$JCI Johnson Controls Q1 2025 Earnings Conference Call

Thanks, Jim. Good morning everyone. Thank you for joining us on the call today. I'd like to start by taking a moment to thank all Johnson Controls' employees for their hard work and tremendous contributions in helping us achieve an excellent start to the year with our strong quarterly results. Before we get into the details on results, I want to briefly address the CEO transition we announced today. As you've likely seen, the board and I have selected Yim Whatam Menace to succeed me as CEO of Johnson Controls in March. I will remain on the board through August 1st to support a seamless transition and will remain an advisor to the company until I officially retire at the end of December. It has been the honor of my career to lead Johnson Controls for eight years, working alongside an incredible team, and to have been a part of the JCI Tao merger before that. We have accomplished a tremendous amount during that time, and I could not be more pleased with the company we have built together. We have successfully simplified our portfolio and positioned our company as a leading pure-play building solutions provider. We are driving results based on our unique value proposition with an ability to serve our customers over the life cycle of the building. The company's future lies in building on the momentum we have underway. Our company has an incredibly strong bench, including our talented CFO Mark. This transition came together after a rigorous and thoughtful succession planning process, and I am confident that as you get to know Yokum, you will agree that the company is in very capable hands and he is the right leader for Johnson Controls. Yim comes from Danaher, where he worked for 13 years. He is a highly accomplished executive with extensive experience scaling global companies with a foundation of customer orientation, innovation, and efficiency. His track record of leading service-oriented businesses and leveraging technology to deliver best-in-class financial performance is uniquely suited for where Johnson Controls is in its value creation journey. I will remain fully engaged until Yokum steps into the CEO role. Then I will work with him and the rest of the management team as we seamlessly transition leadership and set Johnson Controls up for continued success. With that, I will turn to a more in-depth discussion of our first quarter performance. Let's begin with slide four. Johnson Controls is starting 2025 with great momentum and a clear focus, as validated by our first quarter results. Importantly, each of our businesses contributed to robust revenue growth and significant margin expansion and remain positioned for ongoing shareholder value creation. These results reinforce the considerable progress we have made through our transformation efforts and demonstrate the success of our strategic initiatives, which have driven increased demand for our core systems and service offerings. We are confident that our performance provides a solid foundation as we move through the year. Auto momentum remains solid with 16% growth in the quarter, driven by double-digit growth in both systems and service. The sustained demand for our tailored engineered solutions offerings has not only fueled growth but also positions us well for continued success. Our focus on driving operational excellence and fostering innovation is enabling our performance and building on our capability to deliver consistent, predictable results. Taking into account our strong performance to date, we are raising our guidance for the year. Mark will provide more details later in the call. We are confident in our ability to maintain our momentum and deliver long-term shareholder value creation. Please turn to the next slide. Johnson Controls is experiencing consistent progress across key verticals, demonstrating the breadth of our expertise and stability of our business model. Our global presence across multiple domains with a simplified operating model enables us to assist and grow our customer relationships over the course of the entire building life cycle while also delivering safe, healthy, and sustainable solutions. By focusing on the entire life cycle, we create great customer intimacy while achieving a high level of customer retention, a key metric and differentiator. Our services business, supported by long contractual engagements, empowers us to optimize performance at every phase across all building systems, driving increased value for our customers. This is largely achieved through our global branch network and its more than 20,000 qualified technicians, but also through the continuous advancements in innovation and strategic use of AI. We leverage remote monitoring by employing AI to drive utilization and efficiency. For instance, proactive repair recommendations are contributing to a larger share of our overall services growth. Additionally, customer surveys indicate that Johnson Controls technicians are regarded as trusted advisors, which is due in large part to our local market strategy. Our product-agnostic central operations infrastructure supports our technicians with monitoring, call intake, dispatch, and technical support to ensure a seamless and efficient process. This provides best-in-class turnaround time and improved system uptime. We continue to build momentum as a leading solutions provider to data centers, which is one of our fastest-growing verticals and remains an attractive opportunity. I am pleased to report that Johnson Controls was recently named the number one implementer among data center thermal management providers and was recognized as a top innovator. We are one of only two players to be named an overall leader in the field and are proud to be a key partner in supporting the infrastructure of the digital economy. We are capitalizing on the significant transformation underway to support safer and more efficient manufacturing, reshoring initiatives, and Industry 4.0. This is illustrated by how we are driving mission-critical solutions in the healthcare vertical. Hospitals and healthcare facilities face growing challenges, including aging infrastructure and the need to meet ambitious sustainability targets. Our comprehensive portfolio, including advanced HVAC systems, fire protection, and our OpenBlue platform, helps healthcare providers enhance air quality, improve infection control, and reduce energy costs while meeting regulatory requirements. OpenBlue is another area where we have expanded upon our generative AI capabilities. Our software can now easily explain building equipment faults and trends using generative AI and help users with easy-to-understand investigation and resolution steps. Additionally, we can now analyze energy and carbon emissions across their real estate portfolio and evaluate compliance against any local regulations related to excess carbon emissions, helping customers better plan and prioritize capital improvement projects and facility improvement measures. Pharmaceutical manufacturing is also a dynamic area. Demand for advanced production environments, including clean rooms, has surged to support the production of innovative therapies and medications. These facilities require precise temperature, humidity, and air quality management. Our leading solutions ensure that they can operate efficiently, safely, and sustainably. Across the broader manufacturing sector, our ability to integrate smart, energy-efficient, and resilient technologies helps manufacturers optimize their operations and achieve their long-term goals. Our performance in these verticals and our use of AI demonstrate our ability to address the unique needs of mission-critical environments across a range of industries. By leveraging our advanced technology, digital innovation, and focus on sustainability, we continue to deliver measurable value for our customers and position ourselves as a leader in driving long-term growth. In summary, our strong start to fiscal 2025 reflects the success of our strategy to simplify our portfolio and position Johnson Controls as a leading pure-play building solutions provider. The significant progress in our transformation is enabling us to achieve more consistent and predictable performance as we continue to deliver value for our stakeholders. With that, I'll turn it over to Mark.

Yeah, we named Yokum effective on March 12th. It was through a rigorous and thoughtful succession planning process. He comes with, as we've discussed, a 13-year Danaher experience, extensive experience scaling global companies with a foundation of customer orientation, innovation, and efficiency. I think as you look at his background, his track record of leading service-oriented businesses, leveraging technology to deliver best-in-class financial performance, is uniquely suited for where Johnson Controls is in its value creation journey. I think as we've talked about, with the strategy that we've developed, you can see the momentum that we've built with that strategy. He comes in with incredible operational background and a lot of work around strategy. As we take that foundation forward, we're going to be positioned to capitalize on the full growth potential of the company. Couldn't be more excited to have him coming on board, working with him, and ultimately going through a seamless transition.

Yeah, the journey we've been on with the strategy has really set Johnson Controls up to be the leader in building commercial building solutions that are really built on the core of technology and our products, our digital platform that we deploy, and ultimately the services that we gain with the connectivity and the use of data. As we've looked at the portfolio, we will complete the residential and light commercial divestiture by the end of the year. That's a big step towards being more of a pure play. There's roughly about 10% of the remaining portfolio that might not be core to the commercial building solutions, and we'll continue to update you as we address those on an ongoing basis. But we feel really good about how we're positioned in the market, the differentiation that we bring to our customers, and the operating model that we're operating with that now is delivering very predictable results—right from how we're working with customers, how we're building pipeline, how we're converting pipeline, and ultimately how we're attaching service. As I said earlier, with Yokum's experience coming in, his operational experience as well as strategic experience, certainly as we look at the portfolio and the ability to create growth, we see significant opportunity. A lot of the focus will be on capitalizing on that opportunity with the strong operating system that we've built, really understanding the secular trends that are underway in the commercial building segment, and we believe that we're going to be uniquely positioned now to capitalize on more than our fair share.

Yeah, as we saw early signs of the softness in the region, this goes back over the last 18 months, we proactively took steps to adapt to the lower demand and ultimately the increased counterparty risk. As we rebuilt the pipeline, we've now seen a very strong rebound here with orders at 32% in the quarter. We believe that we found the bottom with the current run rate, which is in line with the slower market demand. So based on what we've seen, we've seen real stabilization in the business and now we're really returning to growth, not only in building the backlog but the way that we're going to convert going forward. I think what's most important is the way that we continue to build services in spite of some of the pressure on the new systems. Services continues to be strong and will continue to help maintain a healthy segment EBITDA margin as we continue to rebuild the systems business. So I think we'll see continued growth within Asia Pacific, not only recovery in China but across the overall Asia Pac region.

Great question. So we continue to see strong double-digit growth on data center as well as healthcare and some other verticals. We still don't see any acceleration in what I would call real estate, which is offices and mixed buildings. That would fall into that category for us. You still have owners that are trying to figure out what they're going to do with their current assets, and you still see some hesitation in making certain investments. It's a market that's not declining, it's just not growing at the pace of the others. We have great solutions and products to address that particular vertical as it rebounds, but it's not where we are seeing the most growth. Infrastructure is seeing still some good tailwinds from prior commitments from a construction standpoint, and we're still seeing some positive signs there. And then everything from semiconductor manufacturing or clean room or biomed manufacturing still globally sees a great tailwind, and I don't think we're going to see a stop to that trend anytime soon.

Yeah, thanks. To wrap up the call today, this quarter Johnson Controls achieved record backlog, double-digit organic sales growth, and broad-based strength across our portfolio. Our strong start to fiscal 2025 is a testament to Johnson Controls' talented, hardworking team as well as our unwavering commitment to innovation and operational excellence. I am confident that Yim is well suited to lead Johnson Controls' next chapter of growth as we build on the strong momentum underway to unlock enhanced value for our stakeholders. With that operator, that concludes our call today.