Q2 2021 Johnson Controls International PLC Earnings Call
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Welcome to the Johnson controls second quarter 2021, and earnings call. Your lines have been placed on a listen only until the question and answer session to ask a question. Please press star one on your Touchtone phone. This conference is being recorded.
And if you have any objections you may disconnect at this time I would now turn the call over.
To add Tordella, Franzen, Vice President and Chief Investor Relations and Communications Officer.
Good morning, and thank you for joining our conference call to discuss Johnson controls second quarter fiscal 2020 one results.
First release and all related tables issued earlier this morning as well as the conference call Slide presentation can be found on the Investor relations portion of our website at Johnson controls dotcom.
Joining me on the call today are Johnson controls, Chairman and Chief Executive Officer, George Oliver and our Chief Financial Officer, Olivier Lea and Eddy.
Before we begin I would like to remind you that during the course of today's call, we will be providing certain forward looking information.
We ask that you review today's press release and rates are the forward looking cautionary informational statements that we've included there.
In addition, we will use certain non-GAAP measures and our discussions and we ask that you read through the sections of our press release that address the use of these items.
And discussing our results during the call references to adjusted earnings per share EBIT, and EBIT exclude restructuring and integration costs as well as other special items.
These metrics together with organic sales and free cash flow are non-GAAP measures and are reconciled in the schedules attached to our press release and.
And the accompanying index to the presentation posted on our website.
Additionally, all comparisons to the prior year are on a continuing ops basis.
Now, let me turn the call over to George.
Thanks, Antonella and good morning, everyone. Thank you for joining us on today's call.
I'll start with a brief strategic update while letting a few specific areas related to our growth initiatives Olivier will provide a detailed review of Q2 results and update you on our forward outlook, we will leave as much time as possible to take your questions let's.
Let's get started on slide three.
We delivered another quarter of solid financial performance organic sales and order growth reflected positive as anticipated, which when combined with our ongoing commitment to operational excellence enabled us to grow EBIT by more than 20% year over year.
Despite some challenges and the macro environment inflationary pressures and supply chain disruptions and the lingering impact of COVID-19 trends across most of our end markets continued to improve and we continue to gain share.
We have maintained and incredible level of engagement with our teams globally as well as with our customers and partners and we continue to execute on all of our strategic initiatives, expanding our service attachment rate and driving higher recurring revenue and.
Hansen and connecting our installed base with our digital open blue platform and advancing on our role in addressing the environmental needs of our customers.
Lastly, as promised we are announcing and our cost of goods reduction program on today's call, which targets $250 million and run rate savings by fiscal 2023.
In combination with the SG&A actions, we announced earlier this quarter, we expect to deliver $550 million and net savings, which provide significant margin expansion over the next several years.
These actions are a testament to our commitment of continuous improvement and will enable us to close our margin gap versus peers.
Let's turn to slide four as was the case last quarter. We have had a number of strategic announcements a few of the more notable examples are listed on the slide.
Each of these is significant and its own rights, but I do want to take a minute to touch on two in particular and that's the announced acquisition of silent on air and the partnership would tell you on.
We are extremely excited to welcome the silent and her team into the Johnson controls family.
Your best in class portfolio of innovative cooling equipment and modular data center technologies, it's tailored to Hyperscale.
These specialized data center providers are building and operating the critical infrastructure that the world needs and the rapid global transition to consuming cloud based software as a service.
There is a well established entrepreneurial spirit and <unk>, Thailand are combined with a customer centric culture deep subject matter expertise and a long history of seamless execution.
Expanding our exposure to the data center vertical and specifically the high growth Hyperscale market, it's been a high priority over the last several years.
Thailand and air accelerates these efforts considerably and together, we have an opportunity to leverage a best of both approach to fuel growth and market globally with a high return profile and immediate earnings accretion.
We also announced a transformational partnership with the leading technology player and connected Iot device management Kelly on a division of <unk> technologies.
Simply this partnership allows us to bring connected intelligence to all of the operational and technology.
Heat pumps security sensors or air handling systems and buildings.
This partnership will help remove the complexities associated with pushing that intelligence to the edge by leveraging <unk> connected device platform with secure and simple integrations across a diverse installed base of hardware.
Telling you on open flexible device management capabilities will allow open blue to run on any device and any hardware configuration and cloud scale and address the challenges with monitoring and maintaining performance at the edge.
Moving to slide five.
Turning to the theme on sustainability, we wanted to spend a few minutes highlighting one of the more important secular trends and we.
And expect will benefit our industry for the next decade, plus and that is E carbonization.
The buildings, representing approximately 40% of global greenhouse gas emissions large scale investment and de carbonization is at an inflection point.
We obtained corporate commitment to medium science based targets from over 8000 companies and countless commitment to net zero operations from the private sector.
Federal policies and stimulus to incentivize investment and the renovation of existing infrastructure is growing and regulation designed to reduce emissions are increasing.
We see the investment required for commercial building to achieve net zero extending into the hundreds of billions of dollars.
We believe we are uniquely positioned to capitalize on this once in a generation opportunity with a combination of efficient building systems and smart technologies that are connected via our digital infrastructure opened blue as well as our global presence, enabling us to convert on a local scale.
Turning quickly to slide six we are enabling net zero building today with a value proposition that is centered around transferring the risk of delivering building de carbonization and from the building owner to JCR and leveraging flexible customizable turnkey solutions and our proven capability of delivering.
<unk> energy savings and emission reductions.
One such solution has opened blue enterprise manager, a comprehensive suite of applications to monitor and improve energy efficiency tenant satisfaction asset performance maintenance operations space performance and ultimately the comfort of our occupants.
Using a single pane of glass approach enterprise manager delivers the next generation of smart building capabilities for portfolios ranging from commercial offices health care and mixed use tie and transportation retail and K through 12 and school systems.
Turning to slide seven another increasing area of focus when it comes to addressing decarbonization is the electrification of heat.
This is a market that is growing at a high single digit CAGR overall with a lot of that growth being driven by demand in Europe and Asia. As a result of the increased level of environmental regulations and these regions and minimize the use of fossil fuels and mandate low GW P. Refrigerants.
Many of you have asked recently about our offerings in this space and from my perspective, I would tell you. We have one of the broadest portfolios of heat pump technologies and the industry.
As you can see our portfolio spans all major building segments residential and commercial and industrial covering a wide range of capacities and equipment configurations.
Are the leader and the complex segment, which serves applications like district heating and industrial process manufacturing with the most complete operating stretching between our applied and industrial refrigeration portfolios and utilizing natural and <unk> refrigerants.
District heating is an exciting and sub segment of growth and this category, particularly across Europe and China.
In fact, we have had several major district heating project wins and these two regions recently supplying customers with customizable solutions to help achieve their environmental goals and lower energy costs substantially.
We also have and still.
Wrong market position across commercial and residential markets in China, with leading technologies and applied and Douglas.
Turning to slide eight and staying on the theme of sustainability, our customers are challenged with balancing cost and achieving their sustainability goals.
Our solutions and positioned to address those challenges and be more agile and providing outcome based solutions and services centered around integrated data and reduce energy and cost while providing an attractive return on investment.
As you can see on slide nine the enhanced capabilities enabled by open blue combined with our performance infrastructure business are proving to be a powerful combination and the current environment.
Our energy savings performance contracts offer customers a budget neutral way to fund the improvements necessary to reduce energy intensity and the environmental footprint of the building to guarantee the operational savings.
This is a business, we had been and for two decades, having implemented and well over 3000 performance contracts and North America alone with a portfolio of over $6 billion and guaranteed savings.
Utilizing open fluids and service, we help our customers make and implemented decisions that improve a building's total cost of occupancy energy and carbon profile as well as the wellbeing of their occupants without customers having to manage the process.
We ensure consistent availability to buildings and.
Predictable cost of operations.
As a result building owners are able to focus on their mission and it's their business.
We are proud to be partnering with our customers on several new projects. We have looked at five weeks and wins that showcase our ability to power sustainability for our customers.
Before I turn things over to Olivier to review the financial performance for the quarter, Let me wrap up my opening remarks by saying we had a very strong first half of the year and I am extremely encouraged by the momentum we're seeing across Johnson controls and our teams.
We remain focused on execution and are committed to achieving top tier performance.
We have a number of initiatives in flight designed to accelerate top line growth and improve profitability and ensure we expand our competitive advantages we continue to reinvest in our portfolio, both organically and Inorganically and we believe we are extremely well positioned to outperform as we look to the second.
Half of fiscal 'twenty, one and beyond.
With that let me turn it over to Olivier to go through the details of the quarter.
Thank you George and good morning, everyone continuing on slide 10, and organic sales inflected positive as anticipated and Q2 up 1% overall with strong growth in global products and the line trends improving across our field businesses the strength and robot products was driven by continued <unk>.
High levels of demand in the residential end markets not only in our HVAC equipment business, but also in security products discrete businesses continue to improve on a sequential basis, we service revenues, adding inflected positive and installed down low single digits.
We have been and courage by day more recent development of our order pipeline with clear signs of notable improvements in long cycle project activity.
And that segment EBITDA increased 15% versus the prior year and segment EBITDA margin expanded 130 basis points to 12, 7%. Despite the well that's with <unk> and overhaul volume growth. We have maintained our disciplined approach to managing the cost structure.
Resulting in additional year over year cost savings and we also benefited from strong execution across the board as well and I suppose it keep price cost and seek to expand our gross margins by 80 basis points.
EPS of <unk> 52 cents increased 24% benefiting from higher profitability as well as a lower share count we add another strong quarter of free cash flow performance up significantly versus the prior year and towards the 500 billion balance into two I will review further.
Sales of our performance later in the call.
Please turn to slide 11, or does for our field businesses increased 4% year over year inflicting push achieve.
And stronger than originally plan led by a strong rebound in retrofit project activity, which we include and install backlog grew 4% to $9 $6 billion, we service backlog up 5% to $2 $4 billion and installed backlog at 4%.
$272 billion.
Conversion rates in our <unk> backlog continued to accelerate which gives us more confidence in our mid single digit service growth outlook for the year.
On the install backlog flow rate is improving particularly given the rebound and shorter 10 retrofit activity.
Turning to our EPS bridge on slide 12 operations, wet and 10 cents tailwind versus the prior year driven by higher volume because they keep price cost and the incremental benefits from prejudice cost actions, which offset regional and business mix headwinds.
Net financing charges are dead and additional <unk>, mainly the result of favorable and FX gains and Noncontrolling interest was five <unk>.
Headwinds as a result of stronger year over year performance in our Hitachi joint venture and lower share count and net favorability from all the items were combined three cent tailwind.
Let us turn to slide 13 to discuss our segment results in more details my commentary. We also refer to the segment and market performance included on slide 14.
North America hope and use declined 4% organically driven by a 7% decline and installer.
As demand for shorter and retrofit and upgrade projects continues to improve and comps become easier and a second half of the year. We expect the installed side of our business to grow as we move forward.
Service revenues were flat in the quarter with our recurring contractual service business up low single digits offset by continued pressure and transactional service linked to customers lower discretionary spend.
But domain and applied HVAC revenues declined mid single digits, while fine and security decline mid to high single digits in the quarter.
We had a very strong quarter and performance and fresh Hukstra, which was up mid teens.
Segment margin increased 110 basis points year over year to 12, 7%, primarily reflecting strong growth margin performance up 150 basis points and continued cost and mitigation efforts orders in North America rebounded sharply on a sequential basis and grew 5% versus the <unk>.
Yeah.
Asia Pac orders were up low double digits overall, driven by strong retrofit activity backlog of $6 billion increased 3% year over year.
EMEA revenues were essentially flat organically with the prior year within standard up 1% and savvy is down 1% market conditions remain mixed with varying degree of lingering COVID-19 restrictions and lockdown across many parts of Europe and Latin America.
We saw low single digit growth in our applied HVAC and controls business, which was more than offset by low single digit decline in fire and security, which improved on a sequential basis and assure that happened and Asia.
And grew mid single digits by geography revenue in Europe grew low single digits, what the middle East improved sequentially due to an acceleration and etch Vac demand Latin America was down high single digits EBIT.
EBITDA margin declined 40 basis points, including a 40 basis points headwind from FX, excluding FX EBITDA marching with flat as favorable price mix and continued cost mitigation efforts were more than offset by lower volumes and lower equity income.
Or does it.
E mail accelerated to up 5% in the quarter led by mid single digit growth and fire and security and over 20% growth in industrial and country station.
APAC revenues increased 9% organically with Instyle up 15% and services up 3% both led by a recovery in applied HVAC and control, which grew a little over 20%.
Swings in HVAC was driven by the rapid recovery, we are seeing and China, we're hoping new growth accelerated more than expected.
More than 60% year over year conditions outside of China remain mixed we spoke of <expletive> Lockdown restrictions across part of SaaS is Asia, and despite and COVID-19 cases in India.
EBITDA margins declined 10 basis points year over year to 12, 3%, including a 20 basis point headwind from FX and the divestiture.
Core margins improve it.
By 10 basis points as the benefit of volume leverage was partially offset by unfavorable country mix.
APAC orders declined 1%, despite a 40% increase and China orders as the economic recovery in many of our all the key geographies remained subdued due to the ongoing impacts of COVID-19 and delayed rollouts of vaccines.
Moving to grow about products, where revenue grew 6% on an organic basis in the quarter, our global residential HVAC business was up about 20% in the quarter with strong growth in all regions in North America, and hazy HVAC grew 35% in the quarter slightly ahead of our expectations.
And as the market seems to remain in a V shaped recovery and we continue to gain share as a result of expanding our points of distribution and new product launches.
Orders in the quarter were nearly up 90% and we accepted the quarter with a record level of backlog.
In Asia Pacific, Although his CH, Richard insured HVAC business was up in the mid teens percent range with growth across all of our major regions, Japan, Taiwan and India.
And although not reflected on our revenue growth, our ice and JV in China, who often use 90% year over year and Q2, which explains the majority of the growth in our equity income this quarter.
On the commercial HVAC side defense decline significantly moderated to low single digits as high single digit growth in our indirect applied business was more than offset by a decline in light commercial.
Brian Security products grew low single digits overhaul led by continued strength in our security business, which flattish performance in commercial fire detection and suppression markets.
EBITDA margins expanded 280 basis points year over year to 14, 2% as volume leverage positive price cost higher equity income and the benefit of mitigating cost actions was partially offset by negative product mix.
Turning to page 15, corporate expense was down 15% year over year to $17 million benefiting from cost mitigation actions and continuous structural cost reductions, we do expect corporate expense to step up in the second half as some temporary cost reductions.
Begin to reinstate deepen the federal board performance year to date, we now expect corporate expense to be in the range of $285 million to $295 million for the year for modeling purposes. We have included an updated outlook for some of our below the line items.
Turning to our balance sheet and cash flow and <unk> on slide 16, starting with the balance sheet at the top of the page Simi and that two last quarter no significant changes versus the prior period.
During the second quarter, we repurchase approximately 6 million shares for roughly $315 million, which brings us to around 14 million shares year to date for just and $700 million. We remain committed to completing 1 billion and share repurchases in fiscal 'twenty one.
As a reminder, you may recall that in mid March we announced an increase to our annual cash dividend of 4% to one day and eight cents per share remaining within our target payout ratio of 40% to 45%. This is the first dividend raise since the divestiture of <unk>.
Solutions back in 2019, and we believe we are positioned to resume our pattern of solid dividend growth going forward.
We also announced an increase to our existing share repurchase authorization, which gives us the capacity for a little less than $6 billion in buyback.
Our balance sheet remains etsy with leverage of roughly one eight times below our targeted range of two to two five times.
On cash, we generated $539 million and free cash flow in the quarter, bringing us to nearly $1 billion for the first half. This is a significant improvement compared to our normal seasonality and has been driven by solid trade capital management lower capex.
And timing of payments.
And we enter our back half, we would expect lower conversion levels.
Dan.
What we have seen and the first half and compare to our eastern record seasonality given the expected acceleration in our top line and Capex spend.
Before we tend to a guidance update as George referenced at the start of the call. We're launching phase two of our three years cost poke on presenting the detailed of our cost of good saving plan on slide 17, similar to all of our SG&A savings plan announced intra quarter.
We completed a bottoms up analysis of the entire $15 billion based on cost of goods sold and I've thoroughly evaluated plans to optimize our spend in selected area. We have included a breakdown of the addressable spend category on slide 18 based on.
On our review we have built a family.
<unk> from $215 million and net run rate savings to Brian to be realized over the course of fiscal 'twenty two and.
And 'twenty three.
Nearly three quarters of the savings are tied to plans that improve laid up labor productivity standardized project execution practices and streamline back office activities across our branch based businesses. The remaining 25% primarily address cost in our manufacturing.
T.
And supply chains, including leveraging best practices of our level, three <unk> facilities and deploying them across our manufacturing base.
We have combined our SG&A and Cogs saving programs into a single consolidated view on slide 19 as.
As you can see from the chart, we are targeting $550 million and combine Nate savings over the course of the next two and a half years, which in addition to normal base margin improvement related to revenue growth improved mix and annual productivity provides significant margin.
Run rate potential delivering on this plan will ensure we closed the margin gap versus peers and in turn create significant shareholder value.
Please turn to slide 20.
We are initiating fiscal Q3 guidance for adjusted EPS of <unk> 80 to 82 cents, which is predicated on mid teens organic revenue growth and more modest segment EBITDA margin performance compared to two <unk> compared to what we have experienced in the first half day.
And a significant temporary cost actions taken lost share during the third quarter.
For the full year, we are raising our guidance once again and now target adjusted EPS in the range of total on and 58 cents to <unk> and 65.
This compares.
To our most recent EPS guidance of $2 50 to $2.60 and our initial guide in January of $2 45 to $2 55.
Recall that we provided updated EPS guidance intra quarter in conjunction with our SG&A cost reduction plan in late February.
Based on our strong performance and the first half and continued underlying momentum we're seeing in most of our end markets. We are raising our organic sales growth outlook to the eye and of our previous range segment EBITDA margins are tracking towards the I and of our most recent range and we now expect.
Net 70 to 90 basis points of expansion for the full year.
Free cash flow conversion is well on track for 100% for the full year.
Before we get into our questions I would like to point to our slide 21, and ask you to save the date for our 2021 investor day, which would be held on September eight.
More details to follow in the coming months, we start operator, we can open the line for questions.
Yeah.
Operator, thank you.
Thank you at this time to ask a question from the phone line. Please press star followed by one.
On mute your line and record today and clarity as prompted.
I guess limit yourself to one question.
One moment and our first question is from Nigel Coe Wolfe Research Your line is open.
Thanks, Good morning, everyone.
So on and a good range quota constraints.
And a strange quarter for COVID-19 has been on revenue.
Yes.
So yeah first of all just wanted to touch on the Cogs and SG&A actions.
And I'd be curious you know what.
Prompted the sort of on the second round of.
Efficiency program and samples from.
The review and so is it a case of having lived through.
COVID-19 and remote working that you found more efficient ways of doing things is it a case of Olivia coming in and having a fresh look I mean, what what what prompted that these actions.
So Nigel good morning. Thank you for your question on.
After the merger following demerger, we created the conditions to go to another level of profitability improvement and when and when I started.
George ask us to now look at leave us to close the productivity GAAP to our competition. So that's why it's the driving force and and that was communicated nine showed about seven.
Seven months ago.
So we have been and and we said we will go and update you as plans are unfolding. So first was SG&A and today is our Cogs plan and as you can see from the numbers. Nigel We believe we are going to add a significant profit to the bottom line and.
We are well on track to close the gap to our competitors and Nigel is it's a.
And it really a continuation of the work that we do with the integration we've got strong fundamentals and all across the board. We've got the right leadership team and then the work that we've been doing we recognize that there's a significant opportunity to continue to improve and what we've done as a team is to be able to to be able to detail that and then we're very confident that we're.
We're going to be positioned to be able to deliver on those benefits.
Alright, Thanks, George Thanks, Oliver and then service orders.
Down 3%, so I recognize the backlog.
And just talk about what caused that decline.
Given the initiatives you Havent train two to drive growth and and services and I heard transactional was on a bit of pressure North America, but now what is your confidence that orders start to effect positive from from here.
Nigel as you know, we have and incredible base of service over $6 billion and what I would say here with the service strategies that we've been executing I'm incredibly proud of the progress. We've made is one of our biggest growth vectors, it's being able to increase market and coverage enhanced technology with open blue create new service.
Capabilities really now being able to leverage the underserved install base and then ultimately deliver very attractive margin profile. When you look at the quarter service orders were down slightly and is mainly just timing of conversion.
Had an extremely strong March.
Is continuing in April our service pipeline is up double digits, and then with the site access and proving that that's also helping us to accelerate our <unk> and our <unk> contracts, which is labor and materials and so our attach rate. When you look at our attach rate for service with our installed projects is up significantly up.
The 300 basis points year to date and so when you look at our backlog up 5% with strong.
On pipeline and then the work that we've done executing on our strategy, we're very well positioned for a strong double digit second half and both orders and revenue.
Thanks, George and leave at that.
Okay.
Thank you. Our next question is from Gautam Khanna with Cowen Your line is open.
Yeah.
Yes George.
Richard I wanted to ask and your opening remarks, I think you talked about supply chain constraints and.
What are you and expand on that and just.
And it actually prevent you guys from delivering.
Equipment and the quarter.
Maybe if you have any sort of quantification.
How that manifests.
First quarter results.
And I've a follow up.
Yeah, I mean, our team is doing incredible work across our supply chain as we are working to to be able to support what we see to be and accelerating pipeline of opportunities across our businesses, we're gaining share and and every platform and so as we're working to make sure that we've got secured components and.
Hurdles to be able to support that new demand suddenly we're working it hard.
I believe that our team has done a good job to mitigate on most of the impact I think where we're seeing significant demand and residential on unitary as well as commercial unit unitary product, we're continuing to work that and and not only expand our supply chain, but also our manufacturing footprint and so we're working through that are bad.
Clogs are up and those businesses are record highs and so we are working to continue to accelerate our supply chain to be able to to be able to address and support the increasing demand, but overall I'm very proud of the team and and the work we've done to be able to support our customers and ultimately deliver deliver on the product that's being demanded.
And just as a follow up George.
Any quantification of specific I E. Q orders that you guys have had in the quarter and perhaps any color on the day.
Front growth front log of opportunities that are <unk> specific thank you.
Okay.
Yeah, when you look.
And you look at the progress we're making.
<unk> opened blue across the board not only digitizing, our core business, but now being able to with the data that's being extracted and the solutions that we're bringing to the market truly now positioning us to capitalize on on these significant accelerating trends. So when you look at healthy buildings are open and blue healthy buildings.
And in mid January with our solution portfolio of over 25 unique products and services, which is targeted at healthy people places planet. The market opportunity continues to grow we originally sized it at $10 billion to $15 billion and that continues to increase our pipeline is nearing a one.
On a year to date, we have secured over $150 million. We expect this to continue to play through with a few hundred million dollars and 2021.
We partnered with schools, we've got on incredible base of business with the K through 12 schools, we're working closely.
We have presence with over 6000 districts, where working with sports venues and the like to to bring back.
Bring back people to sports events and so when you look at what we're doing.
It's really a robust approach that ultimately starts with a detailed assessment and then through monitoring remote maintenance and optimization that we can do ultimately driving the best solution and so we're extremely excited and then lastly, with open blue and general across the board, it's really translating to multiple elements.
And it's it's improving our service attach rates, it's improving profitability and our businesses with the booked margins that were booking is.
It's making us more competitive now and the overall smart buildings with our leadership and sustainability and de carbonization, which I talked a little bit about and.
And my prepared remarks, and then the overall acceleration of Digitization within our existing service bays through connectivity going back and getting our install base connected has given us an incredible platform now to become much more intimate with our customers and bring on new capabilities to really change the game and how we serve them.
Thank you.
Thank you our next question, Jeff Sprague with vertical research your line is open.
Thank you and good morning, everyone.
On a Jeff.
Hey, good morning.
Two questions from me first one it looks like you're telling us you're going to absorb this cash restructuring costs and still convert at 100% free cash flow conversion.
And just want to confirm that's the case and if so.
What's really allowing you to do that I guess it has to be working capital and if it is maybe you could elaborate a little bit more on that.
The working capital opportunity, that's bridging you across there.
Good morning, Jeff So you're right the 100% free cash flow will include both the restructuring cash impact of our SG&A and Cogs pronounce.
Coke's programs announced today.
You are right more profit.
We'd be part of how we get that and also announced our working capital if you look at today.
For the second quarter, we have improved cash conversion cycle by about 24 days.
And DSO about 11 days and <unk> inventory and about <unk>.
Five days and GPO and we have build over the quarters, even before I took the position a great machine to have a high focus on working capital and you see that keep delivering them and we are actually very confident in our balance sheet.
And to deliver a 100% free cash flow a D.
<unk> share, but also the following yes, right. If you do some math, Jeff just in the first half we are at.
Converting up to 140%. So we have a quite quite a fair and room to now achieve.
100% for the year.
Great.
And then.
And maybe secondarily.
Just on the Cogs program.
The mix of savings are interesting.
I guess, if I was going to feel that guests are where the cost would come out.
I would've surmised, maybe more and manufacturing and distribution and less so and field labor.
I Wonder if you could just kind of address the manufacturing and distribution piece it looks like you've got a.
$3 2 billion cost base, there if I'm interpreting the chart right and you're targeting $70 million of savings there.
I guess he has been there.
Plans might not be fully mature after a kind of a seven month exercise, but would there be a kind of more room and some of these numbers as you look forward.
So D. So a few things, we said that I'm going to repeat that those savings and net meaning day would flow to the bottom line.
If you look at a day mix our team has done a great job in manufacturing and managing direct metal yours over over the few quarters and we think now the biggest opportunity. That's why we have announced and the numbers. We have announced are in the standardization of our field operations.
Across all the elements of field operation installed services and procurement not your other question was is there more put possible that's of course a day.
Case, we want to be we want to be prudent and we'll keep informing you as we as we go through the quarters, but we have a high level of confidence in our ability to execute these cogs program.
And Jeff I think it's important to note that as we went through the integration we developed a robust operating system for the field, which enables us to be able to take all of what we do to put into that one operating system and then with that globally to be able to focus on the variation.
And each one of the and each one of the cost level levels.
And be able to drive improvement. So the work that we've done is we actually have that detail to that level across the board and how we're driving improvement within that operating system for our field based businesses.
Great. Thanks, very encourage and good luck.
Thank you.
Thank you. Our next question is from Scott Davis with Melius Research. Your line is open.
Hi, good morning, everybody.
On its Scott.
I'm kind of I'm curious.
And logistically and otherwise what wasn't.
On outcome based contract really looks like I mean are you.
Are you deferring getting cash and the door, how long does it take to kind of prove the.
The outcome that you are promising.
Can you walk us through at a high level without giving away your trade secrets here of our contracts. He Christopher can you walk us through or at least at a high level.
A contract like that looks like.
And.
I'll just leave it at that George.
Yeah, So Scott its.
Two our performance contracting that we have today, where we ultimately do a survey of our customers site, we identify opportunities to be able to reduce energy and improve operations and the like and when we do that.
Difficult and improvement.
Made I mean buildings historically have been very inefficient and they've been very energy intensive and so our opportunity here is to be able to create and outcome energy savings higher operations and then do that we and in some cases, we we bring and financing for the project and ultimately then.
Our recurring revenue that goes over and it can be over 10, 15, 20 plus years, depending on the type of projects. These are great returns great recurring revenue that's tied to that and.
<unk> installed project and and ultimately delivering on the outcome and our track record and being able to deliver on.
On the commitments that we make with these type of contracts is extremely high so we do manage a bit of risk, but it's it was relatively low and we ultimately make sure that with the technologies and capabilities that we provide that we deliver on the outcome that we commit Olivia one statistic Scott and we haven't disclosed this before.
If you look at <unk> and.
In energy saving performance market and U S, which is a 4 billion market the company as a market share, which is 50% higher than our number two competitor.
So we have a strong position in the energy saving Ofcom based market and we believe that wig and to leverage this capability going forward as buildings decarbonize across the planet and.
And Scott I think it's important to understand that today.
Buildings are about 40% of the carbon footprint globally and about 75% of that is operational and.
So when when commitments are being made to get to net zero carbon emissions buildings become very important and and how they ultimately drive towards getting to getting to that that outcome and so we have an incredible opportunity with the capabilities that we have now with the not only what we've done historically with performance contracting, but now with <unk>.
And blue to bring together Holistically complete systems.
And with the use of the data we can drive a lot of optimization and what we ultimately deliver for customers to be able to meet their objectives.
Totally makes sense and it.
Is it harder to collect.
And those contracts free.
And kind of disagreements on what the what the data shows and the sustainability of that and.
The savings it seems like there'd be some gray area.
And there, but perhaps I'm wrong.
Scott is the opposite of that is very predictable and I think our track record relative to the projects that we've executed.
Net debt has been very strong so we make sure that as we look at these type of projects with the customers that we're doing these projects far.
We're obviously mitigating any any risk and and ultimately focus on executing on the commitments that we make.
Perfect. Thank you for the clarification, good luck and congrats guys I'll pass it on.
Thanks Scott.
Thank you. Our next question is have Steve Tusa Jpmorgan.
Yeah.
Hey, good morning, guys.
Good morning, Steve.
Can you just talk about a little bit more about price cost what was the spread on the quarter and how you're seeing kind of pricing and cost evolved over and over evolve over the next.
A couple of quarters and is there any given your kind of fiscal year and timing any.
Leakage into next year.
And so let me, let me start and I'll turn it over to Olivier for some of the more and more of the details but.
As you know over the last.
Three years, we've really built strategic pricing capability across the company and if you look at the last couple of years, we were able to be able to deliver a net 100 basis points on the top line. As a result that has served us extremely well as we got into this cycle with accelerating inflation. So with that we have improved discipline and appeals.
And we're executing projects better and better margin rates and then within our product businesses, where you you will see the impact sooner because of the material cost.
We've been able to have a very dynamic pricing model that has been deployed across each one of our platforms to ultimately not only see whats happening and the near term, but longer term being able to be very dynamic and how we pass that along into the channels and so to date, we've and <unk>.
The second quarter, we had about a 30 basis point benefit and.
And we believe that the work, we're doing not only and productivity V. A V direct material productivity designing material costs out of our products and then ultimately driving just improved productivity across the entire supply chain that we're still on a position to be net.
Net positive and the second half Olivier no nothing more to add.
Steve and and when you look at the slide 19, when we say 30 basis points based on margin improvement. We are factoring also our best view on on net share price cost, but we have a great process across the organization to maintain that going forward in this very fluid environment.
Okay and any other mechanical items for next year that we should be aware of as you've moved through this year.
Flip either positive or negative outside of the kind of obvious restructuring and the.
And the activities you've already kind of talked about.
Nothing more than what we all read and the news it's still a free environment, we feel very bullish about how the economies across the world are rebounding.
George mentioned that earlier in this call our order flow is increasing significantly and.
Something important if you look at all and store business, which is about 35% of the hub and you have the organization and we see this business now growing and that is done at the back of D or retrofit market, usually 50% of installed is associated with new buildings, the new buildings today.
And are depressed.
So as these new building is starting to rebound and it is.
U S and across the World, we see our business really are taking.
<unk> momentum and that we translate into of course more global products products being sold higher service mix. So we feel very positive about what.
What we see in front of us.
Great. Thanks, a lot I appreciate it.
Thank you. Our next question is from Julian Mitchell.
Mitchell with Barclays. Your line is open.
Oh, hi, good morning.
Good morning.
First question around fire and security.
Good sort of recovery trends very evident on the HVAC side of the house and a foreign securities sales.
Still down mid single digits.
And maybe help us understand.
And how you see the slope of that recovery.
From here.
And perhaps how big of an impact and screen sort of retail.
Piece and there was a headwind.
Yes, Julian let me start by just framing of fire and security and and what we saw in the quarter and what it means.
We go forward. It is about 40% of our total revenues. Its quota building systems is going at a very attractive margin profile due to the the product and service mix, we've got a large installed base, which ultimately drives the recurring revenue.
And this this combined now with open Blue we can truly differentiate what we do longer term to get a higher percentage of that recurring revenue.
And security now and then.
And the new World and the digital World and that now is becoming a critical assets as we think about our smart buildings to be able to collect data and apply analytics and when you look at the sequential trends, our short cycle business and fire and fire and security is up nicely. When you look at our when you look at products up.
Total products is going to be up it's up about low to mid single digits and then our service actually inflected positive in the field businesses, which as you know because of all of the shutdowns. We had a lot of difficulty over the last few quarters to be able to get in and and perform the service. So I think as we go forward those trends on the shorter cycle is coming through.
Very nicely and then on the install side as these new projects are coming to market, both and retrofit and and and install which are longer cycle, we're getting more than our fair share on that so as they are coming to market and these projects start to be redeployed.
<unk> well positioned to be able to start to pick up the install revenues, but I would tell you. The the short cycle piece is actually performing very well and so even though the install revenues were down it's mainly just a function of timing of conversion and we see the orders now picking up very nicely and the second half.
Great. Thank you and then.
Maybe switching to a topic that's relevant across the company.
And there's a lot of interest obviously and the U S education stimulus money that could flow over the next three years.
Maybe help us understand what.
And what the scale of JCR is exposed to range to that education vertical.
As you and looking across the field and global products business.
Yes, Julian let me summarize it quickly here the the three large COVID-19 relief packages. They total about five five trillion dollars and aid over the last 12 months much.
Much much needed.
Really for our customers, we were very active and participating and making sure as those those bills were put together that certainly was focused on healthy buildings and making sure that as we whether it's bringing students back to school room or or the like or buildings. We're very actively involved in and making sure that the details of what was going.
Needed to be able to address some of the new challenges, we're actually incorporated in it and the bills and when you look at the the funding directed to upgrading facilities and the vertical markets that we have the highest exposure and deep relationships. It is K through 12, higher Ed and then state and local government on which.
Play to our strength and so when you look at your question on on Education.
K through 12, we have relationships across North America, or the U S with about 6000 and school districts and and.
And then at the higher and level of about 1900 and.
They all this all plays right into our strengths and so and K through 12 alone there's been about 195 billion allocated and so.
So what we've done is making sure that not only right from the the front end of building the bill to now executing state by state with what we have is a program management office, we're making sure. We're detailing all of the flow of that stimulus and that we're positioned to be able to address the challenges that theyre going to deploy that.
<unk> to be.
We're able to address and so we think the <unk>.
Tam for the for the U S Youre and billions of dollars relative to the opportunity that we see.
As we are going after this and the healthy and healthy buildings market itself. We said it was originally 10 to 15 that continues to be expanded with the stimulus is coming into the market. So we believe that we're and the early stages with the pipeline that we see that.
And the one hundreds of millions of dollars that we can we can be well positioned to execute on.
And Julien I would just add that when you look at education. It is a big vertical for GCI overall, and particularly when you look at North America, it's about 20% on the revenue.
That's great. Thank you.
Thank you. Our next question is from Josh Paul Witzke Morgan Stanley. Your line is open.
Hi, good morning, guys.
Good morning, Josh.
So George if you wouldn't mind and just kind of taken a step back I know with the nature of the field business and kind of the mix of fire and security and HVAC and air and sort of makes benchmarking tough but.
If I look at you know what we've kind of seen so far through the first quarter. It seems like maybe from an orders perspective commercial HVAC is running up kind of mid teens at the market level.
I think you mentioned low double digits and applied North America, but what's your sense on kind of the product side of commercial HVAC and and.
We should sort of see order rates here.
Whether it's this quarter or kind of here and the in the medium term.
Yeah, Josh I think as you look at our mix certainly were on a longer cycle with the installs service part of our portfolio, but as you dig into the specific products and every category, we're gaining share. So if you look into <unk>.
For instance, and the and the unitary business and.
And the the commercial side.
New orders in North America prior to you equipment for the rooftop is up mid teens and with March up over 30%. Our backlog is up 100% now those orders are and are in our product based business. So you wouldn't see those orders.
And the obviously inherent and the book and Bill and then when you look at our unitary share we're up about 40 basis points.
Year over year, and so as we look at the backlog being up 100% and the projected growth here and the third quarter and North America unitary we're project and we're going to be up 30, plus percent and in the quarter and third quarter. So that would be the commercial side on the residential side, our orders were up again about 88.
<unk> record level of backlog there our sales were up about 35% with our our units were up over 40% were seeing strong sell through through that through that channel and we're gonna see continued strength in Q4 on Q3, and Q4 and so thats continuing when you look at.
And the same holds true and our Hitachi business and in Asia Pac and we've got strong double digit.
Revenue, there and mainly driven by Japan, and that's been because of a gain share with our new product introductions and then when you look at even in North America. When you look at even though our installed shows shows our orders were up about 5% and underlying and those orders and north.
Erica we saw mid teens growth and applied equipment orders. So that is going to play out very nicely for us and the second half and ultimately set us up for increased service attach and and service revenue going forward. So you got to look at the details to understand that and every category whether it be through our distribution or as we now set up are instead.
<unk> business that were we're setting it up for the longer term, that's going to be very attractive and just building off one thing that Olivier said when you look at our install business we have significantly outperformed.
Through this cycle with the nonresident construction down as much as it is we were able to actually fill most of that void with short term retrofit retrofit upgrade orders, which in North America alone were up 20% and the quarter.
Now, we're seeing a fundamental that would be short term demand that's going to continue it's going to continue around healthy buildings and sustainability projects, that's going to now combined with what we see happening and nonresidential new demand coming through this is the first that I've seen the two coming together and it's going to play out very well and the second half for.
Strong orders as well as beginning to convert to strong revenue and the second half share should not and.
One statistic again, which gives allows you to put all that together global product in aggregate.
For.
And next quarter, we believe we're going to be able to grow revenue in the 20% plus range. So that gives you an idea about what is going on around all day elements of the portfolio, 20% plus.
Revenue year on year growth expected.
And that's Super color, maybe just one follow up on on Scott's question on performance contracting George I think to your point. This is a business that you guys have been around and for decades now.
I'm surprised given how compelling that is for a customer that the industry isn't bigger or no <unk> exposure to that isn't bigger I mean, it almost seems kind of like a free upgrade that providing you have bond support.
They get that that worked on it.
What's been kind of a bottleneck to that historically.
It's <unk>.
Great question. So we're working with all of our customers and the historically a big customer has been the government on both at the federal level at the state level and at the local level with our with our three P type contracts and performance content contracts and so we've been working with them on and some of it is how they account for the projects and ultimately.
How they look at it as is and upfront costs and how they account versus and ongoing operation operational cost and so we've been very active working with our customers to make sure that they are addressing some of their internal challenges that that they get and the way of doing a contract like this which is very attractive.
<unk> and being able to get returns that pay for the cost of capital and so we're working to.
Really start to create that market above and beyond what it is today and we believe that we're very well positioned to be able to then capitalize on that opportunity Josh.
Perfect. Thanks, George Good luck guys.
Thank you and our final question comes from Andy Kaplowitz with Citigroup. Your line is open.
Hey, good morning, guys.
Good morning, Andy.
Good morning, and Olivier and can you give us a little more color on how to think about the 550 basis points of total cost out and what it actually means for Incrementals on the next few years it looks like.
<unk> core margin improvement of 30 basis points and Youre dialing in on average do you think you can get something like 300 basis points and margin improvement over the three year period with on average 100 basis points and core Incrementals on a 40% plus range, but I just wanted to sort of confirm those numbers.
No.
Good morning, Andy on numbers, absolutely correct issue, if you remove silent and.
In the next next fiscal and day, one after that would be and the 40% incremental after that we believe we will have created the conditions to two <unk>.
Deliver on our 30% incremental.
And we will and.
I mean, we gave you a lot of data data already and Andy and I would give you even more on ending on.
And Investor Day in September.
Very helpful and then Olivia and maybe a follow up in terms of you know we.
Know that Jay says, obviously and inverted companies. So we wouldn't expect a big impact from bottoms and corporate tax line, but how are you thinking about the resiliency of your tax rate. If there is some kind of global minimum tax agreement and what kind of levers can you pull to maintain your relative low tax rate advantage.
So the situation is fluid we all of US are reading the papers Oliver.
And I have insights on what could happen. So one we are of course committed to the 13, 5% tax rate for this fiscal and and going forward, we have rent via scenarios.
We are highly confident that our tax rate, we remain competitive all achieved two two to the industry.
And we have five levers to achieve that some of it is of course, where we have resisted as a company and the complexity of our legal entity structure.
We believe it's going to be and remain a competitive advantage.
Very helpful. Thank you.
Thank you Andy.
Third we have some final comments.
Yes.
Wrap up the call. This morning, as I mentioned earlier, we've had a very strong first half of the year and the momentum we are seeing across our portfolio coupled with our strategic focus and improved execution gives me high confidence and our ability to be able to outperform as we go forward I Hope you and your families continue to remain safe and I look forward to speaking with many of you.
Soon so with that operator that concludes our call.
And thank you. This does conclude the call you may disconnect your lines and thank you for your participation.