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

All right. So we're going to get started again. We're very excited to have Johnson Controls with us and George Oliver, who is the Chairman and CEO.

George, as I walk over to you, maybe just ask you to give us an update, lay of the land. As we sit here today, we're halfway through fiscal year, fiscal Q2. So anything you're seeing in terms of end markets? The cyber incident, I think, is behind you, which is good. Are you seeing -- as you expected? And can you talk about any differences you're seeing in regions? We know China has been difficult, been more selective there. Are you seeing any stabilization? And what about North America and EMEALA?

Andy, it's great to be back with you here today. Let me start by -- when we talk about the cyber incident and what the impact that, that had on our first quarter. Certainly, we lost a lot of momentum because we had compromised systems. When you look at our service business, it's a transactional business. We had to dispatch schedule and dispatch manually. So we had a lot of systems that weren't in full operation. So what I would say is our team did an incredible job continuing to operate -- to be able to operate the company in that environment. And then the way that we've recovered and got the momentum back in November, December was pretty impressive. And so that being said, we're back 100%. We see -- we've had a good start to Q2, both when you look at orders, revenue, the recovery of service, service where we had great successor over the last couple of years getting to double digit. That's where we saw a little bit of softness because of the situation we had with cyber. But we start -- we see that momentum back, and that's playing out as expected. We talk a lot about margins and the margin in backlog that we've had is significantly better, and that's going to turn through the course of the year. And then from a cash standpoint, even in spite of the outage that we had and inability to build for a number of weeks, operationally, we've seen significant improvement in our ability to generate cash. And so when you look at the company, we're back 100% operating. And when you look at the pipeline, very attractive pipeline. So when we look at our pipeline, you would say it's up high single digits. We're tracking how we're going to market by vertical, what's happening economically across the globe. And we're obviously positioned to be able to get more than our fair share with the Building Solutions strategy. So if you break it out by region, you would say -- you talked a little bit about Asia Pac. And certainly, we saw an impact there in China. Some of that is we were recovering pretty significantly last year as the market came back after that second shutdown. And we're pretty bullish relative to how it's going to play out. That being said, we did a little bit of a reset, projects that we were working to push out. And I believe that we're now -- when you look at the pipeline today, it's very strong. We make sure from a go-to-market standpoint, we have the right value proposition by vertical. And we're seeing good conversion. So we're building back the backlog, that will continue and will be set up here by the end of the year to be tracking to growth. When you look at North America, certainly, data centers, some of the institutional space that is playing out has been very strong, strong pipeline, strong conversion there. And then when you look at EMEALA, Marc, our new CFO, he did a heck of a job here over the last year taking our strategy and then more importantly, the operating system that we built in North America and has deployed that very effectively, right, from understanding the markets, the verticals, how do we make sure that we're positioned to win. We're booking at much higher margins. And when that -- when you look at how that business plays out to the rest of the year, we're going to see a significant pickup in margin rate. And then last, I would tell you is through all of this period of some of the challenges we've faced, we have been significantly simplifying our SG&A, because we now have one operating system deployed across the board, one set of data, and then we're working towards, obviously, simplifying our IT systems. But with that, we're operating much more consistently, and then we take out a significant amount of the overhead. So when you look at our margins that we're tracking to, we're -- at the segment level, we're 50 to 75 basis points, that's coming through with that leverage. And on a go-forward basis, I would say that from a growth standpoint, positioned well for kind of mid-single-digit plus growth. And then from a leverage standpoint, we get 25%, 30% incrementals. And so that is what I see playing out.

George, that's very helpful. Like maybe just following up on a couple of things you said. It seems like pretty healthy demand trends. How do you go about driving, call it, more consistent results? And Marc obviously took over for Olivier. Like anything that he's going to do differently to sort of help you get those more consistent results, better cash flow and so on?

So it's -- when you look at consistency, it's around having a common operating system, utilizing the fundamentals, the data front to back, right, from kind of how you view the market, segment the market, to how you create value propositions from a product management standpoint, to how you convert and then ultimately, how you execute from that conversion to deliver margin and ultimately collecting cash. And so we have now one operating system. We've been building this -- it's been multiyears, but now it is effectively deployed across the globe. So it starts with an operating system. And then the second is making sure you have the right leadership then to be able to execute that operating system. We've made significant progress with that across the board, and we're getting much more consistency of performance right from how you look at our -- the commercial element of what we do and how we're converting and how we're obviously improving margin, selling value and getting a higher win rate alike to when you look at project management, from engineering, right, from execution to service, we've got one way, and we're doing -- utilizing the same tools. We're getting good leverage there. And then from a service standpoint, we've got a service machine that just 3 years ago, we didn't have in place. We're now -- we know from an installed base to ultimately new installs that we're performing, how do you ultimately extract the, what I would say now, the life cycle revenue which is significant on this installed base. And so it starts there. Now relative to Marc, Marc has been with the company for 20 years, incredible depth and expertise across finance. I had the opportunity to work very closely with him during the pandemic, he was our Treasurer and an incredible talent and the ability to not only command the financials, but then be able to apply them operationally. And so with his development and succession, I said, you need to go operate our biggest segment, which was North America. So he teamed up with Nate Manning, who's an incredible leader and they did -- they built the operating system and deployed it across North America and did it very effectively. And then as he was looking to further continue the development and as I was building succession to the CFO, so Marc, you go run a business. So he went to Europe for the last better part of the year and then applied that same operating system and really got to that last mile of variation that we had across more complex structure with EMEALA. And the margins that -- with this strategy, not only for growth, but now the margins, the value that we're creating and the margins we're booking is significantly elevated. And now we're getting -- from a service standpoint, we're tracking to double-digit service growth. And so that's when you take a company like ours with obviously, historically, lots of acquisitions, lots of different systems, lots of different go-to-market. We've been working to bring it all together into a building solutions leader that is think of it as we've got the leadership applied product. We deploy the industry-leading digital platform, OpenBlue, and then we immediately get everything connected. And then with the connectivity, you then have the data that allows you not only to perform what historically we did break/fix type service, but now you unleash an incredible amount of opportunity to be able to now really differentiate. That is what will set Johnson Controls apart longer term with the life cycle solutions that we can provide, and we're seeing that. We're seeing that not only with the value of the use of data, but with the data, we're then going back to that installed base, how do you upgrade, how do you -- we can deliver 30%, 40%, 50% energy savings. So there's real value proposition to what we do. That is what we've been focused on. And then obviously, taking the noise out of the system with some of these other businesses that are noncommercial, I think is also going to help.

So definitely [ fall in ] services and the noncommercial businesses. But let me just ask you one more question on sort of EMEALA where margins have been the "biggest struggle". So like what did Marc do in his time? Like how confident are you that you can get margins in the double digits as you've talked about?

So with the cultural change that we've been going through as a company, it's getting everyone on the same page from a strategy deployment. So strategy deployment is, okay, what is our value proposition by vertical? How do we then size each of the verticals by region? Then how do we make sure our sales team is aligned to ultimately then capitalize in on more than our fair share of growth? And then ultimately, from an execution standpoint, how do you have the right regional leadership to be able to effectively execute? And so what we've done is with what Marc has done, it's quickly got engaged right in that value proposition and made the changes that -- in what I would call this last mile, not only in making sure it's fully deployed, but then you have the right leadership, ultimately deploying that strategy on a local basis. And you can imagine throughout Europe, it is somewhat complex. And with that, if you look at the upfront margins on not only the projects that right from the engineered projects to how we install to now the amount of connectivity that we're getting in service, that this year, we're going to go from the margin that we have today, we'll be running -- you'll see a significant ramp up through the course of the year with the idea that we get to double digits by fourth quarter. And more important, the backlog and the mix that we're creating now in Europe is going to bring it to another whole level next year in '25. And so that is the -- what is possible when you take now what we've built and be able to effectively consistently deploy it across each of the markets.

That's very helpful, George. And then obviously, portfolio management is a big topic for you guys or at least that's a lot of the questions that I'm sure you get. So you said and just -- clear, right, you said you're in the early stages of pursuing strategic alternatives, right, of your noncommercial product lines. Is it possible to flesh out a little bit more what you meant by this statement? Is the right way to think about that you're really just focused on divesting JC as residential-focused business, but if the right offer comes for select like commercial businesses, you might be open to that? And then regardless, how do you go about sort of if you do this, offsetting dilution? If you're divesting under 25% of your revenue at your JCI margin, would you likely announce a big buyback as you did when you divested Power Solutions? A lot in there, I know. I'll remind you if I need to...

One of the most important jobs you have as a CEO is to make sure from a portfolio standpoint and from a capital allocation or reinvestment, that you're investing in the core, the value proposition that we're building. So we are constantly looking at portfolio to understand the different models. Are they contributing to the overall building solutions strategy long term? From a reinvestment standpoint, are they consuming more reinvestment than ultimately should be deployed within the commercial building solutions? So you're looking at a lot of fundamentals. And as we've been working on these other, let's say, building assets, but aren't necessarily contributing value to our commercial leadership building solutions, then you look at, okay, how do I maximize value of that asset, not only whether it stays within Johnson Controls or whether there's other alternatives. And so you're looking to solve scale, you're looking to solve, from a margin standpoint, is it consuming more reinvestment than ultimately you're getting for returns that we could get in the building solutions. So you're looking at a lot of factors. So we've been looking at strategic or pursuing strategic alternatives for a number of these businesses. At the same time, we were significantly improving the businesses. So you're improving them, getting them -- understanding the reinvestment. And take the resi space. It requires today almost 2x the reinvestment because of the regulatory changes that are happening. And so when you look at our volumes on the returns on that, just purely because of our market share, we get less return. And so that's an example. And so when that all -- it's disappointing that it was leaked, but this was activity that's been well underway for a period of time to making sure that it isn't one way to solve the problem either. There's multiple ways that you ultimately can solve the problem, and you need to make sure that strategically, you're going to do it in the best way that ultimately creates the most amount of value for our shareholders.

And then you did the big divestiture in Power Solutions, right? So again, like how do you think about -- does it matter to marry like the buybacks versus divestitures? Like how do you think about that?

Well, that one was a tough decision because right out of the gate was even with the redeployment into buybacks, it was dilutive.

Dilutive, right.

I think with the assets we're talking about now relative to the ability to be able to redeploy and redeploy through buybacks and the like, that we can -- we're going to be able to manage that in a better way. And so it's hard to speculate because at this stage, with the leak, it was, in many ways, it was the worst kept secret in the markets. And so I felt that for me to be transparent to recognize that activity is well underway. And then to make sure every step of the way, we'll continue to update our shareholders as you would expect. But until such time, you actually know exactly, it's hard to actually talk much more about it.

Sure. And then maybe just going back to your portfolio. Why is it important for JCI to be -- you're essentially soup to nuts, right? You started with engineering, you go to install, life cycle services, as you talked about, full-service building automation solutions, right? But that is still different from some of your main competitors, right? And they seem to kind of like -- one is going to more pure play, as you know. One doesn't do as much install, they subcontract out. So why do you want to be what you are in a sense versus those guys?

Well, it is when you look at our portfolio, we're in the mix, we're -- have a different mix, right? We're well less than 50% HVAC. And we do have -- when you look at the makeup of our revenue base, 3/4 of it is building solutions where historically, it's your engineering differentiation with the deployment of leadership product. And then by doing so, in an industrial business, you know this, Andy, that as an industrial business, you have -- your entitlement is to get a high percentage of that life cycle revenue. Historically, the way that the business was operated was it was more of a contracting business and then from a service standpoint, more of an opportunistic break/fix business. When I took over, it was to say we have incredible assets here, this is where it would be similar to, let's say, the elevator industry, where you can really differentiate your product and the way that, that product is deployed in a project. But you're entitled to get with connectivity then the linkage to the life cycle revenue. It's multiple times the life cycle revenue. And that's where you actually create the most amount of value. Because you can not only do what we've done historically to maintain the equipment. But now with the database we're collecting, we can see real time before failure, we can be very predictive of failure. So you have -- short term, you have reduced catastrophic failure of the equipment, obviously, improved operations. But when we optimize with data, we reduce energy in the building 30%, 40%, 50%. You create outcomes that historically haven't been achieved because you haven't had that full connectivity. And so it's the engineering depth and expertise, deploying project and then getting a much higher percentage of the life cycle revenues, which is very -- it's high value creation for our customers. And we're seeing that. I mean, I know when you look at where we were just 3 years ago relative to service, it was mainly, I would say, it was kind of GDP. Now we're starting to see the breakout because of the connected assets, whether it be connected HVAC, connected security, connected controls, connected fire and then the ability to be able to put all of that data into 1 platform. And then now the use of the data then creates space optimization or energy reduction or balancing all of the contributing factors to indoor air quality, whether it be outdoor conditions compared to how you are then conditioning and creating indoor quality. So you're solving problems that historically has been done kind of in silos, not with the maximum value. And that's what ultimately we're doing. I think on a go-forward basis, we're going to see much higher mix. We're getting much more value upfront on the engineered projects, because they're very strategic in how we're differentiating the value. And then we're getting a much higher percentage of the life cycle revenue that we're converting with connectivity with OpenBlue.

Yes, that's great. I'm going to open it up to the audience in a second, but let me ask you a couple of follow-ups on service because I think it's very important, as you said. So if I look at service, I think you've guided to high single-digit service growth for the year. I think you said that the cyberattack kind of interrupted your [ NAM ] service business to a certain extent and that you're expecting a big pickup there this quarter actually. So are you seeing that? Because when I look at your service backlog, it's been kind of flattish for several quarters. So do you see it starting to sort of pick up again as you start here?

We're rebuilding the momentum. So as I said, we lost a lot of the momentum with the disruption that we have with the cyber and a lot of -- you just think of a service business, you're up and down the street every day, every week, every month. It's very -- there's a lot of transactional element. And when you're hampered by your IT system, you're not operating at full capacity. And that's what it's all about. The way the teams have come through and then with the systems coming back and like I said, it was in November and December, we've got the full momentum going. The flywheel relative to not only how we're connecting everything that's being deployed, how we're going back into the installed base to create new value propositions. We're creating lead generation that ultimately is converting. All of that is happening. So we're pretty bullish that even though we started off with mid-single digits, that the momentum that we have and the recovery here through the year gets us back to where we were or even better than where we were historically.

Got it. And then maybe it's a good -- just update us on OpenBlue, like where are you in the evolution of it? And how are you thinking about the role of AI, maybe impacting service over time?

I mean OpenBlue, when you think not only short term but long term and short term, what is done to really accelerate the transformation of the company with the use of a digital thread with what we do, how we do it and ultimately how we deploy it with our customers. And so even though we say today, maybe it's less than double digits. So let's say, mid-single digits, where you would say that from where we started to where we are today, it's probably still a significant portion of our service. What we're trying to do is make it -- make all of our services digital. We're less than 10% today, but that is accelerating rapidly because now we're connecting all of our assets. We're adding -- so every -- think of OpenBlue as being fundamental to connecting all of our assets and how we ultimately deploy service number one. And then it's taken -- when we take all of those connected assets, the use of the data is then applying AI and fundamentally changing how our service technicians operate. It actually really drives the outcomes. That's, again, the value is achieved through energy reduction, utilization. There's many value propositions that come from that. And so when you look at pure SaaS, so we now -- when you look at with OpenBlue and with FM:Systems that we acquired, which was a nice add-on, so think of it as we now have the digital twin of the building. OpenBlue was building all of the operational capabilities within the building with the use of all of the assets within the building. And then FM, this suite of applications was more for occupant experience. So think about OpenBlue is right from digital twin to occupant experience of the building. It's second to none. And so our SaaS, now even though relatively small as a percentage of our services, it's going to be -- we're talking now into the roughly $150 million, $200 million of pure SaaS. And that's going to -- that's growing double digit. It's strong double digits on top of that. So that's how you've got to think about the connectivity is getting everything ultimately connected and then we can do everything remote and we can utilize data to create new services on top of that installed base and then being able to create applications with purely the use of data to change not only the outcome of the building, but also the occupant experience within the building.

Got it. Any questions from the audience? Do we have a question? All right. So then let me continue with Global Products, George. So you talked about bottoming demand in Q2, good recovery in Q3 and Q4. So maybe parse that out for us. Obviously, you've got Fire & Security in there. You've got resi products. I think resi products were down 20% in Q1. You're expecting industry volumes to return to growth in the second half. Is that mainly a function of the easier comps and channel destock? You've got rest of world resi, you've got a lot of stuff, so...

So nothing has been, in the last couple of years, been normal because of the way seasonality has typically played out within the Global Products was different with all of the disruption and the backlog and the recovery of the backlog. So put that behind us. We're back to the normal seasonality. And I would tell you, when you look at flow, right, from orders to revenue, now we're back, so we're getting the full flow through the system. When you look at resi, although we had a couple of years of disruption over the last -- I'd say, over the last quarter based on what we see, we've had 4 months -- 4-plus months of share gain. And so when you then look at how -- based on what maybe happened within our channel last year, that correction is pretty much done. And so when you look at the flow now, it's actually flowing positively. So when you look across the businesses, I would say it's true. So as we now get through Q2 as being relatively flat, the bookings and the activity in the bookings does suggest that we see the normal then pickup that we typically have. In that business, you would see Q1 is typically the lowest. You begin a pickup seasonality in Q2 and then you -- ultimately, the peak is Q3 and 4. And what's encouraging right now is those trends are actually playing out.

Got it. And so your distribution base, for instance, in Fire & Security, they're seeing positive...

Correct.

Okay. And then on Rest of World resi, just you mentioned strength in Japan. It's a little hard for us to sort of -- I don't want to say it's forecasted stuff, but you guys see good visibility that, that can offset places like European heat pumps, for example.

Well, I mean the -- let's face it, right? I mean that -- we were planning for a significant expansion in Europe, which ultimately didn't play out last year nor is it going to play out this year. And so even with that adjustment, we see relative stability across that business. And just a little bit on that business, it's been -- even though we're #4 or 5 in that space that we've done a good job in how we strategy that business product, go-to-market, capitalizing on market expansion, I think that's what we're seeing offset some of this other softness that we're seeing. So it's not significant growth. But at the end of the day, after the correction we saw last year, we see now relative stability.

Maybe you could just talk a little bit more about heat pumps, George, like sort of what you've been doing there. You acquired a business called hybrid energy. Like what's the forecast from you as you guys can tell for heat pumps?

Well, usually, when heat pumps are discussed, it's mainly around residential in that part of the market, which is, obviously, that is extremely strong with what's happening there not only in ducted, but ductless. Ductless has led that, but also in the ducted space. If you stay focused on our Building Solutions, we're the market leader in commercial, in the unapplied commercial. And when you look at our technologies, whether it be water-cooled chillers, air-cooled chillers some of the work we do in packaged data center solutions, we're the market leader. So -- and then in industrial refrigeration is another good example where when you take this hybrid acquisition, getting to low GWP is a big deal as far as from a sustainability standpoint. And so this gave us the technology to be able to significantly increase the temperatures in our heat pumps and being able to deploy them effectively in district heating and the like that because of not only to get -- you get 3 or 4x the efficiency out of the deployment of heat pumps to more of the conventional methods that we're supporting the heating and cooling. And so those are -- so for that acquisition, and then we take that technology and we look to how do we then expand that across more of our platform. So today, in the commercial space, we're 30-plus percent of our applications are "heat pumps". And I would tell you examples today where we've converted some of our water-cooled chillers so that previously, there was a chiller and there was a boiler. Now with our technology with the temperature differential, we can replace the boiler. From a -- you think about the value that, that delivers to the customer, not only are they reducing the fossil fuel, the energy, the emissions, but now they're getting the efficiency of one piece of equipment being able to cycle and do both the heating and cooling. That's where you start to see significant value and then from a value recognition, not only from the customer, but then being able to then get a premium relative to the pricing that we have in the market.

Got it. So George, let's talk about your largest segment, NAM Building Solutions. You've had several years now of strong top line momentum. You posted 6% order growth in fiscal Q1 with broad-based demand in health care, data center, government, education. How should we think about sustainability of elevated growth and specifically in data centers? Like it seems like something's happening here across the industry. So maybe give us more color into how big data center is a percentage of HVAC business is? Stepping back, how are you thinking about potential impacts in that sector first going forward?

So I would start by saying that we were anticipating -- if you go back multiple years, what's happening from a technology standpoint where this was going to go. And so we got ahead of it from an innovation standpoint. If you were to go to our engineering research center in York, Pennsylvania, you would see probably the world's leading innovation center around chillers. And then the applications are not only as data centers begin to get configured differently because of chipsets and the cooling that's going to be required and how our technology is going to be deployed effectively in some of these new configurations, we're working -- assume that we're working with every one of the operators, data center operators. And so because of that, we've been very innovative in how we -- right now the preferred solution for the configurations is air-cooled chillers. And that's going to play out very strong here over the rest of the decade. And we're -- we stayed ahead of that not only from an innovation standpoint, but then from a capacity standpoint. A big, let's say, advantage is being able to produce and deliver on the expansion schedules. And so we've been making sure that we're positioned to do that with all of our key customers. And I think I mentioned this during a previous earnings call, this year, there's like 15 to 20 gigawatt of data centers, requiring maybe over 5 million tons of cooling. And we're getting let's say, more than our fair share based on -- because of our technology, the application of our technology and then our ability to be able to then commit to be able to deliver to the schedules that are being had. So that's going to be a very strong vertical for us, and that's going to continue going forward. And we're not only doing that in North America, but we're also now leveraging our footprint globally to now take that same model and make sure that from a platform standpoint, we have the right platforms that we're deploying regionally to be able to configure and execute for the expansion that's happening across Europe as well as Asia Pac.

Does data center end up being your largest end market vertical, would you say?

So it is definitely the highest growth vertical. And I think I would say it's roughly about -- it's roughly when you net it all, probably about 15% of the portfolio.

Very helpful. And do you have, George, a full suite of offerings, like liquid cooling, like how is your positioning there, for example?

So as I said, we've been working with our customers to make sure that they're configuring. Think about these new chips for AI and they're going to run much hotter and they're going to require -- they're going to require our cooling technology but maybe applied differently depending on how the data centers are configured. And then space becomes a big issue. So what we're working on right now is there's going to be a space you're going to have multi -- there's going to be multi stories that are going to be built with the cooling capability to be able to provide the proper amount of cooling. So think of it as from a technology standpoint, we're leading at the technology level and then deploying that in line with the configured future of -- the future data center. And that's where the innovation occurs as we work with all of these key operators.

Got it. So I want to go back to APAC and China specifically. Maybe give more color on how your approach is, if at all, changing in the region. When I compare you to at least one of your large peers, they have seem to have more resilience in China than you guys. So maybe just describe, are you in different end markets? Are you doing different things? Like what are you doing there?

So we're -- if you go back and look at our performance last year, after the -- there was pretty much through Q1 that was coming out of the shutdown, I think the second wave of the shutdown. And then we were -- really had a ramp and pretty bullish relative to the recovery. So that's what you saw second, third quarter. As that played on, that's happening, but not nearly on the time line that we had projected. And so -- what we did was make sure that, okay, based on what's happening, how do we make sure we're more balanced relative to the market? When we look at the market pipeline and we've been looking at this every week is by vertical, with our value proposition, we're the market leader. And so how do we get a pretty good view of what's coming into the market and how do we position to win with a differentiated value proposition? So we go by vertical, we then make sure from an execution, we're executing well across the board. So when you look at the pipeline, the pipeline is as strong -- what I would say is a typical pipeline with some amount of growth. And so as we're recovering, we're making sure that we're ultimately getting not only our historical share but also positioned to be able to differentiate and pick up share. And through the course of the year, rebuild our backlog. And by Q4, we should be tracking to positive growth.

That's helpful, George. And then just shifting to free cash flow, you're expecting 85% in fiscal '24, will be a step up from '23. But you're remaining below your 100% conversion target. So what are the incremental actions or levers you can take to drive improving free cash flow?

So we've been executing on those levels -- levers, and you've seen some of that. It really started -- the peak of our disruption was really second quarter of last year. And when we say disruption, what happened -- when all of this supply chain lead time doubled and tripled, our systems were less mature to be able to fundamentally do that and adjust and maintain stability. So what happened was with our inability to produce and the inventories being built not only in products, so think of it as you have product finished goods, but then you also have your project execution that got extended by, let's say, 1 to 2 months. So that was the inventory. When you look at -- and then from a -- when you then look at our project-based business, you want to make sure you're positioned to get more cash upfront, and then you have your billings ahead of revenue. Well, we got behind on that because of all of the shortage of products and the like. So then play forward in second half, we were recovering. So inventory has been coming down pretty nicely through the course of the second half of the year, billings have been being pulled forward. And so when you saw in Q1, and this is an important fact, that even though operationally, we were significantly better than last year, the one process we didn't work around was billing during the -- when we had the cyber outage. And so -- and we did that because when you look at a project solutions business, you're extracting data from multiple systems. So when some of those systems were impacted, then the ability to manually create a bill would be very difficult. And all you do is put that bill into dispute, extend the cash cycle anyways. So we didn't bill for, let's say, it was roughly 4 or 5 weeks. And so that was October. Most of that cash would have been collected in December. And so even with that gap, we saw a significant operational pickup because of the work we've done. Now Q2, with a full now -- with full flow and this idea that we're getting every day, every week, we're reducing inventory, we're advancing billing then that's going to continue to play out. So that's what gets us to the 85% plus. When you look at our reinvestment, so CapEx as a percent of depreciation is elevated, because of the capacity expansion in our applied equipment supporting what we see to be significant growth long term, and then the second is we have had elevated CapEx on ERP. And so then when you go down through that, that's what the key drivers relative to the overall cash.

That's helpful, George. And then maybe just briefly touch on where Johnson Controls is in terms of any liability concerns. So there's been some recent press regarding you changed the way you pay commissions to the U.S. sales force. And then PFAS, obviously, you're involved in a number of lawsuits. Can you give us the latest timeline or update on how you're thinking about your exposure?

And so let's start with the -- when you're developing a building solution strategy, delivering what we believe is a very different value proposition, and you're changing the fundamentals to how that's delivered, that includes updating sales plans. And so -- and we're very competitive. We're very competitive in how we attract, retain, develop our people across the board. And so this would be what you would expect in line with the enhanced strategy, the ability to be able to then incent what ultimately you're looking to execute and do it consistently across the board. So it's -- there was -- that was -- an issue was raised there because of the change that occurred, but nothing that you would expect would be at all unusual. And then the PFAS is we -- there's really no update, and we're strong in our position of contractors -- government contractor defense. We are different than the other guys because of the insurance coverage that we have. And so we're making sure that every step of the way, we are obviously in active mediation. We're working to make sure that we've got the insurance companies aligned and accountable. And so that's all I can share at this stage, but our commitment is that we're going to continue to be very disciplined in how we work through this to make sure that we mitigate any potential impact.

That's very helpful. Last question, George. So what are the top 2 or 3 innovations and structural changes affecting your company over the next 5 years? And are there any emerging industry trends that are perhaps being overlooked in the current discourse?

I mean I would just say, if you just step back, just now, we're in acceleration mode. We've got one operating system being deployed consistently. We've got a value proposition that is being recognized by our customers. And so now it's just the continued focus on that and executing that flawlessly across the globe. Obviously, addressing some of the complexity relative to these other businesses that ultimately aren't core to the Building Solutions, and we've done a lot of work and a lot of that is well underway relative to what you can expect there. And then I think from a service standpoint, when you think of the business model, which is very different than what others have done or doing and then ultimately how that plays out, is this ability to be able to then -- with these secular trends, whether it be sustainability, healthy buildings or ultimately smart buildings, we are uniquely positioned with the composition of the Building Solutions portfolio. HVAC, Building Controls, Fire & Security, one data platform that ultimately is deployed consistently and then getting the life cycle revenues. Because I think that's what's different. And that's our entitlement, because of not only the technology in our product, but then the ability to then be the leader in this space relative to the management of data. And then the goal is then how do you utilize the data, apply AI, not only that allows us to work in a connected fashion with our customers but then the applications that we provide to our customers are significantly enhanced with the value propositions. And I use one statistic, is buildings are 40% of the global carbon. And the ability to sort of get to net zero and we see this today across the globe where companies that have made a commitment to get to net zero, they now are very interested in their buildings. Because you don't get to that -- you can get through offsets or you can do different things. But when you look at the economics, the best economics is making a building efficient first and then taking the next steps. And so what we see happening now is that demand is beginning to get realized across the globe and the way the pipeline is developing and then how we go about solving the problem and a lot of it's going to be retrofit. So it isn't just the new, it's then going back because with building standards coming about and being deployed -- and we see this with some of these CEO groups that I work with in, on now these building standards that are coming into place. Customers are now saying, okay, how are we going to deal with that? Are we going to pay the penalty or are there economics that we can deploy, technology and ultimately then be able to get more savings there than ultimately having to pay the penalty? And we can make the case that, that's true. And that is what I think makes Johnson Controls unique. We not only have the applied equipment but then we have the use of the full set of building data that then can achieve those types of outcomes for our customers.

That's a good place to end. Thank you very much, George.

All right. Thanks, Andy.