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

So if you see EBITDA of some historical trend about 3 years ago, services was growing at about 3%. It's now growing 10%. The inflection point is going to be driven by the 2 points we mentioned earlier. One, the focus on this -- and I go back service offering, creating service events, having a better training of our engineers, a bigger better incentive plan for our commercial team, having a team across the world managing services. That's one. 2 is digitalization. We discussed that earlier on. And 3, and it's important is the centralization of the digitalization information. Largely today, field is managed at the level of a branch across the world. What we want is now all those activities to be managed centrally at the level of a continent. As you pull data, you can pull resources, you can deploy the latest technology, AI, ML. So then you can accelerate as you accelerate the connection as you accelerate your ability to understand the data, then you can be even better at practive maintenance, creating new service events and serving your customers in a better way, why managing your customer serve even better in the world where we have a shortage of engineers. So it's certainly multiple objectives. Peter, back to your question, be managing the operations, vector of growth for services, number one, disutilization vector growth, net for services; 3, stantarization of the insight and centralization of the common center or the service events would be the vector of growth #3 for services.

That's very interesting. One question that arises from that. I mean as you mentioned, there's a shortage of field industry technicians. For the industry, it's not getting better, it's getting worse, right? So arguably, that's a double-edged sword for services. You're growing your services footprint, you have an opportunity to take share in a very fragmented market through data and digital insights and efficiency, but you also have to manage your own labor needs and inflationary pressures. So if you look at those 2 factors, should we expect services margins to expand with scale or kind of remain where they are.

We don't think that services margin is going to expand significantly. It's already at a very good level. We prefer to play the volume gain on the service pricing. Again, it's the whole profit average of the company. It's already at a good level. Now we want to get more of it. And to your point, going back to the engineers, all of us are training a new generation of engineers, but it's not going to be enough. You need to digitize to make it work. And we think we are in a very good position when it comes to digitization of our offering. We covered that earlier.

It's very interesting, and you know this, Olivier, that I spent some time in the contracting industry myself. There's an element when you're on these jobs of being on the ground, seeing that intelligence and seeing the situation real time and having to make a call, right? So talk to us about how you balance the centralization of management and of intelligence and insight. I think you were just talking about for, how do you manage that with local empowerment and local accountability for the employees in the field and the different branch managers?

It's a great question. often the start to an idea like this is the perception of the frontline employees, right? So we have to work on this. Our reservation we said, well, are you taking off my work? Now they understand that that's not the case, it's the opposite. As you connect to Chiller, you are better at serving your customers, you are better managing the cost for your customers, you cover more customers. So customers are more delighted. We can sign up more work. And as a result, we secure a lower level of attrition we secure a higher level of business. We did a Navy testing, you connected Chiller, A, you don't, B, and how are the 2 customers set behaving? When you connect more revenue, lower attrition, higher NPS and all of that is good for our engineers. And now our engineers have a better tool to compete and they are delighted. Actually, our best now ambassadors for connected anything is our engineers. And actually, we have, as part of our training teams, only engineers who used to do repair go or fashion way where now the evangelist for the digitization. And we have great stories. We don't have the time, but great stories about how that is going.

Yes. And I'd love to hear those stories some of the time. But I mean, just for perspective, nobody wants to sit on a single job stock and trying to figure things out when they could have better insight to help them solve the problem more quickly.

That's exactly... I mean the conversation -- I mean, all of us visit we could invite you at some stage. You go to large customers. And today, you have your engineers saying, okay, this is how your Chiller is behaving. Those -- this is all the data. And by the way, when you have those characteristics or Chiller, this is what happened. I give you the evidence that this is going to happen, so let's do something about it. You have an objective view to generate more work. And that's really empower our technicians and also delight our customers. So it's customers. So it's a win-win.

Very helpful. Just want to turn to broader operating performance. I think, George, on the call characterized the supply chain is pretty well dialed in at this point. Can you talk through how visibility has improved for components? And then to what extent does the back half outlook require further improvement.

So our lead times have been improving since the start of the year. We are not today at the level we were lead times or relative to the pre-pandemic era. We believe we will get close to a pre-pandemic level of lead time at the end of the year, start of next year. We are not -- the guide does not assume a big change in lead time. So we have been conservatively guiding when it comes to lead time to answer to your components, lead time is improving, so components availability is improving too. So the supply chain is slowly going back to what they used to be, but slower than we thought, so and then we thought…

Yes. Yes. So Perry characterized as gradual continued improvement?

Correct.

All right. Helpful. And then just how significant is the delta between the margin profile of what's in backlog versus what's flowing through revenue now we would assume the long cycle component has more price/cost benefits just because of the lag on inflationary pricing. Talk to us about that, talk to us about mix.

So if you look at -- let me give you the elements to enter the answer. The margin on orders on install is increasing sequentially every quarter. That has been happening in the second quarter as well. So that's point number one. And we have said that all along, those rich orders will convert into revenue in about the year, and that's happening. So the lower point of the revenue margin in the field was in Q1, you saw an improvement in Q2 year-on-year, and this improvement will accelerate in Q3 and in Q4. So we should have an important step-up in year-on-year margin in the field in Q3 and again in Q4. So you see today, this margin is to keep improving through the year for the Feed business significantly. You are talking about 100-plus basis point improvement year-on-year.

Yes. Very helpful. The SG&A and COGS productivity programs, as you broke out during earnings, they're generating good returns. What incremental opportunities do you see to generate stronger leverage in the business? You mentioned some abating investment costs on the call. I would be curious to unpack that a bit more.

So if you look at -- I mean, ultimately, if you take a step back, we want to be a 30% incremental company. That's the game. This productivity program is going to help, but there are other levels of productivity we will have at the back of this. We discussed about, for example, field operations, the way we manage this with a central common center at the level of a continent, that's going to be a lever of productivity, which is not contemplated in those productivity numbers. We talk about the ERP rationalization another vector of margin expansion. We talked about a minute ago about supply chain and the supply chain being disrupted. That will cease towards the start of next year, that's in to an increased margin. So what we are saying is we see today ample opportunities for us to keep improving the margin profile of this business. So besides this productivity plan, more will be enacted at just some control to keep improving the margin profile of our company.

I want to go back to something that you mentioned around the portfolio. You called out why you like Fire & Security. For obvious reasons, the industry M&A trends paint a picture that I want to address. I'm not sure we have enough time to fully do justice to the question. But your peers in the HVAC space have been evolving over the past few years to become more focused players. In some cases, they've reduced not only finsecurity, but their fueled footprint. So why is Johnson Controls pursuing a different path? And why do you believe this will translate to better returns over time?

Great question, of course, it's a question on top of mind. Of course, when you have such a large reset done by a formidable competitor, it's a question you need to think about why would a smart company do something different than you, of course. We believe we have a different set of cards. The fact that we have a field presence give us access to a large service business. We talked about that. We're getting to now clearly an acceleration of this as you have a field presence and a solution-oriented set of assets, right, smart building, you have other set of cars. So the field presence our ability to capture services, our ability now to offer solutions with digital being part of it. If you have a portfolio of biosecurity controls and HVAC where you don't digitize this portfolio, you're not going to be able to leverage the benefit we can. So we have a different set of cars, Noah today. Services, solution, digital. And as a result, we believe we're going to be able to serve our customers better and grow profitably the P&L in the field. That's the view.

Yes. I think another portfolio question that's come up. Your exposure within HVAC, obviously skews more commercial, how do you want to grow the resi business over time? And do the industry trends we're seeing towards heat pumps and digitalization, areas where you have great competencies do they make that segment more attractive to?

So if you look at today, RISI's a relatively small part of the portfolio is 13%, 1-3, 8% Rest of the World, 5% North America. On the rest of the world, we have been behaving with the market or gaining shares. That's not the case in North America, and we are working on this. We like resi for a few reasons. One, we believe it's going to be a growing market. 2, we believe that the VRF technology and dockless products are going to be important vector book, including in the U.S. So for that reason, we believe that we should be able to play in the RISI market because of the RF, because of the growing nature of this business. All of us are investing in items. That's something we are doing, too. We're looking at that in various fashions. So we are here to keep playing in raising no question about this.

Yes. And you mentioned North America, just how do you address the opportunity for market share gains? What do you have to do to increase market share?

Largely better operations. The North America situation today is sharply set inflected. And it's one factory to be run better. We're working on this, and we believe that we would get back in the game in a quarter or so.

Okay. Very helpful. And then I think investors tend not to focus as much on the industrial refrigeration business. Maybe you can talk a little bit about how attractive that business is for you? How do margins there compared to the rest of the portfolio? What's your appetite to keep growing that business inorganically potentially?

So this is an interesting part of the business. It's not a large part of our business. It's not a large part of the addressable market. And if you look at the margin profile of this business, it's at the middle of the margin reaches attractive. It's a very segmented market fragmented, and we want to keep growing it. And we will look at investing in this business through organic and inorganic investments as well.

Yes. I mean I think to follow up on that, there's obviously efforts from some folks to pare down their stationary refrigeration business. Transport still seems to be an area where people want to focus and has higher returns. Any thoughts for you on where you might focus within Refrigeration?

Different areas. On refrigeration, the conversation is a lot around carbon emission and RareGen. So that's something we are focusing on today.

Okay. Very helpful. Well, Olivier, I think you and I could probably talk about all these drivers for a lot longer, but we do have to respect the time consideration today. So I want to close by thanking you and thanking the audience for joining us. I would add that for anything that we can help with for clients to learn better about the company or the market, please don't be shy, feel free to reach out. We will be attending other sessions over the course of the day and hope you can join those as well. So thank you very much, and thank you, Olivier.

Thank you for your time. Thank you for being on the call, everybody. You tech -- have a great day and a great conference.