Q1 2025 Summary
Published Feb 7, 2025, 7:58 PM UTC- Johnson Controls has strong pricing power and contractual mechanisms to pass on tariff costs to customers, maintaining margins and recovering costs, which demonstrates robust customer demand and the ability to drive better value for both the company and its customers.
- The company is experiencing a significant rebound in the Asia-Pacific region, with orders up 32% in the quarter, indicating stabilization and a return to growth, not only in building backlog but also in converting going forward.
- Johnson Controls is operating near capacity in North America and EMEA/LA due to strong demand, particularly in data centers and heat pumps, necessitating potential capacity expansion and signaling robust market growth and opportunities.
- Capacity constraints in North America and EMEA/LA could limit Johnson Controls' ability to meet strong demand without significant capital investments, potentially impacting margins. Marc Vandiepenbeeck noted that in North America, they are "very close to be at capacity," and in EMEA/LA, "we are at capacity, we need to probably expand a little bit capacity."
- The North America Building Solutions segment experienced a $20 million drag due to negative productivity from hiring, indicating possible near-term margin pressures due to increased operational expenses. Marc explained that this was "a short-term thing," but it reflects increased costs associated with growth initiatives.
- Uncertainty surrounding tariffs and foreign exchange fluctuations introduces unpredictability in margin expansion, potentially putting pressure on margins in the second half of the fiscal year. Marc mentioned "we have about a nickel of pressure coming from just purely the dollar strengthening," and "the tariff landscape is very fluid and changing rapidly."
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | -11% | The reclassification of Residential and Light Commercial (R&LC) HVAC as discontinued operations significantly reduced reported revenue, despite solid growth in Building Solutions North America. Foreign currency headwinds also contributed to the decline. |
Building Solutions North America | +10% | The segment benefited from strong demand for HVAC & Controls and execution of a higher-margin backlog, driving incremental organic sales. The order backlog remained robust, reflecting ongoing commercial building modernization initiatives. |
Global Products | -48% | The divestiture and discontinuation of the R&LC HVAC business drove most of the decline, removing a large volume of sales from reported results. Additionally, restructuring actions and portfolio simplification weighed on segment performance during the transition. |
HVAC | -67% | The exit of the R&LC HVAC business and classification as discontinued operations led to a sharp drop in reported HVAC sales. Ongoing portfolio realignment also contributed to reduced revenue, as the company refocuses on commercial building solutions. |
Industrial Refrigeration | -5% | While EMEA/LA and parts of North America saw moderate gains, soft demand in regions such as Asia Pacific and macroeconomic headwinds tempered overall growth. The segment is positioned for a rebound as global industrial activity stabilizes. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Organic Sales Growth | Q2 2025 | no prior guidance | mid-single digits | no prior guidance |
Adjusted EBITDA Margin | Q2 2025 | no prior guidance | ~16.5% (expansion of 150 bps) | no prior guidance |
Adjusted EPS | Q2 2025 | no prior guidance | $0.77 to $0.79 (12% to 14% growth) | no prior guidance |
Organic Sales Growth | FY 2025 | mid-single digits | mid-single digits | no change |
Adjusted Segment EBITDA Margin | FY 2025 | expansion of over 50 bps | expansion of over 80 bps | raised |
Adjusted EPS | FY 2025 | $3.40 to $3.50 (6% to 9% growth) | $3.50 to $3.60 (9% to 12% growth) | raised |
Free Cash Flow Conversion | FY 2025 | 85% or greater | 90% or greater | raised |
Capital Return | FY 2025 | no prior guidance | targeting 100% of free cash flow | no prior guidance |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Adjusted EPS | Q1 2025 | $0.57 to $0.60 | 0.63 | Beat |
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CEO Succession and Strategy
Q: What is the plan for the new CEO, Joakim?
A: Joakim will become CEO effective March 12, bringing 13 years of experience from Danaher with a focus on customer orientation, innovation, and efficiency. He is expected to leverage his operational and strategic expertise to capitalize on Johnson Controls' growth potential, especially as the company moves towards being a pure-play leader in commercial building solutions. The strategy includes completing the divestiture of residential and light commercial businesses by the end of the year, with around 10% of the remaining portfolio potentially non-core. -
Tariff Impact and Pricing Strategy
Q: How are tariffs affecting the business and margins?
A: The uncertainty around tariffs is a concern, particularly in the second half of the year . The tariff landscape is fluid, impacting their ability to predict margin expansion. Johnson Controls has evolved its manufacturing strategy to "manufacture in the region for the region," which helps mitigate some tariff impacts. They have contractual abilities to pass on price increases to customers, maintaining margins in many cases. However, negotiations may be needed with larger customers who have more leverage . -
Margin Outlook and Improvement
Q: What is the outlook for margins?
A: Margins are expected to improve across the board, with the biggest opportunities in EMEA/LA and Global Products. In the first quarter, Global Products margins were better than expected due to 11% unit growth and strong performance in the data center vertical. However, uncertainty around tariffs has led to conservatism in margin projections for the second half. Longer term, margin improvement will come from simplification and restructuring efforts, focusing on manufacturing efficiency and deploying commercial resources effectively. -
Data Center Growth Outlook
Q: What is the outlook for data center-related business?
A: Orders and revenue in the data center segment are accelerating. In the first quarter, strong orders were partly due to customers trying to get ahead of changes in leadership and having better visibility on cooling demand. The momentum is expected to continue, with no signs of slowing down. Data centers are a key part of the company's growth strategy, contributing significantly to Global Products' performance. -
APAC/China Performance
Q: How is the APAC region, particularly China, performing?
A: APAC orders grew by 32% in the quarter, indicating a strong rebound. The company believes they have found the bottom in the region and are now returning to growth. Services continue to be strong and will help maintain healthy margins while rebuilding the systems business. They expect continued growth within Asia Pacific, including recovery in China. -
Orders and Backlog Strength
Q: How are the orders and backlog trending?
A: The company has record-setting backlog and double-digit organic sales growth . There is a shift towards longer-cycle businesses, with orders having a longer tail due to stronger customer relationships and focus on attractive market segments like data centers, healthcare, and manufacturing. Some customers accelerated orders in the first quarter to get ahead of uncertainties like tariffs and political changes. -
Capital Allocation Priorities
Q: What are the plans for capital deployment?
A: Johnson Controls plans to return 100% of free cash flow to shareholders this year. Proceeds from divestitures, assuming no significant M&A activity, will also be returned to shareholders via share repurchases. They aim to reduce leverage slightly, bringing net debt to EBITDA closer to the lower end of their 2% to 2.5% target range. -
Service Business Growth
Q: What is the outlook for the service business?
A: The service business is expected to grow at mid-single to high single digits, supported by attaching service entitlements to new systems and focusing on attractive market segments. Current attachment rates are between the low 40s to high 40s, with the best businesses in the 60s and 70s. The company believes they can reach attachment rates similar to industries like oil and gas or elevators, which are 60-70% or higher. -
Productivity and Labor Investments
Q: How are investments in labor affecting productivity?
A: In North America Building Solutions, productivity faced a $20 million drag due to short-term impacts from hiring incremental resources to support growth. While onboarding new hires can temporarily reduce productivity, these investments are necessary to fuel future growth. The company continues to invest in field labor and utilize tools like AI to enhance technician productivity. -
Fire & Security Growth
Q: What is driving growth in Fire & Security?
A: Accelerated growth in EMEA/LA is due to repivoting the commercial organization and increasing commercial intensity. They believe mid to high single-digit growth in Fire & Security is sustainable. The Global Products business also saw mid-single-digit growth, partly due to strong commercial performance and easier comparisons following challenges from a cyber incident last year.