Johnson Controls International plc (JCI) Earnings Call Transcript & Summary

Absolutely. Always.

Thank you.

Thanks, Brian.

All right. So George, one of the opportunities that we are really excited about that you -- we see JCI right in the sweet spot is this whole post-COVID landscape, the healthy buildings, the indoor air quality. But I'm really excited about this. But we're still waiting to try to size the opportunity. So from a technology standpoint, share with you the OpenBlue, but anything you can help us calibrate would be really, really helpful at this stage.

Sure. I'd start by saying the changes coming to buildings and infrastructure post the pandemic does play into our strengths. Our entire strategy revolves around capitalizing on the evolution to a smarter, safer, healthier building. And I think when you look at it, as I said in my opening comments there, the holistic approach that we have, we do have a unique competitive advantage with the -- one of the largest teams of service techs and sales forces globally. We have a very large installed base, which we can focus on upgrading. And then we do have an unmatched portfolio of products and technology inherent, not only in the products that we install and digital at the edge, but now with OpenBlue, how that all comes together into a holistic solution that enables us to be able to create the outcomes that are required now during this pandemic. So if you start with -- let's start with indoor air quality, which is obviously right now front and center with everyone. We have both active and passive filtration. You've seen where ASHRAE has recommended that we go from MERV 8, which to MERV 13. To put that in perspective, a MERV 13 is just short of kind of HEPA filtration, which is applied in isolation rooms and clean rooms and the like. So it's a pretty big step-up. And we get at that, not only with the filter but also with how we modify the systems and being able to not only enable heavier filtration, and then that requires some modification of motors and fans and the like. But also you can deploy other technologies, whether it be UV or bipolar ionization, within those systems to be able to accomplish similar type results. We also have the portable ISOCLEAN units, which is HEPA filtration, which you've seen other competitors, where we're applying that into isolated space. And then for us, it's about our ability to be able to engineer and upgrade and then deploy what we believe is the right solution for the customers that we serve. And so those are some of the elements. The other element is outdoor air. I mean there's a big focus now on how much outdoor air is brought in, what's the turnover per hour and so a safe environment, whether it be 8, 10, 12, turns. So we do modify the systems and then making sure that our control systems are actually in place to be able to facilitate that. So that's been a big focus. Then if you expand beyond just HVAC, there's many elements of the building that actually contribute to being able to support the protocols of a healthy and safe building. And that's starting right from the entrance to a building, where you actually have access control. And you want to make that access control frictionless. And you come in a building, we've now -- we launched about a month ago our industry-leading thermal camera, where you can then sense elevated temperature real time, not only at entries, but you could actually put that in general areas within a building and being able to real-time understand elevation of temperature. Then with our access control and our OpenBlue, the ability now to be able to use all of the data within a building to do track and trace to understand what is the flow of the building, where people have been. And then in the event if there were to be an infection, how do you isolate and then ultimately quarantine. So when you think about what we do not only controls and all of the building systems combined with what we do from an HVAC standpoint does provide a holistic solution in being able to create a standard for a healthy and safe building.

It's a fabulous overview of the technology. Where does it stand? What inning are we in, in terms of all these commercial buildings having to review what's their system today? What's the benchmark? What do they need to change? What inning are we in?

Yes. I think we're in the early innings because you got to realize that this has been the way that it's been for a long time. And so it does require a lot of work relative to not only understanding what is the current environment customer by customer, but then with that assessment, what is the road map, whether it be OpEx or CapEx, and how you enable a customer to be able to achieve or address some of the new challenges that they're facing in this environment. And I think for us, the unique element of what we do is we can then ultimately now with OpenBlue, it does get out a lot of these new challenges and the idea of getting connectivity. So OpenBlue, think about it as -- we've been working on this for 3 or 4 years, the ability to be able to bring everything together into one architecture, utilize one database and then put that data to work in being able to create new outcomes and address some of the new challenges. And I think that is truly what differentiates us in being able to now address some of these new challenges. But Deane, what I would say is that the -- there's heavy activity in understanding what the current as-build or current environment is with the idea that road maps are being developed in how we ultimately work with our customers to achieve what is going to be the new "healthy and safe" building standard.

That's really helpful. On OpenBlue, so we've got lots of investor questions about it. What's the right way for us to monitor the penetration, the success, the utilization? Is it the number of installations? What are kind of the benchmarks that we should be watching for?

Yes. It's a great question. The OpenBlue, what I would say, I'd start by saying it's obviously the most exciting platform launches that we've had in JCI, and it's really a combination of a lot of the reinvestment we've made in products as well as standing up a digital organization and then upgrading our leadership team. And so I think it starts there. And when you look at the -- what's different than our competitors, it allows us, again, as I said, a single architecture, where everything comes together in one architecture. It does take the operational technology that we have within a building, and it combines it with our customers' IT infrastructure and then utilizes cloud to be able to deploy a lot of new applications in a very dynamic digital platform. And it's all about the data, which ultimately creates smarter, safer environments, more sustainable places and spaces. And I think when I would summarize it, I would say that what OpenBlue is going to do for us is really create a competitive advantage. And it would come out -- it would come down to gain market share more effectively, not only in how we deploy our leadership product that has digital at the edge and how we compete with our products, but then with those products now integrated into a holistic solution really does get at these new outcomes. And I think it'll be both top line as well as expanded margins because it will be a higher level of content that's actually achieved through our services, our service offerings and software as a service. And so if you -- simply put, if you look at the 3 big segments, so take our product business, we've been investing nicely here over the last 3 or 4 years to gain market share by platform. And for the most part, that's what we're doing. So it's the reinvestment in product. And then when you look at our field-based businesses, it's about making sure that we're working much further upstream strategically with our customers in enabling their digital strategy, where their buildings now become much more important to how they're executing on their digital strategy. And then with the current pandemic, it's about healthy and safe buildings, and that is ultimately getting a lot of focus. And so for us, I believe it's not only the gaining the market share, but it's our ability to be able to get more of the projects because of that value proposition. So a higher share of the applied projects that we execute on. And then probably most importantly, we do believe in our service business, which is today about a $6.3 billion business in revenue. That we have a real opportunity to take what we do today, which is weighted towards more conventional, more traditional services around HVAC equipment as well as monitoring and doing some maintenance of the electronic systems to now creating outcomes with the digital capabilities that enable us to take every level of service and enhance that. Enhance the value proposition as well as enhance the delivery of that service, which ultimately drives growth. So I think over time, you'll see not only a higher share of projects, but then -- on the installs side. But on a run rate basis, we were able to get our traditional conventional services to roughly 4% or 5% growth, and that was more in the traditional space. This will enable us not only to continue to support that, but incrementally add to that growth with the new offerings that we ultimately bring to the market with OpenBlue. And so I think it's -- the differentiation I'd really tie it to is 4 or 5 key things. It's purely around the building systems and the data management, which is fundamental to OpenBlue, and that's across both HVAC buyer and security compared to our competitors. It's an ability to be able to then make a digital twin with what we do within a building and working so that they actually become more productive in how they actually facilitate and run the building. It's better integration because it's a simpler integration with the OpenBlue platform, and taking, whether it be an existing building and/or a new building, and how you actually facilitate that with new product or upgrades. And then it's about analytics. And so we're -- we've created an ecosystem now that allows us to be able to apply our domain, but also bring in partners that bring technology and capabilities that we believe enhance what we do, whether it be through AI, artificial intelligence, machine learning or any of those type of capabilities that isn't necessarily our core that we can ultimately leverage and create outcome. And then it's all about cybersecurity. So everything we're doing is we're building in the highest levels of cybersecurity, making sure continuing to build out the chip to cloud security. So the entire framework or structure that we provide. And so we're -- I think there's a lot of elements that truly differentiate, and we're in the early stages, but you will begin to see that in higher market share, higher service revenues on a run rate basis over time.

And just to clarify, the higher services level, that includes all of these new monitoring capabilities? And just how big a contributor could the monitoring side be in terms of the kind of new healthy building ecosystem, as you call it?

Well, when you think about OpenBlue, think about data, data management, applying analytics, artificial intelligence. And so either we're managing that, doing monitoring and applying those analytics and creating an outcome and or we're facilitating our customer, right, with that data. And so I think that is -- when you think about services on the monitoring and potentially as a service with the new solutions that we bring, that is the incremental revenue that you pick up your customer. So in simple terms, think about our service business as we do install and then we get an attach rate and so we should be better positioned to increase our attach rate. We look at revenue per customer. So we have the traditional conventional work. And then now with OpenBlue, what are the opportunities to be able to build on that with new solutions and value propositions that get higher revenue per customer? And then, Deane, I think one of the big attributes is because you can enhance everything we do through service, whether it be our delivery processes and then ultimately, the outcomes we create, it's the stickiness and our ability to be able to then retain customers that ultimately is a key contributor to ultimately sustaining higher levels of growth with services going forward. So I would just simplify it as that.

Yes. That's exactly what we're looking for. We only have 3 minutes left here. I know it's not a big part of your business, but we did get some data points yesterday about residential HVAC doing well because of work from home as well as just a hotter summer. Are those trends that you've seen?

Yes. Very consistent with what you've seen. Like we said during our earnings call in the month of -- really, it was May -- April and May were tough. Late May, things started to pick up. Obviously, this is a very different cooling season than it was last season. And because of that, there wasn't as much inventory in the system. And then the pure demand has been very strong. And so we saw our orders were up close to 300% in July. Now we don't talk about orders and products because it's a book and bill business, but realizing that when you look at just one month, there was a significant pickup in orders, replenishing inventory as well as not taking into account what they saw the new demand to be. And we've been -- that's been continuing. I mean we've been very strong in July and August, not only with continued orders, but also being able to fulfill on a growth rate basis strong double-digit growth in the residential business. And we've been -- I mean, we started from a smaller position, but we've been investing in new products. Our new products are very competitive. And we've been working not only making sure we have the competitive product, but also our distribution is such where we're picking up additional distribution and getting more coverage of our product in many of the key markets. I think we froze. Deane? I think we froze.

Is there anything else that you would like to add, Brian?

Yes. So Deane -- we lost Deane.

Okay. If there is nothing additional to add, I would like to thank everybody for their time in the session. And thank you, Brian and George, for your time today as well.

Terrific. Well, I can't see Deane, but I want to thank Deane for having us today and having the opportunity to share what we have going on in Johnson Controls and do look forward to engaging many of you going forward. So thank you.

Thank you. This session is now concluded.