Good morning, everyone, and welcome back to day four of Oppenheimer's 20th Annual Industrial Growth Conference. I'm Noah Kaye, Managing Director in our research practice. We're delighted to welcome the management team of Johnson Controls back to the conference. We have CFO Marc Vandiepenbeeck with us. Marc, thanks so much for making the time to be here. Oh, thanks for having us, Noah. Especially coming right after earnings. We appreciate the quick turnaround. Marc, you know, obviously, leadership transition was a big focus of the discussion yesterday and earnings. Maybe from your perspective, you know, walk us through the work you've done so far with Joachim in his first two months in the CEO role. What are you looking forward to tackling, kind of pursuant to lean initiatives and value creation opportunities? No, I mean, it's only been seven weeks at the end of the day. But in his short seven weeks, he's visited, I think it's eight countries, 100 customers, walked 15 factory floors, visited all of our engineering center, hundreds of frontline technicians, hundreds of sellers. I joined him on some of these, and I can tell you they are extremely immersive, from Gemba walks to deep dive into commercial motion, deep discussion on our engineering advantages and gaps, all the way to factory floor, doing lean exercise right there on the spot. So no stone unturned with Joachim. He's developing a deep understanding of our end markets and what it takes to win and how can we accelerate growth and our profit margin. Being kind of unencumbered by our history, he can take a clean, fresh look and emotionally, I would say, develop a strategic plan. You know that, but the lean journey is not one that takes a day. It's years. But it's all about refocusing the entirety of the organization on our customers and doing critical value stream mapping across the board. And that will take some time. But ultimately, what I think you'll see from us is two different opportunities. The first one is around defining our strategy and portfolio. And that strategy will dictate where and how we play. It's hard so early in the process to give you a clear insight of where it is heading. But in generalities, you can see certain business or product lines where it will be difficult for us to outpace the market either on growth or profit. And we will likely take swift action on these. But there are parts of the portfolio where we can see great opportunities, either to run these parts of the portfolio better and create some very attractive cash flows within our wallet, and some places where we need to double down because we see great inorganic opportunities and we see great organic opportunities to accelerate the growth of what's in front of us. The second big benefit you're going to see is around reducing waste and further simplifying our operating model. The first change is really a first step towards improving margin and reducing our SG&A. And that constant customer and competitor focus as well will ultimately allow us to accelerate our growth. So it will take time, but the opportunity is undeniable. Yeah. And you know, in relation to that, Marc, I mean, you announced this revised reporting structure. It brings the company in line with a number of industrial peers, you know, sort of a regional segment basis, and it really fits your regional go-to-market model. And I have to kind of, if you'll allow me, three different questions embedded in this one. You know, I think we'd love to understand how that internally translates, the streamlined segmentation internally translates into cost-out opportunities. So that's the first question. The second is, you know, how do you think about that aligning with the efforts to become more customer-centric? And the third, I think, sitting here as investors, you know, what are you hoping we understand about the change in reporting structure? Yeah. And I think all three are kind of all in the same, but with different angle. I mean, the segmentation itself is not a major cost opportunity. It's a first step. What's important is what follows. And you got to understand where we came from. The separation we had between our global product segment and our three-field regional-based businesses, you literally had two operating models operating simultaneously within the company. And that created redundancy in processes, in infrastructure, in leadership, often having two teams doing the exact same thing, but for different channels. And so that harmonization will provide much, much clearer line of accountability and improve really the quality of our functional leadership and reducing the cost to deliver. And we're going to do that by really focusing on the customer. And that's what those three segments are. Instead of focusing on the channel to market, we really focus on the market itself where the customers are. That's really the cornerstone of the change in that operating model. That historical structure with both teams going to market kind of independently and trying to maximize their own ability to address that market with their limited view of the market is completely turned on its head. We now have regional leaders that can maximize the opportunity in the market in order to win more customers and optimize channel management and meet the customers where they want to be met. And what I mean by optimizing the channel management, it's really to win more customers by meeting them through the channel that's the most appropriate. You know, what we've learned from our history is some customers and end markets want the OEM to be the partner. They want that life cycle. They want us to stand behind our product. And they appreciate the engineering value that comes from our system. There are some parts of the market where life cycle isn't a priority or the customer doesn't have the right profile. And that is where we got to deploy our channel partner. And now, instead of having two teams competing like that and potentially overlapping, you have separate teams that are looking at what's best for JCI overall and then deploy the resources in a harmonious way in those markets. Now, from an IR perspective, the very last part of that question, I think there's two or three solid outcomes here. First, you know, we are more comparable. And that's a benefit for you and for all of our investors. But that's also a benefit for us. I can now more easily hold my team accountable vis-à-vis some external benchmark and clearly say, you know, we have outpaced these three competitors, but not that last one for this particular region or that particular product line, and driving an entire organization, not only towards the customer, but towards the reality of we are competing day in and day out for the attention of those customers is going to drive really critical benefits, but ultimately, and I mentioned that a little earlier, what investors are going to see is a reduction in our cost to serve, and you just see that already in the third quarter in our guidance. Our corporate costs, we've guided around $80 million. If you look at the prior quarter, the second quarter, that same number was about $50 million higher. So that's the run rate benefit of simplifying and transforming that structure and getting ahead of that transformation, if you'd like. Just to clarify, Marc, are you suggesting it's a $200 million annualized run rate benefit from the transformation, or is this more like one time in the quarter? No, no, it's not one time. But it's a combination of, and that's why I said in and of itself and resegmentation doesn't drive that, right? It's the change in the operating model, getting ahead of the stranded costs we saw associated with the diversity of the residential light commercial. And it's the value of our cost effort. But a big part of that lower corporate cost has to do with our cost to serve the operating model, now that we have a unique one, created allowed us to actually eliminate a lot of redundant teams that were trying to support either way of the structure. As you know, our SG&A has been historically a little bit higher than best in class. And that's a first step to get us towards that best in class SG&A. That makes perfect sense. Thanks, Marc. So then maybe we can talk through kind of the targets around long-term double-digit earnings growth. You know, if I think about the opportunity set to get there today, I mean, how much of the growth really requires kind of a top-line growth and generating kind of core good operating leverage versus some of these initiatives around cost-out, OPEX optimization, post-portfolio transformation, buybacks? How do we think about disaggregating those levers? Yeah. So let's start with growth because it's not purely like growth, but how do we leverage our existing costs, whether it's our field infrastructure or with our sales team? And I'll take it really simply. If you look at the face of our financial, we probably have close to best in class gross margins, but our SG&A far outpaced some of the other players. And if you look at the couple of levers that explain why the SG&A has been a bit of a drag on the enterprise performance and our ability therefore to drive double-digit EPS growth consistently and perform well, is that operating model and the best in class function from an operational performance that will reduce that cost to serve by simply supporting one single, I'm sorry, operating model versus two disparate ones. The second one is it also allows us to leverage our sales cost, our sales force, much more productively. We can now address the end market much more efficiently. And so for a given dollar of investment on marketing, on selling, on infrastructure to actually serve those markets, we can drive a whole lot more sales. And that will allow us to kind of create more leverage, if you'd like, in any additional point of growth we'll see. Now, with the work Joachim is leading on lean management, I believe our gross margin entitlement is not yet where it's at. It's great, but it's not where I think the entitlement is ultimately long-term. As we implement lean, we create standard work. We improve the capacity in our manufacturing. We accelerate our engineering cycle time. You'll see a productivity lift in gross margin. And between that and the SG&A, there's hundreds of basis points to be gained here. Now, executing on all of that, we take the next couple of years. But ultimately, it will drive net segment margin improvement. And I think you combine that back to your second part of your question. You combine that effort on improving margin with a really disciplined capital allocation and aggressive share purchase that will allow us to maintain that double-digit EPS growth for the foreseeable future. You know, I think about the margin accretion from growing services. I mean, you've got already a high share of revenue relative to industry peers from services. You know, by the way, is it fair to say that the service revenue is true recurring and MRO work rather than sort of new build services? You're already nodding. So yeah, that's a true services number. The margins are attractive. Just give us a sense of how resilient, you know, the services business would be in the event, say, like there's an economic downturn. Yeah. And you're right. What we call service is genuinely true service revenue. When we talk about service attachment rate, we talk about real service. And what I mean by that is real recurring contractual engagements, a lot of them being multi-year that are directly attached to a system or a product we sold, right? We exclude completely retrofits, refurbishments, or modernization upgrades, however you want to call that. That is part of our system play. System. It's not at all part of our service play. And so really using that traditional service definition means we have a lot of resiliency. And we've tested over time how that business acts or behaves through the economic cycle. Now, we've not had a really big downturn in quite some time. But in the prior economic downturn, you can see like at the very beginning of the downturn, maybe a slight increase in cancellation of contracts at the very, very beginning. But very quickly, that's come back through to a higher level of labor and material because you see that parts market, that service market kind of increasing simply because the deferral of critical maintenance, the deferral of replacement and modernization means the need for service. That's where the kind of very invaluable franchise we've created with our service technician across the world, across our branches, provides really a differentiated value here. Now, we still believe there is a big opportunity to continue to improve both the profitability of that business as well as its growth, again, through lean by making our teams more productive and relying less and less on increasing the number of technicians to attain further accelerated growth and just making their life just more enjoyable and more productive through technological tools and kind of better standardization of the work we do with them. Better insights and intelligence, right? I think that really bridges to the OpenBlue technology platform. I mean, I looked at that study with Forrester, you know, ROI of up to 155% over three years. You know, that's a great payback period. I think, you know, with a value proposition that's that compelling, you know, what's sort of the primary gating factor or barrier to adoption? You know, if we think about OpenBlue as sort of low single-digit% of your install base today, and I think that's correct, so. Yeah, it is. Okay. What would a 10% penetration mean for kind of your overall revenue and EBITDA? It would mean a lot. Let's first talk about what OpenBlue really is. It's like it's a real differentiated offering, right? We have a leadership position that was part of that Forrester analysis. We have capabilities that are completely unmatched. We can operate our own equipment through that system or competitors' equipment. And we provide a single piece of glass for our customer to view all of their assets and see the operational health of those assets and take action on those, either through actually the software, if we can change a set point or improve the performance of an asset, or we can do that by, you know, recommending a service ticket and having therefore our technician on the back end coming and making that improvement. It provides an ability for the subscriber of that software to have clear visibility on all critical KPIs like energy consumption, greenhouse gas emission, the load on different parts of the building and different parts of the assets. But the list goes on, right? So we have seen an incredible growth in that business since its launch, but we continue to see kind of lower adoption than we had anticipated, even though we have between that and our FM system well over 1,000 customers that we serve globally every day. There are a couple of reasons for that, right? The first one is we were way ahead of the market with our capabilities and product. And so kind of the market's catching up, and that's okay. But the other part is there are some structural inefficiencies that exist within the building that are not bubbling up quick enough to the actual decision maker within that building. What I mean by structural inefficiency is like the assets as we engineer and design, when we do the installation, when we design the system, as soon as it goes live or even sometimes through the installation process, which more often than not we're not doing ourselves, there's already some deviation, if you like, from the ideal operating point or the operating point of that asset. And think about that operating point as like the foreground point of that asset, and it quickly falls off on the other side if you overrun or underutilize that asset. And when that system is inside, we already see deviation, and then the asset goes live, whether it's our control system or HVAC system, whatever it might be, and for three, sometimes six, sometimes 12 months, our service team doesn't get engaged, and that asset continues to deviate from that foreground point. We have seen through OpenBlue, and that's where a lot of that payback comes in, that between 30% and 50% of efficiencies to be gained by not waiting and bringing it back immediately to that ideal operating point, and that's what OpenBlue does dynamically for our customers. It's bringing it back to the original intended load, use, whatever it might be. Sometimes automatically through AI, depending on how the customer decides, or sometimes it literally shows the customer your asset, your chiller, your controls, your engine is not working at the operating point, call a technician and we can adjust that. Now, given that paradigm, you would say, well, every building owner should be clamoring and asking for that solution, and you mentioned that payback that a lot of our customers have seen, but the decision makers in the boiler room, if you like, are not the same decision makers as in the boardroom, and they don't talk enough with each other, and their agendas aren't always aligned, and so we're there to try and break that paradigm, but it needs to start at the top of the house where they need to realize that there's huge inefficiency in their building assets and there's productivity to be gained. And as soon as that comes in, you will see a better alignment. What can you do ultimately, which is really the core of your question? I think it's an incredible opportunity. It's way less than 1% today. If you would think it would be like 10% of our install base, it would make this a multi-billion dollar business for the enterprise. We're far from there because of what I'm talking about and the dynamic. And that's why the team is very focused on transforming kind of the market here and helping the market see those inefficiencies quicker rather than waiting the quarterly or annual maintenance of their equipment. Yeah. You know, I was at Expo and looked at the Enterprise Manager's AI integration. And as a layperson, seeing how like the generation of those recommendations, and you know, I can understand what that means. I'm not a technician. I know right away, okay, you know, this seems something that would make sense. It's actionable. That could be a real bridge, right, between the boiler room and the boardroom. It is. It is the real bridge. Two things. I can tell you, I've met with customers, particularly in my prior role, and very often the pushback is they can't believe it is that simple and transparent, right? It's like you're selling them the future and they're like, I can't believe the future is already there. Very often in technology, the future is already there. It's about acting on it and integrating it better. And we're improving on that all the time. So that's the first aspect. The second aspect is the cost, that cost of operational efficiency sometimes shows up in their P&L, if you like, very quickly, right? Because your maintenance costs are going up and all of that. But sometimes it takes a couple of cycles, a couple of years, sometimes longer because you've shortened the life of an asset or your energy consumption that you've now gotten used to. You don't realize it should be 30% lower. And it's not a priority because you think the size of the prize is somewhere else. And so it's that focus dynamically that we are working on. And with the success we've had with, as I mentioned, the first few hundred customers, the thousand customers that are now on the platform, I think that flywheel will start to accelerate as those adoptions and the critical value that comes from those adoptions will start really driving kind of the market insight. Yeah, we're looking forward to that. You know, I want to shift to demand more broadly. Just give us a sense of how, you know, the pipeline has developed, and I think particularly since, you know, some of the tariffs news really started coming out. Have you seen, you know, any real changes, material changes in the pipeline or orders conversion as a result of tariffs? So probably just like you, we are watching all the key external indicators, right? And you probably see the same conclusion we see. We can see there's a point towards softness in the second half of the calendar year, I would say, not of our fiscal year, but we start seeing those indicators pointing to quite material softness in the back end of the year. And to be transparent with you, when we then go look to our own internal indicator, and those are measured by, we have health indicators on our pipeline, pipeline growth, time to close an order, number of abandoned opportunities, all of those key leading indicators. To this date, we don't see anything overtly concerning. The conclusion here is that there might be a little bit of a disconnect between where some of the bigger projects that maybe were helping some of those larger KPIs, whether it's ABI or the Dodge Construction Indices versus what we see day in and day out in the key vertical we play. Now, some of those key verticals are more impacted than others, right? I'm not telling you every vertical is booming, but the vast majority of the core vertical for JCI, their health is continuously improving, and we don't see any sign yet of a decline. Can you double-click on that a little bit by the verticals? I mean, you know, applied, private security, you know, these are the major ones. Like, give us a sense of the trends. So if you think through vertical first and product second, data center, I mean, it remains the strongest vertical globally, growing at very, very solid double digits with a pipeline that doesn't seem to show any sign of slowing down or weakness. So the next one from a vertical standpoint, the industrial vertical, particularly complex manufacturing, we still see a lot of increase in our pipeline, especially around retrofit and improvement of the manufacturing footprint. And that's not just in the U.S., that's across the globe, right? Then you think about commercial real estate, that thing starts to break off a little bit. And it's a little bit of a tale of two cities, to be honest. The higher end of that market, strong and getting stronger, and we continue to see shows of signs of probably high single-digit growth. So, I'm not talking about data center kind of level, but still very healthy. In the Class A, yeah. Yeah, in Class A office, mid-size mixed-use office, but in higher-end geographies or locations, yeah, absolutely, and then you go to the lower end of the office space, B or C, that market is soft. You see softness. And I always give the same example. You walk the street of New York City, you will see a Class A building in a great location where every floor is occupied to the brim. They've optimized the building, and you will see a completely empty Class B office building right next door to it where half of the shutters are closed, and it's probably utilized less than 50%. And that dynamic continues, particularly in North America, but I think we see that outside. From a product standpoint, yeah, we see more demand on HVAC and controls because of our offerings and what we do, more than we see that on fire and security, as fire security, by the way, is a little bit more exposed to those softer-end markets as well. So you explain one with the other, but HVAC between data center, the industrial momentum, the commercial heat pump in Europe, overall demand for sustainable outcome, there's a lot of tailwinds in those two product lines. And so we don't see any softness in that demand right now. Fire and security in North America seeing a little bit more softness. It's not retracting, but it's a very muted growth. Marc, you know, you mentioned helpfully the tariff impacts that you expect at sort of 2% of revenues, I should say, which you expect to offset dollar for dollar. You also said that kind of the tariff impacts do limit some of the margin expansion opportunity in the back half. Maybe just help us understand that margin math a bit more. You know, maybe ex-tariffs, could you remind us of what margin dynamics would have looked like otherwise for the back half? Yeah, starting with that last part, outside of tariff, we would have anticipated much better margin improvement year on year and sequentially in the second half. But as you know, the tariff dynamics are extremely complicated to navigate, particularly with the fact that they're changing constantly. We want to communicate fairly with our customer and give them a chance to understand where and why there is an impact. And you know, we're a lifecycle solution. That means a lot of our relationship, while they start with a system, they often end up with a multi-decade relationship on service and parts. And this customer will remember how we acted and managed the current environment. And what that ultimately leads to is we have found a way to recover the vast majority of the impact of tariff through targeted pricing and a better supply chain management. But we've not embarked on trying to get margin rates entitlement on top of those surcharges. By the way, this has been extremely well received by our customers, and it's also easier for your salesforce to explain that. So we have great engagement there, but we think it's part of the reason some of those demand signals I was talking about earlier are still very strong. Now, the dynamic of our margin rate in the back half is, yeah, Q3, when we provided guidance for Q3 and for full year, obviously we give by default some visibility into Q4 as well. So you can see the second half, it's still strong margin because we had very strong margin in the second half last year, but year on year, it's flat to slightly up, and we were originally anticipating to be a little bit better. Now, you're going to see segment margin under the new reporting segmentation. Americas will have higher segment margin rates than the rest of the enterprise, like EMEA. I'm sorry, I even have to rewire my brain and APAC. But year on year improvement, you'll see from a margin rate standpoint, we really come from EMEA, APAC having some pressure in Americas, staying about where it is to slightly up, yeah. Great, great. Marc, I want to end with a couple of questions around free cash flow conversion and capital structure. Give you credit, I mean, you know, the revised guide, 100% free cash flow conversion. What drove that increase in the guide? And you know, were there any sort of non-repeating benefits to be aware of that would challenge your ability to replicate that in 2026 and beyond? Not something particular I would point to, but what I can tell you is as soon as I took the role, we've embarked on a quality of earnings improvement journey. You know, we discontinued our factoring programs, we improved our supply chain, we deployed best-in-class procurement and receivable management. That really allows us last year to have still 95% free cash flow conversion, which we were happy with, and this year getting even higher at 100%, and then next year probably, you know, somewhere in between. But we still see some strong opportunities in inventory management where the lean management approach that we talked about earlier will drive material improvement. It will take some time, but for this year, there's a couple of dynamics that at the beginning of the year, we weren't sure they would drive as much as they have, but we've been able to command very strong upfront payments on our large order, and we continue to do so. As our order momentum continues to be strong, so does that cash flow improvement. And then the structural headwinds we've talked about historically, they're not going away, right? But because of the fundamentals of our work in capital improving so well, I think we've seen that 100% back in, and I think the opportunity in 2026 is beyond with the inventory management is we have more tailwind that can help us support, I would say, a mid- to high-90s cash flow conversion over time. I think the related question here is just around capital intensity. I mean, you know, revised structure, new leadership, you know, will there be any shift or opportunities for, you know, decreasing capital intensity in the business if you just think about CapEx, for example? Yeah, well, it's very early for me to comment exactly on where we're going to go, but what I can tell you already from the early stage conversation Joachim brought to the table is that lean approach means you do more with the infrastructure you already have. And our ability to build more capacity within the existing footprint of the either manufacturing or incredible 40,000 field-based labor, we can drive a whole lot more out of that existing capacity, reducing our need to constantly reinvest. Now, having better visibility on higher growth and more attractive parts of the market, we can also deploy capital in parts of the market that accelerate growth faster. And that doesn't just mean capital, capital as in CapEx. It also means like the way we spend our R&D, the way we deploy some of our SG&A and get faster and quicker leverage on all of that. Very good. Marc, I think we're going to have to leave it there, but really want to appreciate. Thank you for, you know, sharing your thoughts and insights with us. You know, I think this is a very exciting chapter for the company, you know, between sort of the organizational leadership changes, building off of a very, you know, proud and long foundation. We're looking forward to seeing you, you know, continue to be successful on the journey. Same here. I'll say thank you and have a great day with the conference, everyone. Take care. Cheers. care. Cheers.