Johnson Controls’ HVAC Orders Jump 44% as Data Centers Boom

“Systems grew 13%, reflecting continued strength in data centers, while service continues to deliver with a solid 8% growth,” said Marc Vandiepenbeeck, EVP and CFO at Johnson Controls International. “The demand environment also accelerated as we exited the year.” 

Orders increased 44%, driven by data centers plus battery and semiconductor manufacturing and large research universities. Backlog increased 43%, to $23 billion.

“We see customer demand translating into record backlog, a strong pipeline, and increasing visibility into longer-term demand with our largest customers,” said Joakim Weidemanis, CEO.

The Bottleneck

There’s more to that $23 billion backlog than just demand for equipment that still needs to be produced, although that is certainly part of it — and something JCI is working on. The company reported it can actually add HVAC capacity relatively quickly.

“We’re able to, for many of our product lines, stand up new physical plant capacity within 12 months,” said Weidemanis. Lean manufacturing can create additional capacity even faster — “within quarters.” JCI expects $900 million in capital expenditures in FY2027, which covers manufacturing and innovation/digital/AI improvements.

But that is not the main holdup, JCI execs said. Theoretically, the company could deliver its entire backlog within 12 months.

“Doesn’t mean that our customer will be able to,” Vandiepenbeeck explained. “The primary constraint really is not demand,” although the demand does continue to accumulate, he said. The main holdup is that, in addition, some customers “continue to face power and some electrical infrastructure limitation.”

That affects when customers can take delivery, and the timing of projects. 

If those constraints ease, “our ability to unfold more of the backlog quicker is absolutely an opportunity,” he said.

Chillers

JCI said systems growth benefited from higher chiller output, and the company’s mix is shifting away from traditional fire/security toward “the higher-end margin chiller where we differentiate more,” Vandiepenbeeck said.

“The year was really supported by the accelerated growth that we saw mostly in System, and that’s our chiller output revenue that came about,” said Vandiepenbeeck

JCI doesn’t see that slowing in the near future. 

One analyst on the call specifically raised the concern that chillers are “going away” as data centers adopt new cooling architectures — if data centers increasingly use direct-to-chip/liquid cooling, do they eventually need fewer chillers?

Weidemanis rejected this theory.

“I think there will be some situations over time where on the margin, perhaps one or two fewer chillers will be needed,” he said. But in practice, he said, data centers are not yet being designed with fewer chillers.

“By and large, customers are designing data centers with redundancy and designing them for operating at certain peak conditions.”

Customers still need chillers for redundancy and peak operating conditions, he explained, while liquid cooling equipment is creating additional opportunities for JCI. Equipment-wise, he said, JCI is adding capacities in CDUs, cold plates, and controls.

The Service Tail

According to Weidemanis, all this equipment JCI is putting into data centers will eventually create a service tail for HVAC contractors.

“The systems growth is very healthy, and the attachment rates in the data center world are higher than fleet average,” he said. “We believe there’s both, over time, a top-line acceleration opportunity, but also a very nice margin opportunity here.”

In other words, JCI sees the data-center boom as more than a wave of equipment sales. Every chiller and cooling system added to the installed base potentially produces years of service and aftermarket work, meaning the construction boom may eventually become a service boom.

Pricing

JCI expects price increases to continue outpacing inflation in FY 2027, although those increases may not be sufficient to fully preserve the company’s gross margin percentage on the additional costs. Vandiepenbeeck said JCI is balancing inflation recovery against the need to remain competitive, rather than pursuing more aggressive price increases solely to protect margins.

“We are price/cost positive for the year. There was a lot of inflation on both material and a little bit on raw,” said Vandiepenbeeck.

He said the additional pricing above inflation wasn’t enough to preserve JCI’s full normal margin rate.

“Said differently, we do not get exactly the 37% gross margin rate we have on our recovery on inflation, but we are absolutely price cost positive,” he explained. “It is just slightly margin dilutive for the year.”

An analyst explicitly asked whether JCI needs more price increases in 2027 to be price positive.

“We are price/cost positive in 2026, and we will be price/cost positive in 2027. We don’t need more relative price,” Vandiepenbeeck said. “Ideally, I’d always love more price, but we want to remain competitive in the way we play in the market.”

Looking ahead, JCI expects to remain price/cost positive in 2027. The company intends to “price way higher than what we see in inflation,” Vandiepenbeeck said. “But our ability to maintain, from an inflation rate standpoint, the entirety of the gross margin rate of the enterprise, at time will become challenged.”