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

Great, [ Tate ]. Thank you all on the virtual link here. This is our 43rd Annual Industrials Conference. We're very pleased to have with us for -- I don't know, this might be like the 10th year that George Oliver, who is the Chairman and CEO of Johnson Controls and prior to that, Tyco, which is where I met George years and years ago. George, welcome. Thanks for joining us today.

Great to be with you, Gautam.

Great. Well, I thought we'd just kick it right out into Q&A and...

Sure.

Great. [Operator Instructions] But George, maybe just -- let's talk about the topic du jour of the day, which is inflation, part shortages and the like and what you're doing to mitigate that.

Yes. I think it's important to kind of frame this up that really over the last 2 years, we've been strengthening both our procurement processes and making them much more strategic in how we were working with our suppliers as well as our pricing capabilities throughout the enterprise, both in global products in the field. So if I can start with pricing, we established, as we were very decentralized before, kind of separate and prior over the last couple of years now have a global pricing desk with a pricing leader that ultimately now is tracking inflation and setting the appropriate price strategies proactively across all regions and doing it real time, more proactive pricing capabilities. And we've built a pricing team now -- that is now across the businesses. So if you go to Global Products, we've been -- added price escalation clauses to new existing distribution contracts. This does allow us to raise prices outside of the typical cycle. We reprice existing backlog. So as we have -- it's book and bill but with the orders that we do have that aren't shipped, we ultimately increase price before a specific date. We've also changed -- big element of cost right now is freight. And so we've changed the freight policies to raise the thresholds on and eliminate any free freight. So there's been a lot of good work. And I think with the backlog and what we project going forward, we're in a really good position there. In the field-based businesses, it's a little bit different. We have built in escalation clauses in the majority of our PSAs in both annual as well as multiyear PSAs, and that's all in place. We've included price escalation on both materials and labor when you look at our project-based business. And I'd say, we've been much more disciplined with project execution in the field, making sure that there's a -- I would say, a new discipline around change order management and ultimately, not only working closely with our customers, but then as disruptions are happening that are impacting then our cost and some of the variation we're seeing, we're now executing change orders to be compensated for the changes that were now being incurred impacting these projects. And so that is the framework. And what I would tell you, we've done a really, really good job in proactively making sure we see what's happening from an inflation standpoint and depending on the cycles within the businesses now, proactively putting that price in place. And you've seen that not only in the first quarter, but for the total year, we increased the top line because now we see another 1 to 2 points of price. And I think that will continue to play out. I think the backlogs that we're building, we have a strong project backlog of about over 10%, and the margins in backlog are better. And as we execute through the year, we'll see those margins execute. And like I said, we've been very aggressive on our products because it's a shorter-cycle business. And you saw that in the first quarter, that's coming through very nicely. As far as supply chain, we continue to identify and escalate the risk. We've been working on this for over a year and really understanding not only short-term impact but more important, strategically longer term, how do we work proactively with our supply is to make sure that not only the current demand, but more for the future, do we have the right supply chain and are we working strategically in the right way to ultimately support what we see to be very nice growth over the next 3 years. And so it has been -- what I would say, it has been a battle over the last 8 or 10 months. And I can tell you, I've been actively involved with a number of our suppliers, CEO to CEO, and I feel really good about the progress we've made. And I do -- I think, one of the things we've been looking at is looking at the next 18 to 24 months to make sure that we understand the demand, the lead times and then working more agile with our suppliers and how they're ultimately going to be positioned to support us. And so Gautam, it has been a challenging environment, but I couldn't be more proud of the team and the work that we've done to not only navigate the supply chain, but more important, how do we position ourselves to get ahead of the inflation that we've been experiencing, and we've done that really, really well.

On that last point on the -- working with the supply chain over the past year, any areas within it that need to come in-house? I'm just -- are there any areas that you worry about, "Hey, we need to have -- we better have more internal capability, whether it -- " you tell me. Take it from here.

Yes, what I would tell you is that although we did great work during the integration and looking at all of our strategies that we deploy across the supply chain, let's face it, the last 2 years have challenged a lot of those new ones. And so for us, it's given us the ability to not only look at what I would say kind of the big rocks set of surface short term, but then how does -- what are the implications longer term. And that does include, make, buy other critical components that ultimately, we should be producing in-house versus supplying. And then what is the global footprint. And so I think we've taken all of that into account. And as we're now positioning to be able to support the accelerating growth, I'd say that we're making a lot of those changes and those are all elements throughout them. This is quote on my experience over the last 40 years and we've used this as a real opportunity to not only continue to improve but to fundamentally take a step function change in our capability, not only to get to the lowest cost, but to be agile and resilient with our supply chain to be able to support our growth.

With -- maybe looking at it by market, is there one area -- are fire and security products facing greater pinch points relative to the HVAC market? Or anything you could -- or is it kind of broad-based everyone's affected equally, every product equally?

I would bucket into 2 categories. I'll keep it simple. The -- obviously, as we've been digitizing our products or digitalizing our products and as well as our field capabilities, chips become more important. And so how do we position not only from a technology standpoint with the right technologies, but also the right partners in being able to fulfill the demand around microchip, chips and the like. And so realizing that we have chips that go into now pretty much everything that we build. And so working to make sure that we've got the right technologies, we're leveraging the technologies and we're getting the right partners to be able to be positioned long term to support us with the growth that we're achieving. That's number one. Number two has been North America from a labor standpoint. When you look at our overall supply chain, we do count on second- and third-tier suppliers that are locally positioned within our manufacturing facilities and the like. And just with all of the disruption in labor, not only because of the virus, but also some of the other challenges, we've been working very closely with our suppliers and making sure we've done really well. I think I talked about this during our earnings call, in being able to get the labor, that we're requiring to support our growth within our manufacturing facilities as well as our field-based business. But we've seen that there's been a -- labor has been a pinch point for a lot of our suppliers. And so we have partners that work with contract labor that now we've engaged to make sure that they're supporting our suppliers. And so we're managing through it, but those are probably the 2 biggest elements of what we've seen.

You guys -- we were talking to a company yesterday at the conference that talked about how a lot of their seasoned employees were actually leaving. They were affected by the great resignation. Have you seen that much at JCI? Or...

We look -- that's a great question. We look at that constantly. And so certainly, there was a little bit of -- from a retirement, more of the -- a little bit of that in the early stages. But when we look at our core attrition right now, it has not significantly changed in our core business. So I think what we've done as a company and how we positioned ourselves now to really lead in smart building solutions and then the ability to have the impact on decarbonization and healthy buildings and now ultimately creating autonomous buildings, we've got a lot of excitement in the market. And so as a result of that, we're not only attracting but retaining a lot of our critical talent, which has been very important for us as we're now not only ramping up in the current state, but we see this continuing here as we not only get through '22, but as we continue in '23.

One of the things I remember at the Investor Day, you guys talked about the SG&A and cost of goods sold, cost reduction programs. And you put round numbers from $500 million, $250 million. Do those numbers change given what we're seeing in terms of supply chain, labor, what have you?

No, I think...

[indiscernible] a lot? Did they increase? Or not?

Well, what I would say is, I think, as we laid out back in September and the opportunity that we have to create real growth machine, not only top line, but also from a margin expansion, we're on track. And this all started 4 years ago when I took over, we worked on the integration, streamlining the cost structure, improving the key fundamentals and then ultimately driving more operational discipline across all of our business processes. And then as we really got focused in executing on the key growth strategies, we got to another whole level. And that's what we announced a year ago with the opportunity to now within the framework that we created, with the strategy that we have deployed, how do we now take that to a whole new level. And that's what was the foundation of the overall SG&A and COGS savings. And we're on track. I mean when you look at -- we delivered the $60 million last year, we get the $230 million this year, we've shown where the underlying improvements came through in the first quarter that was expected. Obviously, we had a little bit of offset to that because of the disruption that was -- that we incurred. But that doesn't stop us from getting to the 250 to 300 basis points of margin improvement and, obviously, getting the leverage that we expect on the growth. The underlying leverage will get about 30 basis points. And then, obviously, with the additional margin expansion supported by SG&A and COGS. So I think we're in a really, really good position. We're executing well, certainly navigating the current environment. But longer term, I couldn't be more confident that we're positioned to deliver on the plan that we outlined.

Okay. And one of the things that also kind of high level I was thinking about is, as you guys have really -- I guess, you have transformed this company over the last 4 years, so, too, have your competitors. Carrier is out there, they're just acquiring the remaining interest in the Toshiba VRF technology. Trane Tech has been [ pondering ] or what have you. So just what are you seeing competitively that's maybe different over the past year or 2 years ticket time frame? And how is that going to raise the stakes or change kind of the basis of competition? Maybe talk about applied, whichever end markets you want to start with.

Well, I mean, I think, what's important is you got to look at the individual businesses, but more important, you got to look at the whole and ultimately, how we're executing on the entire portfolio. Because I think for us, the future is the ability to be able to take the individual strengths, whether it be HVAC, fire and security and then now having a leadership digital platform with OpenBlue, it's really the combination that fundamentally changes the output, right? What we can do to achieve not only what historically has been achieved within each one of the domains but also on the improvement in each of the domains, but more important about how they come together to change the output as it relates to decarbonization, sustainability, being able to truly get to a clean air delivery rate as it equates to indoor air quality. So there's some major changes that can be achieved with the combination. If you look at each of the individual components, when you look at whether it be HVAC, we're very strongly positioned pretty much across the board. Our strength is more weighted in the commercial business, and it is a very attractive space for us with the work that we've done with chillers and rooftops and industrial refrigeration. And based on all of the new products that we've launched over the last few years, what I would tell you is we are, when we look at units, we are gaining share across that. So that's an important part of what we do. And that's -- and then as you start to see these new demands playing out, decarbonization, healthy buildings, we have been able to capitalize in a very big way with our combined capabilities. And so I think that continues. Fire and security, where obviously, we have a strength in fire and security as it relates to services. And that in base, that installed base as well as what we do in services becomes an important piece in how we take all of the digital systems within a building, integrate them with OpenBlue and then use the data in a universal way to create applications that create outputs that historically haven't been achieved. And so I think, although maybe the core business could continue to grow kind of GDP, our weight -- half of our revenues in Fire & Security is services. And so that also is in the base of service that we that with the work we're doing, we're going to outperform the market 200 or 300 basis points. And a lot of that is because we have an installed base that we're ultimately now connecting and then getting to a PSA or a performance service agreement that's long term. And then we ultimately mind the performance contracts, and then we add new services that are supported by OpenBlue. Now whether it be chiller services that create a better uptime or better -- or less energy consumed or an indoor air quality healthy buildings as a service as we've launched. So there's a lot of digital services now that with that connection, we can now apply new services that ultimately are solving problems that our customers are looking to solve, that ultimately also delivers a very attractive value proposition. So when we look at the combination, there's going to be different fundamentals. Most important is that we're positioned to continue to gain share in each of the domains. And then more important, with the combination, with our digital capabilities is what ultimately sets us apart from the competitors and how we ultimately capitalize on what we see to be very attractive growth vectors over the next decade within buildings.

Yes. And to that point, so OpenBlue and the digital strategy is key. It's a differentiator. The other companies we cover argue that they do something similar. They have the ability to remotely diagnose to help optimize uptime and the like. So I recognize there's probably some element of table stakes and there's some elements of actual differentiation. Where do you think OpenBlue has an edge that other guys aren't dealing with? Like where is it that you guys are really setting it apart from the carriers and the other folks?

Well, you said it. I mean everyone's digitizing or digitalizing their core. And so whether you're in HVAC or in fire and security, there's always been a digital component. I think what's unique about OpenBlue is the ability to be able to bridge all of the systems within a building, be able to create a common or a universal set of data. And then depending on the problems that are being solved in the building, you now have the full data set to then build applications. So think of it as that Gautam, versus there's always opportunity to use digital to enhance any one of the capabilities suffered in a part. But our advantage now is that we are now leading with the ability to take all of the data and ultimately get to significant value propositions around energy reduction or delivering on the decarbonization of buildings, which buildings represent about 40% of the global carbon. And most companies have made a commitment to get to net zero, where you can't get to net zero without reducing the carbon in the building. And so we've launched Net Zero Buildings as a solution. Well, what does that mean? It means that not only do you have the leadership products in censoring that goes into the building, but now you have the ability to understand the overall operation of the building and deliver on outcomes that are supported by OpenBlue. And so that is, I think, what's going to differentiate us as we move forward. And we're seeing now, like net zero buildings as a service or decarbonization, we have a pipeline of over $1 billion, solely ultimately focused on decarbonization. And we're engaging. So historically, we engage at a lower level within the customer supporting individual buildings. We're engaged so we're continuing to do that and make sure that we have leadership product and leadership services. But at the same time, from tops down, we're getting better alignment now with all of our all of our enterprise customers across the globe and understanding their strategies around how they're going to configure buildings and how they're going to achieve their net zero commitments and ultimately, how they sustain level of health and safety of the building. So there is a conversion that's happening as we speak, and I think we're going to be positioned well to capitalize on that.

That's actually really interesting. This whole kind of evolving business model around decarbonization as a service or net zero as a service. I'm curious if you could expand on it. Like so -- are there actual case studies where you're getting customer acts, says, you know what, I'm going to actually -- does it drive early replacement? I have a number of questions on this. So typically, you replace the system if it broke or if it was just economically unfeasible, right? The energy payback was attractive. Are you now seeing kind of early retirement of systems because of the decarbonization desire on the -- yes -- maybe -- and then how do you actually build for this? Like I imagine it's high margin, but just curious how that's changing the revenue model, if you will, on the applied -- through the applied space?

So let me start by saying we've been doing performance contracting for a long time. We're very successful. And it really starts with having the depth and expertise to go in, survey a building, understand what the opportunity is to improve the operation of the building. Energy is a big part of that. Now health and safety is a big part of that. So -- and it's been mainly focused on government customers. Well, what's happened now though is with the -- in buildings where, I think, historically viewed as more of a cost or a balance sheet item for a lot of our customers versus a strategic asset. And so now when you project the future, I think, there will be a price on carbon. I mean at the end of the day, with the reinvestments that are going to be needed and ultimately how that materializes, I think, there will be a price on carbon. And so when you look at the overall economics, you start to factor that in, what opposed to doing the traditional payback on pure operational savings what else -- what other factors that you have to take a look at to make sure you're ultimately achieving your decarbonization net zero commitments. And so, I think, to your point, we do upgrades. We obviously -- it depends on the customer as far as their ROI and what they've already got installed and ultimately, how we maximize what that investment has been and how we deploy digital and use of data to change the solutions and services that we can provide. But on average, when we go into a building, we can configure a solution and generate 50% savings. 50% energy savings and the like, and it's true not only equipment upgrade, but a lot of deployment of digital with the use of data that ultimately gets to those outcomes. And that's what we've been focused on doing. And we've got a pipeline that's very robust right now. And these are longer cycles. So these are projects that, obviously, you're working in a more strategic level with the customer, defining what the possible is and then ultimately creating an economic model that makes sense based on how they value.

So I mean when we think about a 50% savings or whatever, I mean, I presume the payback on the -- on whatever they're paying JCI, is fairly quick. We're talking a couple of years, 3 years, 4 years.

Typically, a little bit longer. It depends on the kind of equipment that's required if you had to upgrade, equipment and the like. And the reason why these typically longer cycles is because of that, but you -- what we go in and we'll do an upgrade, we'll get a long-term contract. We'll not only -- and then with that, we get a service over -- it can be 15, 20 years based on supporting that, an overall value proposition. So it depends. It really does depend on what the current rate is and ultimately, what you do to create the future state that ultimately delivers on our customers' expectations and then how do they look at that from an economic standpoint and for value.

Okay. Do you guys actually go after some of your competitors' installed base? Are you offering OpenBlue type solutions? Because if you can use -- if it's system agnostic, why not?

So we can bridge -- great question, Gautam. I think it's going to be a real competitive advantage. We can bridge to -- with our OpenBlue bridge. And what that means is that any other system within the building, whether it be our systems or competitor systems, we can connect, we can then utilize the data and then within the database, put that to work and ultimately supporting the services and outcomes that we commit to deliver for our customers. So that has been -- and today, historically, we've done a lot of service on competitive equipment. Now recognizing that historically, that's been more weighted towards mechanical, right, more great fix, maintain the equipment versus now. We can now connect. We can bridge competitor equipment with the use of the data that fundamentally now allows us to be able to deliver something more than what historically has been delivered through the traditional services. And so that, I think, for us is going to be a big plus as we look to continue to accelerate our service growth.

Do you actually have sales force incentives out there that will like go out there and put feet on the street and call on your competitors' installed systems to help upsell OpenBlue? Or at least educate the customer on what's possible?

Well, what I would say is over the last 2 years, and we've been communicating this, where services was embedded within our field business and more of create an installed base and then ultimately, one-off go after the service versus setting it up as a strategic business. So over the last 2 years, we've got a service, it's very much aligned to our solution-based business, but standing up as a service business that really goes at it much more strategically. With understanding installed base, we're attaching contracts, how we're connecting each of those contracts. And then from a service offering standpoint, how we're deploying our digital capabilities to further enhance the contracts that we ultimately have with those customers. There is a -- we've launched 12 new services, digital services. And again, I would say, we have hundreds of millions of dollars of targeted back -- targeted pipeline that we're going after that has payback. So you say I target my customer base, I launch a service, and then I can tie it to a payback to that customer. And so we're at that stage now with the connectivity and then supporting -- which ultimately would yield more revenue per PSA because now you're taking that PSA that's connected, you've got a digital framework and you can now add new services very easily on top of that, using the data within the building.

I was going to ask on that service thrust that you guys stood up a couple of years ago. There's been some traction, meaningful traction in terms of penetration -- attach rate on your existing installed base. What is sort of the upper limit? What's the entitlement on service attach? And how long do you -- how many years do you think it'll take to get there?

So we're -- I mean, we're making good progress. I mean when we started and we did the baseline well over a year ago, we said we're roughly mid-30s. And last year, we had a nice pickup, I think, about 400 basis points to about 40%. So that would be with the installed base, the active installed base, we've got contracts that supporting about 40% of them, right? So then we said, that now on a go-forward basis, we're going to accelerate, and we're going to -- we think our entitlement, depending on you can assess your customers are they self-serve themselves and then is there some level of service that we can actually provide to them also. So we're trying to bring that entitlement up higher. So we think it's in the 70%, 80% range that we should be able to achieve. This year alone, I think, we're on track. We increased our attach rate 100 basis points in the first quarter, and we're tracking very well to get to probably 400 or 500 basis points for the year. We'd get up to kind of mid-40s. And I think as we continue to enhance our overall technology, the way that we're standardizing, how we're connecting, the way that we're ultimately attaching PSAs, we're creating a machine. I mean the idea of -- we've got an installed base, you do lead generation, you do conversion to PSA connection, PSA and then you do the same when you're launching these 12 new services that we've already launched on top of that PSA base. And so that gives me confidence that the overall value proposition is working. We are differentiating and we're starting to see momentum in our pipeline development, in conversion. And when you look at our service business in the first quarter, I think, the orders were up 7%, led by -- it was actually double-digit growth in North America, which is where we have a strong base. So we had growth across all regions in domains. And I think that is a demonstration that we're getting higher attachment. We're getting higher revenues per customer and that we have a pipeline that suggests that's going to continue to sustain. And we've committed to be high single digits here for the year. And so I think we're off to a good start in the year. And I think we're on track with where we thought we'd be as we're transforming the company into a project -- from a project-based business to a service recurring revenue business because of the value propositions that we bring that's leveraging not only our product technologies, but also the overall digital platform with OpenBlue.

Have you guys ever given kind of a rule of thumb for every 100 basis point improvement in the attach rate? It equals x million dollars a year of revenue -- of recurring revenue. Do you have any?

So we've been doing a lot of modeling. And so all of the modeling we've done with all the pieces, so think of it as you've got the -- on the front end, you've got higher connection, higher PSA, so you've got more -- from a digital capability standpoint, more digital capability to deploy new services, you've got higher PSA, which is the base on how you actually add new services and then you get ultimately higher revenue per customer. And then on the back end, with connectivity, you have lower attrition because you can better serve, you can fulfill and better serve the customer, you have better insights into what you're actually providing to the customer, and you can pivot and make sure you minimize the variation of the service. And so we modeled all of that based on -- I think, we projected that we're going to grow 200 to 300 basis points above. So this year, we're going to be roughly -- we said to -- what is it, 7% or 8%. And then on a go-forward basis, we're going to be able to sustain that and continue to accelerate because of these contributing pieces. I mean they come together in the model. So think of it as right now, we're projecting about 200 to 300 basis points above the market growth because of the -- with the strategies that we've deployed. You're on mute.

Sorry about that. Again, rookie mistake. I should know this. Yes. I was going to switch quickly to Fire & Security because one of the things in the long-term forecast that was given, it looks like Fire & Security was going to grow kind of at a similar rate to that of the HVAC market. And that's bucking the historical trend of the old Tyco, if I recall. So I'm just curious, what gives you that confidence? Are you -- what is sort of the forward visibility of the front log on some of the Fire & Security end markets?

I mean I think -- the way I think about it, Gautam, is that when you look at the commercial HVAC is certainly -- we believe we're going to outpace there because of the -- not only the product but our go-to-market and our ability to really differentiate with OpenBlue. And that's a given, and I think we've demonstrated that. When you look at our commercial HVAC, because we don't include our book-to-bill orders in our overall orders like our competitors. But if you look at our products business, we grew mid-teens revenue and our orders were double, more than double, double that, let's say. But we don't -- because of the variation in how we book to bill, and so we're -- when we look at each of the platforms, we've been gaining share. And so that's from a commercial standpoint, and that's continuing. When we look at fire and security, it has historically been a GDP-type growth business, right? I mean -- and so I think we're -- and that will continue. We'll have leadership product to be able to differentiate and be able to create the installed base. The real opportunity for us is that we've got a different mix than the other Fire & Security players at about 50-plus percent of our revenue is service. And so everywhere we have service today, we have an opportunity to be able to combine that with the other service, domain service and fundamentally change what we're delivering. And it does tie to some of these other outcomes. And so what I think is when you look at our installed base, when you look at all of the equipment being connected and fire and security being an important part of the equipment within the building, and now utilizing the data, there's a lot of sensing in fire and security systems. And that sensing has got critical data that ties to the optimization of energy consumed in a building. It's used to get to a clean air delivery rate. It's used to optimize usage of space. So a lot of data that ultimately then gets put into applications that it could be a significant value proposition. And so I think for us, it's our ability to be able to now leverage that base, leverage OpenBlue and then fundamentally change the way that we're providing services to what historically we've done. So we believe similar to HVAC, we can -- that is contributing to the 200 to 300 basis points of increased growth over the market on a sustained basis.

Got it. That's helpful context. George, I know there's only 5 minutes left. I did want to touch on a couple of things. Why is North American resi HVAC for you guys core? Because you've been somewhat subscale. I know you're expanding capacity now. But how does it tie into the commercial HVAC strategy and the footprint you have broadly in digital?

So for us, I would say, when you look at resi HVAC, where -- if you included all of our unconsolidated JVs within JCH, we're roughly $5 billion, right? So we're a big player in resi. And when you look at the technologies, not only inducted but also in [ unducted ], I think they are converging and ultimately going to be employed for the next generation of solutions, especially as it relates to heat pumps and the like. And so that is our portfolio and what we've done within both of those portfolios, we've had reinvestment, not only standalone but also reinvestment in how we're leveraging the technologies that fundamentally is going to create a multigenerational plan of new products. So that's one element of why it's employed. And then when you look at it from a go-to-market standpoint, what I would tell you, the way that the market is served is with a full line curve. And so whether it be -- and you might say where is the split, is it resi to small or small to midsize or to -- there's probably some differentiation there, but what we've learned is having the full line card from an overall distribution standpoint is very important. And what we've done, Gautam, is we've -- with the investments we've made, we've been very successful in developing real competitive product that's leading in the industry. And as a result of that, that has enabled us to expand our distribution nicely. And within the current environment, we are exceeding more than what we originally planned with those investments. And so with those investments, we did plan additional capacity, which we talked about in Mexico and that capacity is coming online. And it's been, from my experience and having done a lot of work in operations, it's world-class, and it's been done in a cycle time that even in spite of some of the supply chain challenge, has been done extremely well and done on time. And we're already ramped up. We've already got 1/3 of the capacity on board, online, and now we'll complete that through the course of the year. And that will enable us here because when you look at our business, because we were smaller than the rest, we didn't have the capacity that ultimately could scale to some of the increased demand we see here during the cycle. But I think going forward, we feel very good about the product, the ability to leverage the technologies, differentiate the products, and ultimately then leverage the distribution that we've built to be a real player within residential.

And do you think -- do you have a view on North American resi and kind of where we are in the cycle? Because it has been sort of a big outlier with respect to recent growth.

Well, I think, we're aligned with the others and what their perspectives are. We all see all of the same data from an industry standpoint. We're expecting the industry to grow mid- to high single digits this year. And a lot of that is supported with backlog. Our backlog in our product-based businesses, which would include our resi business is up almost double, and it's a book-to-bill. So you can imagine that although we've been growing nicely in products, our backlog has been growing there also, no different than our backlog and our project and service-based business. So we think -- and that's also supported by pricing. There's been a lot of pricing in the space, and we've been very much a part of that leading that. And so we do have -- the toughest compares will be Q1, Q2. We grew our North America business, 17% in Q1, and it's on a plus 45% compare. So we're performing extremely well. Obviously, we're executing a significant amount of backlog versus what normally we would experience because of the backlog we built, that will carry us well into Q3. And so I think we expect the market of kind of mid-single digits, at least for the near -- beyond getting through the backlog. We expect it to grow in line with that, and it will be slightly better this year because of the back that we've got.

I know we're running up on time. I did want to ask about cash redeployment. You did a small acquisition or it seemed like a small acquisition recently. Kind of what's in the M&A pipeline? And can you talk about your expectations for cash conversion over the next couple of years? It looks like you're finally -- you guys are finally in that spot where 100% plus is the right number in terms of conversion. Can you just talk a little bit about M&A pipeline and cash conversion from here?

Yes. So M&A, we've got a very, very strong pipeline and in line with the strategies that we've communicated. We said it was going to be focused on key technologies that ultimately is going to support our digital and smart buildings platform. I think FogHorn, which you referenced, is a great example where we were developing organically that capability. This accelerated now the capabilities we have to really advance what we can do with AI at the edge, which is going to be a very important element to a lot of the services that we discussed earlier. We -- I think, a good example of filling white space is Silent-Aire because data centers is, obviously, a very attractive vertical, growing very nicely, and that gave us capability that we didn't have to support those customers. And then the other is the service footprint. So as we're digitalizing our service and developing a strong base of service in all of the key markets, anything we can do to expand that to make sure that we're positioned where the growth will occur, especially with some of the key verticals. That's been our focus, and we've got a very strong pipeline. We said that the conversion of this pipeline would add about 1% to 2% top line in addition to the organic growth that we committed to. I think that's coming through as planned this year. So most of the pipeline, what I would say, are smaller bolt-on assets. We certainly -- with the organic opportunity that we have and the way that we're executing, prefer this to a large transformative acquisition. And like I said, I think, the overall -- we're -- our current leverage is 1.9x. So we've got plenty of capacity in line with the overall deployment. We said we -- very confident in our ability to deliver on the commitments we've made over the next 3 years. We'll increase the dividend in line with our overall performance. And we've been -- we've demonstrated that from a buyback standpoint, we've been also capitalizing or being opportunistic with buybacks. And so I think that -- what you've seen will continue, and it will continue to play out as we've executed, as we've demonstrated.

Cash conversion, 100% plus. So that's that.

Yes, the cash -- I mean, the cash conversion here, we've done incredible work over the last -- with the simplification of our structure and building standard processes and then automating those processes. Without getting into a lot of the detail, this started back in 2018, and we've been able to achieve free cash flow conversion of 100% plus for a number of years here. As you know, our executive compensation has been directly tied to that and being able to sustain that. Like I said, we've got -- there's still opportunity to improve, which we're -- we've got dedicated teams working to continue to improve the processes and that's around policies for collections, payables, inventory management. But we're absolutely confident that we can continue to deliver the 100%-plus cash conversion. That's a critical fundamental for us.

George, thank you very much for sharing your insights. Really appreciate it as always.

Gautam, great catching up. And yes, I look forward to getting together in person sometime.

Yes. We look forward to it. We got to do it. All right. Take care.

All right. Take care.