Q2 2023 Johnson Controls International PLC Earnings Call
Good morning, and welcome to the Johnson controls second quarter 2023 earnings Conference call.
All participants will be in listen only mode.
Should you need assistance please signal.
Conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
To ask a question you May press Star then one on your telephone keypad.
To withdraw your question. Please press Star then two.
Please note today's event is being recorded.
I would now like to turn the conference over to Jim Lucas Vice President of Investor Relations. Please go ahead. Good morning, and thank you for joining our conference call to discuss Johnson controls second quarter of fiscal 2023 results. The press 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 Dot com.
Joining me on the call today are Johnson controls, Chairman and Chief Executive Officer, George Oliver and Chief Financial Officer Olivier Leonetti.
Before we begin let me remind you that during our presentation. Today, we will make forward looking statements listeners are cautioned that these statements are subject to certain risks and uncertainties many of which are difficult to predict and generally beyond the control of Johnson controls. These risks and uncertainties can cause actual results to differ materially from our current expectations.
We advise listeners to carefully review the risk factors and cautionary statements in our most recent Form 10-Q Form 10-K and today's release.
We will also reference certain non-GAAP measures reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are contained in the schedules attached to our press release and in the appendix to this presentation both of which can be found on the Investor Relations section of Johnson controls website I will now turn the call over to George Thanks, Jim and good morning, everyone.
Thank you for joining us on the call today.
Let's begin with slide three.
We are proud of our second quarter performance, which saw sales segment EBITDA and adjusted EPS all exceeding the high end of our guidance.
During the quarter sales grew 13% organically as we realized strong pricing and improved volumes across both our shorter cycle global products and longer cycle business solutions.
The overall demand backdrop remains robust with orders growing 8% for business solutions and continued momentum with service orders growing 14% in the quarter as the adoption of our digitally enhanced solutions continues to materialize and provide value for our customers.
Our resilient backlog grew 9% to a record $11 $7 billion and our service backlog increased by 15%.
We made great progress executing on our higher margin backlog build and continue to convert at a faster pace, resulting in improved gross margin performance and strong incrementals.
In addition, we realized $75 million in productivity savings and are on track to meet our targets of delivering $340 million in savings for the full year.
As a result adjusted segment EBIT margins expanded 120 basis points.
As we move into the second half of the fiscal year. Our strategy remains sound as we continued to execute our resilient backlog deliver on our productivity initiatives and advance our digital transformation.
Our pipeline remains healthy and we expect momentum to stay positive.
While global macro conditions remain uncertain, we are confident in the fundamentals we have built across our business.
Our visibility into the second half of the year provides confidence in raising the lower end of our full year adjusted EPS Guide, which Olivier will provide more details on later in the call.
We continue to anticipate strong topline growth and backlog conversion in the second half, which should lead to continued margin expansion.
Now turning to slide four.
We continued to demonstrate our unique value proposition and accelerated our leading position through our pillars of growth.
We have a significant market opportunity ahead of us connecting smart healthy and sustainable buildings.
As a call for climate action intensifies, we are seeing strong tailwind for our sustainability infrastructure and de carbonization offerings.
As we have stated in the past nearly 40% of global energy emissions come from buildings.
At Johnson controls, we play a vital role in helping our customers bridge the gap towards a net zero future.
Yeah.
Oh and systematic approach to Digitization is creating a new class of smart buildings, helping reduce energy emissions improve efficiency and optimize costs.
We are well positioned to capture secular trends to help build towards a more sustainable future.
Okay.
Opened blue is a key differentiator as we advance our leadership position across our vectors of growth.
Last quarter, we highlighted the significant progress through our digital transformation journey and today, we continue to see increased adoption of our open blue platform across multiple use cases.
By combining our dynamic product portfolio and services, we are making significant progress in expanding our global footprint of smart building solutions, helping better serve our direct channels through real time monitoring of connected devices.
Our integrated domain expertise and unique capabilities set us apart and we look to continue this momentum as we help our customers deliver their objectives.
While we continue to scale and capitalize on these emerging opportunities we remain committed to building on our strong operational foundation in further expanding our margin profile.
We have made great strides in successfully navigating inflationary headwinds and supply chain constraints over the year.
As these have eased our ability to execute is important.
We see the results through our progress with our suppliers disciplined pricing approach in delivering on our productivity savings plan.
Lastly, we look to maintain our prudent approach to capital allocation and drive long term shareholder value through our attractive dividend growing in line with net income as well as consistent share repurchases.
Year to date, we have returned over $700 million in capital, including roughly $250 million in share repurchases and nearly $500 million in cash dividends.
Moving on to slide five.
There hasn't been a lot of focus the past couple of months around commercial construction, particularly with regards to the commercial office sector.
While Johnson controls does have exposure to this sector represents a small portion of our overall business.
In addition, we have a large installed base and there continues to be demand for retrofit projects.
This slide highlights the overall diversity of the Johnson controls portfolio.
Within commercial we are diversified with exposure from retail lodging and hospitality sports and entertainment to warehouses.
Yeah on commercial we have a broader exposure to institutional industrial data centers and government sectors.
Funding, both for new construction, and especially retrofit comes from many different avenues.
It remains a lot of pent up stimulus funds in both the U S and Europe that have not yet been released.
We have a strong backlog today and we continue to see a long runway for growth as we leverage our broad portfolio of products and solutions.
In addition to our diversification of the verticals, we serve a key differentiator of our portfolio is the ability to leverage our large global installed base of equipment.
As we further digitize our offerings to create smart connections, we can create more predictable outcomes for our customers as we help them use the power of data to make net zero a reality.
On to slide six services, a key area of focus for us as we leverage our large installed base.
We once again saw a strong double digit growth in sales and orders.
We are making tremendous progress and taken what has historically been a mechanical break and fix business and building a solutions based business that creates a higher margin recurring revenue stream from our large installed base.
As we create more predictive outcomes it not only helps our customers achieve better results, but it also allows us to better leverage our global field operations more effectively.
We are creating more standardization across our field operations and capturing better data from our connected solutions.
As a result, our higher margin parts business grew over 20% in the quarter and we see this as a growth contributor to our overall service strategy.
De carbonization is an area of focus across the entire Johnson controls portfolio, which includes our sustainable infrastructure or <unk> business that the kpis on this slide represent.
In addition to ESI de carbonization touches many products and solutions.
Nearly 55% of our products and solutions drive sustainability.
This includes heat pumps energy efficient refrigerants and digital solutions to name just a few.
As an example, when we upgrade an asset or a solution in the field. It drives efficiency at the building level, such as software for controls or upgrading a chiller.
Within ASI, specifically, we continue to see strong orders revenue growth and a very healthy pipeline.
The healthy buildings market opportunity remains strong as evidenced by our almost $2 billion pipeline.
We are seeing increased traction among both federal and international regulators as productivity benefits associated with well managed indoor environments come to the forefront.
Recently, the European Parliament voted to include a promising enhancement to the energy performance of buildings directive, which would require indoor environmental quality monitoring of buildings.
Johnson controls is encouraged by the latest developments as the I E. Q language has the potential to drive increased adoption of digital building systems and deliver improved health and wellness all while accelerating the de carbonization of buildings.
Turning to slide seven.
We are honored to be continually recognized for our dedicated sustainability efforts.
During the quarter, we received several recognitions, including being named one of the world's most ethical companies for the 16th time by Ethisphere.
We were especially honored to be named to the clean 200, the eighth consecutive year.
Every year 200 out of more than 6000 companies are selected for the high proportion of their revenue earned through sustainable business.
We are proud of the recognition and will continue to further our strategy to help tackle building emissions globally.
I will now turn the call over to Olivier to go through the financial details of the quarter Olivier. Thanks, George and good morning, everyone. Let me start with <unk> on slide eight total.
<unk> sales grew 10%, while organic sales increased 13% with strong double digit growth.
Across each of the segments price contributed 10% during the quarter and volumes were up 3%, which was offset by a 3% FX headwind.
Adjusted segment EBITDA increased 20% with margin expanding 110 20 basis points to 13, 8%.
Price cost was positive and we delivered strong productivity.
Turning to our EPS bridge on slide nine adjusted EPS of <unk> 75 cents was preferable to D. I end of our guidance by one cent and increased 19% year over yet operations contributed <unk> <unk> of the growth in the quarter as price cost continued to gain momentum.
And we saw good drop through on our improved volume.
SG&A and Cogs initiatives delivered nine cents of growth below the line, we did see headwinds from nonrecurring corporate items, FX and net financing costs.
The whole we were pleased with the strong adjusted EPS performance in the second quarter.
Let's now discuss our segment results in more detail on slide 10 through 13.
Beginning on slide 10, organic says in our shorter cycle global products business increased 12% in the quarter benefiting from strong price realization up nine and 3% important books.
We saw strong growth across most of the portfolio led by greater than 20% growth in commercial HVAC.
This growth occurred in both applied and light and light commercial where demand remains strong.
Global residential declined low single digits as modest growth in the rest of the world partially upset high teens decline in North America.
This was a continuation of channel inventory being reset, which we will expect to continue for another quarter or two.
Fire and security grew low double digits with continued momentum within our fire detection products.
Industrial nation, or soy experience double digit growth in the quarter driven by solid growth in both North America and EMEA.
Adjusted segment EBITDA margins expanded 250 basis points to 18, 6% as price cost continued to improve and productivity was positive moving to slide 12 to discuss our building solutions performance, where orders increased 8% organically as China rebounded from Covid related <unk>.
Tax during the first quarter, we saw healthy growth in install orders of 5% and we're especially pleased with service orders growing 14%.
Our focus and invest and investment around increasing our service offering continues to gain momentum.
So with that sense grew 11% with organic sales, increasing 13% made up 10% price and 3% volume growth.
Service revenue grew 11% and install revenue increased 15%.
Adjusted segment, EBITDA increased 16% with margins expanding 50 basis points led by positive price cost and improved productivity.
Building solutions backlog remain at record levels growing 9% to $11 $7 billion.
Service backlog grew 15% one installed backlog increased 8%.
Let's discuss the building solutions performance by region on Slide 13.
Orders in North America increased 8% with strong growth in our government and manufacturing sectors.
Service orders grew 14% with double digit growth in both recurring and nonrecurring contracts of a whole demand continues for HVAC and controls, which grew high single digits within the quarter.
We gate fire and security orders grew mid single digits.
Sales in North America were up 14% organically with broad based growth across the portfolio.
Our installed business grew 17% with strong growth in both retrofit and new construction, which grew 15% and 20% respectively.
Service continues to perform well up 9% year over year with high teens growth in our shorter cycle transaction of business.
HVAC and controls remain a strong part of the portfolio growing high teens year over year, what fine security increased low double digits.
Segment margins expanded 190 basis points year over year to 12, 5% driven by ongoing productivity benefits and the execution of high end margin backlog researching and positive price cost.
Total backlog ended the quarter at $7 $7 billion up 13% year over year.
In Miller orders were up 7% led by mid teens growth in industrial and food E. G H.
<unk> and mid single digit and low single digit growth across our fire <unk> security and HVAC <unk> controls platforms, respectively.
On the whole service orders grew 13% led by double digit growth in our recurring client service agreements primarily in securities.
By region, we saw strong double digit growth in both Middle East Africa, and Latin America.
Does he need Miller grew 12% organically with strong low double digit growth in both service and install our shorter cycle transactional business was the main contributor to the overall service growth.
With our recurring plant service agreements reporting solid growth up low double digits of a whole momentum continues to build within applied commercial HVAC and fire and security where each contributed to meet teens growth within the quarter.
Segment, EBITDA margins declined 270 basis points to six 7% as Edwin from nonrecurring items offset operational improvements year over yet.
Backlog was up 5% year over year to $2 $3 billion.
In Asia Pacific orders grew 9% with 20% growth each service led by strong growth in our shorter cycle transactional business of a hole in store orders grew 6% organically by region, China recovered from Covid related Lockdowns in Q1, we shrunk.
Growth of greater than 30% in the second quarter.
Sales in Asia Pacific increased 15% with strong mid teens growth in both service and in store.
Commercial HVAC and controls grew high teens, while fire and security decline low single digits, China gained momentum as the country continued to reopen during the quarter with strong sales growth of 16%, which included double digit growth in both service and in store.
We expect continued recovery with a solid second half performance in China.
Segment EBIT, a margin declined 10 basis points to 11, 8% as positive price cost was offset by FX headwinds over the quarter.
Backlog of $1 7 billion declined 3% year over year.
Turning to our balance sheet and cash flow on slide 14, we ended the second quarter with 2 billion in available cash and net debt remained.
At two two times, which is within our long term target range of two to two and a half times.
Free cash flow turned positive in the quarter as anticipated inventory improved sequentially and free cash flow remains a major focus with inventory being a driver to further improvement in the second half.
Now lets discuss our fifth scored yet 23 guidance on slide 15.
We are introducing third quarter Albany, Oregon expense guidance of approximately 10% as spot price continues to be a strong contributor.
For the third quarter, we expect segment EBIT, a margin to expand 120 to 130 basis points and adjusted EPS to be in a range of one dollar one cent to Wanda La <unk>, which represents a year over year growth of 18% to 21%.
On a full year, we are once again raising the lower end of the wide ranch introduced at the beginning of the year.
Our new adjusted EPS range reflect what had been at the top of the range. We had discussed as a base case the last two quarters.
Over 40 of adjusted EPS guidance range is now $3.50 to $3 60, representing growth of 17% to 20%.
On the top line, we anticipate organic sales to grow approximately 10% for the full year. We now expect segment EBITDA margins to expand 100 to 120 basis points as we continue to execute on fulfilling our higher margin backlog.
We expect full year free cash flow conversion to be 80% to 90% recognizing that second half free cash flow will be driven by inventory reduction.
We are pleased with our first half performance and he's solid momentum entering the back half of the year on pipeline remains robust across all of our vector group and our productivity initiatives remain on track with that operator, Please open up the lines for questions.
Thank you we will now begin the question and answer session.
To ask a question you May press Star then one on you touched on phone.
If you were using a speaker phone, we ask that you.
Please pickup your handset before pressing the keys.
To withdraw your question. Please press Star then two.
In respect of time, we ask that you limit yourself to one question and one follow up.
After this time, we will pause momentarily to assemble our roster.
Yeah.
And today's first question comes from Nigel Coe with Wolfe Research. Please go ahead.
Thanks, Good morning, everyone.
One other question.
So you guys. The last one so a good finish on a pretty good high here. So on the on the price cost. If we appreciate the extra the extra disclosure around the around the <unk>.
One seven for the quarter.
Half of that in and ingold products any sense, so any kind of color on how that price cost.
You know tailwind looks and in <unk> and <unk>.
Yes.
Thank you for your question our price cost will remain positive of course in the line rate for the second half of the year as we keep monitoring. It lies in the shrunk margin backlog, we have in the in the in the P&L.
In addition, okay, but no yeah. When you look at base business. What you see happening is all the work that we did through the course of last year building, a very strong back backlog with very strong margins as you'll see as we begin to turn that we're seeing a nice pickup in the margin rate, which is exactly what we expected.
Okay, but no no Todd disclosure around price cost okay.
And then on the on the on the Pie chart of exposure that I thought that was very helpful.
So roughly 20% commercial obviously that includes say that's renovation and new build typically with the distilled it down to just the commercial office and you build what the message here is that it's like low single digit exposure to commercial office being built and so if you can just maybe just comment on that and then thinking about the exposure to a regional bank land.
<unk> when you when you look at it on a Pie chart, you know where do you see the exposures.
Exposure has opened up a commercial office.
Hey, Nigel let me, let me touch upon the commercial exposure I think it's important to understand the secular trends that are underway well underway within our sector around sustainability healthy buildings in digital and I think the value proposition that we're bringing to hopefully address these to these issues do play out.
Across all of the verticals that we support and when you look at the commercial sector. We typically are 50% newbuild and 50% retrofits and so we're still seeing very strong not only the conversion of the newbuild that had been started but we're seeing a pickup of opportunities as we're retrofitting that space now with digital with upgrading equipment.
Shipment as well as then now focusing on outcomes that we can create now leveraging the connectivity that we have in the building the data the way extract and then using that data to reduce energy consumed and just overall efficiency of the building. So I think right now even though that's been a concern as far as the overall pipeline that we're developing.
Around it's still very strong and we stay focused on on how we differentiate and ultimately then deliver on the challenges that our customers are facing reality.
Relative to the banks, maybe Olivier you can share your thoughts so as we put in.
George preparing remarks, we have a low exposure to the office.
Yes, your numbers in the ballpark Nigel our customers also have many funding sources. So we don't see today, an exposure to what is happening in U S. In the banking industry. Another another data point as George indicated the backlog is strong and very resilient, which is another indicator about the strength of the <unk>.
Financing sources.
Right, Okay I'll leave it there thanks, a lot guys.
<unk>.
Thank you and our next question today comes from Jeff Sprague with vertical research. Please go ahead.
Oh, Hey, thanks, Good morning, everyone. Good morning. These are the service orders look.
Borderline fantastic actually I'm wondering if you could.
Provide a little bit more color on the composition obviously your.
Introduced the call was highlighting some of the secular things that you've put in place, but when we think about for example, North America service orders up 14%.
Should we think of that is driven by existing customers, who are taking more of your up sell is that the primary driver or as they say.
Recapture of installed base that maybe you weren't serving before I'm sure. It's there's a lot of different things, but I was just wondering if you could kind of characterize maybe the key drivers there.
Let me just Jeff let me lay out the fundamentals of our service business saw a historically it has been a mechanical break fix business and as we've been transforming the company with digital going back and making sure that all of our installed base is connected.
Ultimately then use that data to not only enhance the traditional services that we perform but then add on additional value propositions with energy and in space utilization. There's a lot of things that we can do it with now the capabilities of open blue.
And then ultimately with with that we get a better value propositions and better delivery. Our attrition comes down and then ultimately we we believe we can sustain double digit growth with that with that model. When you look at the quarter, we were up 11% revenue growth like we said 14% of orders, but the underlying.
To your question when you look at connected Chillers were up a 100% year on year or up.
Almost 14000 Chillers that are connected that real time, we are collecting data. We're performing service and then we're ultimately creating new opportunities on top of that with additional revenue and then when you have these agreements in place you get significant pickup on additional service beyond just the contract that we have so our.
Our PSA is when we talk about preferred performance service contracts were up double digits and that's that's increasing our recurring revenue base on a forward looking basis that we're going to be able to achieve being able to support those customers and so when you look at the service business and then the last thing. We highlighted is when you do that with the insights that we're creating.
We can create events predictive events, which ultimately drive upgrades predictably versus reactively that ultimately generate businesses. So our parts business is up well over 20% year on year as a result of the work we're doing so it really takes everything we've been talking about as far as mining the installed base.
Our connectivity to the installed base were up over 600 basis points since Investor day, and in the quarter of 146 basis points year on year, and so that is creating the base that we ultimately then go create new value propositions supporting our customers, especially along the lines of these secular trends.
Great. Thanks for that and then just on Europe and corporate it sounds like.
You took a couple of hits that.
You know, we just digested and move move Don can you give us some.
Sense of what these were how large they were and if they are kind of truly nonrecurring in nature.
Absolutely. So so for me that the fundamental of the business is the same as for the field business, meaning we have accumulated reach marching orders in the backlog and does reach marching orders are today being realized in the P&L, we don't see them yet in Miller, because we at some.
<unk> tends to things, we add a last yes, some tax credits, which are not being reproduced tax items, which are above the line and we have this year also some U K pension one off cost, which I'm packaging mill outperformance, we expect the performance to increase.
Sequentially in Q3 by a sizeable amount and we expect our mill our performance in Q3 year on year to be about flat. So that's full Miller for corporate no structural increase to our costs and compressed against some one off.
Some are one off which white good lost Jeff about $20 million someone of DCF, which are impacting.
Impacting negatively our P&L, it's a range of items are but no recurring increase in corporate cost.
Yeah.
Great. Thanks, I'll leave it there.
Thank you. Thank you and our next question today comes from Steve Tusa with Jpmorgan. Please go ahead.
Hi, good morning.
Good morning.
Just so the answer to <unk> question, just to be clear that that commercial that's your total revenue so that's not theirs.
Theres also a global exposure outside of the U S. And you mentioned 50 50 split between retrofit and new that that obviously does not include our services as well you were talking about the equipment split there.
So, but when we look at our revenues.
Central to everything we do within those verticals for the company, including our global products business and in the field business, both install and service.
Through cycles, you know the the new construction goes down the service and retrofit goes up.
But as we've been now capitalizing on the opportunities with the new service offerings that we have we are seeing a natural pick up of additional retrofit because of that.
Along the lines of these secular trends.
Okay, and then just lastly on the.
Amelia margins can.
Can you maybe talk about the timing of price cost coming through there is there any you know regionally is there any kind of like lag or lead relative to the inflection you're now seeing in North America.
We should see the marching to pick up Steve in Q3 sequentially by more than two points sequentially and as I indicated we should be about flat GM yet the underlying performance of Miller is very strong as educated and the backlog Martinez now being.
Realized at a elevated rate.
And are you still for the third quarter kind of reaffirming the what.
What you had said last quarter with the buy I assume with the guidance being as strong as it is for the third quarter on margins that you're still comfortable with the profile of.
The strong year over year, it at North America feel correct.
Numbers, we discussed you have a ceiling tactical shoetree across the <unk>, including from North America.
Okay, great. Thanks, a lot.
Steve.
And our next question today comes from Noah Kaye with Oppenheimer. Please go ahead.
Good morning, Thanks for taking the questions. So you've got the acceleration in order sequentially. This quarter on a tougher comp maybe comments on orders expectations for the back half and in pockets of strength that you see.
Yeah, when we look at what's happening commercially you got to look at it right from the pipeline with developing to how they are converting and what our backlogs are and how they're going to turn.
With the backlog the backlog is up 9% in the field year on year. When you look at the what's within that backlog, where it is very resilient and in line with our core our core strengths. When you look at you know when we look at North America applied.
<unk> were up our backlog is up over 30% and our revenue turn was roughly about 40%. When you look at all in relative to our our revenue and that's continuing we're seeing capitalization of the the trends that are underway, we have a very competitive product lineup and we're actually gaining share when you look at light commercial.
Globally, where backlog is up 30% and revenues returning about 30% so extremely strong performance within the commercial sector. When you look at North America, commercial which rooftops. In addition to the the applied we're on a run rate now with backlog.
Significantly up and we're turning now better than 60% growth and so are our focus has been how do we continue to strengthen the pipeline conversion and then with the capacity expansion, we've had and the resolution of some of these constraints from a supply chain standpoint has really helped us not only reduce lead times we can.
Ultimately continue the growth, but now being able to execute on the revenue growth and so as we look at the secular trends and the pipeline development around sustainability healthy buildings on digital now with the digital deployments that we have we see still very strong pipeline and so our focus is how do we.
Make sure within that pipeline, we differentiate with our products, we differentiate with our solutions leveraging digital and that is what ultimately gives us confidence that we can continue to convert and in a very positive way here through the second half.
Okay. Thanks, George and then you know maybe you can characterize the inventory build in terms of composition and how you see that working down certainly it's normal to see some seasonal build in parts of the business, but that's a longer cycle, you know higher components portion of.
But just be interested in your characterization. Thanks.
Yeah, Let me address that and then Olivier can talk about the financial impact as you look at what's happened over the last couple of years, we had significant disruption and as a result of that we built up inventory all of that peaked.
From a data standpoint in the first quarter, we've had the entire team now now that we've been really leaning out and getting our capacity in place and working with our key suppliers. We've got the supply chain working pretty well and so as a result of that we're not only making sure that we're protecting the significant ramp in the second half on the commercial backlog.
I I discussed, but then making sure that we can rebalance all of our input to output relative to the material required and so we've got a line of sight too.
Pretty significant step down in Q3, and in Q4, which gets us back to where we need to be from an overall inventory perspective.
Not much more to add if you look at the inventory turns in Q2, we improved sequentially by six days, we didn't want to reduce the inventory by much more than that due to the strong demand we would have to satisfy in Q3 for the full year, we expect inventory to be back at that level already.
Was at the end of 'twenty, two and as we have discussed before we want to keep improving inventory turns as we get into 'twenty four.
That's very clear thanks for the color.
Thank you.
Our next question comes from Scott Davis Melius Research. Please go ahead.
Hi, good morning Fellas.
Good morning, Sean.
George the parts numbers that you gave us kind of echo <unk> comment on.
Service and parts pretty amazing.
What are I mean, I understand digital is a big role here, but is there any way to think about kind of your capture rates and how they've improved over time with digital is it.
I'm trying to picture for the most part if something breaks people want to replace like for like but maybe.
Around the world, it's not always that case, but.
How much is digital I guess improved your take rates our capture rates on those spare parts I guess is my question.
Okay. So I think you'd start with the installed base that we're serving and were up pretty significantly another 150 basis points. So we have it.
What's driving that Scott is the connectivity. So we go back we make sure that it's connected we outlined that we have the utilization of the data. We then manage what we traditionally have manage well.
Productivity from that.
We improve our value delivery and then we have with the insights after after three months six months nine months, we're comparing that performance to the fleet.
And that gives us and we know what what what vintage the equipment is and then historically we know.
Predictably, where issues are going to ultimately rise and so what we do is we then go back and do upgrades with parts and and continue and this is to avoid any catastrophic failure or just to improve overall efficiency and so when you look at our connected Chillers now are connected equipped.
We're reducing attrition about it's about half of what the the traditional service customer attrition was and so you get you get higher penetration of the installed base, you've got more ability now to use data to create value propositions on energy on efficiency overall utilization.
<unk> and then when you look at some of these bigger secular trends around sustainability healthy buildings, and then ultimately smart buildings. It becomes the platform that we can then utilize all of our open blue applications to build on top of so it's a combination of all of that and then if you look at historically what.
It has happened when we do have a contract we're seeing significant pickup when we say Ellen M. It's because it's coming out of the utilization of data and then how we're presenting additional opportunities to the customer to then be able to capitalize on.
Does that does that help Scott.
Yeah, no it does and I think maybe just as a natural follow on.
You used the term vintage I think as it was.
Appropriate.
I think there's always been a view that these big charge this last forever and.
And in fact, they seemed to last a very long time, but given <unk>.
The carb or or or.
Or are other drivers are you seeing the actual kind of useful life or vintage come down.
Because there's a greater interest in people pulling.
35 year old or 30 year old units out of service because it just doesn't make any sense, where maybe in the past that it makes sense to keep them alive.
So what I would say is we've actually seen both where you have assets that we can go in and on a run rate basis significantly reduce energy consumed to benefit the customer and ultimately address some of the sustainability challenges that they're facing.
And in other cases, we can we can put a value proposition together to upgrade the equipment to deploy digital and then to get a payback based on how those those that equipment is actually operated so thats, what we do through our sustainable infrastructure business, which today, we have a significant pipeline that we're working to convert it.
It's about $7 billion and so Scott it really depends on what the current operations out with the current <unk>.
Age of equipment is how it's operating and then we what we do is try to provide a value proposition that is the best in their in their case that ultimately achieve what they're trying to set out to do.
Very interesting. Thank you best of luck guys I appreciate it.
Thank you Scott.
Thank you and our next question today comes from Chris Snyder with UBS. Please go ahead.
Thank you so our volumes in the quarter really stood out that was a nice improvement up three works I believe down one last quarter does this pickup just reflect the catch up and volumes pushed out of last quarter or more so supply chain improvement or company capacity additions.
And with that you know it looks like around 90% organic in the back half how much volume is.
Yep.
Well, let me start by saying that operationally, we have seen significant improvement across our portfolio. So when you look at our velocity in the field based business.
You're definitely seeing a recovery recovery of the backlog.
Because that had built.
As you recall last year, we had extended our project cycle times because of supply chain and other challenges that now is getting back in line.
So that's some of the reduction and then the or the increased revenue and then in the products business. The same holds true we have <unk>.
<unk> done some significant work and how we've expanded our capacity to capitalize on these trends to be able to be competitive with lower or shorter lead times in the market to continue the growth in the backlog, which is what we've done.
And so it's a it's a little bit of both where we're recovering the backlog and then because of our ability to be able to better serve customers that is ultimately, helping us to be able to drive growth.
Thank you I appreciate that and then also wanted to follow up on service orders, but specifically the relationship between service and equipment orders.
Service, obviously has some pretty good secular tailwind with open blue and the market share opportunity that brings but theyre also the connection between service and equipment or are we looking at passing all right. So I guess my question is if we do hit a period of cyclical pressure and equipment orders are down on that what is the ability.
Or the opportunity to kind of grow service orders through.
Through the cycle. Thank you.
Let's start with the the overall model. So it starts with the install base and even though we've made significant progress. We still are currently performing service on short of about <unk>.
50% of the base that we've put out into the field over the last couple of decades, and so the opportunity for US is to continue to penetrate that installed base doing upgrades deploying digital and then ultimately providing these outcomes that I think with the combined portfolio.
Portfolio that we have which is the leadership HVAC equipment portfolio and our leadership building solutions. The two combined to be extremely differentiating relative to the output. So we can create and so we believe that the continued expansion of the of the attach rate to that installed base the ability to be able to connect us.
Ada there is significant value that we generate to our customers and in any downturn.
The single biggest reduction as energy savings and so when we deploy a full solution. We can reduce energy 2030, 40% and then couple.
Couple that with the improved overall operation of the building beyond just the chiller its significant benefits to be able to to be achieved for the customer. So I believe that the the differentiation with the value the ability to be able to go get more of our installed base to build on that real differentiator.
Solutions utilizing the data and AI is going to be you know, it's going to continue to allow us to be able to expand services no matter what the cycle is that we ultimately experience.
Thank you I appreciate that.
Thank you next question today comes from Julian Mitchell of Barclays. Please go ahead.
Hi, good morning.
It's been a lot of questions on the building solutions side, So maybe looking at global products for a second.
We've had very very good operating leverage first half of this year and in the last two years.
You know you're running up against some tough comps in the back half I'm just wondering how you're thinking about the degree of margin expansion year on year in global products and then well.
Looking out beyond the very short term you know what.
When we look at some of your peers honeywell's margins are quite a bit higher you'll you'll HVAC payers are somewhat lower.
So how should we think about kind of normal operating leverage or incremental margins in global products beyond 2023.
Yes, So let me just give you the overall strategy and it literally can touch upon the financials. When you look at what we're doing within the global products business. It starts with making sure we have leadership product and we've we've invested over the last five or six years and I think we're positioned pretty much across the portfolio to lead in.
And differentiate in the differentiation, obviously drives value and with how we serve our customers. So it starts there. The second is making sure that we're operationally local for local and making sure we ever robust and resilient supply chain and we've made a lot of progress there. So from a cost standpoint, we ultimately can maintain.
<unk> low cost and how we ultimately serve the key markets that we serve and so and then from a overall SG&A.
SG&A, while we've been focusing on is really getting leverage out of the SG&A structure and there's still significant opportunity ahead of us to simplify that Julian and so I think the you know.
As we look at our product business, where we've been and where we are there's still significant room for improvement.
It's going to be driven by the continued leadership product the digital content the connectivity that's going to ultimately be valued.
And ultimately that translates into the solutions that we provide in the field and so we're in a position to continue we're getting good continued strong price cost because you know the product and because of the value proposition that is going to continue Julien.
Do you want to yes, absolutely if you look at the second half with G. P. As you said Julien.
The strength in the year on year and marching trend, we will start to normalize because of the tough comps com and what we take calls in terms of margin profile for the second half is our solution business, where you see the trend which happened in Q2 is going to accelerate in the second half of the year. So that's your first question.
Regarding your second question beyond 'twenty three we believe we can deliver 30% incremental George mentioned few of the points supporting this we believe in a global product we have strong product offering heat pump is going to be part of this and then we also are very bullish about what our building.
Solution margin could be.
Backup solution services enabled by digital on top of that we have shrunk operate cheap.
Breaking love rich capability in the P&L as we keep going we have invested over the last two years. We believe that this investment would start to slow down then we should be able also to increase leverage next.
Next year.
Thanks, very much and then just my second one more on the portfolio.
You've seen some some moves that one of your peers.
Recently, so I just wanted to you know given it's been seven years or so since the large very major portfolio move at J C. I.
How are you thinking kind of George and Olivier about you know are there elements of pruning here you know do you start to maybe get back on to M&A now that you're quite far through the the current three year plan in terms of savings extracted from the base business and and then.
Put a fine point on it you know what is the appeal to you of that European residential heat pumps market.
Let's reflect on where we've been we did the merger with the divestiture of the seating business back back in 2016 with.
The merger with Tyco and Johnson controls.
And then we said from the strategy that we laid out was to really.
Step back and understand what the future buildings would be and what was going to be required to ultimately win over the with the trends that are underway. We said at the end of the day the value proposition with a leading HVAC business combined with having a leader leading.
Building management platform that the two combined is ultimately what's going to be required to be able to deliver smart sustainable healthy our most productive most efficient buildings and that as has been our strategy. So as we've been looking at our portfolio continuing to strengthen HVAC not only with our organic investment.
But also looking at potential bolt ons or gaps that we might have an and heat pumps has been a huge focus of ours I mean, our when you look at our heat pump portfolio about half of our HVAC portfolio is made up of heat pumps, we've had significant reinvestment into heat pumps and that's <unk>.
Gonna be a continued focus of ours as you as you stayed at from an M&A standpoint, and then on the digital side, what's happening the combination of what we've done in our building management system platforms coming together now with a leading data platform with open blue It really does position us to now differentiate the solutions that we can ultimate.
We serve our customers with Julien with the combination and so with that you know from a capital deployment, we've been certainly providing your returning.
A lot of capital back to our shareholders through dividends and share repurchases and that's continuing to be strong and we're going to continue to focus on from an inorganic standpoint, where we can leverage the strength of the strategy that we're executing organically and how do we complement that with M&A.
No nothing more to add to Keene is going to be the name of the game are services dishy toward our IP and products and in terms of putting putting George and set to death is going to be really at the mounting but nothing significant we want to do.
Great. Thank you.
Yes.
Thank you and our next question today comes from John Baugh.
Fargo. Please go ahead.
Hey, good morning, Thanks for taking my questions.
I wanted to start I think George you said about 50 50 mix in office.
The sort of new versus retrofit side, just wanted to confirm that it would be something simpler or something similar for for non res exposure and then could you talk about sort of retrofit and how much of that activity is dependent on third party financing or most of that just internally.
From customers as well as the push versus pull dynamic how much of these sales do you think your sort of generating on the sort of push side and going out there and selling the advantages versus customers come coming to you and asking for this.
When you look at our vertical markets, we serve and in line with commercial.
A little bit about commercial, but it's similar percentages plus or minus relative to install two two servers.
A big focus of our company now is not only to get the equipment installed, but then to be able to from a solution set standpoint, leveraging our data to really capitalize on that installed base with the recurring revenue over the lifecycle. So there's a big focus on continuing to expand our service services across all of the key.
The verticals that we support but it is that historically if you asked the question. It's similar type percentages installed service it varies a little bit by by vertical.
As it relates to nonresident in general when we look at the overall non res the indices that we look at.
Well, we are seeing the benefit of is the construction starts are up and a lot of that was the you know the projects that got put into the pipeline over the last couple of years and that's benefiting us. The good news is that Abi has come back a bit and stabilized somewhat positive here and in the in the month of March.
So when we look at our the indices.
Very strong our pipeline around non res across the board is very strong and our our our task is to then within that pipeline to really differentiate and that's what's happening, especially as we focus on these secular trends as we talked about today around sustainability healthy buildings.
And then ultimately delivering smart buildings, so we don't see.
Significant differentiation across the verticals I would tell you that right now you know health care is strong and data centers are strong and theres a lot of verticals that play to our strengths that we're capitalizing on but I would tell you right now its pretty pretty much across the board.
Got it and and and then Olivia just thinking about the back half of the year I mean, it seems like from a sort of top line growth perspective.
It looks like the third quarter would be in a pretty tight band across the segments something like high single digit low double digit growth and then Q4, maybe more mid single digit high single digit across the segments.
<unk> is.
You know when when you look at it where do you see the greatest upside risk is this primarily a function of ongoing supply chain constraints and and if those were to ease and where could you see things come in a little bit better.
So if you look at today and in your sense, it's from the court and from also our print in Q2, I mean of course, you have always some risk in the large business like ours, where we are.
Very confident about the markets we are facing.
The value proposition of our company's resonating if you look at the macro indicator LIBOR docomo <unk> markets across the world actually strengthening.
You see the backlog is strong.
The backlog is growing so so so today, we see that this is a balance expat set the fixed based expectations for the second half and again, we said that all along we have accumulated a sizable backlog Asbury will reach margin and that is going to give us also a lot of momentum going forward.
I think a key statistic is when we look at.
Our global products business, which kind of spans all of all of our markets. When you with the exception of the softness we see in resi duct at our backlog in our global products business. When you look at both direct and indirect is up over 20%.
So you realize that that ultimately plays too to our strength.
With the work we're doing around the commercial sectors.
Thank you.
Thank you.
Thank you and our next question today comes from Nicole <unk> with Deutsche Bank. Please go ahead.
Yes, thanks, good morning, guys.
Good morning, Nicole.
Maybe just starting on the ordinary really strong in the quarter accelerated versus one kill them.
Any thoughts on how orders are trending into April is that has that strength continued and I'm also any thoughts on how you guys are seeing orders in in the third quarter I'm, just because the comp the two year stack comp that's got a little bit tougher from here. Thank you.
Yeah, I think when we look at our commercial operating system that we that we're really driving us and really understanding market and in the pipeline development, how we're converting by vertical by region.
Looking at not only global products, but also solutions, where we're tracking as we have been now you understand through the quarter are typically a lot of the project business. It gets weighted to the second half so.
Based on what we're seeing with activity with the pipeline that we're building and how we're converting it is in line with what you would expect Nicole.
Okay got it thank you al.
And then I know, it's a small part of your business, but just wanted to discuss the North America E. Marquette and I was just a little bit surprised to see it down high teens for you guys just a little bit worse than peers can you just talk a little bit more about what you're seeing with respect of price versus volumes and the inventory dynamics in the channel. Thank you.
Yeah. So when we look at we look at it globally.
Total revenue was down about four obviously with.
J C J C H being up single digits with our North America business down in the teens.
Well, we look when we look at that obviously, we're going through you know, where we are seeing sequential improvement not only through our operations, but now with the rebalance of inventory with our distributors.
And that's playing out as we planned.
And then when we look at.
The growth is going to come from.
Dr businesses under maybe a little bit of pressure in North America.
Our ability to be able to now capitalize on on V are often in Iraq and pack and our <unk>. Our <unk> business is very strong and so when you look at our business there globally.
It's starting to accelerate.
On what we see and so I think that's a position that we believe we are going to be able to capitalize on given the strength of our conducted portfolio and continue to be able to gain share there with the deployment of that product.
Thanks, I'll pass it on.
Any color there.
Thank you and our next question today comes from Joe Ritchie of Goldman Sachs. Please go ahead.
Hello, Joe Your line is open perhaps you're muted.
Oh I apologize we'll go on to the next question comes from.
Right RBC capital markets. Please go ahead.
Good morning, everyone.
Morning, Hey, there was a reference and early in the prepared remarks about pent up stimulus are still waiting to be released.
Can you just take us through the key buckets there the line of sight, and then where and how would you benefit.
Okay.
Yeah, when we look at all of the programs that have been playing through with Covid programs the infrastructure.
Act the inflation reduction Act and then in Europe . The fit for 55, the building standards, we're tracking that pretty much across the board and we participated in and ultimately developing those those bills and so as we're tracking this we've seen if you look at the problems our customers are trying to solve whether it be education.
Or or health care or any of these type of problems. We are seeing we are starting to see a pick up last year.
And that's continuing this year and being able to know that funding getting to our customers and ultimately converting.
That's gonna take when we look at the deployment of all of that Dean over the next 10 years. It peaks you know roughly about five years out so it's not going to come into play immediately but we are beginning to see.
Those monies flow to the to the customers that ultimately can put it to work in solving some of these problems that they're solving around sustainability and healthy buildings and the like so we do see that as we size the market.
On a run rate basis about 250 billion when we did our Investor day, we believe that the funding that's coming into play more than supports the ability to be able to capitalize on that market opportunity and then with our leadership product, but the solution set that we're building with digital then positions us to really get more than our fair share.
Got it I appreciate that and then a follow up question for Olivier on free cash flow just given the comments and expectations on the inventory step down in the second half are the.
The cash conversion from that is that included in your reaffirmed cash flow conversion guidance, 80% to 90% or would that be potential upside.
It is a it is included in our guide.
And again, we discuss about this we have clear line of sight of what needs to be done we have reduced inventory sequentially by about six days and we have we could have done more than indicated why we did not we need to satisfy the strong demand we have in country, but we have clear line of sight of Oh.
Inventory reduction and that's indeed embedded in our guide.
Thank you.
Thank you and our next question comes from Gautam Khanna with Cowen. Please go ahead.
Hey, good morning, guys.
Good morning, good morning.
I had a question that I've heard.
And you could help us with which is on orders.
Related to install so I.
I wanted to get a sense for how much equipment price.
Up.
Year over year in the orders and then how much does equipment price represent as a percentage of.
Of our total job you'll book.
Because I'm trying to understand like.
Are you booking an install higher volumes as well as.
Higher prices, if you could give us some color on that.
Yeah. So when we look at our install business, it's really focused on the core as we continue to make sure that we're increasing our installed base and then ultimately we're capitalizing on the recurring revenue we get through service over the lifecycle. So when you when you on that business were increasing both price.
As well as volume on the core.
Where are we with deep focus is some of the other contracting that goes in line with some of those projects that we've de emphasized but when you look at the core business that ultimately is driving our product sales and creating an installed base to be able to generate services, that's continuing to grow both price as well as <unk>.
All right.
Okay can you say, how much prices up on equipment, maybe year over year with it.
The installed business would be golfing would be in line with the overall overall price. So we're yielding as a company we're high single digits.
Rice.
Okay, and then could you maybe refresh us on your targeted maybe over the next 12 months, where do you think service attach rates.
How much of that could grow.
Previously you guys talked about 40%, where where you're targeting over the next 12 months.
What we're targeting is continued acceleration.
I said earlier, we're up about 100%.
Year on year with our connected Chillers that ultimately gives us the opportunity to get additional revenues and.
And reduce attrition and improve the overall performance and so what we committed.
See just continued sequential as well as year on year progress and our ability to be able to know.
Connect in mind that installed base.
We think that these are low double digit growth in services is that going to be.
Potentially subject to an exploration as we keep digitizing services offering.
The service business will increase attach rate is one dimension that's not the only one.
Okay.
Thank you and our next question today comes from Brett Linzey with Mizuho America. Please go ahead.
Hey, good morning, all just wanted to come back to slide five and specifically the D carb and the healthy pipeline.
About $10 billion can you just remind us what the hit rate or the conversion rate typically it looks like there and then is there anything unique or long end it about some of the timing on those projects.
Yes, so on the on the let's start with the sustainable infrastructure. We did have a nice pickup in orders, which was 29% which was a pick up from Q1 revenue turned strong at a roughly about 16% and that's going to continue.
The pipeline is about $7 billion that we've been working to convert and this is where we put together a solution with our products with our digital and then ultimately create an outcome.
Continued strong pipeline execution conversion.
On that on the healthy buildings.
On a year on year were only up 2% orders, but recognizing that was to a tough compare we do believe our pipeline right now is up about 69% as it relates to these projects. So there's still significant demand so that hasnt changed.
Since Covid and we're positioned now with the I think differentiation not only with the product, but also now the digital solutions that really differentiate how we can actually serve the customer with those with those capabilities. So both are continuing to be very strong. In addition, a lot of that also converts to service and when we go.
Go in and saw a healthy building solutions, there's a there's a tail that comes through with the services that we built.
Alright, great.
So I think that was the last question just thought I'd like to thank everyone. Once again for joining our call. This morning.
We delivered a very strong first half and are well positioned to build on that momentum in the second half of the year certainly the digitization of our offerings.
Continued to accelerate as we lead the way towards the smart healthier and more sustainable future for our stakeholders.
Look forward to engage with many of you over the coming weeks and with that operator that concludes our call.
Thank you Sir.
Today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.