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

It's Johnson Controls, and we are very excited to have George Oliver back with us again. George became CEO of JCI in September '17 after his brief but important role as President and COO of JCI. And he was a CEO of Tyco from 2012 to 2016, and he did spend more than 20 years with GE, so a long time.

I know.

So with that, George, let me just start out, we'll get sort of the short term out of the way if we could. You just reported a relatively strong Q1. Seemed supportive of your 8% to 10% revenue growth for the year. So maybe we can start with just an update from what you've seen from a demand perspective, and then we'll get into supply chain.

Yes. I mean I'd start by saying that, overall, we're executing extremely well on our -- not only just our growth strategy, but our ability to be able to execute the SG&A cost out productivity that allows us to be able to deliver over the next 3 years 250, 300 basis points of margin expansion. So from a growth standpoint, we're hitting on all cylinders relative to if we start with -- let's start with Global Products. With the reinvestments that we've been making across our product platforms, we've been executing very well. In most cases, gaining share above market growth, and that has continued, especially during this cycle. And I feel really, really good about the progress we've made, and that's going to be a critical contributor to when we think about the secular trends around decarbonization, healthy buildings or ultimately, autonomous buildings. Obviously, products are going to play a big role. And when we look at our revenue, we achieved 14% growth of revenue. We don't report orders in our Global Products business, but our orders were double that. And so we're positioned for the rest of the -- as we go through the rest of the year with very strong demand. If you look at our field-based business and the backlog that we've built there, we're up over 10%, and we have a $10.5 billion backlog. And a lot of that has been through our success of really differentiating the type of solutions that we're building. I would start with -- in the HVAC -- the Commercial HVAC space, we're seeing tremendous performance across the board. Our Commercial HVAC was up double digit over the last quarter. And in many categories, we're up even more than that as far as the backlog. And so that has played out extremely well. And then as we think about the type of solutions that we're building now for more of the focus on indoor air quality, that has been a huge, shorter-cycle demand that's come through and built backlog. So overall, I'd say with the backlog and then we're projecting -- so on Global Products, we're projecting double-digit kind of low teens growth for the year, and that's supported by the -- what we see in the short term and then on our project-based business with the backlog we have. And to date, we had roughly 5% or 6% growth in the field in this last quarter. We continue to accelerate through the conversion of that pipeline through the course of the year. And so that gives us tremendous confidence that we're well positioned to be able to deliver on the 8% to 10%. And then the -- as part of that is also the pricing. We talked about that during the earnings call, where we're going to yield 5 points of price. And when you think about that, certainly, in the first half, we've had some pressure because a lot of the projects that are turning in the first half were actually booked prior to any of the acceleration of the inflation. Now we claw back and we ultimately manage those margins. But in the last 9 months, as we had accelerated, we've been very robust in our ability to be able to price for what we saw the future inflation will be as we model the business. And so as we look at the backlog that's going to convert through the course of the year, we're going to start to see much better. We go from a headwind in the first half to a tailwind in the second half from a margin standpoint. So as we look at our margin structure, with the segment margin, we committed to get to roughly -- it's 50 to 60 basis points. Now it was down 20 basis points from what we originally said. And it's purely because we're getting the acceleration of price offsetting the additional costs now that is being modeled in what we're ultimately pricing. So I think, overall, we feel -- given the environment we're in and what we're seeing in the markets that we serve and now with the secular trends, we're well positioned to be able to deliver on the growth.

So a lot to sort of follow up on there, George. So let me just take the last thing you said about price versus cost. So like is what you're assuming basically that inflation stays relatively consistent and that pricing flows through? How do you get sort of the flip from the headwind in the first half to the tailwind in the second half?

Yes. So we've been -- when we -- as we go through '21 -- early in '21, and as we saw the inflation starting to accelerate, we made sure that over the last 2 years -- or maybe 3 years, we've been building pricing capability. So very disciplined, strategic pricing for each of the markets that we serve with the domains as well as in the field-based business. So as we saw the trigger, we saw the signal on the inflation, we have a model that immediately begins to model what a forward-looking cost is going to be. And so as we did that, our acceleration of taking not only the materials inflation and then the additional pressure that we saw on components coming through the -- because of the supply chain disruption and then all of the extra costs that we're incurring because of logistics and disruption, we immediately have been putting that cost into our model. And so as we've been pricing on a forward-looking basis, we're taking -- we're making sure that we're conservative, meaning that we're pricing for all of the cost that's going to be incurred at the same time that we're working feverishly to be able to reduce that to be able to mitigate that additional cost as being experienced. So I think that gives us confidence that based on our model and the agility that we've had and how we've been pricing with the margins we put into backlog as we get through the course of the year, we're going to start to see a much higher price based on the cost that we ultimately modeled. And then on a run rate basis, for the year, that supports the 5 points of price for the year. But more important, on a forward-looking basis, we've got a much higher margin in backlog not only as we exit '22 but also as we begin '23.

And then maybe just talking about operational constraints. Have you seen any alleviation in all of supply chain you [ add? Did Omicron first ] start to wind down here? Anything happening along that front?

Yes. So -- I mean I was -- started it by saying that the last year or so has been -- I mean, given the experience that I've had running supply chains and I've never seen anything like it, I would tell you that our team has done a phenomenal job in mitigating the impact and being able to convert and execute on our revenue growth. What I would say, short term, in addressing your question, January and into February, we saw a high absenteeism because of the Omicron. That has been significantly reduced. And that also has had an impact. We talk about labor. We talk about supply chain constraints. Not only is it really driven by -- I would -- there's really like 3 different categories, the one being semiconductors or microchips certainly is an important element, especially as we digitalize everything that we do. Everything that we put into the field now has chips. And we've been very agile in how we've been not only strategizing the technology but the resiliency of that supply chain not only short term and longer term. And the second big one, I would say, is purely labor in North America, that given what has happened here with the pandemic and the like, certainly, we've done a really good job in attracting labor and supporting our growth but it's also depending on our supply chain doing the same. And so we've been -- that probably has been the biggest challenge, making sure that our second and third tier suppliers that are supporting our manufacturing facilities actually have the amount of labor that they need to then be able to support our growth as we get through the year. And so we've been very active, working with all of our supply base. I would say, overall, it's improving, less of the challenges that maybe we're experiencing some -- during some of these surges of the virus. But again, it's one of these things we're managing day-to-day.

Yes, for sure. So George, it's funny, like a few years ago at this conference, I remember asking about incremental margins, and you told me 30% as a goal, that's pretty good. And now you're talking about 40% underlying incremental margins for the long term. So Olivier coming, I think, has been really good for the business. But let me ask you structurally, what has changed to allow you to put out that forecast of 40% incrementals?

Yes. So behind all of what we've done is that we took this incredible complexity that we had within our project-based business and have really focused on, how do we standardize work? And then with standard work, how do you then leverage the scale? And it can be in CoEs that do the design of our project installations, the way that we deploy our equipment or projects, it's through every element of what we do, right, from the commercial activity, right through the engineering activity, right through the execution of the projects. And so we've taken all of that variation out of the field, standardized the work, really built functional excellence just to be able to support the work. And then you have the ability to be able to then leverage the volume that are coming -- that's coming through the overall machine that you built. And so that has given us all the work we did with SG&A and cost of goods, it was working to simplify that structure. So as we simplify, make it more repeatable, then as we put work -- put volume through that structure, we're going to get much more leverage. So by executing what we did in the quarter, we actually had incrementals of 40%. It was being offset by the additional price that ultimately was required to offset the additional costs that are being incurred, which then ultimately, in the quarter, had about 100 basis points of headwind that will come down a bit here in the second quarter and then significantly down in the second half. But I mean that has been purely the one fundamental that has impacted our ability to be able to get to the first year, margin expansion that we've committed as part of the 3-year plan to get to 250, 300 basis points.

Yes. Does the plan vary by geography in the sense that I feel like you have a pretty complicated European setup? Is that a true statement? And is that kind of what...

Well, we've been doing the same in all of the regions. So everything we do on any of the standardization of work, whether it be install or we -- I'm sure we'll talk a little bit about service, we are building a service machine right from how we look at our installed base to how we convert with technology and connectivity and ultimately then, how do we build new services with the OpenBlue capabilities. But no different than what we're doing in North America, it's the same as we're doing in Europe and same as we're doing in Asia Pac. So the standardization is working across the board. You start from different positions, right, based on what the current structure was and what it could be. So the answer is there is difference, but I think as time goes on, you'll get much more standardization or consistency of how we're operating the business no matter where we are across the globe.

So I should ask you about service. You mentioned it. So maybe talk about how far OpenBlue is and sort of its maturity in the use case for customers. And then obviously, you have a target out there of 7% service growth. The conviction level and sort of that longer-term growth, I mean, that's a big deal for you guys because remember, when you started, it was flat basically.

I think that you got to start with the framework of service. We're about a $6 billion service business. Historically, if you look at the type of service we did, it was break, fix, maintain equipment that we deployed in the solutions that we ultimately installed, right? And that was -- and the whole strategy was build the installed base and then there was a service entitlement. And whether or not we actually got to the entitlement was secondary, right, I mean, if you look at it historically. So when I took over, we put service front and center with the idea that we created an installed base. We differentiate that installed base with not only our product but also the digital capabilities that we can deploy. And then because of the value proposition that we can bring to not only what we've done historically from a mechanical standpoint, but with the connectivity to that install, we can then ultimately mine the data and significantly enhance the outcome that we can ultimately deliver to our customers. And so by doing so, we started the journey. If you go back a year or 2 ago, we said we're going to start with focusing on attach rate. And so we started off with what we said with our installed base, when you look at our chillers or whether it be our Metasys installs or whether it be our fire detection systems or our installed base, we took a full inventory of where is our equipment today and what do we do today to service it. And we said we only had 35% of those -- that equipment with service agreements. And we said, well, starting there, there's a significant opportunity to go back and start to build the service business focusing on the installed base, converting that and ultimately, getting to PSAs. Now that -- a lot of that was not connected. So we're now up to 41%, which we're making significant progress. The second part of that was then within that installed base, how do I get connectivity so that every time I get a PSA, I get it connected? So I immediately then have much better insight into not only how the equipment is working but then how I ultimately service that equipment to deliver on our agreement. So that's number one. And then once you have the connectivity, we have demonstrated that with the data that we pull out of that equipment and/or -- and other equipment within the building, we can significantly enhance how that equipment is put to use within the building. And so then you deliver with connectivity. We now have launched a dozen OpenBlue-supported applications that the value proposition is reduced downtime of the chiller or reducing energy -- optimization of energy consumption by 20%, 30%, 40%. And so there's a lot of opportunity now to take that. Once you get that contract and you get it connected, then you can build on top of that with additional services. And so our model, when we laid out to get to 200 or 300 basis points above market, so recognizing that with the old model -- historically, if you go back in the last 10 years, our service business grew 2% or 3%. We got it to 4% or 5% right before the pandemic, right? And then with the pandemic, we -- certainly, it was an opportunity to step back and understand the secular trends around decarbonization and healthy buildings and autonomous buildings. How do we then capitalize on this as an incredible accelerator to now deploy our digital capabilities to really convert our business model to a service in how we support our customers? And so when you look at our -- today, less than 10% of our PSAs are actually connected with a -- you install a gateway, you get a connection, you extract data, you apply AI and you enhance an output. So we're starting at that end. So the -- when you size the market, not only with our installed base but our competitors' installed base also, that we can easily now deploy a low-cost -- a gateway that enables us to be able to put all of our data, all of the data into OpenBlue. And then now with our AI capabilities, fundamentally change the outcome. And it can be at the lowest level of operating the piece of equipment. And then more important with these growth vectors that will -- it will materialize what we think is going to be a $250 billion market accumulative over the next 10 years is what is fundamental to now being able to then optimize the solution around addressing the 40% of the global carbon that's within a building. So how do you take all of the multiple systems within a building, use the full set of data that fundamentally changes the outcome and significantly reduce it? We can typically reduce a building's energy demand by 40%, 50%. That's a big deal. And then on healthy buildings, we -- you can solve the problem in multiple ways. Now you need to solve it in the most optimal way, which is not only getting to an indoor air quality that's to a much higher standard, but it's doing it requiring less energy. Well, that one goes against the other because usually, one way to increase indoor air quality is to circulate more indoor air. Now what we do is we deliver a clean air delivery rate, which then takes into account all of the other factors within the building using OpenBlue and then optimizes how the HVAC system then is operated -- configured and operated to be able to deliver an indoor air quality rate. So those are the outputs of the value propositions that fundamentally, we're positioned -- we're going to be positioned much more differently than our traditional competitors to be able to capitalize on.

So you kind of answered my next question, but I'll ask it to you this way, George. So like when I look at your target of 55% attachment, like it feels to me like there's low-hanging fruit when you have low attachment rates, right? But then as you get up, it's a little harder, right? So is that true? And so does -- because, ultimately, it's a 7% growth that we want to ascribe to. So it seems maybe it's easier now when you've changed perception, digital is coming in. How should we think about that?

Our entitlement of service -- when you were to say, okay, based on what we've learned, customer back relative to the value propositions, whether it be at the individual equipment level or now supporting some of these larger growth secular trends, if you were to say, what is my entitlement based on my installed base? The JCI installed base but also our competitive installed base and say, what is our ability to be able to convert? Because today, we do support customers that have multiple OE equipment within their facility that we ultimately service. And so our strategy is that we're going to connect everything and then we're going to be able to get -- our entitlement is multiple times the size of our business today. And the ability to convert on that entitlement is understanding the installed base, getting the attachment with a connection and then fundamentally differentiating the service we perform because of the way that we put the data to use with OpenBlue. And I believe that when you look at our growth rate, and we're seeing it now, we're starting to see real traction that we get to -- this last quarter, we were at 7%. We're projecting high single digits for the year. That does have a little bit more price, as we said, during the -- our earnings call. But I'm confident that our -- now from a market sizing or the way that we're executing and deploying the solution set with the connectivity that we're going to like what the result is, given the ability to be able to grow services kind of high single digits.

So one more question on service for now. So like your transactional service grew faster than your contractual service when you look at your 7% order growth. So what is that? Is that just pent-up demand? Is it air quality? Like what is that?

Well, it's both. It's -- when you look at our customer base, certainly with all the lockdowns and the -- not getting access to sites and people not returning to work and maybe some of this work being deferred because of cost or the like, you got to realize that now with people returning, with sites opening up, with some of these protocols being relaxed, then certainly, the demand has picked up. So that certainly has helped. But recognizing that everywhere we have a PSA, we generate additional service. So even though we have a contractual agreement to provide a certain level of service or an outcome that we -- when we're in a building and the ability to maintain, there's always additional service. So one leads to the other. So you're seeing that we're getting a much higher PSA, which is driving more L&M or more additional service as well as we're getting more access to our customers because of some of these other factors that are playing out.

So George, it's interesting. I asked your peer the same thing, like when we talked about IAQ, it's like, how long can the cycle last? Because you guys, both of you are very big in education and hospitals. And that's where the stimulus has been. That's where IAQ was focused. And I still, at least for me, can't tell is this big peak year this year, is it 2 to 3 more years. How do you guys think about sort of these tailwinds?

Well, let's take into our air quality. So when we first started, I think as everyone began to size that, it was initially a few billion, then it was $5 billion and then $10 billion -- $10 billion to $15 billion. So it's been held somewhere around $10 billion or $15 billion, in that range. We had an incredible year last year. We delivered over $400 million of revenue short term that ultimately was because of that stimulus and the strength that we had within schools and key verticals like that, that drove the demand. We've been very much focused on really differentiating the solution set that we deliver. We're now -- we've launched our indoor air quality as a service, which takes into account all of the factors that contribute to that, which ultimately we can manage. We can upgrade and manage and deliver on an outcome consistently. And so -- and then with that, we can convert to a service versus a onetime event. So last year, a lot of the $400 million was mainly we went in and did an upgrade, and it was just a onetime fix as far as an install. And now it's -- we're converting to more as a service. How do we bring our technology together with our domain expertise, configure a solution that ultimately we deliver with OpenBlue and as a service? And so we're getting -- a higher percentage of our business today is now more service than it was purely just upgrading equipment. And so we're -- our orders in the first quarter year-on-year, we were up 45% into our air quality solution. So that was significant for us. And so I think the trend, we still have a lot of room to go. I think as businesses get back to work and schools get back to fully functioning and the like, I think there's a lot of pent-up demand. And the problem is going to have to be solved. I mean it isn't -- you can't go and put blinders on or ignore the problem. The problem has to be solved. And so we're working very proactively with all of our customers, all of the key verticals that we support to make sure that we're positioned to support them and ultimately deploy the solutions that are most applicable to what their space is.

So let me shift gears. [Operator Instructions] So just talking about install for a second. I think backlog there was also pretty strong, 11% year-over-year. You highlighted retrofit activity, new construction APAC. Obviously, there's a little bit more concern about interest rates. How do you step back and sort of look at the install cycle here over the next couple of years?

So when you look at -- I mean, we have been in a recovery, and that's been the -- that has lagged the rest of the industry, right, as far as recovery. Now we supplemented our demand last year. And as we get into that with a lot of the short-cycle demand, like we talked about indoor air quality and those type of upgrades, and that was pretty robust and helped our install business. When you look at the leading indicators of what, at least, the near term is going to be, ABI is one, and that's been pretty steady and positive over the last year. You've got construction starts, which suggests in '22 that -- and I think some of this is U.S. data that's going to be kind of mid-single digits. So you got leading indicators that suggest we are in a sustained expansion here, where you got to realize that residential and some of these other sectors that obviously had a much faster recovery from the pandemic, we didn't quite see in the commercial space because of the lockdowns and more of the decision-making around capital deployed into new structures and the like, but that all picked up pretty quickly beginning of last year. And from a cycle standpoint, there is a lead time to how that converts to projects and then ultimately to the execution of revenue. But I feel, based on our pipeline right now, I would tell you our -- not only is our backlog at a high -- with our backlog and our field-based business, our pipeline is as big as it's ever been as far as projects that we're working on. Now if you were to segment that, what's driving that? I would say decarbonization, sustainability is number one. There is a significant amount of projects now that are very much focused on that deliverable, which that plays to our strengths given not only OpenBlue and the digital capabilities, but combined with our domains, especially the experience that we have with our performance infrastructure business, and so that's strong. And then the verticals globally that I think would support that also is when -- industrial is pretty strong globally. You've got data centers that are strong. Health care, I would say, is another, that's strong. Some of the education around what we talked about with indoor air quality and the like has been strong, where there's been a lot of stimulus. So right now, I feel really good about not only the backlog we've built but the pipeline that we're continuing to convert, and it's very much aligned to when we laid out our strategy, especially as it relates to the secular trends. I think it does uniquely position Johnson Controls to be able to now capitalize on those.

So George, I know you'll tell me we're in early innings of the decarb cycle, [ as you made ], like -- but are these larger projects that are now coming into the backlog? And are they using -- like performance contracting is still a small part of the business, but is it -- is that what these things are now?

So when you -- it's a whole -- think about decarbonization. We sized it to be about $250 billion. And it's really -- the reason why -- number one is the -- 40% of the global carbon is within buildings. And then the ability to be able to reduce their carbon is pretty significant. You can reduce, let's say, 50%. And so that is what's fundamental to how we size the opportunity with what we can do to achieve that value proposition. And so it is built on the -- it's not going to be served by the way that the market has been historically served by individual domains. The -- what is important here is that the outcome, the most optimal outcome is built on being able to take all of the systems within a building, be able to bring that together into one database, and then depending on the factors that contribute to the optimization of that space, you can then manage and manage the data through OpenBlue and then the outcomes that OpenBlue generates. That is fundamental to our ability to lead in decarbonization. So that being said, the customers aren't going to buy the way that they historically have bought. But what I would tell you is that as we advance the -- especially if you take -- you looked at our 150 top enterprise customers and the way that we historically engaged, it was domain by domain, maybe to the first or second level of management but depending on their structure who we ultimately sold to. When you start talking about decarbonization, you're now selling to the C-suite. And you're disrupting how they think about the problem or ultimately go about solving the problem because you're changing capital allocation. You're potentially changing how OpEx budgets are managed or set managed. And so you go through this discovery and understanding if they've made a commitment to get to net 0. They've got a certain amount of building stock. How do they get their buildings to net zero and then how do you engage strategically understanding that strategy to how our strategy aligns to being able to deliver on that with them. And so you get into -- you're typically talking to a Chief Sustainability Officer or to the CFO or -- I've talked to a number of the CEOs of our top customers and understanding -- really through discovery, understanding the problem and then ultimately what is required to attack the problem. And then it starts the process of the how. And then we do advisory services, consulting, understanding what -- how do you optimize the building by upgrading equipment, deploying OpenBlue, using data and ultimately creating outcomes that historically haven't been achieved in the building. That is what actually happens. And so our pipeline right now, like I said, is up over $1 billion of projects that we're currently working on to convert that are ultimately factored. And really, based on the customer commitment, in the sense that we get relative to where we are, we're in a position to be able to convert on that.

So George, it's easy to focus on HVAC. There's a lot of things going on there, but there's a fair amount of your business that's Fire & Security, which I know you know really well. What's changed in Fire & Security since the Tyco days? Because it looks like the growth is quite strong compared to where we were in the Tyco days.

So pretty much like across the portfolio right now. It starts with being a leader in technology and product. And so we have been reinvesting, no different than what we've been reinvesting, how we've been reinvesting in our HVAC platforms but also into Fire & Security. And I'd say, across the board, we're in a leadership position. Take security. Security was viewed years back that it was becoming obsolete. It was just an alarm. And that at the end of the day, the business was being disrupted. Well, we've invested in the next generation of technology, which was Qolsys and that was on the intrusion side. So we have intrusion access and video management. And when you look at those businesses today with how we're positioned, we've been -- we're positioned where we're delivering double-digit growth. And so again, it's through business -- technology, product, business model that ultimately delivers on what we see the market opportunity to be or the problems that we're trying to solve. Those platforms are integral to a smart building because a lot of the data that is managed through our security systems, that data is then put to work with data from other building systems that we bridge with OpenBlue, that then is used with -- and we apply AI depending on the problem we're trying to solve or what we're trying to optimize to get to a different outcome within the building. So they become very critical to what I see the future to be as we try to solve and capitalize on the secular trends that we're focused on. On the fire side, the core of fire install, you could argue, is more GDP. It's more governed by the expansion of the market from a GDP standpoint. What I would say has been -- was underexecuted was our ability to really get to our entitlement of service. And again, it's through connectivity and not only getting all of our fire panels connected but getting the insights into how they're being managed, how they're being serviced and then, more important, how that data also gets put to work in other building solutions. So I think those are the things that are different. And I think when you look at the strategy that we have to not only outperform each of our core businesses -- outperform the market growth within our core businesses but now, more important, how do you take the total and really fundamentally differentiate the solution set that we can go after these big secular trends. I think that's what uniquely positions us, they do.

So we only have about 5 minutes left. So let me ask you a little bit about the balance sheet. You said -- you talked about 1% to 2% M&A each year. You obviously bought Silent-Aire, a very interesting space. Are there any other white spaces that you really want to focus on? And the environment this year, George, seems more volatile. Obviously, valuations have come down. Is that helpful? Or are sellers going to be pretty resistant to selling at lower prices?

So similar to our other strategies, we built a real, real capability in M&A with a new M&A leader, François Mandeville, who joined us from Danaher and building a real M&A capability. And he's been focused on supporting the strategy that we've laid out. We're focused on continued leadership in product. And if there's any gaps within that product set, depending on the verticals that we support or the trends that we see happening, how do we make sure that we're opportunistic and going after acquisitions? I think Silent-Aire was a great example of that, where data centers represent significant growth for us within our core. It was a space where the market was changing based on the configuration of the solutions that are brought to that market, and Silent-Aire gave us that capability. So that's a great example. That's number one. Number two, I would say the whole digital technology that we've got -- we've built a software machine under Vijay Sankaran, and where we've taken all of our software assets put together into one structure, building one architecture and then with OpenBlue, making that fundamental to all of the systems that we deploy. And so anything that enhances -- so we have an organic road map of what we're investing in and the building blocks of OpenBlue and how do we continue to advance that. And then we look at what potential acquisitions could help us accelerate, not only build -- acquire that capability but accelerate the overall deployment of OpenBlue. A good example of that is FogHorn, right? That as you digitize a building, it's important that you build intelligence at the edge and you have that compute at the edge, so you can create a lot of functionality there, and that's what FogHorn does. And then being able to connect that with OpenBlue through the cloud and use those outcomes ultimately back into optimizing other functions of the building is very critical. And so the FogHorn is a great example of that. And then what I would say is from a go-to-market and capabilities from a service standpoint, as we think about decarbonization and our ability to be able to really build on this connected service offering and getting the right capabilities and footprint globally to be positioned to support what I believe is significant entitlement over where we are today, those are the focus areas. And we said we would deploy -- so on overall capital, we would continue to support a strong dividend increasing in line with our earnings growth, and we've done that. We just upped that roughly 26%. And then we would be -- we would have a healthy buyback on an annual basis. This year, we'll do -- we've communicated, we'll do $1.4 billion of buyback. And that even after that, we had $8 billion over this plan that we communicated with our Investor Day that we'd have to deploy to do strategic M&A that ultimately would contribute 1% to 2% additional revenue growth as a result. And we're on track to do that. I mean that's what -- we've got a great pipeline. We've got a great team that's working, the pipeline converting. And it gives me confidence that we're very well positioned to be able to, to your point, capitalize on the current market to be able to do the type of bolt-ons and acquisitions that ultimately support -- are right down the middle in being able to take our strategy and ultimately take our strategy to the next level.

So I've got 45 seconds left, so I'll ask you a quick question. Cash flow. Again, since you and I joined each other a few years ago, free cash conversions really come up. Are there still more opportunities there? And how do you balance it versus this year, inventory is key?

Andy, there's always opportunity still.

I knew you would say that.

And so what we've been doing is we -- this obviously is front and center to everything we've done with this transformation that I've led with the team and that hasn't changed one bit. And so there's always opportunity in any one of the elements of working capital, our ability to be able to improve. And we're doing that with streamlining processes and then by streamlining processes, automating processes. And then, ultimately not only supporting what we do in cash, but overall, our execution across the enterprise, we're simplifying our ERP structures also. And so I think there's plenty of room for improvement with what we're doing, and the team is fully aligned and incentivized. It is core to our incentives and ultimately being able to sustain 100-plus percent conversion of earnings to cash.

Awesome, George. Thank you very much for coming here. Good seeing you.

Thank you, Andy. It's great being back.

Yes. It's great being back.