Johnson Controls International plc ($JCI)

Well, good morning, and welcome to the home of York. This is how Johnson Controls began. A professor and a technology innovator that had a problem at hand that needed to be solved, and he solved it with technology. 140 years later, we're here. And when we think about it, the future of many of the scientific discoveries that are now being deployed in human society requires even more of that kind of innovation, application-specific technology-based innovation. The scientific discoveries that I'm talking about that are now being deployed widely in society are not just AI that requires more thermal management at an economic price point and being energy-efficient, but also biologics manufacturing and other forms of advanced manufacturing, which we'll talk more about. But let's start with data centers. The greatest infrastructure build-out in human history. We expect data center CapEx to reach $7 trillion by 2030. But this growth of AI factories, factories of intelligence depends on mission-critical infrastructure. And that's where we play. These data centers can only scale with highly efficient thermal management or cooling, heat extraction at a fraction of the cost, at a fraction of the energy that they require today. Otherwise, we can't deploy the future chip generations, that all the chip manufacturers are continuing to launch. And that's not just a problem for the future. That's a problem right now. There's a constraint. The data centers can't get hold of enough power. They don't want to divert power to cooling. And that's where we play, and we'll talk more about that today, not just at the component level or at the product level, but we are taking a position in the entire thermal management chain. Then we have biologics. Biologics is the next generation of drugs that's already here. And just like you hear from the what it's called, people are manufacturing biology, live biology. And that requires thermal management or very, very precise and high capacity thermal management controlled within very, very tight tolerances to avoid yield losses that some of these factories are experiencing today in the 30% to 40% range, which, of course, dramatically impacts the cost of these drugs -- cancer curing, but also delaying drugs that are about to be launched or in the pipelines of all of the large pharmaceutical companies. They can't do what they aspire to do without high capacity, high precision and highly energy-efficient thermal management. And that energy efficiency is not an academic point. All of these industries that I just talked about are much more energy intense than their prior incarnations. AI factories, the data centers are infinitely more energy intense, use more energy both for the compute, but also for the thermal management and cloud storage data centers, that was the data centers of the prior generation. The same thing is going on in biologics. Biologics plants are on average, about 7x as energy-intensive as traditional pharma manufacturing. And I could go on and on. I could talk about other forms of advanced manufacturing, batteries, semicon and so on and so on. These are industries that are also pushing the boundaries of the performance of their products. And as they do, in many cases, they are requiring even more precise indoor operating conditions and that's where we play. The energy though is -- that they consume, if you draw the map or align and project into the future, there's not going to be enough energy on this planet to fuel all of those industries. And that's one of the reasons why the cost of energy has continued to go up and up over the last couple of years and is projected to increase -- increasingly so in the future as well. So to be able to help them do what they do with a high capacity, high precision thermal management, we also need to be able to do that at a fraction of the energy that's being used today. So human society needs help to basically decarbonize or reduce energy intensity, whichever word you want to choose for that, what we have to do from a technology innovation point of view is actually the same. So we have a really important role to play here. So we, in some ways, were born to -- for this time when our capabilities and thermal management are more important than they have been in our history and perhaps in human history. These are all constraints that I was talking about, constraints that you will meet our innovators today that they are working very hard to resolve with technology-based innovation. And so that in a nutshell for me, is why I chose to join this company. What other place could you go work, what you do, what your team does really matters, really matters for the development of human society and where technology-based innovation based on the types of capabilities that we have already exist in the organization. We haven't quite fully unlocked our potential yet. We'll talk more about that later today, but we have the wrong capabilities. And we have a few more things going for us in terms of our potential that we're going to work on unlocking here. So let's talk about where we are today and a couple of the topics that we're going to spend time on together. So great companies are really built around 3 things. Number one, you have to work on something that matters that you can develop a passion for that your people can develop a passion for. You have to pick something that you can be the best at. And number three, you have to be able to do this in a way that creates an economic engine so that you can keep fueling the work that you're doing, that matters that people are passionate about and that we can continue to evolve our ability to be the best at. So the great thing with Johnson Controls, for me and for all the colleagues that you're going to meet today is that all those 3 things come together, and that's actually what we're working on. So we have, what I would say, the raw capabilities for what it takes to win. We have the 2 bookends that you see on this slide. We have impressive and unique differentiated technological skills and thermal management, not only, but that's where we're going to spend most of today about. We also have one of the industry's most comprehensive field footprints, and that really matters because customers, of course, buy our solutions not to just buy them and use them for a couple of weeks, but they plan on using our platforms for decades in many cases, and they need that life cycle support. So both these bookends are capabilities, and you'll meet many of the people here today that were built over decades and of course, on the technological capabilities, like I said, we're in the home of York here, they've been built in and around this area over the last 150 years. Think about it this way. My grandparents' grandparents, that was the generation that worked here. That's the thermal management, 150 years ago. So all of what you're going to hear about are skills and capabilities that have evolved over time from generation to generation of leaders. So 2 fantastic strong bookend, and we'll go a little deeper into those. But to have those bookends and those are great capabilities. You have a lot of potential, but how do you unlock that? We'll talk a lot about that here today as well. First, you have to clarify in a large organization of almost 100,000 people, you cannot be working on 15 things on the same time. It has to be clear to everyone what our priorities are. So over the last year, we have developed and clarified for our people work we're going to be focusing on. And those are articulated in our 3 strategic pillars. And they are really centered around many of the things that I talked about in my introduction here. We are going to help the world unlock the constraints and deploying AI in human society by making it much easier and faster and more economical to stand up a data centers. We're going to enable, for example, the biologics manufacturers to do what they do without losing 30% to 40% of their yield. And we're going to very actively help the world decarbonize or reduce our dependence on energy by making sure that everything we do consumes just a fraction of the energy that our technologies need today over time. Clarity on its own and a large organization like this is an accelerant because when you align across the organization, so your salespeople know that these are the priorities, and we help direct their efforts towards these strategic pillars when your R&D teams and your product management teams knows these are the priorities and your innovation road map start to change. The wheels start to not just work better together or the COGS work better together. But over time, you're able to work a little faster. So having clarity on its own is an accelerate. Number two, what we've been working on over the last year is really our business system. And that is really the main theme of today. You're going to hear about how we're going to unlock our potential, these core capabilities that we have that haven't fully been unlocked yet, you are going to hear how we're going to do that with the business system. So the strategic pillars is where we point the effort and focus the organization and the business system is how we're going to improve this company, and you'll hear a lot more a little bit later what that is all about. And those 2 things together orchestrated in the right way, which we're working on, will and is creating this economic engine that will help us continue to make even more room for investments in innovation, for example, but in other areas as well, while we also improve the financial performance of our company. So let's talk a little bit more about our strong technological capabilities, the capabilities that have really been built in this facility in this area over the last 150 years as well as in our controls, engineering and innovation center in Milwaukee. So as you saw on the last quarterly call, where we talked about what that differentiation actually is built on, it is built on the fact that we own both the unique technologies and each one of the subsystems that in this case, here illustrated for an HVAC unit or high-performance chiller, we own all the technological capabilities within each one of those subsystems. We also manufacture all of those subsystems. So we both control the ability to innovate within each one of the subsystems at speed as well as precisely for the types of customer applications that we're going after. We also own the COGS. We can make trade-offs and choices and we can do that while we're innovating as well. And so we do that for each subsystem. But by owning the capabilities across the entire system we can make system-level decisions on how to eke out even more performance out of the whole system that we're launching we can choose at what speed we'd like to go at and innovation, and we can greatly impact the COGS because, as many of you have heard, 90% of your COGS is controlled when you design the product, and not later when you manufacture it because many of those decisions have already been made. So in the chiller here, there are 1,000 patents and innumerable amount of trade secrets behind this -- these products that we have in the market today. Now you could argue, have we really leveraged these skills over time. And you'll see later on today, we'll talk about how we're unlocking greater speed of innovation and increasing our capacity for innovating even more because we have the raw capabilities that you see articulated on the right which is an example of energy consumption. So in principle, we have the capabilities to help customers cut their energy consumption in half already today through the capabilities that we have in our HVAC systems, our Control systems, Metasys as well as our digital and AI-based overlay systems. Again, we can debate how well we have unlocked that potential. That's what we're working on. That's what the business system is here for. So that was an example of how we're innovating on the subsystem level as well as the holistic system level to create a highly differentiated offering for our customers. That was an example on an HVAC chiller level. That same way of working, we have, over the last year, been applying to the thermal architecture or the thermal chain of AI factories of data centers. So we've taken positions beyond chillers, beyond air handling units with the Silent-Aire franchise, and beyond the learnings we've had over the last decades of serving those data center applications. And we've moved left on this chart into closer and all the way to the chip and build a portfolio of capabilities now that will allow us to apply that same kind of thinking, systems thinking holistically across the thermal chain in a data center. And that way of working will allow us to not just reduce the amount of power that needs to be diverted to cooling or providing more cooling today but over time, as we move into a 2-phase cold plate world will actually allow us to dramatically cut the amount of power needed for the whole thermal architecture for the entire data center. Some of these innovations, which we'll talk to you about at some later point in time, are going to be truly category changing for thermal management over time. And we haven't maybe talked to you too much about the details of the Alloy acquisition and the Accelsius partnerships, but they both have one thing in common. These are highly science and technology-oriented companies. And with Alloy, we didn't acquire a building or some hardware. We really acquired a group of highly talented engineers out of the -- PhDs out of MIT and Harvard and Boston. So we're super excited about what we're going to be able to do there to really make an impact on the world in the data center world. And the other book end that I talked about, if the clicker could work, if you could advance one slide, please. As I talked about here previously was our global field presence around the world. So this is something that's been built over decades. And we're not only talking about service people, as you see on the right-hand side, many of our customers are not buying commodity products, right? They're buying something that needs to work with the system that they're designing, whether that's a biologics plant, a data center, a battery plant, semicon plant or for that matter, research -- economic research hospital. So they need advice early in the design of their overall system from people like our sales consultants our solution architects to guide them on what the best choices are for the outcomes that they're trying to drive. But the depiction on the right here really talks about our service capabilities, which are the large group of people that we have in the field in about 100 countries around the world that help us support our customers to really get the value out of the systems that they have purchased over the life cycle of when they're using these products, which, in many cases, is 20-plus years. So they really rely on our people for that long. They have people changes in their organizations. They don't always remember how to operate certain things at certain points in time. Something changes in their overall system, something needs to be tweaked on our side of the equation. And that's where our service engineers in the field come in to play. And so as you can see, we have a significantly larger team around the world than most of our competitors. And these are people who weren't just hired from high school yesterday, right? These are people who have, in many cases, decades of experience, domain expertise, not just on the technology side, but also in terms of helping customers think about how to run the system as part of their overall system. So a great competitive advantage. But here again, we can ask, hey, have we really leveraged disadvantage? Have we unlocked our potential here that we have? And we haven't yet, but that's what we're going to show you, that's what we're working on today with the business system. So what is the business system? Business system is really how we are going to transform this company. And that's why we're going to spend the rest of the day showing you how we're doing that. But I'll take a step back. For those of you who are not familiar with this, we're, of course, not the only company that is applying a business system. Many have some efforts, fewer have really managed to, over time, make it part of how they run the company. But that's what we're doing here today, and you'll meet a few people who really have understood how to do that. So we're going to show you how we're doing it. But let's take a look at this image here. This is a Formula 1 pit stop. I'm sure some of you might have seen some videos in the 1990s. I'm told, I'm actually not a Formula 1 fan. One day, I'll have to learn more about that. But in the 1990s, it would take 9 to 10 seconds to change the tires. Fast forward today, they're able to do it in less than 2 seconds. So how have they done that? Cross-functional, continuous improvement, establishing standards, executing on the standards, going back, continuous improvement cross-functionally again and again and again and they just continue to get better and faster. That's sort of the idea that you should have in your head when you think about a business system. A business system, when implemented well, changes the culture of the company and creates a situation where a team of people, a group of people is able to just continue to improve and improve and improve and improve continuously. There's no end to it. Think about it in another way, business system is very much about speed, about speed of execution, about eliminating things that slows you down. You'll see plenty of examples of that today. So it is -- of course, there are some approaches, there are some tools, but it's very much a way of working together, human beings as a team, think of your favorite sports team. I'm sure you've heard analogies of, hey, we had all the best players, and I won't start with a baseball analogies. Now I'll just say that the brewers, Milwaukee Brewers don't really have many big names but they just keep on winning, and they have a system for how they do things, how they train people, how they work together. And you've heard that in other sports as well. That's pretty much the mental picture you should have of a business system as you walk around here today. And you're going to see it, by the way, being practiced at Gemba, where value is created, where the action happens it doesn't happen back in the office in the headquarter, right? The business system is all about teaching people to work together at Gemba where value is created. It's also a lot about problem solving, but we'll come back to that. Speed to solving problems. More broadly, the tools and approaches that are part of the business system, some of which you will see during the day, fall into these 3 categories: Simplify, so we have a set of approaches and tools that help us simplify what we do, what should we not work on, what's less important, what's more important? Let's focus on what really matters, kind of like our strategic pillars in some way for the enterprise. Then we have Accelerate. That's really built on what many of you will have heard about called lean. Lean -- person who went to Japan many, many years ago, regrets not calling it learn. Lean makes it sound like it's all about cost. It's actually not. It's about speed, speed to learning, speed to learning that you have a problem, speed to figuring out why you have a problem, speed to countermeasuring, why not solve because you only countermeasure until you find a better way. So there always -- so it's speed to learning, but it's really speed, as I said before. And then, of course, today, Amplify, there are off-the-shelf ish tools available to apply AI and digital while we're improving processes while we're working on speed that just weren't available a few years ago. A few years ago, we would have to hire data scientists. We've been competing with Google and Microsoft and the tech companies for talent like that. But now with the tool sets that they've developed, and the wider availability of digital and AI people, we've been able to now create approaches for how we build in AI and digital into our business system and as we improve the processes against speed. And I think of the speed part is we take something that used to take months and weeks and turn it into weeks or days. And with Amplify, we're able to take the weeks and days and today's in hours and sometimes even minutes. You'll see some examples of that later today. Some of the foundational approaches within the business system that you're going to see during the day are the following 5, and these are sort of general concepts that the business system builds on. So number one, standard work. For anything that you do in a company or in a sports team for that matter, make sure that the expectation or the best known way of doing it is defined and clear for everybody. Let's make sure that if you're playing defense, you know what your role is on defense. That the best known way is defined and that you're trained and everybody knows what the best-known way is until you find a better way, of course, but you always have to start with the standard. You'll hear about problem solving. We want to teach everyone in this company, and we're well on the way to become really good problem solvers. Most human beings, in particular, those who've gone to college and have more advanced degrees, tend to think of themselves as outstanding problem solvers. What I found when you work together in a company cross-functionally, your organization's problem-solving capability isn't always that strong. But the more problem solvers you can have in a company close to where the action is, the more likely are to be able to spot a problem to get to an understanding of why you have the problem and to get the countermeasures quickly. So problem solving is something that is a very strong element of our business system. And that's why all the best of the leaders that we have in the room says problem solvers on the back because we want to remind everyone that everyone needs to be a strong problem solver. And you have something called value stream mapping. Value stream mapping is -- and you'll hear plenty of that today as well, is an approach to look at an overall process, starting with the customer, going end to end to figure out where is value created and where is -- where is the waste? What's holding us back from going faster, for example? Why do we have to have so much inventory in the process? It could be physical inventory in the factory or it could be something as simple as we're waiting for approvals in an administrative process and there's a bottleneck somewhere. So value stream mapping is a way to -- a team-oriented way, to enable a team to together map out an end-to-end customer process, always anchored in the customer to be then able to see where we are going to apply our improvement efforts such as Kaizen. Kaizen are groups of maybe 8 to 10 people that get together for 4 to 5 days to solve big problems. Not just make a plan for solving the problem or analyzing, but solve the problem rapidly in a week. And as you will see later, we're running lots of Kaizens now. And of course, those need to be pointed at the big problems that we identified in the value stream maps. And they're always cross-functional. The people on these teams are always cross-functional. They typically also always involve an AI or a digital person so that we can apply those approaches, digital AI approaches in the week when we're making the improvement. And then visual and daily management. You'll see some examples of that, too. Once we've improved a process with some of the tools and approaches that I just talked about, we typically stand up what we call visual daily management which looks like something that you see on the screen here, where the team is working in the process meet on a daily or on a weekly basis to basically track how we're doing for how they define what winning looks like for that process. Each column here is one metric. That's one aspect of what winning looks like. Each line is -- the top line is daily. The second is typically weekly, maybe monthly. The third line is, if we're off target you see red or your -- green, you didn't almost win the Olympic metal, you're on or you're off. The third line is the Pareto of where or why you might be off. And the fourth line, typically handwritten is the team as they stand there on a daily or a weekly basis. They are agreeing committing to each other what actions they're going to take to get back to green. And if nothing else creates the accountability so that when they stand there tomorrow morning or next week, again, we're all reminded about what we committed to each other to drive improvement. This -- all these tools help with faster problem solving and also faster and better sustainment of all the countermeasures that we were implementing. So where are we on the journey? I already got that question on the way in here. You guys are good. You get on the questions right away. So the way to transform a company with the help of the business system, I mean I have learned over the last 2 decades, 2 prior companies I worked in. You always have to -- I have learned pick high-impact areas that are widely recognized to be big opportunities. So that's not a list of 60. That's a shorter list, 10 or less. Then in those impact areas, this could be things like why are our salespeople in Michigan only spending 10 hours a week selling. It seems like you could sell more if you could spend 20 hours a week [indiscernible]. That's what I've learned in my career. So that's a high-impact problem, not just in Michigan, but we know that problem exists in several places. But we've decided to start in Michigan, go narrow and go really deep to really understand the problem and start to implement the countermeasures. And as we were doing the work, we were training not just the people on the front lines, but we're training and bringing in leaders into the value stream maps that we were doing, into the Kaizens that we are doing. And so they could themselves see that this cross-functional way of working at Gemba really enables us to get to countermeasures implementation of sustainment much, much faster. This is a better way of running the company, and this is the way we're running a company. There's no other way we're running the company. So that also needs to be clear to everybody. Not because I said so, but because they're seeing it themselves, and they're seeing the enthusiasm and the motivational impact this has on our people on the front lines. So you can see some of the numbers here. We have ignition. I would call it, ignition. Now we're moving beyond ignition, and we're starting to scale and roll out some of the improvements that we've driven. You'll hear about many of them during the day here, to other areas. And you can see there are a lot more cities and locations added here. And this is now starting to accelerate here over time. You don't change a company in a year, a week. It takes -- if you have 100,000 people, it takes a little while. But results are already starting to show up in the P&L. And they will continue to show up. And the idea here, like I said, is to build the engine, the team, the capability that just keeps on improving and improving and improving. And there's going to be no end to the improvement that we're going to be able to drive. And this is the way that we are going to use to unlock our full potential that I started to talk about here earlier in the presentation. So what you're going to see today are really excellent, I think, examples of the power of the business system. So we're here at JADEC, our advanced development and engineering center. Home of the York. We've been innovating here for 150 years. And you're going to learn a lot about our unique technological capabilities within our thermal management. But you're also going to learn about how with the business system we are going to double the capacity of this team, of this facility without adding capital without adding more people. We are going to add more people. But if we didn't add, we could still double the speed and the capacity of innovation. And you'll agree and understand much better after the tour, but that's the kind of potential that we're talking about with the business system. We're then going to take you to one of our manufacturing facilities. It's not our largest facility, but it just happens to be in this area. And that's the facility -- one of 40-plus factories that we have around the world. And with the work that the team has done there, we're now able to quadruple the capacity of that plant. Without adding capital, without adding people, it's just simply applying the business system. And it's a combination of people who know how to do this together with people who know our processes, our company, our applications, and if you put these types of people together, they do the work at Gemba, they do the value stream mapping, the Kaizens and so on. These kinds of results are possible. And then finally, we're going to end the day in Baltimore in one of our local market offices. And there, you will see what I think I've mentioned on some of the quarterly calls earlier this year and last year, how we're helping both our sales and service teams double the amount of time with customers, double the amount of selling time with customers. And it's the same approach, value stream mapping, Kaizens, cross-functional teams, including our digital and AI teams working together at Gemba. So these are the kinds of results that are possible. And you can't copy paste and do everything in 6 months everywhere in every corner of the company. But this is what we're going to be rolling out over the next couple of years here in the company. Now before we start the tour, I just want to mention that you are going to meet a number of leaders, and you will also have a couple of guides with you, not professional tour guides, but they are people who are doing this work, senior leaders in the company. But I also want to make sure that I highlight here that your -- for us overall as a leadership team, one of our promises to our employees is to make sure that we have a safe working environment that they can rely -- their families can count on them coming home because they work in the way they came to work because we have a safe working environment. We will make sure that we provide the right safety gear for you during the day. Sometimes you'll hear people talk about PPE. It's basically safety stuff and listen to your guides and we'll provide you with the right type of equipment at the right locations. Just having the best people being aware of that we're moving around, of course, is one of those elements. Very good. So these are the people you're going to meet during the day, in addition to the guides that you have. So these are -- and they will introduce themselves, you'll hear that the majority of these people have worked for Johnson Controls for decades. Feel free to ask them questions. How they're thinking about the whole theme of using the business system to unlock our full potential. I think you're going to find some people who are really quite enthusiastic about what we're doing here. You're also going to find a few people who joined us more recently to help us accelerate the pace at which we can go. But a great group of people. As you can see from some of these titles, there are some VPs, but mostly, we have people here who are doing the actual work, they are not full-time presenters to groups of visitors like you, not at all. They are the people doing the work. And I think that's sort of the objective of the day here is for you to get a chance to meet the people who are going to apply or are applying the business system and who are going to lead the improvement and the transformation of our company. Our job as leaders is to support them, to help guide them, sure provide some directions, priorities, the strategic pillars. But at the end of the day, they're the ones doing the work. And when I say we have ignition, it's ignition with people on the front lines. And why I'm saying it takes a few years to go implement everywhere? Well, it's because we have to not just get to the top 200 leaders, we have to get to our people on the front lines. But this is a known approach, by the way. It's a known journey, well at least it is to me and a few others on the team here. And so I can tell you, when I say we have ignition, we truly have it, and we're now truly starting to build momentum beyond the ignition. You will see it from our colleagues. Don't take it for me. You should take it from the colleagues that you're going to meet here. Very good. So with that, we are now going to break into our group's. And there we go. So you have a vest so that should be a clue where you should go. So look for the color -- same color of your vest. That's the team that you're going to have 2 over here, 2 over here. So please, you're now free to get up and then go join your team, and I will be walking with one group during the day, and then I will see you in the wrap-up as well. So I hope you enjoy and have a great day here. Looking forward to it.

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