quarter maybe about 40, 45%. It does imply kind of this nice step up in the second half above 50. Can you just talk about that and maybe what are the drivers of that step up are in the second half?

Marc Vandiepenbeeck

For sure we can maintain the full year roughly 50% operating leverage outlook because the structural driver of our leverage build materially around the year and are supported by of course the backlog and the backlog margin, the visibility we have that and the margin expansion that come, but also the work associated with the trend at cost and it’s all inflecting in the second half of the year and that leverage continues to improve that 50% in based on our mid single digit perspective on top line growth. If we can accelerate that top line growth, not all of that incremental growth will come at an operating leverage in the 50s.

It will probably come closer to our long term algorithm well above 30% but maybe not at the other 50% range.

Amit Mehrotra

Thank you.

operator

The next question goes to Steve Tousa of JP Morgan. Steve, please go ahead.

C. Stephen Tusa

Hi, good morning.

operator

Thanks. Steve, please proceed with your question.

C. Stephen Tusa

Hello, can you hear me okay?

Joakim Weidemanis

Yes, yes, we can hear you. Steve.

C. Stephen Tusa

Hello, can you be okay? Great, thanks. Sorry. Just on the North America margin was just a little bit lighter. I hate to nitpick because they were really good results on special orders. The North America margin was a little bit lighter. There was a $15 million headwind from other. Maybe that was something we were missing from the comp from last year or something like that maybe just touch on how you see North America margin trending in the next couple quarters and anything there from the quarter.

Marc Vandiepenbeeck

So if you look at the growth in North America, very strong system growth, strong service growth as well, that mix normally would be lifted by much, much better growth in the service thanks to the rate and we saw some benefit associated to productivity overall. The opportunity in North America is accelerating our service growth and the margin rate that comes with that. You know that there was a few smaller headwind in the quarter in North America, about $15 million we tag as other. That more has to do with some periodic small adjustment we do on product liability.

Those are just reserves we adjust over time. Not something material, not something recurring within North America. Margin potential continues to be strong and will probably come slightly better than what you saw in the quarter in the second half.

C. Stephen Tusa

Great, thanks. And then just one on data center. Where do your, where do your lead times stand today?

operator

Go to Scott Davis of Melius Research. Scott, please go ahead.

Joakim Weidemanis

Scott.

Scott Davis

Hey guys.

Joakim Weidemanis

Steve still on there? Yeah, we are. Operator, can we please ask you to take command here? Steve was asking his follow up question. So let’s allow Steve to do that and then Scott, we’ll go to you right after.

Scott Davis

No worries guys.

Joakim Weidemanis

Thank you. Operator, can you please step in? Okay, Scott, if we have you on the line, please go. Please go ahead. I will act as the interim operator.

Scott Davis

I could call Steve and ask him what his question is, but.

Marc Vandiepenbeeck

Go ahead, Scott.

Scott Davis

No, sorry about that. But look, hey, I’m kind of curious that the entrance into CDUs is the. Is the goal here to kind of bundle this into a total solution that, you know, I would imagine it’s still a separate purchase order right now and perhaps even a separate process altogether. But what, where do you kind of see that market going for you guys today?

Joakim Weidemanis

It’s a mix, Scott. There are certainly a lot of business that transacts CDUs only, but we do see plenty of opportunity for combined offers. And obviously we have a number of very important key accounts and so we work on more than one application together with them over time as the thermal architecture for data centers evolve, as is normal, I think in a complicated system like that you might see some slight changes in the overall architecture. And so the roles that certain devices play today might evolve a little bit over time. And I think that’s of course why we chose to add CDUs to our portfolio.

To be able to lead in that and be able to be a player that helps our data center customers with the most optimal and highest performing thermal Architecture, not just for today, but in the future as well.

Scott Davis

Okay, fair enough. And then, Bokim, you mentioned that you were just in Asia pac. I’m not sure. It’s a big, broad region, so not exactly sure where you were, but perhaps since you were there recently, you could just tell us what you’re seeing on the ground, because clearly we’re seeing a broad set of different results. You guys are a little better than most people this quarter, right?

Joakim Weidemanis

Yep. Yeah. So I was, I’m not going to say I was all over the region, but I was in all the major markets, a number of countries. So in our case, we are seeing continued stabilization in China and part in our business, and part of that, of course, is that we have worked hard on shifting a little bit on the mix of which verticals we focus on in China. And so I think we’re in a better place now. Our commercial teams are more aligned with where there is still growth, and our service business there, we have continued to invest in.

And so we see that as a continued good opportunity. So we see stabilization in China, but unlikely that China is going to return to the kind of growth rates we saw in past years. But what’s exciting is that of course, it’s no secret that there are some other major economies in the region that have continued to strengthen overall. And so I think we have a really strong, good team on the ground in a number of countries in Southeast Asia as well as India and some of these countries. Of course, they’re all looking at data centers and there are several emerging players in these markets.

But in terms of, for example, investments in healthcare, hospitals and pharmaceutical manufacturing, that’s also a growth driver for us in a number of those countries there. So I’m super excited about our prospects here in Asia. So stabilization in China and then growth opportunities and major economies elsewhere.

Scott Davis

Okay, helpful. Best of luck. The rest of your guys, thank you.

Joakim Weidemanis

Yeah, thank you.

operator

Thank you. Moving back to Steve Tutor of JP Morgan. Steve, please go ahead.

C. Stephen Tusa

Yeah, thanks. That was, that’s. That’s a quality move. Thank you for letting me back in. I appreciate that. Just the data center lead times. Where. Where are you now? And then, Mark, give us a little bit of color on what BMS did in the quarter. We’re trying to tease out kind of the like, for like applied orders growth, you know, the BMS kind of orders would, I would think, be lower than what applied was. Maybe not, but maybe those two, those two follow ups. And thanks again for letting me back in.

Joakim Weidemanis

Yeah, sure. Lead times. You know, I gave the Example in the prepared remarks here. So we’re making good, good progress on the on time delivery. And that’s on time delivery as requested by customers. Right. So by definition that is then being predictable within the lead times that the customers are asking for. We continue to sustain. And I talked in previous calls about how we cut, you know, lead times in half for one of our product lines in a factory and that work is now being cascaded out to the other product lines in that factory and other factories.

And we did hire a new VP of operations a couple months ago. And you know, he and his team are now ramping, you know, very, very nicely. And I’m actually, and we were reviewing it just the other day. I’m really excited about what I’m seeing from our operations teams, not just in terms of short term results, but the aspirations and where we think we can get to, you know, not next year, but this year. And so, you know, more to come on that. And I think in a little bit of an environment like we have in the data center market right now, the ability to be able to deliver not as predictably, but fast is part of, you know, one of many things that contributes to our competitive advantage.

So.

Marc Vandiepenbeeck

And then bms.

Joakim Weidemanis

Yeah, bms. Go ahead, Mark.

Marc Vandiepenbeeck

So the BMS growth in the quarter was, I would characterize, very solid in the high single digit rate. We feel very strong about the backlog of that business because it’s continued to improve. The pipeline of opportunity is also accelerating. Align a little bit with the strategy we laid out at the beginning of the opening comments around our mission critical and how a strong BMS controls offering for those particular specific vertical is really resonating well with the customer and we think we can continue to improve that business nicely over the next few quarters.

operator

Thank you. The next question goes to Jeff Sprague of Vertical Research. Jeff, please go ahead.

Jeffrey Sprague

Hey, thank you. Good morning, everyone. Hey. I want to come back to the new products Yoakum. You know, it’s just kind of interesting how sensitive this market is, right. You might argue your stock has been, has been weak year to date because Nvidia scared people about warm water cooling. You know, and here you are with, you know, an offering, right. So, you know, clearly you’re in the loop on product development. You mentioned reference designs. Maybe just for the benefit of all of us, just, you know, a little bit more detail on, you know, where you sit in sort of the technology path, the forward planning, understanding what’s coming down the pike and you know, how you’re, you know, we’re not surprised by this, but in fact we’re prepared.

Joakim Weidemanis

Yeah. So I can’t. Good morning, Jeff. I won’t comment on specific product launches in the future, but the reference design that, and there are two documents that we guides that we issued to the market. And these reference designs, for those of you don’t know, they’re really for the benefit of data center designers and operators as they’re working on designing the next generation of data centers and that, that kind of work. You know, we did a lot of work with Nvidia and so some of the guys that we publish here is in collaboration with Nvidia. Of course, beyond those documents that we publish, an element of how we work in this industry is we essentially every other week have large engineering teams from our largest customers, colos and hyperscalers, who sit with us in our innovation center in JDEC in Pennsylvania to collaborate on, you know, what the next generation of designs should be based on the learnings so far.

And that helps feed our innovation pipeline. And it’s, it’s really an excellent way where we can combine our deep technological know how and thermal management represented by, you know, our very talented people in that innovation center where the people are actually using the products from our customers and then apply the technologies that we have and more and more competitive solutions. And so you saw a couple of launches here earlier this week at the big show that’s ongoing as we speak here and we have a significant roadmap behind that. And as you remember, we play in three categories in data centers when it comes to thermal management, chillers, air handling units, mainly through our silent air franchise, but beyond that as well.

And then we entered CDUs and then of course we’re in the controls system as well. And so there’s a lot more to come, Jeff, and we’ll keep you posted as we launch these new products.

Jeffrey Sprague

Great, appreciate that. And then maybe just a different thread here, just on the kind of the portfolio review. Yoakim, I would assume that’s still ongoing, but it also looks like the retail business did not close yet. I thought that was sort of pending and close to being done. Maybe the stuff that you’ve already publicly identified to go where are we in those processes? And any other update would be appreciated.

Joakim Weidemanis

Yeah, so we continue. I think I’ve commented on that in the past, but we have undertaken a thorough strategic review of our entire portfolio. You know, we’ve worked with the board and calibrated and aligned on what we think is appropriate to do. And that includes both how we can Execute better as well as potential alternative futures. And we’ve commented on a little bit how big part of portfolio that might entail and the main driver here is to create shareholder value. So we continue to work on both improving execution and on the portfolio moves that we’ve flagged in the past.

And we’ll keep you posted as we make progress on that.

Marc Vandiepenbeeck

And I’m not going to comment on particular ongoing transaction. We have not announced anything particular on retail. We are very happy that we we close the disposition of one of our residential monitoring security system as we continue to walk away if you’d like from that particular sub segment of the market.

operator

The next question goes to Chris Snider of Morgan Stanley. Chris, please go ahead.

Christopher Snyder

Thank you. I wanted to talk about the longer term margin opportunity for the company. You know, I think when we look at the model, you know, we can see the SGA as a percentage of sales is quite high compared to the competitor. So I think it’s, you know, understandable the opportunity there. But can you talk about the opportunity on gross margin just because the company is already running above the industry, it seems like on the gross margin line. So can you just kind of talk about entitlement there? What is the opportunity to kind of grow that into the coming years? Thank you.

Joakim Weidemanis

Hey, how are you? Yeah, that’s a topic we’ve discussed in the past. And yes, our gross margins are running a little higher than some of our directions peers. I see opportunities there. I think we’ve discussed with at least with some of you and some of your events, the opportunity for example in footprint consolidation in our manufacturing setup and there’s also an opportunity to continue to drive better productivity in our field on the service side of things. You know, you should think of the example that we’ve talked about in our the work we’ve done with the business system with our H Vac sellers where we’ve been able to more than double the amount of time they spend with customers and selling.

You know, we have that kind of opportunity that we’re already working on in a couple of our markets with our service team. So I still see healthy Runway to improve our gross margins. And then on SGA maybe you know, on the A side of that, I mean we are working away at just simply reducing our costs. You know, we are a smaller company than we were when we owned retail. And there are there continue to be cost reduction opportunities on the administrative cost of the SGA on the S side and the R and D spend within sga, you know, on the S Side, I’ll refer to the example with the H Vac sellers.

We think we can decouple the future growth from top line growth from the growth of the S cost by applying the business system and exactly the way we outlined it in the example that we gave. Basically help our sellers, help them do their job, double the amount of time they can spend with customers. Meanwhile though, on the R and D cost, our ambition is to significantly, and we have already this year in our plan and it’s embedded in the guide, started to ramp up our spend in R and D and that’s going to continue to increase at a very healthy rate here going forward.

But we’ll still be able to drive margin expansion because of the types of things that we’re working on that I gave you examples of here. So still unchanged view versus what we’ve talked about in the past. I see no reason for us not being able to achieve the segment EBIT margins that our best performing peers have. And I think over time we should be able to even go beyond that. And obviously they are not sitting still. We recognize that and they are extremely capable. So we know that’s a moving target. But our opportunities are plenty here.

Christopher Snyder

Thank you. I really appreciate that. And then if I could maybe follow up on labor availability in the market and particularly how it impacts the service business. You know, we’re obviously labor seems like it’s still tight out there. When we see these orders and growth numbers, it feels like it will continue to get tight. You know, have you, has there been any change from your perspective in the ability to kind of either recruit or retain service professionals? And is this becoming a growing competitive advantage for a company like JCI who already has, you know, such a big, you know, technician base compared to some other smaller competitors or upstarts in the market? Thank you.

Joakim Weidemanis

Sure. I think the availability of service labor has been a topic for the last 15 years. So that’s. It’s hard. Hardly a new phenomenon. And that’s why so many companies, including ours, have been working on for several years. But now we’ve accelerated on looking at how we can make our teams that we already have in the field much more productive. Again. Think the example of how we can double the amount of time the salespeople spend with customers. We can do the same thing and we’re working on a similar thing with our service team and that’s process work, but it’s also in a much better way leveraging the connected installed base that we have and you reconfigure a little bit how work is done, field versus the office.

So there’s plenty of opportunity, lots to go out there. Now, we do have, like you pointed out, a significantly larger field force than many our peers and that is an advantage. So we want to make sure that we make them more capable, more productive, but we’re also wanting them to provide even more value to our customers. So over the next couple of quarters, you know, we’re working on a number of service products offerings that we don’t have today that we’ll be launching to the market and you’ll hear more about that in the future. So we’re happy to have that advantage to be able to leverage, but we have to leverage it in a much better way doing the kinds of things that I was talking about here.

operator

Thank you. The next question goes to Julian Mitchell of Barclays. Julian, please go ahead.

Julian Mitchell

Hi, good morning. I just wanted to start off with slide 9, 9 and 10, just to try and understand, I guess, the tie in of the systems orders to the systems revenue, because again, with that very high order growth and your lead times, you’ve made good progress bringing those down. Would have thought you’d get some translation of that into revenue this fiscal year. So is it the case that the customers are specifically placing orders that are very long dated and also wanted to understand what you used to call products, is that still not in the order numbers on slide 9 and anything to call out with what’s happening with products?

Marc Vandiepenbeeck

Yeah. Thanks, Julian. So the backlog strain is very encouraging. But the mix of that backlog and the timing of, of the broader portfolio dynamic today only supports the mid single digit guide we’re providing. I would say we started the year on the lower range of that mid single digit range and I think we are going to print the second half on the higher half of that range, the better half of that range. And if you look at the content of that backlog, all of it could be shippable in the next 12 months. But a lot of it depends on customer availability and customer ability to accept that orders.

And the way the dynamic works with some of our larger relationship is it’s an ongoing conversation with those customers. The quicker they can take it, the quicker we can turn revenue. There’s obviously at a certain level of growth a capacity constraint, but we don’t believe we’ve reached that capacity constraint just yet. There’s opportunity to improve there, but overall we think that that backlog continues to support a solid mid single digit revenue guide. What I would say is if you continue to unfold that backlog beyond the next 12 months, I think we’ll be very comfortable to start talking about a slightly better growth than what we’ve seen maybe in the prior quarter.

operator

The next question goes to Andrew Obin of Bank of America. Andrew, please go ahead.

Andrew Obin

Yes, good morning, can you hear me?

Joakim Weidemanis

Hi, Andrew. Yes, we can. Thank you for asking.

Andrew Obin

Yeah, good morning. Yeah, of course. Just a question. I mean, clearly improving throughput has been a key KPI for you and you know, I think I’m trying to figure out this order thing as well. Should we think that there is a relationship with freeing up more capacity and your ability to take more orders in the near term?

Joakim Weidemanis

Yeah, absolutely. And on the capacity, you know, we made significant investments in physical plant and machinery before I joined the company. And so we more than tripled our physical capacity. And then with the lean work, the business system work, you know, there’s an opportunity to keep expanding that capacity materially, very materially, without having to spend the same amount of capital. You know, we may need a little bit of capital here and there, but nowhere close to what we spent in the past. When larger customers are negotiating or looking at placing larger orders for, you know, number of data centers that they’re planning over the next couple of years, one of the factors they do look at in vendors is their ability to deliver and it’s the reliability, proof points and the ability to turn things around quickly.

That doesn’t mean that they need things, you know, in six weeks from now. They’re simply very super realistic about their own ability to plan ahead and manage all the construction work and so on. So they know that their plans may change as the project progresses and then they need a partner who can react quickly, quickly and be flexible on the factory side. So that’s kind of where both the capacity, the lead times and the reliability of the on time delivery come in. So yeah, it’s definitely part of a competitive advantage in this game that we’re playing.

Andrew Obin

And just a follow up question on slide 6, I mean clearly you’re highlighting this product introduction. I think a lot of us were in Vegas and saw specifically YKHD product, which I think is very important for you leapfrogging the competition. Are you starting to, are we seeing the impact of these product introductions on your orders this quarter? Is this still in the come?

Joakim Weidemanis

I think there’s, it’s very minor in the orders that we’ve taken so far. So it’s more about what’s to come. And by the way, those launches, I did get a note from the team so thanks for stopping by and spending time with our team there. All those new products, I mean, they are a result of the work that we do together with our customers. I alluded to it earlier this morning. We have large engineering teams coming in from our customers that sit with us for a week, 10 days. We’re creating the new roadmap product roadmaps basically off of what they have learned by applying ours and other people’s products.

So that’s why we’re so excited about the launches that we have, because we know that these precise needs are there. And we will be able to see that in our order entry, I expect. Already here ramping in the quarter. We’re in already.

operator

The next question goes to Joe Odea of Wells Fargo. Joe. Joe, please go ahead.

Joseph O’Dea

Hi, good morning. Just on the capacity expansion and the tripling of physical capacity and is that specific to chillers or includes air handlers? Just any specificity around it in kind of global versus Americas. And then really just in terms of the fixed cost impact that that has today. Any quantification of a burden today and sort of how you see that improving in over the next 12 months or so?

Joakim Weidemanis

Good question. The answer is that we have had invested in capacity across the board, meaning chillers, air handling units. And because of the investments in the air handling units capacity, we also made room for the CDU business that we launched into here a couple of quarters ago. The fixed cost aspects of those investments have already been in our run rate for more than a year.

Joseph O’Dea

And presumably that’s a tailwind kind of each quarter in terms of utilization.

Marc Vandiepenbeeck

It creates leverage opportunity as the volume comes in. Absolutely, yeah.

Joakim Weidemanis

And as we continue to work on the lean work to eke out more capacity without adding fixed cost. Yeah.

operator

Thank you. The next question goes to Andy Kaplowitz of Citigroup. Andy, please go ahead.

Andrew Kaplowitz

Hey, good morning, everyone. Andy, I think. Good morning. I think fire and security markets, I think you said we’re up like low single digits in the quarter, but as you know, a lot of those businesses are short cycle. So are you seeing an improvement in sort of more of your short cycle markets these days? Given where the global economy is and specifically the US Economy looking a little.

Joakim Weidemanis

Better, I’d say there’s no material change in the markets. I think the change that we are working on operationally is what you heard me talk about. I talked about the H Vac seller capacity, time with customers and so on. That kind of work, you know, we’ve embarked on in the other parts of the company as well, and then for those, the fire and security businesses, we’re also looking over how are we, where are we specifically pointing the effort at what parts of the market and trying to help that team, you know, just be more clear about, you know, our priorities and making sure that behaving in the way and pointing the effort at the most attractive parts of the market.

So like I mentioned before when I got the portfolio question, where regardless of what the outcome is on the portfolio, we’re making sure that, you know, we improve the execution, the operational performance of all parts of Johnson Controls.

Andrew Kaplowitz

I think that’s helpful. And then maybe I just want to ask the sort of capacity question a different way. Like obviously you’re getting larger orders now and to become a bigger part of the portfolio. I assume they’re competitive on pricing, but what’s your ability to scale these projects themselves? I mean, maybe you have 50 chillers or 100 chillers in each of these orders. Can you get better margin on these individual projects moving forward?

Joakim Weidemanis

In terms of our ability to scale, we have no major bottlenecks at this point in time at least. And to some extent, larger orders have always been part of. If we talk about data centers. But by the way, on the pharma side that I commented on some of the prepared remarks here too, some of those factory build outs are also significant projects. So that’s not a new phenomenon. And the capacity build that I talked about, it isn’t just the physical facilities, it’s also the resources around that project, engineering teams, project management teams and capabilities like that.

So we have made those investments as well and are working on improving our ability to get more out of those teams. And it’s the same lean principles we’re applying in those teams as we’re applying in the factories on the margins. I mean, these are of course discussions where obviously the customers ask for multiple bids. But then also there’s an ongoing discussion, as you heard of, they send their engineering teams that sit with our engineering teams and we try and come up with solutions that really offer real tangible value. Less energy consumption, more cost savings and things like that.

And as we do that work, we of course look at opportunities for us to also be very, very cost competitive. So there’s no particular margin headwind coming at us if, if that’s the question. We don’t see that at this point in time.

operator

Thank you. The next question goes to Joe Ritchie of Goldman Sachs. Joe, please go ahead.

Joseph Ritchie

Thank you. Good morning and thanks for putting me in. So look, Yocum, you sounded, you know, obviously very Happy about the record order quarter. Sounds like you’re pretty sanguine on the pipeline as well. If you could maybe just characterize what the pipeline of orders looks like today versus maybe three to six months ago. And then also as you kind of think about your data center customers, has there been any real discernible shift in like Colos versus Hyperscalers and where you’re seeing demand growth today?

Joakim Weidemanis

Pipeline continues to remain very healthy and healthier. We are also doing. I should. And it’s not that things are just falling in our laps. You know, we’re working with our sales teams around the world. So in addition to the example I gave you about the doubling the amount of time that our H Vac sellers in one region are spending with customers, you know, we are also in the process of rolling out a very practical, pragmatic pipeline management approach which basically aims to help and teach our sales leaders and our sales individual sales contributors on how to more effectively plan and spend their time.

And in my experience, having done that a number of times with what tends to happen is that, you know, you just get better pipeline growth and over time you are positioning yourself for even better order growth. So that’s on the pipeline. And of course the result of, as I alluded to in my prepared comments here, being much, much more deliberate with our teams about which parts of the market we want to go after versus maybe not as important. That has. That has an impact as well. So as you shift your effort more to parts of the market that have healthier growth rates, your mix of your pipeline and order entry, of course changes as well.

Marc Vandiepenbeeck

And then Colos versus Hyper.

Joakim Weidemanis

Yeah, yeah. I mean there are incremental changes in how certain hyperscalers or Colos approach, how they do business and, and how they buy and who they partner with and so on. But look, there are no real material changes in how the big players are behaving. I think as a result of our growth in the future it started to. But more in the future will come from also from Asia, PAC and Europe. And the mix there of hyperscalers versus call them local players. Colos is a little different than in the United States, not materially different. So I think if anything our data center business is going to broaden and I think that’s a good thing.

operator

Thank you. This concludes our Q and A session. I will hand the call back over to Joakim Widermanis for any closing comments.

Joakim Weidemanis

Thank you. And thank you for all your questions today and thank you for those of you who visited our booth at Ahr you certainly kept our team on their toes there, but great to have you and host you there. This quarter’s results reflect the momentum that’s building across Johnson Controls as our teams operate with greater clarity, discipline and consistency. And we’re seeing those improvements show up in how we serve customers and in the strength of our results. As you can see, I want to thank our 90,000 colleagues for their commitment and energy. Your focus and ownership are what give me such confidence in our opportunities ahead.

I look forward to continuing my conversations with all of our stakeholders. Thank you for joining us today.

operator

This now concludes today’s call. Thank you all for joining. And you may now disconnect your lines.