The paragraph is the introduction to Johnson Controls' Second Quarter 2025 Earnings Conference Call. The operator begins by welcoming participants and explains the call format, mentioning it will be recorded and include a Q&A session. Jim Lucas, Vice President of Investor Relations, begins the presentation by introducing key executives, CEO Joakim Weidemanis and CFO Marc Vandiepenbeeck. He notes that the discussion will include forward-looking statements and non-GAAP measures, and he refers to SEC filings for risk factors. Joakim Weidemanis, who is new to the role, thanks the Johnson Controls team for their work and the warm welcome he has received.

The paragraph discusses the strong second-quarter results for Johnson Controls, highlighting a 7% growth in organic sales, a 180 basis point increase in segment margins to 16.7%, and a 19% rise in adjusted EPS. Orders climbed by 5%, with a record backlog growing 12% to $14 billion, reflecting sustained demand for the company's solutions. The new CEO, drawing from his 13-year experience at Danaher, shares his early observations at Johnson Controls, emphasizing the potential for enhancing shareholder value by spending time at Gemba, or the frontline of operations, to understand the business better. The company's strong performance and momentum led to a slight increase in their full-year guidance.

Over the past eight weeks, the speaker has visited multiple countries, engaged with customers and colleagues, and assessed the company's capabilities, discovering Johnson Controls' strengths in market-leading franchises, such as YORK HVAC, a dedicated workforce, and impressive technological capabilities evidenced by 8,000 patents. The company is undergoing significant changes, including the sale of the residential and light commercial HVAC business and the evolution of its operating model into three geographical, customer-focused segments. This reorganization aims to enhance customer service, operational performance, and innovation, ultimately driving faster growth and improved profitability.

The paragraph outlines Johnson Controls' organizational model, which focuses on three geographical segments acting as the company's commercial engine, supported by two global centers for functional excellence. The products and solutions group aims to enhance innovation and operational performance, while the commercial and field operations team focuses on improving capabilities and growth. The model clarifies roles and responsibilities, emphasizing customer focus and competition to drive growth, agility, and predictability. However, current complexities in product offerings and operations slow down execution, which can be improved through lean and business system approaches.

The paragraph discusses the strategic focus of Johnson Controls on aligning the organization around customer needs through lean practices, waste elimination, and continuous improvement. The speaker emphasizes the importance of understanding their business, markets, and customer needs to optimize their strategy and portfolio. There's a commitment to focusing on customer value and lean principles to drive accelerated value creation. Johnson Controls aims to redefine building performance with smart, safe, and sustainable buildings. Marc Vandiepenbeeck then reports on the company's strong fiscal second quarter, highlighting 7% organic revenue growth, a 180 basis point increase in segment margin to 16.7%, and a 19% rise in adjusted EPS, reflecting the team's effective execution and strategic focus.

In the second quarter, the company reported strong financial performance with approximately $800 million in available cash and a net debt ratio of 2.4 times, aligning with their long-term targets. Adjusted free cash flow increased by $1.1 billion year-to-date, highlighting robust financial management and operational performance. The Building Solutions segment saw solid growth, with North American orders up 4% and EMEA/LA orders increasing by 10%. However, orders in Asia Pacific remained flat, although service orders grew nearly 20%. Organic sales rose by 7%, with significant growth across regions, particularly in HVAC and Controls in North America and both systems and services in Asia Pacific. Margins improved thanks to operational efficiencies and an optimized service mix, enhancing profitability.

The paragraph outlines the financial performance and future outlook of a company across different regions. In the EMEA/LA region, the adjusted segment EBITDA margin increased by 410 basis points to 12.5% due to enhanced productivity and a favorable service mix. In APAC, the adjusted margin rose by 360 basis points to 14.6%, driven by similar factors. However, in North America, the margin decreased by 20 basis points to 13.4% due to higher system growth surpassing service growth. The company's Building Solutions' backlog is at record levels, with a 12% growth to $14 billion. Organic sales for Global Products grew by 8%, with significant contributions from Applied HVAC, which grew over 20%. The adjusted segment EBITA margin expanded by 600 basis points to 30.3% due to operational efficiencies. Looking ahead, the company anticipates mid-single-digit organic sales growth in the third quarter, with an adjusted segment EBITA margin of 17.5% and adjusted EPS between $0.97 and $1. For the full year, the company maintains its guidance for mid-single-digit organic sales growth and raises its projections for margins, adjusted EPS, and free cash flow conversion, supported by strong order growth and a robust backlog.

The paragraph discusses the company's financial outlook, including an expected adjusted EBITA margin growth of 90 basis points and adjusted EPS of $3.60 per share, indicating 12% growth. Improved working capital metrics and strong free cash flow performance lead to an anticipated 100% free cash flow conversion for the year, which will be returned to shareholders through dividends and share repurchases. The updated guidance accounts for the current geopolitical environment, estimating tariff exposure at 2% of sales or 3% of cost of goods sold. To mitigate tariff impacts, the company is enhancing its manufacturing strategy, supply chain, pricing, and contractual rights. The focus is on maintaining strong performance and navigating geopolitical complexities. Joakim Weidemanis expresses enthusiasm about leading the company, emphasizing customer focus and execution as priorities.

The paragraph is from a conference call where the speaker, likely a newly appointed CEO at Johnson Controls, acknowledges and thanks key colleagues, Marc and George Oliver, for their significant contributions and support during transitions within the company. Marc has been a strong partner since becoming CFO in January 2024, and George's support as the previous CEO has been valuable. The speaker expresses enthusiasm for engaging with investors and analysts, leveraging his previous experience to form transparent and constructive relationships aimed at unlocking the company's potential and building a high-performance company. The session then opens for a Q&A, and Scott Davis from Melius Research asks how the speaker plans to implement lean processes in a large organization like Johnson Controls. The speaker acknowledges Scott's familiarity with lean and begins his response.

The paragraph discusses the strategy of aligning an organization towards customer-centric operations by involving all departments in waste elimination, improving process capabilities, and reducing costs to enhance competitiveness. Despite having some remnants of lean principles from past automotive connections, the current foundation is weak but there's a positive open-mindedness towards it. The approach suggests focusing on one value stream at a time, mapping out issues and opportunities from the customer's perspective through various stages, from installation to suppliers. The speaker expresses optimism about the potential for improvement through lean execution, and notes they have already begun working on one value stream, emphasizing the importance of prioritization due to the complexity of managing too many SKUs.

In the paragraph, Joakim Weidemanis discusses the process of SKU rationalization alongside value stream mapping. He explains that as you address challenges in a value stream, complexities like SKU proliferation will become evident and can be tackled. The company has initiated efforts to address SKU proliferation separately, targeting easy wins first. Stephen Tusa from JPMorgan enquires about the margin potential of the business, particularly in comparison to Johnson Controls International (JCI) and its model involving field labor projects. Weidemanis asserts that there is significant margin improvement potential not only in products but also in field operations, aided by digital tools, suggesting no inherent limitations in margin growth compared to peers.

The paragraph is part of a conversation involving Joakim Weidemanis and operator Nigel Coe. Joakim Weidemanis discusses his approach to evaluating the company's portfolio, emphasizing the importance of strategy in creating shareholder value. Though he's only eight weeks into the role, he is analyzing the company's business strategy and expects to share more insights in the future. In another part of the conversation, the focus shifts to free cash flow, where Marc Vandiepenbeeck speaks to Wolfe Research's Nigel Coe. Marc highlights that they have raised their free cash flow guidance to about 100%, attributing this to a strong performance in the first half of the year, which has historically been flat or only slightly positive.

The paragraph discusses the company's strong start with $1.1 billion in value generation, highlighting improvements in working capital processes and metrics, while acknowledging headwinds in the coming years. Despite early in his role, Joakim Weidemanis is reviewing the company's strategy with a fresh perspective, particularly regarding capital allocation. He is considering opportunities to differentiate technologically within franchises and will later discuss implications for the capital allocation strategy, which currently focuses on returning capital to shareholders as opposed to acquisitions.

In this paragraph, Amit Mehrotra from UBS questions Joakim Weidemanis about the company's strategies for enhancing returns, specifically asking if there's potential for immediate cost reductions or if the focus will be on leveraging the existing service network for longer-term improvements. Joakim responds that both approaches will be used. He highlights that while leveraging the field service capabilities will involve enhancing efficiencies and digital solutions, there will also be opportunities for cost and capital takeout outside of the field service area. Amit indicates an interest in understanding near-term actions to improve margins and briefly mentions a follow-up question for Marc.

The paragraph discusses a conversation involving Marc Vandiepenbeeck and Joe Ritchie from Goldman Sachs, focusing on how the business manages contract pricing amid inflation and tariffs. Vandiepenbeeck explains they've strengthened contractual terms to allow for repricing in light of potential inflation and better management of change orders. Previously, there were delays in their pricing strategy execution, but they've overhauled their approach to improve it. Joe Ritchie then asks Joakim Weidemanis about the company's medium-term margin expansion expectations, given that they are set for a 90 basis point expansion this year. Ritchie is seeking more information on the company's opportunities for further margin expansion.

In the paragraph, Joakim Weidemanis discusses the company's strategy to accelerate growth and improve margins by becoming more customer and competitor-oriented and implementing lean operational practices. He expresses optimism about leveraging existing resources and reducing costs to enhance profitability, drawing from his experience with prior businesses. Joe Ritchie inquires about the fundamentals of the business, particularly related to data center growth and a new liquid cooling product. Weidemanis notes that he has engaged deeply with major customers in this sector, highlighting their focus on customer orientation and expressing confidence in the company's potential for new product rollouts.

The paragraph discusses the company's involvement in the data center business, highlighting its collaboration with large customers to design data center architectures using its differentiated high-performance YORK Chiller platform. The demand for these services is strong, particularly in North America and the growing Asia-Pacific region, while Europe lags. The company's established presence and service capabilities in Asia are emphasized as mission-critical. Additionally, the company is investing in field operations with specific data center expertise to further capitalize on market opportunities. The paragraph ends with a transition to the next question from Julian Mitchell of Barclays on the margin outlook.

The paragraph discusses the company's operating margins, with a focus on BSNA's impact and overall tariff-related issues. Marc Vandiepenbeeck explains that while the operating margins improved in the first half-year, the second-half guidance is more stable year-on-year. This is partly due to tariff impacts and the company's decision not to apply margins to certain areas, which affects short-term improvements. However, by re-segmenting and simplifying operations, they anticipate future margin improvements, particularly in the Americas segment. Additionally, there's a mention of the fire and security market underperforming compared to HVAC.

The paragraph is part of a discussion about a company's sales and various business segments. Joakim Weidemanis addresses the fire and security portfolio, acknowledging its strength but also indicating that it's too early for him to provide a concrete assessment of its growth potential. He emphasizes the need to evaluate different parts of the portfolio for their roles, profitability, and contribution to cash flow, similar to experiences from Danaher. Weidemanis plans to reassess the company's strategy and market possibilities before sharing his conclusions. Additionally, Noah Kaye from Oppenheimer asks about the impact of cost inflation on margins, seeking clarification from Marc regarding the assumptions on gross and net cost inflation as a headwind.

Marc Vandiepenbeeck discusses the challenge of tariff impacts on margin expansion, particularly in the Americas segment, where they aim to adapt by altering supply chains to be more localized, incurring short-term costs. Despite these costs, they emphasize maintaining fair relationships with long-term customers, focusing on cost recovery rather than profit margin expansion. Noah Kaye appreciates this approach and prompts Joakim Weidemanis, who mentions the company's strong data center business but does not foresee any new structural changes beyond previously discussed plans.

The paragraph discusses a company's organizational structure that includes dedicated resources for major verticals like data centers, with specialized R&D and manufacturing teams. The company plans to expand this model to other verticals with growth potential. The structure, based on the author's industry experience, is designed to provide global coverage and focus on specific technologies, while adapting to different vertical needs. It's a proven approach that has been effective in various industries. The paragraph ends with a cue to the next question from Chris Snyder of Morgan Stanley.

In the paragraph, Chris Snyder asks about changes in the competitive environment of the data center market and its implications for JCI, given the market's rapid growth. Joakim Weidemanis defers to Marc Vandiepenbeeck, who explains that while new entrants have appeared with attractive products, JCI's 140-year experience and technological advantage, particularly with their YORK product, provide significant differentiation. Their product offers a wide operating range and a global single platform for customers to standardize and expand infrastructure. This continuous innovation and improvement add value for customers. Joakim adds that he recently explored the technological capabilities at JCI's global R&D center for HVAC chillers.

The paragraph discusses the importance of high-performance chillers in data centers, likening them to aircraft engines due to their critical role in efficiency and performance. The speaker emphasizes the expertise and unique know-how developed over decades in designing these chillers, highlighting that unlike new entrants, they use specially designed, application-specific modules to enhance performance. This specialization and experience position them strongly in the market for high-performance chillers. The conversation then shifts to the installation business, with a focus on its role in driving the aftermarket sector.

The speaker discusses their current strategy work, focusing on evaluating the performance and competitiveness of different installation levels for their projects. They are analyzing hundreds of projects to understand the financial and competitive impacts, as well as the connection to service contracts. The goal is to identify under which conditions various installation scopes are beneficial. The expectation is that the results will vary based on customer types and product circumstances, showing that sometimes comprehensive installation makes sense and other times it does not. The speaker notes this is part of broader efforts to simplify and better execute strategies, and is eager to share more findings in the future. They acknowledge that this situation is common in other businesses as well.

The paragraph is part of an exchange during a call where Joakim Weidemanis discusses the company's performance across various verticals. He notes that most verticals are doing well and highlights the positive growth outlook based on leading indicators, despite industry reports suggesting possible slowdowns. Weidemanis also mentions an upcoming divestment from the commercial sector but does not elaborate further on it. Following his remarks, Nicole DeBlase from Deutsche Bank asks about pricing versus volume expectations in light of potential tariffs and macroeconomic uncertainties. She inquires if the company has adjusted its pricing expectations and whether they anticipate a decrease in volume, considering their robust backlog and positive leading indicators.

In the paragraph, Marc Vandiepenbeeck discusses pricing and product strategy in the Building Solutions business, emphasizing the importance of providing value to customers rather than focusing solely on units sold. He notes that despite being mostly a long-cycle business, about 25% of the company operates on a shorter cycle, and macro uncertainties, including tariffs, are taken into account in their projections. Andrew Kaplowitz from Citigroup asks about service growth, and Joakim Weidemanis responds by highlighting JCI's strong service growth and the strategic advantage of its 40,000 field personnel. He emphasizes leveraging this position to continue improving service attachment rates and margins.

The paragraph discusses strategies for building more capacity in service businesses through lean approaches, process improvement, and digital methods to enhance not only capacity but also response time, which is crucial for maintaining a competitive advantage. The speaker sees opportunities to improve attachment rates across various businesses but refrains from providing specific numbers. They emphasize applying lean strategies not only in factories but also in service businesses, back offices, and corporate overhead. The paragraph also includes a transition to a Q&A session where Deane Dray from RBC Capital Markets congratulates Joakim Weidemanis on his first conference call and notes a pleasant surprise in the company's precise guidance of 360.

In the paragraph, the discussion is about the company's approach to guidance and earnings visibility amid other industries retracting guidance. Joakim Weidemanis, the CEO, explains that despite being new in his role, the company has strong visibility on earnings due to its long-cycle and recurring business components. He has reviewed the financials extensively with his partner, Marc Vandiepenbeeck, and is confident in their position due to these factors and recent strategic actions, such as tariff countermeasures. The closing remarks emphasize the successful second-quarter results, a strong backlog of orders, and ongoing demand for their solutions, along with an appreciation for the constructive interactions with stakeholders.

The paragraph highlights the company's improved focus and streamlined organizational model, emphasizing their enhanced customer orientation and efficient operations. The speaker expresses gratitude to the global team and participants of the earnings call and looks forward to future discussions. The call is then concluded by the operator.

This summary was generated with AI and may contain some inaccuracies.