Q3 2021 Johnson Controls International PLC Earnings Call
Sales and free cash flow are non-GAAP measures and are reconciled in the schedules attached to our press release and in the appendix to the presentation posted on our website. Additionally.
Additionally, all comparisons to the prior year are on a continuing ops basis.
Now, let me turn the call over to George.
Thanks Antonella.
Good morning, everyone. Thank you for joining us on the call today.
Let me kick things off with a brief update spotlighting a few specific areas related to our strategic initiatives.
<unk> will provide a detailed review of Q3 results and update you on our forward outlook, we will leave as much time as possible to take your questions.
Let's get started on slide 3.
Another quarter of solid results with demand accelerating across most of our end markets as a robust recovery continues to expand.
Q3 represents our easiest comparison of the year, but I am encouraged to see the underlying sequential improvement experienced in the first half.
<unk> to accelerated in the third quarter with many of our businesses back to operating at pre pandemic volume levels non.
Non residential construction markets continued to recover led by the ongoing strength and retrofit activity tied to demand for a healthy building solutions.
New construction is also beginning to show.
Signs of stabilization and the inflection in order trends for our longer cycle project businesses sets us up well as we look to next year and beyond.
Our services business has recovered and we continue to transform this business through our digital service strategy to drive higher levels of recurring revenue and an improved.
<unk> growth profile.
This recovery has not been without its challenges we have managed through significant headwinds related to persistent supply chain disruptions component shortages labor constraints and continued inflation.
While these dynamics have created some revenue pressure, which will continue near term the pacing compas.
Opposition of order growth in the quarter provides confidence that we will remain on track over the medium and long term.
Our teams have done an excellent job navigating these challenges and I'd like to acknowledge and thank them for the tremendous amount of time and effort dedicated to meeting our customer needs, particularly over these last.
Several quarters.
As you may recall in an effort to mitigate the severe impact of the volume declines during the height of the pandemic, we implemented significant cost actions last year.
These actions provided a material boost to profitability in the prior year period and led to best in class Decrementals.
Lapping that difficult comparison, and managing the return of some of those variable costs, coupled with navigating current capacity constraints and supply disruptions has resulted in significant margin pressure.
That said, we were able to deliver better than expected margin expansion in the quarter and remain on track.
Beat our targets for the full year, which is a remarkable accomplishment in the current environment.
At the same time, we remain laser focused on executing our strategy, which is driving continued share gains.
As we will discuss over the next few slides, we continue to advance our efforts to deliver innovative.
<unk> solutions to help customers enhance building performance and reduce costs, while achieving their net zero carbon renewable energy goals.
This will be accomplished through our ongoing digital transformation enabled by open blue and accelerating our offerings to deliver the outcomes our customers need.
So, let's turn to slide 4.
Continuing our trend to highlight a few notable achievements over the past quarter recently, we launched the latest offering under our open loop platform net zero buildings as a service.
I will spend more time on this announcement in a few minutes as this represents an important.
And step forward in enabling our customers' achievement of de carbonization and sustainability commitments.
We have now filed our 200 U S patent applications and received 90 U S patents for our open blue energy optimization innovations.
We announced another strategic.
<unk> partnership with <unk>, which will allow us to leverage their Iot device manager and industry, leading automated digital certificate platform to encrypt data and authenticate the density of users devices with services within a building.
This will further expand Johnson controls.
<unk> already robust capabilities around cyber security risk management, providing our customers peace of mind and resilient solutions that ensure hardware software and communications remain trusted throughout the building lifecycle.
Together with the announcement of our partnership with <unk> on last quarter opened Blue solutions.
As we will have confidence that their devices are safely and securely connected to the network.
About 2 weeks ago, we launched the community College partnership program.
Aimed at expanding and advancing associate degree and certificate programs, and HVAC fire and security and digital building automation.
<unk> systems across the U S.
Over the next 5 years Johnson controls will grant $15 million to nonprofit community colleges in support of academic programs that train and develop the next generation of skilled trades technicians.
In addition to the funding Johnson controls employees.
Please will be increasing their support through volunteer and Mentorship programs and also provide a pathway for our student internships and entry level employment opportunities.
Lastly, we are proud to have received additional recognition for our efforts to ensure we create a diverse and inclusive collusive working.
Work environment.
Really being named as 1 of the best companies for multicultural women <unk>.
We are also proud to be a part of the Forbes 2021 list of best employers for diversity as well as the financial times European climate leaders list further demonstrating our commitment to sustainability.
Before I move to the next slide I wanted to welcome Vijay <unk>, our Chief Technology officer to the team.
P. J is transforming our software organization strengthening our engineering development processes and expanding the solution set of our open blue platform.
We are excited to have Vijay.
He is already having an incredible impact internally and you will hear more from him at our upcoming Investor day.
Let's move to slide 5 for a brief update on trends in our service business.
As we have shared with you over the past couple of quarters accelerating growth and service has been a strategic.
On <unk> underway since well before the pandemic.
Ultimately the actions we are taking are designed to drive to a 300 basis points of above market growth, which would place us firmly in the mid single digit annual growth range for the entire 6 plus billion dollars in revenues.
Our.
<unk> initiatives multifaceted simultaneously focusing on increasing our contractual service attach rate, reducing attrition and driving higher revenue per user while transforming our offerings through digital.
Enabling higher digital content and connecting our installed base compounds our ability to create.
Our approach higher levels of recurring revenue over time.
In the quarter service revenue increased 11% in line with the rebound we expected with double digit growth across all 3 regions.
Order growth also accelerated as expected up 13% and.
Our attachment rate year to.
<unk> has now improved close to 400 basis points already achieving our guidance range for the full year.
We expect to continue this pace going forward again, aided by our digital services and solutions, which were up mid teens in the quarter.
Please go to slide 6.
I referenced are new opened blue offering net zero buildings as a service back on slide 4 and I thought I would spend a few minutes highlighting the importance of this launch.
Not only does this offerings fulfill in immediate need as expressed by our customers. It also represents the next phase in the evolution of our digital smart buildings.
<unk> offerings, which will drive our shift towards increased deployment of higher recurring as a service revenue models.
Our broad building systems portfolio and market, leading capabilities and expertise in ESCO projects combined with the open blue software platform uniquely positions Johnson.
Johnson controls to provide customers with guaranteed outcomes and risk management models to achieve their emission reduction commitments.
Based on our high level of customer engagement and the extensive market back research conducted leading up to the development of this solution the need for a trusted partner to deliver.
1 source seamless roadmap to net zero in the urgency to reduce carbon emissions is clear.
What is also clear is that digitally enabled solutions that tie together the.
And Ot and the built environment.
Are the only ways to provide these roadmaps.
And nearly 250.
$5 billion sustainability and de Carbonization is a once in a generation opportunity and we are excited about our role in leading these critical trends.
Net zero buildings as a service includes a full portfolio of sustainability offerings tailored to schools campuses.
Data centers health care facilities, as well as commercial and industrial verticals.
It Leverages a game changing new solutions net zero adviser, which delivers turnkey AI driven tracking and reporting of sustainability metrics and helps building operators insurer improve carbon reduction.
In renewable energy impacts of their buildings.
We also leveraged the full open blue suite of connected solutions and services offered through flexible risk sharing models that enable tailored deal structures, where end users pay for outcomes rather than assets.
Turning quickly to.
Slide 7.
Just a few examples of customer wins tied to the theme of de Carbonization and net zero.
I won't go through each of these but in every example, Johnson controls is providing unique solutions to solve the outcomes our customers are looking for.
Some of these new relationships are borne.
<unk>, our digital partner ecosystem, while some are long standing relationships, where we are converting existing building automation systems to open blue or advancing customers' ongoing sustainability initiatives.
In all of these we are driving energy efficiency, reducing energy consumption driving.
Out of our cost savings and emission reductions.
Before I turn things over to Olivier to review our financial performance in more detail. Let me conclude my opening remarks by saying I remain extremely encouraged by the demand patterns playing out across our portfolio. Our teams remain dedicated to.
Driving top tier performance. Despite some of the short term challenges we are facing we.
We are watching closely the resurgence of Covid cases, and the potential impacts renewed lockdowns and supply chain constraints may or may not have on project activity and from a supply chain perspective, we are confident.
And our ability to manage access to critical materials and components, although lead times and conversion cycles are stretching we believe conditions will begin to improve over the next couple of quarters.
We are successfully leveraging our pricing capabilities to offset inflation and we still expect to remain price cost positive.
Positive for the year.
At the same time, we are making tremendous progress on our strategic initiatives to accelerate top line growth and improved profitability, including indoor air quality de Carbonization Smart buildings digital services and our productivity program and we continue.
To reinvest in our portfolio, both organically and Inorganically.
We believe we are extremely well positioned to outperform throughout the next cycle.
With that let me turn it over to Olivier to go through the details of the quarter.
Thanks for charge and good morning, everyone continuing on slide 8.
Organic sales accelerated in Q3 up 15% or in line with the guidance, we provided last quarter as growth in global products and our field businesses accelerated.
The strengthening robot products was across the board from continued high level of demand in residential end markets.
In both our global HVAC equipment and security products to the anticipated rebound in commercial HVAC and fire and security.
Segment EBIT increased.
Increased 21% versus the prior year and segment EBITDA margin expanded 30 basis.
Increasing 16, 2% better leverage on higher volumes and the benefit of our SG&A actions and strong execution more than offset the significant headwind from the reversal of temporary cost reductions and a modest headwind from negative price cost.
<unk> of 83.
<unk> increased 24% benefiting from higher profitability as well as a lower share count on.
On cash we had another strong quarter.
Free cash flow in the quarter was $735 million flat versus the prior year. Despite the plan.
Planned uptick in Capex.
Will review further details of our performance later in the call.
Please turn to slide 9 orders for our field businesses increased 18% year over year accelerating accelerating at a faster pace than expected led.
Led by continued strength in our head for fleet project activity, which will include an installed but also stabilization in new construction activity.
Service orders recovered above pre pandemic level up 13% led primarily by improving conditions for our.
Our transactional service business.
Backlog grew 7% to $10 billion, we service backlog up 5% and installed backlog up 7% conversion rates in our service backlog continued to accelerate our install backlog flow is improving particularly given.
Hey profit activity, which turns more quickly.
Turning to our EPS bridge on Slide 10, let me touch on a few key items operations, where our 16th tailwind.
Versus the prior year, driven by higher volumes and favorable mix partially.
The rebirth by price cost and the reversal of prior year mitigating cost actions.
Just to further emphasize the magnitude of the headwinds from the temporary actions. Excluding this impact underlying incrementals in Q3 were just over 30%.
We.
We are on track with our SG&A productivity program, which equated to a benefit of around <unk>.
Since we spoke last time, we have already begun taking some of the necessary actions to achieve the savings related to our Cogs per gram, which would begin impacting the P&L in fiscal 2022.
We are well on track to achieve our savings targets for fiscal 'twenty, 1 and beyond.
Let's turn to slide 11 to discuss our segment results in more detail.
My commentary, we also refer to the segment end market performance included on Slide 12.
North America.
<unk> grew 8% organically with.
Growth in both service and install.
Service revenues were higher in all domain driven by a sharp rebound in our transactional service business, which increased nearly 30%.
Install demand, which is the area.
For our business that was most impacted by supply chain disruptions.
Continues to be driven by Shoretel shorter cycle retrofit and upgrade projects. In addition to easier prior year comparisons.
Our domain commercial applied HVAC revenue grew mid single digits.
1 final security increased low double digits in the quarter, we had another strong quarter in performance infrastructure, which also grew revenues low double digits. This business as a leading position in the ESCO market, which is well positioned to address customers' decompensation needs.
Segment margin decreased 70 basis points year over year to 14, 7% as North America experienced the most headwinds from the reversal of temporary cost.
The majority of the action.
In the prior year related to fellows and other employee compensation.
Related expense.
Orders in North America accelerated on a sequential basis and grew 18% versus the prior year with mid teens growth in fire and security and performance infrastructure.
Commercial HVAC orders were up over 20% overhaul driven by strong profit.
TVT with equipment orders up over 50%.
Backlog to $6.2 billion increased 6% year over year.
Revenue in <unk> increased 17% organically led by strong recovery in install activity.
Non resi construction grew more than.
25% in the quarter with most verticals returning to 2019 levels led by increased demand for energy related infrastructure projects.
Brian Security, which accounts for nearly 60% of segment revenues inflected sharply growing at a mid twenties rent right.
In Q3, and surpassing 2019 levels.
Industrial retrofit generation grew 20% in commercial HVAC and controls grew high single digits.
By geography revenue growth in Europe accelerated to nearly 25%, while the middle East.
Declined low double digits.
<unk> in Latin America increased 10%.
Segment, EBITDA margins increased 250 basis points, driven by volume leverage and the benefit of SG&A actions.
Orders in mill accelerated further increasing 22% in the quarter with strong growth.
Fire and security and commercial HVAC.
Asia Pac.
APAC revenues increased 14% organically with install and service increasing by the same amount.
Commercial HVAC and controls while revenue grew mid teens, primarily driven by the ongoing recovery we.
We're seeing in China.
A margin declined 280 basis points year over year to 11, 8% as the benefit of volume leverage was more than offset by the significant temporary cost mitigation actions taken in the per year and geographic mix.
APAC.
APAC orders grew 14% driven by continued strength in commercial HVAC in China and recovery in controls business in Japan.
Economic conditions outside of China remained mixed with uncertainty increasing as ongoing and renewed lockdown restrictions.
Across parts of Southeast Asia, Australia, and parts of Japan for low rise in Covid cases, and continued delays in the whole out of vaccines.
Global products revenue grew 21% on an organic basis in the quarter in line with what we initially expected.
Spite incremental headwinds related to Covid lockdown in Asia in the short term supply chain restrictions.
In aggregate, we continue to gain share across most of our portfolio.
Our global residential HVAC business was up 16% in the quarter with strong growth in all regions.
<unk> North America HVAC grew mid teens in the quarter slightly ahead of our expectations benefiting from a stronger sell through demand, particularly in April and May.
Our <unk> residential HVAC business was up high teens.
Led by strong share gains in Japan, and Taiwan as part of our successfully for to obtain the number 1 residential share position in those markets.
Although not reflected in our revenue growth our <unk> joint venture grew revenue, 44% year over year in Q3 expanding.
Our leading share in China.
Commercial HVAC sales improved significantly up more than 20% with our indirect applied business up more 25% light commercial unitary up over 20% led up led by the recovery in North America.
Yeah, Hi.
High single digits.
Fire <unk> security products growth was above 30% led by continued strength in our security business, which grew over 40% in the quarter.
National fire detection and suppression products were up.
Low to mid.
<unk> on easier year comparisons and the stabilization in key vertical markets EBIT.
EBITDA margin expanded debt 140 basis points year over year to 29% as volume leverage positive mix increased equity income and the benefit of SG&A.
More than offset the significant temporary cost actions taken in the per yeah, I was as well as current price cost pressure.
Turning to slide 13, as I expected corporate expense increased cynical income significantly year over year often abnormal.
Normally low level to $70 million for the full year, we now expect corporate expense to be in the range of $280 million to $285 million.
Slightly below the low end of the prior guidance.
For modeling purposes, we have included an updated outlook for some of our below the line.
On items I would point out that Amit amortization expense now reflects the impact of signed air.
Turning to our balance sheet and cash flow on slide 14, starting with the balance sheet at the top of the page similar to last quarter no significant changes versus the prior period order.
Then the net reduction in cash due to closed due to the closing of the site and App transaction on.
Our balance sheet remains healthy with leverage of roughly 1.8 times still below our targeted range of 2 to 2.5 times on cash we generated 700.
$75 million in free cash flow in the quarter, bringing us to nearly $1.7 billion year to date. This is a significant improvement compared to our normal year to date seasonality and that's been driven by solid trade working capital management and the timing of Capex and all the payments.
We expect the much lower conversion level in the fourth quarter, given the reversal of some timing benefits for the full year, we expect free cash flow conversion to be approximately 105%.
During the third quarter, we repurchased a little more than 5 million shares.
For roughly $240 million, which brings us to around 19 million shares year to date, completing our $1 billion per hub, we expect to repurchase.
An incremental $250 million of shares in Q4.
Please turn.
For slide 15 for a look at our updated guidance for the full year, we're raising our guidance once again and now target adjusted EPS in the range of $2.64 to $2.66.
This puts the midpoint.
End of our previous EPS guidance.
On to <unk> $2.58 to $2.65.
Based on our strong performance year to date and the continued underlying momentum we're seeing in most of our end markets. We continue to expect organic sales growth in the mid single digits.
Segment EBIT a margin.
Our tracking towards the high end of our most recent range and we now expect 80 to 90 basis points of expansion for the full year, which includes a 10 basis point Edwin highlighted through the acquisition of <unk>.
Based on the <unk> Guide Q4 adjusted.
EPS is expected to be in the range of 86 to 88 cents, which assumes mid single digit organic revenue growth and 30 basis points of segment EBITDA margin expansion.
Before we get into your questions.
Just a quick update.
Our Investor Day plan for September 8 we made the decisions to the event virtually hedges.
As illustrations details will be available over the next couple of weeks, we start operator, we can open the line for questions.
Thank you we will now begin the question and answer session. If you would like.
On a question it is star 1 and record your name and company in respective time, we ask that you limit yourself to 1 question and 1 follow up question. Our first question comes from Joe Ritchie of Goldman Sachs. Your line is open.
Thanks, Good morning, everybody.
Good morning, Joe.
So.
Ask maybe maybe just starting off I, just would love to maybe just talk about that debt.
On the pressures.
And to talk about it in place and how that impacted the business. This quarter and also just thinking about what's embedded for the temporary cost actions as we head into for Q.
How much how much.
<unk> stepped down from 3 Q on Q.
Clearly recognizing that there was a pretty big headwind this year from debt.
Furloughs Robertson.
Yes, Joe Let me, let me take that and then I'll turn it over to Olivia to give you. Some some additional color on a year on year basis.
When you look at the year.
Does that are we set up the year and made sure that we were anticipating the inflationary pressures in <unk>.
It's really making sure that we're driving the proper level of price as well as continuing to drive productivity, we built that into our model and so every every step through the year. We've been staying ahead on pricing we've been.
The way, we driving additional productivity to offset some of these headwinds and I would say from a pricing standpoint over the last couple of years, we've built a lot of strong strategic capability across our businesses.
And that has played out extremely well during this period of time.
With the inflationary environment we.
Ultimately that was going to be a challenge in the second half and we anticipated that.
As we probably have about 2 points of price flowing through the top line.
Given the timing of that that has created some headwind here in the third quarter or the work that we've done here, we're going to be set up still to be able to continue.
We knew we didn't deliver on the 80 to 90 basis points of margin expansion for the year.
So I think the team has done an incredible job from where we for the year up and then ultimately how we've executed we've executed extremely well Olivia.
Absolutely good morning, George So at a high level we.
Mentioned this so 30 basis points.
EBIT.
Margin increase in the quarter, we had the impact of silence for about 10. So its a 40 basis point increase in Q3 going to some of the elements you asked specifically about politics.
PBT day impact of our.
Temporary actions from last year net of our ongoing productivity program is about 160 basis points.
In the quarter, if you look at price cost impact.
For the in Q3 is around 40 basis points. We believe we would be price cost positive for the second half. So of course Q4 would be positive and last piece of your question <unk>.
Headwinds from temporary actions in Opex net of.
<unk> ongoing productivity actions in Q for the impact would be about 50 basis points negative. So we are posting improvements in margin rates. Despite 2 major headwinds, which are temporary in nature and we feel good about our ability to keep.
Moving the profitability of Johnson controls.
That's very helpful and clear. Thank you and then maybe just my follow on question I know that.
You, probably don't want to preview too much exactly what we'll hear on September 8. So if you could give us any kind of color on how youre planning to organize the virtual investor.
Keep a day and the key topics that you'll be you'll be focused on.
Yes, Joe I mean, we're setting that up very much in line with the strategy that we've communicated with all of our key growth vectors and how we're not only reinvesting in products and technology opened blue, but also making sure.
With that we're positioned to be able to capitalize on on big growth vectors as we build out our digital services as we capitalize on the trends and de carbonization as we capitalize on this significant market is being developed with with healthy buildings, and then making sure that debt is coming together.
And supporting the core because at the end of the day, we have a unique position here with the combined portfolio to truly lead the future buildings as we are thinking about healthy building not only healthy people healthy place with healthy planet and so that will be core to the strategy and then supporting all of that will be.
All of the all of these strategic priorities, we're executing on operationally that ultimately delivers on acceleration of growth and above market growth, while we're continuing to deliver.
Best in class.
As far as margins and being able to close the gaps that we've had there through our cost out programs.
We're extremely excited about the progress we've made and really looking forward to laying that out in detail on September 8.
Great. Thank you I look forward to it.
Thank you. Our next question comes from Josh <unk>.
<unk> of Morgan Stanley Your line is open.
Hi, good morning, guys.
Good morning, gentlemen.
Great.
Thanks for all the color there on some of the margin drivers in for Q.
I know price cost is always a bit of a moving target. It seems like youre getting on top of that so I guess it leaves net productivity is maybe the biggest factor for getting all those actions to drop to the bottom.
Bottom line in the overall EBITDA leverage.
Does that 50 basis points of net headwind kind of slipped more acutely either based on the comparison for the temporary items or just on productivity deca ramping up.
So.
Thank you for your question demand.
Main impact of D headwinds easing Q3 by a wide margin.
And that's true by the way for the fall.
Fiscal year, and our ongoing productivity actions of an equal weight in Q3 and in Q.
Yeah.
Got it and then.
George a question for you just on kind of the day overall cadence of demand or mix of drivers here I think.
The building space, there's this pretty heady cocktail with cyclical recovery in some of the secular drivers that you talked.
For whether it's <unk> or.
Building efficiency infrastructure all of that.
It does seem like there's some order momentum, but when do we see these.
These tailwind kind of stack up where you get the cyclical and secular at the same point like do you think that those can actually overlap or the secular stuff, maybe it takes a little bit longer.
Talking about Josh, let me say that and in all the time that I've been in these businesses I've never seen a as fast a recovery to get back to.
To where we were as I've seen with this cycle and if you look at why that's true with our business. The general macro conditions continue to improve although they're not.
Linear across all the regions as Olivier laid out we're seeing continued momentum in construction related indicators and that's beginning to accelerate so we're actually seeing that come through and that's supported by Abi continuing to be very strong Dodge construction starts are improving sequentially.
Well, what we're seeing is we're very active in the earlier shorter cycle projects, which is really outperforming right now and and for US a lot of that is focused on healthy buildings and thats been really critical to how we filled in our backlog through the course of the year.
Retrofit right now on these smaller projects continue.
On a ramp in North America, they were up year on year, we're up over 30%.
So that has been a big driver of our install business and when Olivier talked about our backlog were up we've got a record backlog were up 7% and so as you play out fourth quarter, we don't see any slowdown and so as we begin to set.
22 that is where we've had a lot of the pressure here in 'twenty, 1 and that's that's come back nicely.
Can go through different verticals that are driving that health care education.
Some of the data centers, we're seeing good activity there real estate is coming back and so I think overall.
Setup from you asked about the cycle this not only the short cycle demand as well as a longer cycle and then with services with now these new demands and new outcomes that our customers are looking for we have an incredible opportunity now as we're digitizing our existing service business to now take.
We have technologies and to be able to create new outcomes, which ultimately has given us a recurring revenue stream and that is another dimension that we didn't have before as we get into <unk>.
More of a change in the market and being positioned to be able to be able to now capitalize on those changes.
Let.
The new gave you Josh some additional statistics, we gave some of those in our prepared remark. So what is the proof point about the Dekalb market right. It's a market, we believe which is going to be around.
250 billion.
What's up hopefully over the next 10 years.
Let me do you feel that the best proxy for this adjunct in controls, it's our performance infrastructure contract.
This business is yet to date growing at about 15% 1.5.
Lost share this business was growing too.
So it's really.
Our business, which is taking <unk>.
Acute on day indoor air quality.
Hugh.
Pos in in store.
Order growth between the retrofits.
And new in a retrofit, which is a byproduct of indoor.
<unk> T. The order growth was in the quarter, 29% close to 30% on the 2 year stack put us 10%.
And we said that last quarter, we see this retrofit really accelerating at Ts and we said we are starting to set to see on them.
The inflection point in new built with we said that last quarter. It is happening this quarter, new build install up 16, 1.6.
1.6 in the quarter, then you speak about services and.
George mentioned some of the statistics already so we have.
Clear indicators that we're getting traction.
Thank you both for all the color really appreciate it.
Thank you. Our next question comes from Nigel Coe of Wolfe Research. Your line is open.
Thanks, Good morning.
And for the same but the virtual thing for contemporary.
Great I was actually for the forthcoming.
Okay.
On.
Understandable.
Sure.
We were also looking forward to a nigel.
Then that's north of Varian.
So I just wanted to kind of go against on the APAC margins because it seems.
On the temporary costs.
Kind of a comment but it does feel like there's a bit.
There is a mix issue as well on I'm. Just wondering is that China outgrowth, primarily you didn't call it out country mix, there and thinking about the price cost maybe you mentioned price cost was.
This is the.
Quarter from a price cost effective does that hit more.
More in APAC on other region for <unk>.
So youre right Nigel.
2 impacts for APAC.
1 country makes China, particularly on the 1 end bundle, but to also <unk>.
Actions, we took last year to reduce our opex.
Space its difficult to read the quarter because of those phenomenons that impacting APAC do you have data impacting also on North America structurally the margin profile of the business is improving across the portfolio that includes also the regions Nigel net of those 1 off.
So there is a little bit on mix there.
The region, where we've had continued pressures there with volumes.
That's playing through there, but that's beginning to come back also as we see kind of on our Japan business and the business. So we haven't Hong Kong and the like so.
Some mixed Theyre also okay. Thanks for thanks.
And then ultimately.
On the patent.
Filings over encouraging how.
How do we how do we measure ultimately success and momentum from from an external perspective is it really just the cadence on installation and setup.
Or are there other.
A metric that you can call out to give us a sense on how we're progressing here.
Yeah, Let me, let me frame it up for Ya Nigel Open Blue now is being incorporated we're leveraging open blue with all of our services with getting all of our installation connected being able to now extract all of the critical data and then.
Apply AI and.
Analytics to that data to create new outcomes and then if you advanced forward that not only doing it with the core business, but now as we're building out new capabilities across across all of our digital platforms and bringing them all together into 1 architecture I talked about BJ soccer.
And on board, we've been able to bring Vijay on and he's got an incredible reputation and the ability now to be able to take all of what we've done and really put that together not only and enhances our core but it accelerates the pipeline of digital content that is ultimately now being deployed in everything.
Current come due and so a good metric is when you look at our digital revenues are digital revenues today, we don't segment that but if you were to look at all of our digital revenues were up strong double digits across all of our whether it be our platforms <unk> through our digital services and so another way to look at.
We do is when you look at our pipeline. So as we were building pipeline across all 3 regions.
Much more significant digital content, that's being now built in the solutions that we're deploying because we're now differentiating the value that we're bringing to our customers with new offerings and so that pipeline.
<unk> is well over I think we've talked about this in previous quarters is now well over $1 billion going forward. So those are the ways you kind of look at how it's being deployed and the amount of impact that it's having not only on the core but now as we look to really lead what I would call autonomous buildings of the future.
Which is a little bit more forward looking we'll have all of the pieces that come together to be able to now support these big outcomes and Olivier said it de carbonization is going to be a $240 billion market healthy buildings is $10 billion to $15 billion in the digital content is what enables us to bring leadership.
Future solutions to that and so as we and then smart buildings will be a little bit longer term, but we showed some examples today, we're deploying open blue not only takes all of our core enhances our core, but then positions us to be able to get incremental revenue above that.
Thanks, George Thanks for that.
Our next question comes from Jeff Sprague of vertical research your line is open.
Hey, Thanks, good morning, everyone.
Just 2 for me.
We drilled on a little bit on that actually kind of what's going on in your rosy in light commercial business.
It can maybe some production or.
Supply chain disruptions there you characterized it as kind of in line with your expectation.
It looked like it was stronger than that in the quarter, So give us a little bit of color on what's going on on that business and we have the ability that may be uncorked, some more volume.
<unk> is there.
Yes, Jeff.
When you look at our light commercial and includes not only the light commercial unitary rooftops that also includes V. R. B RF and as we said earlier via RF for continuing to perform extremely well when you look at the unitary business. We've been we've been launching new products. So we've got it.
Our product lineup now of 3 new product launches, we've been expanding the capacity with those launches and now with this strong recovery, we've been working to keep up with the recovery.
The market our orders when you look at our orders in that space were up about 75%. So we didn't get the.
So.
The pull through here during the quarter, but we're continuing very strong with the new products that we've launched and we've got a backlog debt.
Now as is up 3 times from what it was a year ago. So a lot of this is just.
On the cycle time of conversion and while we're continuing.
<unk> to expand the capacity for the new products that we've launched.
Understood.
Maybe you could give us a little update on silent are now that you own. It obviously you havent owned it for long.
But kind of the <unk>.
Initial customer response.
<unk> you.
On the pull the business around the globe.
Any change in customer behavior or anything like that since you took the keys to the asset.
Yeah, Jeff So let me, let me comment on that.
Couldnt be more excited.
As things have opened up I've also had the opportunity.
Opportunity to visit our silent air team.
A couple of sites and are.
Our in Phoenix here recently.
And I couldnt be more excited about how this is going to fit in to our portfolio and align to our priorities and so when you look at this it's bolt on technology.
Tony.
On a white space that we didn't have capability in.
It also enables us to be able to build out in.
An increased installed base, where we haven't had a significant level of service there, but there's tremendous opportunity to build service on top of those offerings and then the whole digital content being able to take what they do so.
Working with all of the data center operators that really is innovative it takes the technology. It configured that technology in a way that truly differentiates how they work with each each of these data center operators and now you throw digital into that it really becomes a game changer and so I believe.
Well as we look at data centers, and how we're going to be able to leverage this not only with the silent air capability, but also with the core our core capabilities I couldnt be more excited now with any integration and the like there's a lot of work, but having been with the team and really taken a pulse on where we are.
It's going.
That really nicely for us.
On additional com.
Sure.
On your first question on <unk> in North America, we have been at capacity from a manufacturing standpoint now for Q few months few quarters, and we are adding capacity at the start.
On a play out what fiscal yes. So.
Very soon and we believe we're going to be about debt to change that trajectory, we adding a fair amount of capacity actually.
Great. Thank you for that color.
Yes.
Thank you. Our next question comes from Deane Dray of.
Etsy capital markets. Your line is open.
Thank you and good morning, everyone.
1 of the day.
Start off on the question with Olivier.
The performance on trade working capital is pretty impressive in a quarter. When many of your peers are needing to add lots of buffer inventory.
RBC for trading working capital moving against you I did see inventory was up $7 million, but could you talk us through where it stands today just overall trade working capital.
How you're navigating through this period.
Jean Thank you for your question so remarkable.
Our performance on trade working capital.
7% of revenue in the quarter.
We went to about $13 a half same.
Same quarter a year ago.
All the lever is actually playing in our favor let me convert and then let me speak now in terms of.
Any kind of days, so DSO up.
Down 9 days year on year is structural.
We have now in place a strong.
Mechanic to really do a good job on DSO, that's a structural improvement and we have not reached our best game here. If you look at Gpus.
Bulks improvement year on year by about 4 days against structural we have volume programs in place to make our GPO, even better for Johnson controls and last 1 in terms of inventory.
Also good job that's a byproduct also of strong demand so some of the inventory.
<unk>. So its 15 days in total is structural some of it is temporary but we feel good about the free cash flow generation of the company. We said before Deane that we were a 100% free cash flow.
Organization would be at 105, including restructuring so.
<unk> run rate in <unk>, and we feel strong about cash flow generation in our company Dean.
That's all great to hear on its <unk>.
Such a difference between where the company was a couple of years ago.
On.
Working capital management free cash flow on being comfortably above.
So read centers.
Congrats for the team there.
And then just second question for George just put this net zero building as a service that you're highlighting today put it in context.
It is encouraging to see a SaaS business being added to this but where does it stand on the priority stack.
100 per in terms of let's say indoor air quality and are there.
Any regulatory oversight, that's going to come into the industry on how these calculations are being made because obviously this feeds into each of your customers' ESG rankings and so forth is a lot of focus.
On just how does this all develop from here.
Good day, let me, let me start with the healthy buildings indoor air quality, because that's front and center as we as we sit here today because of the.
There is significant demand and as I said, we've sized that market up to be $10 billion to $15 billion of double digit CAGR.
We have secured.
Well over 300 million to date.
And we have a pipeline that's well over $1 billion.
We're working on and that has been continuing to accelerate because of the reopening and return to work plans and the like and a key space for us.
Within within healthy buildings is K through 12, we've got an incredible position within schools across 6000 school districts across the U S and as well as 1900 higher Ed higher Ed. So overall, it's been our ability to be able to not only from a pure equipment during our.
A pure equipment upgrade its really taken the combined capabilities that we have within a building that ultimately then creates the best outcome. As you think about healthy buildings are indoor air quality. So that is front and center today, when you think about <unk>.
<unk> sustainability, we've been in that space for years.
Performance contracting business and really that business has been focused on reducing energy consumption, reducing the carbon footprint now with the commitments that have been made.
Pretty broadly now to get to zero net carbon emissions.
<unk> abilities that we can bring now without just.
1 on narrow solution, we can bring a full solution to a building that enables us not only to optimize the equipment, but how the equipment operates within that building with the occupants that ultimately then creates the best outcome, which is ultimately reducing energy and achieving.
<unk> the de Carbonization goals, we believe over the next decade. This will build into a $240 billion market and thats above the 300 plus billion dollar market that we serve today and I think when you look at our now not only the products in the building systems that now we have brought together.
Now when you layer on open blue and in the digital capabilities. It is what is required to get to the best outcome as Youre looking to make a building most efficient and then with the remaining demand how do you drive towards renewables as far as supply. So that is going to play out a little bit longer term.
And but but a very attractive space for us.
Terrific I bet, we'll hear more about that on September 8.2.
Thank you. Our next question comes from Steve Tusa of Jpmorgan. Your line is open.
Hey, good morning.
I wanted to save money.
Hey on on the services.
Revenue growth.
11% I think it was what what do you how.
How do you kind of see that going forward I know there's like.
It's kind of a confluence of events of comps being a little bit easier, but also some momentum and kind of your initiatives.
How do we think about kind of that growth rate.
Into the next 18 months 18 to 24 months.
Yes.
We've talked a lot about this Steve we've made incredible progress here and taking our $6 billion business and then as we look at how we can fundamentally differentiate.
That business and it's pretty simple.
For us we believe that when we deploy our digital capability with our core capability and get everything connected that in itself is going to be a big uplift and we're seeing that we're now up to.
We made the the 400 basis points of improvement on a.
Cash and so everything we deploy we attach and then we get a contract and then the ability to differentiate the type of services that we will ultimately perform with the data that is extracted from the systems that we deploy to optimize the overall operation so that with the increased installed base to attach the additional.
Additional services.
And then now as we think about some of these new new opportunities with healthy buildings and de carbonization all of those converge into our ability to be able to deliver.
We committed to a 300 basis points above above the market and I think as some of these.
These trends continued to accelerate I think there is opportunity beyond that and so a lot of it is the debt.
For the connection the additional services utilizing data the retention of customers and creating outcomes that historically haven't been achieved because it's been more of a mechanical service versus a digital services.
Got it and then just on your orders you mentioned the light commercial orders being up a lot.
What were the applied orders up in the quarter.
For applied equipment.
Yes, so when you look at our commercial HVAC business Steve.
Extremely pleased with the performance that we've seen.
It's a combination of the new products that we've continued to launch and we're gaining share we're seeing that pretty much across the board and then we're also.
Enabling this connectivity is we're embedding technology within the product that enables us to easily connect for.
For service for the long term service how that plays out the orders.
We are a better than 20 per cent globally.
For the for the quarter broad based across all 3 regions I think Olivier said that in North America applied equipment as part of the overall, 21% increase was up over 50%.
So we feel really good about the backlog we built.
So that's going to play out and then the continued pipeline that we're seeing build that we're positioning to be able to go. After so that has played out from a revenue standpoint was was high single digits pretty much across the region seeing growth varying levels of growth across all 3 regions, but Steve that.
And how is a strength for us and I think as we look at our strategy is not only within the equipment, but then the ability to be able to build a base for service with connectivity, we're really going to be positioned well.
Alright, okay. Thanks, a lot.
Okay.
Thank you. Our next question comes from Scott Davis of Northcoast Research.
Your line is open.
Hey, good morning, guys. Good morning, Scott.
Just most of my questions have been answered, but just to clarify a couple of things I mean, when you talk about being kind of on the on the right side of Prost price versus cost and bye for Q.
That materials labor and let's.
Research ex or more just kind of material side of it.
It's mainly material, which is the big headwinds we are.
We are looking at.
So if you look at for example, Cooper and <unk>.
The pricing of declining.
<unk>.
Let's just up.
Steel mill, starting to catch up day lead time has been reduced by.
75% and if you look at some of the analysts report on these important commodity analysts are predicting that.
Rice of steel by December.
So it is very soon should be able to go down significantly.
So we believe that the worst is behind us.
And commodity okay.
Okay, and I know you fire and security business is a little bit more labor intensive than.
The Asia Pac side on the install.
Are there labor shortages that concern you do you feel like you've got the capacity to be able to handle kind of ever rising orders here.
Yes, Scott.
We're anticipating that we're going to have challenges as the recovery start started to heat up and recovers. So we've had what we call <unk>.
Pretty much across all of our key markets that is solely focused on on labor and making sure that we're getting more than our fair share.
As far as labor and I would tell you.
At our at our manufacturing sites at our in the field with the work that we've done we talked a little bit about that in my prepared remarks.
<unk> from programs that we've launched to be real attractive to technicians in the light coming to work for our company. So what I would say here today, although we've had as we've ramped up it's been a significant ramp up we've certainly had some pressures Scott, but I feel very good about the progress we've made and.
With regard to be able to continue to support the recovery and ultimately the growth that we're projecting.
And stating the obvious our guidance includes obviously consider the current environment.
Yes.
Thank you good luck guys.
Thanks Scott.
Where we are.
Thank you our last question will come from Julian Mitchell of Barclays. Your line is open.
Hi, good morning.
Just wanted to follow up on the margin point. So I just wanted to clarify I think Olivia you've talked about a sort of 40% baseline incremental.
In the medium term.
Leaving aside portfolio changes.
So I just wanted to make sure sort of your confidence in that figure.
Amidst the current cost environment.
And also when we look very short term on the Q4 margin by segment do we expect broadly similar.
Brian to hold as you just saw in Q3.
Julien. Thank you for your question so.
We feel confident about our ability to.
Meet our productivity goals, our programs are well on track.
SG&A, we start to deliver on those.
We are slightly ahead Cogs will have <unk> impact next fiscal we are very pleased with where we are and what we said before is debt.
550 million of net debt.
Drop of profit to the bottom line.
Still are very bullish about this and.
Those are the key to do achieve.
Percent incremental over the next 2 years, we feel bullish about this as well based upon where we are again, we talk about some of the trends going on commodity and labor. We gave a lot of colors on commodity we believe we would be able to achieve the goals.
We have mentioned in productivity we don't.
<unk>.
Despite those trends in commodity and labor.
Thanks, very much and then.
Just when you're thinking about the sort of fire and security field business I realize that <unk> approach is to have on sort of a broad.
We're building the services pulling through the product.
Clearly you've seen peers sort of have a somewhat different view most recently the merging our net finance field business from from product for example, maybe help us understand George.
How substantial or significant do you think those revenue synergies.
For all from having a strong fnf's field business sort of pulling through on the product side and helping you perhaps buildup that that service.
Service activity as well.
Sure So, let's look at fire and security in the quarter, although it.
Was.
Energies on lagging the recovery its come back really strong not only in our products being.
Being up over 30%, but now converting with new installs in the field and building backlog in and then recognize that would that backlog or would that would that installed base that we create it does spin off very attractive service.
And so when you look at.
Your question, how do we compare to the others and ultimately strategically how this contributes to 2 hour growth when you look at our.
Fire and security field business, it's about $7 billion on revenue and it's 1 of our highest margin be used in our portfolio.
And then when you look at fire and security products is another roughly $2 billion.
And then with this installed base is what ultimately spins out a very attractive what I would say more traditional services business and now as we think.
As we go forward, it's going to ultimately then be much more digital and be contributing to.
The fire and security aspect, but also to the overall smart building aspect of the building. So it is going to be an important part of the overall ability to be able to now capitalize on these big trends, we talked about de carbonization, we talked about healthy buildings.
And so when you look at ours compared.
Not on others. There are some similarities there are major differences I.
I think you need to look at the geographic mix, the product and solution mix the customer mix.
I would say that we have a significant advantage when it comes to scale and overall portfolio maturity and then as I said.
Really as you look at the future and the ability to be able to now take all of the multiple systems within a building and bring those together into 1 architecture with 1 data platform that enables it ultimately longer term enables an autonomous building, but as we step step for away from.
For 2 are today to where we go we should see incremental growth as that begins to transform and so I truly believe the work that we've done on how it's been integrated and how it is enabling not only.
Services, our service being able to deliver services growth above market as well as being able to really.
Capitalize on what we see to be accelerating trends in our space. It does become a competitive advantage.
Great. Thank you.
Thanks, Alright, operator, then we will close out the call I want to thank everyone for joining our call. This morning.
And as I mentioned earlier, we've had a very strong third quarter and the momentum that we're seeing across our portfolio in key verticals, coupled with our strategic focus and improved execution gives me high confidence in our ability to keep outperforming as we move forward. We look forward to speaking to many of you and hope to see.
Virtually at our Investor day, that's coming up on September 8 so on that operator that concludes our call.
Thank you for your participation in today's conference you May now disconnect at this time have a wonderful day.