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

All right. Welcome back. We're going to get started again. We're very excited to have Johnson Controls with us today; and George Oliver, who is the Chairman and CEO of Johnson Controls, who started. I think you became CEO in September 2017, George.

Yes.

It's been a long kind of short but long journey, right, like pandemic, lots of things going on. So maybe just sort of starting out asking about that. Like generally, the company has inflected very positively under your tenure. But you've had sort of a number of like external things impacting supply chain, China. Maybe when you start, I remember field execution needed to improve. So maybe you can talk about sort of the transformation that JCI has gone through. What's been good, what still needs to be done. We'll start with that.

Yes. So when you look at that period of time, there's been just a tremendous amount of change that we've actually been able to work through it at the same time that we're transforming the company. And so when you think about Johnson Controls, we're a different company today than where we were 5 years ago. And a lot of that is we become more of a technology company. So when you look at our portfolio from a global product standpoint, we've had significant reinvestment into our portfolio, whether it be HVAC equipment across all of our platforms, and then with the building management systems with that portfolio. And what's unique about Johnson Controls is not only the leadership in HVAC, but combined with the digital capabilities that fundamentally now address the secular trends that are well underway. When we talk about decarbonization, sustainability, elevating now with the pandemic, elevating indoor environmental quality or an industry that maybe has lagged most around digitalization. And so as we think about the future, it's not only in addressing these trends is electrification, and that's through the equipment and a big opportunity with our heat pump portfolio and then digitalization that enables us not only to get the intelligence at the edge of our equipment, but then to be able to bring that into OpenBlue, which is our leadership digital platform that ingests all of the data, not only from our systems, but bridging to all of the other building systems that then gives us a platform to change the fundamental outcomes. And that's reducing energy, improving indoor air quality and ultimately getting to an autonomous building. So that was the strategy of the merger. And then as we've been transforming the company, it's about making sure that we're leveraging not only the products, but now our direct channel, you ask about the direct channel in the field. What we've been doing with the field-based business is taking a business that historically has been more of a mechanical business, contracting mechanical business and now being able to differentiate the solutions that we can design and deploy that ultimately get to a recurring revenue. So a big focus of the company was above market product growth and then taking a field-based business, a solution-based business and get a high recurring revenue of service from that installed base. And we're on track with that execution of the strategy. And when you look at just recently, when you look at our global products, we've been gaining share over that period of time with the investments we're making. And from a field-based business, we've been able to now get our service flywheel going from a break-fix service business to a digital service business where everything is connected -- utilizing all of the data. And then through that, we're now creating outcomes that are very different than what historically we've been able to achieve. That has been really the core of the strategy. And I think overall, in spite of the pandemic and then the supply chain disruption and resulting inflation and then the disruption with Ukraine and all of the above, I think at the end of the day, when we step back, if I go back and evaluate where we are to the commitments we made for 2024, we are definitely on track and being able to execute on those fundamentals. Now some of that might be a little bit delayed because of the overall period of inflation that we've worked through here -- but from a fundamental standpoint, we're building strong fundamentals that are going to be able to sustain above market growth with a much higher level of service and ultimately, technology that gets deployed to be able to maintain that.

Do you think the more significant issues, call it, chips or labor availability -- anything else that you want to bring up is sort of behind the company? Are there any lessons stores that you learned through, call it, some lumpiness that you've had?

Well, let's start with that a year ago, right, when we were in -- we were experiencing the most amount of disruption in the supply chain was mainly driven by semiconductor Microchips, which as we have digitalized our portfolio, we're now consuming a lot more of that product. And so as we -- what we learned was that when you looked at all of our digital assets in the portfolio that's been put together, it's been put together through acquisition. And so when you look at the SKU base of materials that we consume to make that product very large SKU base, the learning was and on a go-forward basis, we can significantly simplify the amount of chips that we consume. We can then create resiliency and redundancy in that supply. And that as a result, we have strengthened our relationships with the critical suppliers in a much bigger way, not only to support the short-term demand, but to position to now be able to support the growth that we're experiencing through the deployment of our digital capabilities in line with the product that we're deploying. So I think the learning is that I think what it did was uncover a lot of things that we're taking for granted, right, relative to very short lead time, lead times on most of the components that we were buying that went into our supply chain. And then overnight, with the accelerated demand, we had lead times double, triple, in some cases, go from a few weeks to over a year, and that's what ultimately created the disruption. So I think we realized that supply chain or what we do is an important element of our strategy that -- and then the resiliency and redundancy of that is critical in each of the markets that we operate to make sure that we're positioned to be able to deliver on the growth.

Yes. With the understanding that you're never done, like are you mostly done with your resiliency and redundancy actions around supply chain?

Yes. So where -- when you look at our supply chain, where we have supply chain located pretty much in every market that we operate in, and we made sure that we've created the redundancy or dual sourcing and make sure the resiliency around the different sites. So a lot of that work has been being done, and it has significantly improved in our ability -- the predictability of our -- to get the components that we need on time to be able to support the elevated run rates of production that we're ultimately working towards as we capitalize on what we see to be very strong demand that's coming through these secular trends that we talked about previously.

Got it. And then you mentioned it a little bit. So like I think the 2 big initiatives you had, George, when you came in, were cash conversion improving that in service, right? So service kind of speaks for itself. It was flat when you came in, plus 10, I think, was in the first quarter of this year. So how would you characterize service, though, going forward? Like do you feel -- I think you kind of said it, but you're on track for driving -- in '21, I think you said you're going to drive $2 billion in additional service revenue by '24% -- you feel good about that?

Yes. When we laid out that plan when we went through the Investor Day, was there was a flywheel that we said that when we took our company, which historically has been budget-based company that did break and fix service in the field. It's pretty much controlled regionally to how we operated in supporting customers. What we've done is creating now a service business that now everything gets connected, everything that we're putting into the field is connected. We did say that when we looked at our installed base, historically, we weren't providing -- it was roughly about 35% of that installed base. We're providing some level of service to and that we had a significant opportunity not only to get everything connected going into the installed base, but then to create with the data that we extract with that connection, being -- understanding what we can go do with the other installed base we weren't serving. We now have increased that to about 43%, 44% of the installed base. And then now with the connectivity, we get incredible insights. -- that ultimately, we can go back. And now with our OpenBlue capability, we can go back and create additional value propositions over the core service that historically we performed in maintaining that equipment, now you're getting insights that you can significantly reduce energy consumed or you can do a vibration analysis that gives you predictive capabilities to failure. And then you can take the legacy when you look at the vintage of the installed base, based on what we see through warranty and through the experience, how we can proactively create service events in replacing parts or upgrading equipment that maintains reliability and creates value because we don't get into a disruptive situation with the customer. So there's tremendous opportunities that come off of that, that we believe that not only get a higher level of contracts, you get additional revenue of service because of the added value, the use of the data and then you get from an attrition standpoint, break and fix companies typically have high single-digit attrition. When you get into a digital service business, attrition significantly reduces because of the ability to be able to provide better service, more value and then sustained over the life cycle of the contract.

So George, I think OpenBlue as a concept is a couple of years old now sort of right about -- like where would you assess its maturity as a platform? Like how much more do you think it's mature again, I could say this at the American analogy and innings like where is OpenBlue and its maturity? And how do you prepare these days versus competing digital offerings?

Yes. So all of the assessment that we get externally of our OpenBlue capability, we certainly are positioned in a leadership position in the space we're in. And today, the capability that we have to digitalize our service is we have all of the technology capability to do that, and that's what we're doing on the installed base. And then the added capability as we're developing applications using the data, applying AI, changing the outputs that we can achieve. A lot of this is now going into solution sets that are addressing sustainability to be able to go after the whole -- the decarbonization commitments that have been made to get to net 0, buildings represent about 40% of the global carbon. And so if -- as you're as customers are committing to get to net 0, they have to solve their buildings to be able to ultimately achieve their goals. Well, we have the technology today to do that. So we take not only the leadership equipment and what I call the electrification of the building through heat pumps, but then you deploy OpenBlue with the utilization of the full set of data that allows us to get to outputs that historically hadn't been achieved. And the outputs are obviously reduced energy being consumed, elevated indoor environmental quality and ultimately a platform that can take and automate a lot of the activity within the building. So as far as what are the other priorities within the building. So from a maturity standpoint, we have the technology today to do all of that. Now we continue to enhance the applications utilizing a broader set of the data that allows us to continue to focus on what are the problems that our customers depending on what verticals. So whether you're in health care or you're in different verticals. Obviously, they have different priorities of how they ultimately want to operate and how do we then use our data platform to be able to deliver on those opportunities. So we have made, what I would tell you, based on my experience in technology, we've got an incredible team led by Vijay Sankaran, that we've taken all of our software engineers and all of our data scientists and AI folks and put them into one team and now totally focused on not only at the domain level, making sure we have the technology at the edge within our equipment. But then how does that then get infused into one data platform, OpenBlue, with the applications above that, that really fundamentally change what we can do for the customers and how they're solving what their biggest challenges are with buildings.

So George, I know you get asked a lot of questions about indicators, ABI, Dodge Momentum, what have you. Are you seeing any incremental signs of weakness in any of your shorter-cycle businesses outside of residential, which we'll talk about later. And then and/or is there any sort of a little bit more consternation of customers that's slowing down some of your larger orders? You talked about some lumpiness in North American Install. Did it have anything to do with like customers being a little slower?

So let's start with when you look at the secular trends that are underway and our ability to be able to capitalize on those opportunities, I don't believe is a company better positioned than Johnson Controls for what we're doing. So therefore, from a pipeline standpoint, we get a lot of access to projects that are coming to market. And so when we -- and we go to market, not only do we sell leadership equipment through our indirect channels, but then we configure solutions that ultimately address sustainability, decarbonization, different problems that ultimately we believe that we're uniquely positioned to solve with the combination that we have. So the pipeline right now continues to be very strong as far as the opportunities. Now as we look at the pipeline, then we prioritize where we apply our domain, how we design spec, design, configure solutions that are very unique in how we ultimately solve their problems. And so some of these projects -- it's hard to predict exactly when you look at our sustainable infrastructure business as an example, this is where last year, we converted over $1 billion of opportunity. The pipeline is over $8 billion. Now you say, well, how fast can I convert it? I really -- these are active projects that our customers are prioritizing on their journey to get to net 0. And depending on their prioritization, whether it be financing, there's different elements that come into play that ultimately affect their decision. And so a couple of these projects, they're going to get booked. It's just a matter of timing and how they get booked. So that was a little bit of what we saw in Q1 as we talked about the orders. But given the pipeline, the demand that we see on the commercial side, when I look at our commercial platforms right now in HVAC, so it's anywhere from the rooftop commercial rooftops in commercial, whether we have water cooled, the air cooled chillers whether IR industrial refrigeration because of district heating projects that we're pursuing globally. When you look at the different demands that we see coming in, certainly plays to our strengths. And so we're in the process of expanding capacity in many of these platforms with the idea that based on what we see in our pipeline and how that's going to convert, what we're going to need to be able to produce to then be able to turn that revenue. So it's a combination of making sure that our supply chain is ramping up with critical components that support the growth. It's making sure that our sites are prepared with the adequate capacity to be able to convert so that we can not only address the backlog that we've built, but then be able to reduce lead times to make lead times a competitive advantage and ultimately how we take on what we see to be incredible growth in the space we're in. Now some of that is being driven by -- when you look at whether it be the IRA in North America or whether it be the IRA in Europe or even going back to the green deal what are some of the building performance standards that are being put into place in Europe. When you think about those regulations that we have played a big role in getting the education into the public sector. So they understand when they're making commitments to get to net 0 they're taking into account buildings as being a big element of that. And so therefore, when you look at in the IRA, there was elements around heat pumps and deployment of heat pumps. And when you look at the REpower in Europe, I think those numbers suggested that there's going to be 20 million heat pumps by $20 million, $30 million and maybe $60 million by 2050 that's going to be required. We've been very actively making sure that as the regulation is being put into place, it's aligned to what we're capable of being able to achieve on the journey to net 0. So a lot of the demand is also being stimulated by those regulations. And that looks -- when we look at the pipeline now, being able to support that demand, we see that starting to materialize.

Got it. And just to be clear, as I want to sort of get the short term out of the way. You did say that you saw orders sort of increasing in Q2, right? Have you seen any continuation of that momentum and maybe differences in the product -- Global Products business versus the field anything?

Yes. So we look at -- when we report orders, it's our field-based business. And so when we look at our pipeline with what ultimately got delayed in the first quarter and how that comes through in the second quarter, we saw continued strength in our ability to be able to convert as we go through the year. And the pipeline generation, like I said, continues to be very strong. That's what's most important is getting the visibility to the opportunities. And then in a project-based business, making sure that we're at the table differentiating what we can do with our technology that changes the value proposition. And we do that early cycle is what ultimately then gives us the advantage to be able to convert. And that's certainly a big part of the process. But I see continued strength in the pipeline and our ability to be able to convert and deliver on a go-forward basis, very strong growth.

And just a follow-up on that, China, like have you seen improvement in China in Q2 after being impacting Q1 yet? Or is it still too early?

China, is -- when we got impacted -- we knew and back in, I think it was in the November, December time period when we were shut down when the COVID shutdowns and the like, it pretty much shut down a lot of the -- not only commercial activity, but our ability to be able to actually deliver. But net-net of it, we actually had a decent quarter without all that being said, we were short on -- it's roughly about $50 million of orders that ultimately get delayed because of the shutdown. Now after the first of the year and the opening up has been pretty strong -- and so when you talk to anyone on the ground there, it's back to full strength. The business activity is back to where it was. We're converting on the pipeline. I keep a pretty good pulse with our team there. So yes, we feel very good that, that was a temporary situation because of the lockdown situation with COVID and that now with the opening up that we're going to be very well positioned to be able to now capitalize on that market and really leverage the strength. That's one of the markets that's getting back to service. When we started this journey 3 years ago that we had a low level of service, a lower level of service in that market. Our service growth in China has been significantly stronger than the average. So as we've been deploying the strategy there with getting everything connected, then being able to use the data to get a different value proposition, that all has been accelerated immensely. And so that in that market is actually -- we see that to be a real strength for growth going forward.

And George, it's kind of interesting because like while last quarter, you had maybe some lumpiness, you still raise the low end of your range for the year. And I think, Olivier, when he sort of originally gave that guidance suggested that you would hit the higher end if it weren't for like the global economy falling off. So maybe just exploring the last part of that statement, like so far, so good. Is that the way I should think about it?

Yes. When you look at our fundamentals in spite of maybe there was some noise here in the first quarter and a couple of topics. But net-net, pretty much started the year as we had anticipated. And then when you look at how the year plays out, we're absolutely on track to ultimately achieve our plan. And so the -- when we gave the guidance back in November, it was the idea that, hey, we can't predict the economy. We said if the GDP was 2%, 2% or 3%, then we'd be at the higher end of the guide. That absolutely still holds true. When we talk about kind of how we're executing on the fundamentals. And when I say fundamentals, not only creating the backlog, being able to convert the backlog, the margin that we put into backlog over the last year, how that margin is going to flow in our project-based business through the course of the year because most of that now is all in backlog. And with the improved velocity, the flow, the project flow and conversion is improving. So we have confidence that as we execute on those margins, those margins are going to flow through nicely through the course of the year. So we'll see nice margin expansion. We'll see very strong growth. And then from a product standpoint, which underlies all of what we do is continuing to get back to unit growth. So we've had strong pricing, but with some of the disruption in the supply chain and then this past quarter, a little bit of the softness we had we weren't where we wanted to be with an overall unit growth. But the global products on a forward-looking basis, we get back to unit growth plus pricing. So when you look at the fundamentals of the business, very strong and then the last is from a free cash flow. As we get stabilized, we'll certainly be positioned to be able to, on a run rate basis, get back to 100% free cash flow conversion. Now short term, we've been challenged with inventory purely because of the disruption that we've experienced going through the course of last year, being out of sync a bit in our residential manufacturing and carrying inventory there. And then our -- all of our commercial programs are accelerating. So as we're as we're planning for accelerated growth in units, we're also building inventory and how we're supporting that growth going forward to make sure that we can produce. So we'll rebalance that inventory and make sure that for the year with this year, we committed to be roughly about 85% conversion. But as we go forward, we have confidence that now with the predictability, the stability of our supply chain and then our ability to be able to now consistently execute on this growth as far as on the commercial products, will position us well to be able to not only deliver the year, but as we project '24 and beyond.

So I wanted to ask you about that unit growth because you do have a long-term growth algorithm of 6% to 7%, right? And I think that was before sort of really significant inflation. So there's a lot of unit growth in there, right? And then for this year, you're talking about a high single-digit to low double-digit growth, but that's what mostly price, vast majority of that is price. So why is volume pressure? Is it just supply chain and residential? Is there anything else going on there? Is that just conservative? Like how do you think about that?

Yes. So when you look at the -- we originally -- I believe it was 4% to 7% growth at the Investor Day, the CAGR. And we said very early on, we said we're to the higher end, I do agree. And that at the end of the day, that didn't have a lot of the price that we've gotten as a result of inflation. Now when you look at our -- I think it's important to note that when we look at our field-based business, it's hard to unitize our solution-based business, right? Because I would say that, that business kind of follows the overall, what I would call, more of the market growth. The output of that is then accelerated service growth. So we are getting the unit service growth, which is from a return standpoint, where is a significant amount of the return comes from in our field-based business. So we're getting nice growth. We went from kind of GDP growth as a break and fix service company to now a digital service company that now we're getting well above market growth, and that's going to continue. That algorithm continuing. In Global Products, when you look at the units, we were getting -- when we look at pure units, we were getting good unit growth up until the beginning of last year, it would have been the first quarter of last year. The supply chain is then challenged, right? And then some of the -- when we look at units, there's also some units that go into our solution set within the solution business -- so even though -- it shows that we're somewhat down in units last quarter, we're relatively flat in total units. On a go-forward basis, we're now seeing the units going to continue to get -- to improve. And that's taken into account there is going to be a little bit of softness on units, which is offset by price in the resi the resi space. But on the commercial side, we see continued strong unit growth going forward. So net-net, when you look at the algorithm that we put together for 2024, I think we're well positioned now, obviously, with the pricing on the growth side to be well above what the forecast was and being able to be positioned to be able to deliver on the margin structure that we committed. Like I said, it might be delayed a little bit because of the timing of the recovery from the inflationary period that we just went through, but we're confident that the fundamentals are being built to be able to deliver on those expectations.

So let me ask you one like HVAC question on price. Like I often get the question like HVAC companies have raised price quite a bit over the last few years, like what if demand does lack and stickiness, you guys have continued as a sort of peer group to raise price this year. Commissar off the bottom. So stickiness of price, just kind of more normalized your raising price. How do you sort of answer that question?

So I think price is a function of value. So our focus has been from a product portfolio, having differentiated product that uniquely solves problems that our customers are trying to solve. And then therefore, ultimately, you get the return for the value you create. And so this idea that it's just purely price, I don't believe is the underlying driver. And then I think our differentiation with digital, so what we do not only with digital at the edge with our equipment, but then more important, how we configure our equipment into solutions with digital, then gives you another layer of value contribution. So when we're configuring our product into solutions, that gives us a significant enhanced value proposition. On the indirect channel, it's making sure that then from a product coverage standpoint, we've got the right presence within all of the key markets to make sure that we're getting more than our full share of the market. And so I don't believe at this stage, I think the way that we've been pricing in line with the value creation with the reinvestments we're making from an R&D standpoint, it's in line with what you would expect as a leadership industrial company that's reinvesting and ultimately generating returns. And we've been very -- we made sure that every step of the way that we've led that at the product level, you can see that with the work that we've done in the product margins, not only with price, but then with productivity and higher mix and the like that has contributed to the overall increased returns.

Right. So let me ask you one related question on pricing. Like you've constantly -- you consistently said, right, you've got improved pricing in backlog. It's going to flow through over time. But you still have somewhat extended lead times, right? So it does take time. Are there significant differences regarding how we should think about potential margin improvement between your regions in the field. Like I feel like we want to make sure we understand there are differences between EMEA and North America, Asia.

Yes. So the difference has really come down to mix of the mix of the type of solutions that get deployed. And then historically, what the mix has been of service. And so as we -- you started with pricing, pricing in a field-based business is making sure that you're adequately costing for the cycle time that you execute on. So typically, our project-based business is anywhere from 6 months to -- it can be multiyear, but it averages, let's say, 12 months. And so when you're costing a project-based business, when you're contracting, you look at every one of your cost line items and you project what the inflation is going to be over the period of that project. And then you then book then from there, you -- from the value you create, you price and you price a margin rate above that -- and then you also get a better view of then what is the service revenue stream that, that project generates going forward. And so where we got into a challenge was when we're booking projects in '21, we were anticipating inflation, but we weren't -- we were not building in the level of inflation that actually began to come through late '21. Yes. When we pivoted late '21 and '22 from an overall costing standpoint, significantly elevated the costing, which then with the solution set that we're building, we are then pricing accretive margins on top of that on a go-forward basis. When you look at how the project-based business turns, you look at when it was booked, what the cost was when you booked it to then how you execute and you can see the flow. So we're increasing the velocity, the flow rate of our project. So you can actually see every quarter, the projects that are going to be completed on the executed side. And then to be agile here, we then take the data and make sure that as we're booking to execute it, it's closed loop that we make sure that as we're modeling, we're modeling appropriately given what we're experiencing. And so after that pivot, everything that's been put into the backlog over the last year from a costing standpoint and then from a booking standpoint is much higher, the accretion of the margin rate and then with the higher cost. And so that has been consistently applied across all 3 regions. And so the difference in the margin rates per se is most around the mix and then the percent of service that's being generated. So as we continue to build and execute on the service flywheel, then you're going to start to see a much higher mix of service, which, as you know, is at a much higher margin rate. And that is when we think about our field-based business, it's a critical element of capitalizing on these secular trends because to solve some of these problems around decarbonization, sustainability of buildings, there's an element of what we do in the direct channel that you just can't take technology off the shelf and apply it and achieve the outcomes that we can achieve. There's a level of domain with the way that we deploy our equipment in the solution set and then the ability to use -- so it's not only the equipment but the digital -- the data that is ultimately consumed that optimizes how that equipment operates within the building that then gives you that next layer of value. that when we think about our field-based business, it's the transformation of a solution-based business that historically was contracting to now a business that's differentiated with the outcomes we achieve that then gets converted to a recurring revenue going forward. And you're seeing that today. The acceleration of our service business is an output of the execution of our strategy.

Yes. I mean, to that point, right, you mentioned a little bit of noise in Q1. I mean, the Q1 was fine overall, but products margin was high and field in North America and EMEA was a little low. So can you forecast that right going forward? Are you comfortable with where we all are and thinking about your...

Well, the -- what we said was actually where we ended, it was very -- we were pretty much where we thought we'd be in the field in Q1 based on what we knew was in the backlog, what was going to convert in Q1. Now when you look at Q2, Q3, Q4, majority of that revenue is already sort of in backlog. We know what the margin -- the book margins were. We're tracking very consistently now on how those projects are converted. So it's very predictable. And so what we said that through the course of the year, margins are going to continue to improve on a year-on-year basis, the big inflection is Q3 because that's when we had the most amount of projects that converted prior to the acceleration of the inflation in hand, we had the most amount of disruption because of supply chain because of the disruption that we had in the field. And so that was the inflection point where you start to see a significant improvement year-on-year with the idea that for the total year, we're very confident of the margin improvement in total for the company that we've committed for the year.

I want to open up the audience in one sec. I just want to ask you about fire and security. It is 40% of your business. Like those markets seem to be holding up pretty well for you. Q1, you recorded orders up low single digits in North America, up strongly in Europe. So maybe just color for the year. Do you expect pretty good orders in fire security at all? Any concerns there?

Yes. So when you look at -- I mean, again, it comes down to historically, fire and security has been lower growth than HVAC. And we understood that as we put the portfolio together. But as you look at the future, these systems are critical to being able to create a smart building because they do have a lot of the censoring, a lot of the data that ultimately gets consumed and put into an overall smart building. Now it starts with having a leadership product. So we have leadership product in each of our security domains. That has played out very nicely. We had strong growth in Q1 at the product level. And then on the solutions set, when we use the direct channel, it's where we create an installed base that then generates service. And a lot of that is around fire detection, the electronic fire detection as well as the electronic security that we deploy and we get a recurring revenue. And so when we look at that going forward, not only as stand-alone systems, we still see we still see very attractive growth. But the real opportunity is as this begins to converge into more of a one building platform that takes all of the domains, put them into one architecture. And then with a data platform with OpenBlue, not only the data we collect, but also being able to bridge or have a gateway to all of the other building systems is what is going to be different about Johnson Controls, where then we have one digital platform that ultimately creates an intelligent, what I would call dynamic building and how it's operated, where today, because of the way the systems operate separate and apart and with controls, although there's a lot of software and controls and how it runs the building. Once you set it, it's set. What we're doing with OpenBlue now with our controls with Metasys is making it intelligent and then dynamic. So with the use of all of the other data in the building, occupancy, temperatures, air quality, then you can dynamically control the building to optimize for not only the environment but also the ability to be able to reduce the energy consumed to be able to maintain the building. So I think as we think about the portfolio going forward, a very important element of the solution sets that we're building to be able to capitalize on these secular trends.

Got it. Any quick questions from the audience? All right. So I got 2 more questions for you then, George. So just in there kind of related, right? We really haven't talked about heat pumps today. I know you want to talk about heat pumps -- like just like represent close to 50% of sales, but you also bought hybrid energy recently. So maybe talk to us about that? And how significant of a tailwind do you think the legislation is for you guys, both in the U.S. and Europe and how to drive the business. And let me just -- well, let me answer that, and then I'll ask you one other quick one.

So let's start with the demand signal. So it starts with -- in the building to get to net 0, you had to electrify everything. The way you electrify heat pumps, heat pumps, you can replace boilers, you can -- in some of our new equipment that we've infused some of the technology where you can get the elevated temperatures you can do both heating and cooling, replace boilers, the fossil fuel boilers, a huge value proposition not only decarbonization but then getting the energy efficiency that you achieve. And so when you think about the problem that we're solving and then the legislation that's coming through that's identifying this is one of the big elements of being able to achieve the net 0 and ultimately the climate change within a degree an aha of Celsius. This is one of the big contributors because HVAC left to its own devices is kind of the way that just pure demand of HVAC is going to increase carbon. And so the way that you continue to enhance the comfort and capitalize on some of the emerging markets as far as the expansion of HVAC is then at the same time, being able to deliver it in a different way, which is heat pumps, right? Because you can get and heat pump applications, you can get 3 to 4x the output for energy consumed with the applications that we provide. So you asked about the market. The market is about, let's say, it's about $100 billion. This is market information, right? And it's going to grow -- the projection is going to grow mid- to high single digits. I believe with the stimulus and what's coming into the pipeline, like I said earlier, that our team has actively been involved with the public sector in defining the regulations and educating them what can be done in buildings with technology that exists today, not only in the electrification, but with the digital content that ultimately achieves these outcomes that haven't been achieved. And so it's combined the public sector, working with the private sector, establishing the regulations. And then when we look at our portfolio of heat pumps, right, from at the residential level, some of the air-air, air to water, water to water across the whole gamut, we've been innovating and elevating our reinvestment in HVAC, a significant amount of that reinvestment has been into heat pumps. So you asked about the recent acquisition was an ability to be able to take a technology that enabled us to be able to elevate the temperatures to be able to address a market that we weren't serving that we think is going to be a very attractive market for the climate that it's all about what climate are you going to base on the temperatures and the like that you can effectively be able to deploy heat pumps. And so I'm pretty bullish on the demand that we see coming into the pipeline with the stimulus that's been put into place like take the IRA, that stimulus, which was targeted around obviously, sustainability and delivering on the net 0. When you look at that, we believe that that's going to multiply 5 to 10x because that's just the stimulus element. There's an underlying investment that's made that we believe is going to be a market opportunity for us to be able to capitalize on with the equipment. So we've got the broadest portfolio. We've been innovating and continuing to enhance that portfolio. And I think we're going to be well positioned to now be able to capitalize on what we see to be very strong secular trends that we've been positioning ourselves to be the leader in being able to capitalize on.

So I'm already over, so I'm going to ask you this question just as you can give me a very quick answer because I have to ask it I've asked all the companies. What are the top 2 or 3 innovations and megatrends or structural changes affecting your company over the next 5 years? Are there any emerging industry trends that are perhaps being overlooked?

I think everything we've talked about here today, I think you said that I think the space we're in, the secular trends that are well underway and being able to be materialized. I think the unique capability that we have with not only the leadership HVAC portfolio, but combined with our digital, we're being recognized with OpenBlue as a leadership platform with what we're doing, not only from a capability standpoint, but from a cybersecurity standpoint, from an AI standpoint. When we look at the combined capabilities today, we can solve the problem that's at hand, which is ultimately affecting climate change and getting buildings to be a big contributor to that success. We're a company that we're a different company today. We've been through a major transformation during a significant amount of change. I think that, that has enabled us to be able to accelerate what we're doing and ultimately creating a company that's going to be able to be truly differentiated with technology. the foundation being digital and then being able to solve problems that others aren't able to solve because they don't have the breadth and depth that we have and how we ultimately solve the problem.

George, very much appreciate you being with us. Thank you.

Thank you, Andy.