Earnings Call Transcript - JCI Q4 2021

Operator, Operator

Welcome to the Johnson Controls Fourth Quarter 2021 Earnings Call. This conference is being recorded. If you have any objections, please disconnect at this time. I will now turn the call over to Antonella Franzen, Vice President and Chief Investor Relations and Communications Officer.

Antonella Franzen, Vice President and Chief Investor Relations and Communications Officer

Good morning, and thank you for joining our conference call to discuss Johnson Controls' fourth quarter fiscal 2021 results. The press release and all related tables issued earlier this morning as well as the conference call slide presentation can be found on the Investor Relations portion of our website at johnsoncontrols.com. Joining me on the call today are Johnson Controls' Chairman and Chief Executive Officer, George Oliver; and our Chief Financial Officer, Olivier Leonetti. Before we begin, I'd like to remind you that during the course of today's call, we will be providing certain forward-looking information. We ask that you review today's press release and read through the forward-looking cautionary informational statements that we've included there. In addition, we will use certain non-GAAP measures in our discussions, and we ask that you read through the sections of our press release that address the use of these items. In discussing our results during the call, references to adjusted earnings per share, EBITA and EBIT exclude restructuring and integration costs as well as other special items. These metrics, together with organic sales and free cash flow, are non-GAAP measures and are reconciled in the schedules attached to our press release and in the appendix to the presentation posted on our website. Additionally, all comparisons to the prior year are on a continuing ops basis. Now let me turn the call over to George.

George Oliver, Chairman and Chief Executive Officer

Thanks, Antonella, and good morning, everyone. Thank you for joining us on the call today. I'm going to start off with a quick look back at 2021 and update you on a few of our long-term strategic priorities. Olivier will provide a detailed review of our fourth quarter results and provide you with our fiscal 2022 guidance. As always, we will leave as much time as possible to take your questions. Let's get started on Slide 3. We rounded out fiscal '21 with another quarter of solid financial results, having met or exceeded all of our original commitments for the year, in what turned out to be a much more difficult environment than originally planned. The ability to deliver these results, while navigating through unprecedented levels of inflation and supply chain disruptions, is a testament to the operational discipline and agility demonstrated throughout the organization. For that, I am incredibly grateful for the efforts of the entire Johnson Controls team. Despite the challenging external environment, our end market demand remains strong. Robust retrofit activity, coupled with a pickup in new nonresidential construction we are starting to see, creates a strong future demand trend. This is evidenced by the continued momentum we are seeing in our order books and the record backlog we have built. We also remain focused on the big picture, moving ahead with bold new commitments, doubling down with ambitious new ESG goals set earlier this year, embarking on a substantial new productivity program designed to drive a step-function change in profitability. Just recently, at our Investor Day in September, we committed to a new set of 3-year financial commitments. We made significant progress in advancing our growth strategy, scaling our OpenBlue digital platform, launching 8 new major offerings and greatly expanding our partner ecosystem, investing in the refresh of our product portfolio, focusing on accelerating our service growth and improving our attachment rate. Furthermore, we are capitalizing on strong secular trends for healthy buildings, decarbonization and smart connected equipment and buildings. As end markets continue to recover and the adoption of these trends continues to expand globally, I am confident we are uniquely positioned from a competitive standpoint to continue to outperform. Please turn to Slide 4. In addition to the strong financial results and advancement on our strategic initiatives, we have continued to lead in ESG, including continued progress toward both our 2025 sustainability goals and our new ESG commitments. This is not, by any means, an exhaustive list, but I am extremely pleased with what our teams have accomplished in the last year. We are committed to net zero, committed to reducing emissions within our own operations and that of our customers. Our science-based targets have been approved. Our leadership team is aligned from a governance perspective, and we are extending our leadership in sustainable financing as well. Tomorrow, I travel to COP26 in Glasgow. We made great progress in driving home the understanding that buildings represent approximately 40% of global greenhouse gas emissions, and there is no tackling climate change without substantial investment in buildings. Governments are now acting on this and mobilizing billions to upgrade buildings. Johnson Controls is perfectly positioned to deliver those solutions. At COP26, I will meet with government and business leaders to build momentum and ensure action. Turning to Slide 5, I wanted to take a few minutes to highlight several new strategic developments in the quarter. Most recently, we signed an MOU with two significant technology leaders, Accenture and Alibaba, to address sustainable infrastructure needs. This collaboration will focus on an estimated multibillion-dollar market for digital solutions serving data centers in China. We also signed a foundational technology agreement with Tempered Networks, building upon our recent cybersecurity partnerships with Pelion and DigiCert. Each of these partnerships embeds a critical layer of trust, security, and operational capability into our OpenBlue platform and connected devices. These elements differentiate our products and services to help protect the integrity of our customers' operations and data. Tempered brings an industry-leading zero-trust secure network capability that helps us drive customer confidence and, in turn, accelerate the adoption of OpenBlue services. Our partnerships with UL, Safe Traces and with Phylagen are powerful examples of how we are innovating to extend our Healthy Buildings leadership, providing new indoor environmental quality solutions to address our customers' most pressing challenges. Our near-term focus is on the education vertical as there is a clear and compelling need to help those customers optimize their investments. With an estimated $195 billion in government stimulus earmarked for K-12 spending, this provides a significant opportunity. Additionally, we entered into an exclusive joint development agreement and investment with Phylagen, a leading biotech company working on the identification of indoor bacteria and viruses that are all around us in buildings. Our work with Phylagen is a commitment to developing the cutting-edge capabilities to deliver and maintain healthy buildings. Please turn to Slide 6. At our Investor Day, we shared with you our 3 pillars for delivering above-market growth over the next 3 years and beyond. One of those pillars related to gaining share through innovative product development centered around digital and sustainability. As planned, we launched over 150 new products in fiscal 2021, spanning nearly all business units, resulting in continued share gains in both Q4 and the full year. In 2022, we are well positioned to gain share with another 175 new products across 4 main categories: sustainability, smart buildings, digital, and residential, with heat pumps central to our product development strategy. These are just a sample of what is expected to launch over the next 90 days, with a steady pipeline behind us. Turning to Slide 7. Service plays a central role in everything we do. Over the last 18 months, we have strengthened our market-leading capabilities to best position ourselves for the shifting industry demographics and evolving digital technologies that are enabling outcome-based solution models. At the start of last year, we began articulating our intentions to accelerate service growth to a couple of points above market levels, part of which would be the result of increasing our attachment rate by leveraging our large installed base and the digital transformation of our business. In fiscal 2021, we saw the early benefits of our efforts shine through. We exited the year with service revenues up 8% in the fourth quarter with high single-digit growth in all 3 regions in nearly all business domains. For the full year, service revenue grew 4%, which is up 2 to 3 points over 2019 levels, despite a slow start to the year as we managed through lingering site access restrictions and abnormal customer budget pressures. Looking ahead, we see service accelerating through fiscal 2022, in line with our goal to outpace the market. The order strength we've seen in the second half of the year bolsters that view. Service orders were up 7% in Q4 and, importantly, up low single digits organically versus 2019 levels. Additionally, we improved our attach rate to approximately 40%. Turning to Slide 8. The third pillar is our vectors of growth, which we believe, on a combined basis, represents an incremental market opportunity of $250 billion over the next decade. Our unique portfolio is a competitive advantage across all 3 areas. From a financial performance perspective, we have significantly increased both revenue and orders in fiscal 2021. This positions us very well for continued strong performance as we move forward. Next, on Slide 9, I wanted to highlight a key customer win related to one of our key vectors of growth. In Q4, we were awarded a Buildings as a Service project by one of our long-standing customers, the University of North Dakota. This is the second long-term Performance Infrastructure contract we have been awarded with this university in the last 2 years. It leverages not only our expertise in Performance Contracting, but also the OpenBlue Enterprise Manager software. The total contract value was nearly $220 million over the life of the project, with a smaller portion of that booked during the quarter. On a related note, our OpenBlue Healthy Buildings platform enabled nearly 900 colleges and universities to safely and efficiently welcome students, staff, and faculty back to their campuses this fall. Before I turn things over to Olivier, let me conclude with a few thoughts. I remain extremely encouraged by the demand patterns we are seeing across most of our end markets and the ability of our teams to capitalize on more than our fair share of that demand. We see this decade as being one of the most exciting for the smart building industry, which Johnson Controls is positioned to lead. Underlying momentum in our short-cycle businesses continues to improve despite pressure from ongoing supply chain and component availability constraints. Our longer-cycle install business, driven by the new buildings market, also continues to recover, although extended lead times and inflation are delaying some investment decisions, particularly on larger projects. Retrofit activity remains an important driver of our business, and we see plenty of opportunity to capitalize on this activity going forward. All of that said, we are very mindful of the macro backdrop and our outlook does not assume any significant near-term improvement in supply chain conditions or inflation over the next couple of quarters. On price/cost, given the progressive rise in inflation for almost all input costs throughout the year, we took decisive steps on pricing and cost to stay ahead of the curve. I am confident we will continue to manage through these challenges. Looking ahead to fiscal 2022, our focus turns to accelerating and demonstrating our growth capabilities. Our proven product technology leadership, combined now with OpenBlue, truly differentiates the solutions we can bring to our customers. In fact, we believe we are best positioned to lead the revolution of smart buildings, and we are fully committed to creating healthier, safer, and more sustainable buildings. With that, let me turn it over to Olivier to go through the details of the quarter.

Olivier Leonetti, Chief Financial Officer

Thanks, George, and good morning, everyone. Let me start with a brief financial summary on Slide 10. Sales in the quarter were up 5% organically, led by Global Products, which is truly a reflection of the team's strong execution. Underlying momentum in this business continues to improve, as evidenced by mid-single digits growth on a 2-year stack basis. Our longer-cycle field business continues to recover, led by strong growth in services, up 8% in the quarter. Segment EBITA increased 10% versus the prior year, margin expanding 30 basis points to 15.9%. Better leverage on higher volumes, favorable mix, and the incremental benefit of our SG&A actions more than offset the headwind from the reversal of temporary cost reductions and price/cost, including significant supply chain disruptions. EPS of $0.88 was at the high end of our guidance range and increased 16% year-over-year, benefiting from higher profitability as well as a lower share count. Free cash flow in the quarter was approximately $300 million, reflecting the reversal of timing benefits experienced in the first 3 quarters of the year, as expected. On a full year basis, we achieved 105% free cash flow conversion. Please turn to Slide 11. Orders for our field businesses increased 9%, led by low double-digit growth in install on strong double-digit growth in retrofit activity. We are also seeing continued strength in our service business, with orders up 7%, driven by strong growth in North America and EMEALA. Backlog grew 10% to more than $10 billion, with service backlog up 5% and install backlog up 11%. The sequential improvement was led by strong retrofit activity as new construction continues to recover from depressed levels in fiscal '20, particularly in North America. Turning to our EPS bridge on Slide 12. Let me touch on a few key items. Overall, operations contributed $0.09 versus the prior year, including a $0.04 benefit from our SG&A productivity program, achieving our targeted savings in fiscal '21. We are well on track to achieve our SG&A and COGS savings in fiscal '22 and beyond. Similar to last quarter, excluding the headwind from the prior year temporary actions, underlying incrementals in Q4 were approximately 30%. Corporate was a $0.03 headwind year-over-year and other items netted to a $0.06 tailwind, primarily related to lower share count, lower net financing charges, and FX. Let's discuss our segment results in more details on Slide 13. My commentary will also refer to the segment end-market performance included on Slide 14. North America revenue grew 4% organically, led by strength in services, which was higher in all domains. Install revenue was up low single digits, primarily due to strong demand from shorter-cycle retrofit and upgrade projects, and positive growth in new construction. Both our internal and customer supply chain restrictions negatively impacted our North America install business. By domain, Commercial Applied HVAC revenue grew mid-single digits, while Fire & Security increased low single digits in the quarter. We had another strong quarter in Performance Infrastructure, which grew revenue low double digits, the fifth consecutive quarter of double-digit growth, a good reflection on our customers' demand for decarbonization solution. Segment margin decreased 20 basis points year-over-year to 15.2%, primarily due to the reversal of temporary cost from the mitigation actions in the prior year. Orders in North America were up 11% versus the prior year, with high single-digit growth in both Commercial HVAC and Fire & Security. Performance Infrastructure orders were up nearly 40%. Applied HVAC orders increased 10% overall, driven by strong retrofit activity, with another strong quarter of equipment orders up over 20% in Q4. Backlog of $6.5 billion increased 10% year-over-year. Revenue in EMEALA increased 3% organically, led by continued strength in our service business, particularly in our Applied HVAC and Industrial Refrigeration businesses. Fire & Security, which account for nearly 60% of segment revenues, grew at mid-single digits rate in Q4, with strength across our enterprise accounts and residential security businesses, including a rebound in our retail platform. Industrial Refrigeration also grew mid-single digits, while Commercial HVAC & Controls declined low single digits. By geography, revenue growth was broad-based, with strength in Europe and Latin America, partially offset by a low double-digit decline in the Middle East. Segment EBITA margins declined 30 basis points, driven by a prior year gain on sales. Underlying margin performance improved as favorable mix, positive price/cost, and the benefit of SG&A savings this year more than offset the temporary mitigation actions taken in the prior year. Orders in EMEALA continued to accelerate, increasing 7% in the quarter, with strong mid-teens growth in Commercial HVAC and high single-digit growth in Fire & Security. APAC revenue increased 7% organically, led by low double digits growth in Commercial HVAC & Controls. EBITA margins expanded 80 basis points year-over-year to 15.5%, driven by a favorable reserve adjustment. APAC underlying margin declined year-over-year as volume leverage and net productivity was offset by unfavorable mix and negative price/cost. APAC orders grew 4%, driven by continued strength in Commercial HVAC. Global Products revenue grew 7% on an organic basis in the quarter, with broad-based strength across the portfolio. Our Global Residential HVAC business was up 5% in the quarter. North America Resi HVAC grew 4% in the quarter, benefiting from both higher volume and pricing. Outside of North America, our Residential HVAC business grew mid-single digits, led by strong double-digit growth in Europe and driven in part by the launch of our new Hitachi air-to-water residential heat pump, which was well received by the market. In APAC, Residential HVAC declined low single digits as a result of softer industry demand in Japan, given the COVID-related state of emergency in place for much of the quarter. We continue to gain shares in Japan, up more than 100 basis points in the quarter, as we continue to launch new premium products with indoor air quality technologies. Although not reflected in our revenue growth, our Hisense JV revenue grew over 40% year-over-year in Q4, expanding our leading position in China. Commercial HVAC product sales were up low double digits overall, led by mid-teens growth in our indirect Applied business, including strong chiller demand within the data center end market. Light Commercial grew high single digits overall, with North America unitary equipment down 2% and VRF up high single digits. Our Light Commercial business in Asia was up low double digits, including a significant win in Taiwan to supply high-efficiency ductless unit with indoor air quality technology to all schools across the country. Fire & Security products grew high single digits in aggregate, led by our access and control and video solutions business and return to pre-pandemic levels for parts of our fire suppression business. EBITA margin expanded 90 basis points year-over-year to 18.7% as volume leverage, higher equity income, and the benefit of SG&A actions more than offset the temporary cost action in the prior year and price/cost, including the significant supply chain disruptions. Turning to Slide 15. Corporate expense increased significantly year-over-year off an abnormal low level to $83 million. For modeling purposes, we have included an outlook for some of our below-the-line items in financial year '22. I will point out that amortization expense reflects the full-year run rate impact of Silent-Aire as well as additional software R&D. Net financing charges returned to a more normal level as fiscal '21 benefited from significant FX gain. Noncontrolling interest reflects continued growth in our Hitachi JV. Turning to our balance sheet and cash flow on Slide 16. Our balance sheet remains in great shape. We ended the year with $1.3 billion in available cash and net debt at 1.8x, still below our targeted range of 2 to 2.5x. On cash, we generated a little over $300 million in free cash flow in the quarter, bringing us to nearly $2 billion year-to-date and achieving our target of 105% conversion for the year. As you will recall from our guidance last quarter, we expected a reversal in some of the timing benefits we experienced earlier in the year. I am extremely pleased with our cash performance and remain confident that we will sustain 100% conversion over the next several years. During the fourth quarter, we repurchased a little over 4 million shares for approximately $300 million, which for the full year, brings us to around 23 million shares or $1.3 billion. Let's turn to Slide 17 for a look at our historical Q1 seasonality. As you can see, Q1 typically represents less than 15% of our full year EPS given our normal seasonality. For Q1 of fiscal '22, we expect to be above that level, with Q1 guidance representing about 16% of our full year at the midpoint. Additionally, we expect an improving first half, second half versus historical seasonality. As we look at fiscal '22 overall, on Slide 18, we are entering the year with record backlog, and underlying markets are continuing to improve. With that said, we do expect supply chain constraints and the inflationary environment to continue, at least over the next couple of quarters. On a full year basis, we expect high single-digit organic revenue growth, with 70 to 80 basis points of segment EBITA margin expansion. Although we expect to remain price/cost positive on an EPS basis, the inflated level of pricing will result in margin headwinds of approximately 40 basis points for the year. Underlying margins are expanding to 110 to 120 basis points. Additionally, we expect another year of strong earnings growth, with adjusted EPS in the range of $3.22 to $3.32, which represents year-over-year growth of 22% to 25%. Turning to Slide 19. We can see that our expectations for fiscal '22 are very much in line with the growth expectations we provided at our recent Investor Day, and we are accelerating growth in each area. Lastly, on Slide 20, I want to reiterate that we are well on our way to our '24 targets.

Operator, Operator

We can now open up the lines for questions.

Nigel Coe, Analyst

Thank you for the insights on business performance. It appears that you are excelling in several key areas, particularly in North America Residential. The performance in the Applied segment also seems to be stronger compared to some of your competitors. Additionally, Performance Contracting stands out with five consecutive quarters of double-digit growth. I would appreciate it if you could elaborate on these three areas. Regarding the residential segment, it seems you still have a greater focus on independent distribution, so I would be interested in understanding the sell-in and sell-out performance there.

George Oliver, Chairman and Chief Executive Officer

Nigel, just for clarification. What was the first comment you made?

Nigel Coe, Analyst

Could you comment on the performance of North American Residential compared to the industry, specifically regarding your high single-digit growth and Performance Contracting? It seems you are outpacing your competitors. I would like to know how you feel your market shares are doing. Additionally, could you provide insight on the sell-in versus sell-out dynamics in the residential channel?

George Oliver, Chairman and Chief Executive Officer

Sure. If you examine North America, particularly the commercial HVAC market, it's clear this is a compelling end market with strong long-term drivers that align well with our core business. We've been investing significantly in our products and, overall, I believe we are gaining market share. For the year, we expect to see an increase of nearly 200 basis points, focusing on energy efficiency and sustainability. Our industry-leading chillers support this, along with the new rooftops featuring low-GWP refrigeration which enhances efficiency and service. We're also making substantial investments in next-generation air cooling technologies, electrification through heat pumps and heat transfer units, and advanced VRF technology. Our performance has been strong not only in North America but worldwide, allowing us to build a solid installed base that promotes long-term services. This is further improved by our digital capabilities with OpenBlue. Specifically, in Applied, the demand for retrofit opportunities fueled by the focus on healthy buildings and the return to work and school has been particularly robust in North America, driven by strong performance in controls, airside, and filtration, with K-12 demand being significant. We are also witnessing a global surge in demand for air-cooled chillers in data centers and the rental market, as well as industrial heat pumps within our IR portfolios. Our global orders in Applied have risen by 11%, and in North America, our equipment orders are up in the mid-20s percentage, a strong result following a solid third quarter. Overall, we are gaining market share, up almost 200 basis points. In the residential sector, our performance remains strong. We have a significant backlog in our ducted residential business, and we are performing well while investing in new products and continuing to gain market share. Globally, our overall position in residential is decent, with our JCH business up about 4%. We have been gaining share and succeeding with the new products launched in the market. Although our performance in Japan was down 11%, we still outperformed there, which is a crucial market for us. We experienced strong growth in Europe, up about 35%, and the Hisense business, as Olivier mentioned, is up over 40%. Overall, we are optimistic about our performance in the residential market.

Olivier Leonetti, Chief Financial Officer

Let me comment also on Performance Infrastructure, Nigel. This is a proxy for what is happening in the market for sustainability. As we put in our opening remarks, orders for this business for the year were growing at 42%. We are very pleased about how this business is behaving across the globe. We have created a practice now at Johnson Controls fully dedicated to sustainability. We are very excited by what we can do for our customers on this front, Nigel.

Operator, Operator

The next question will come from Gautam Khanna of Cowen.

Gautam Khanna, Analyst

I would like to hear your perspective on the service attach rates for this year and what you anticipate the ultimate entitlement might be. Does it grow from 40% to 50% or even to 60%? Please discuss the economics and how that impacts margins. It seems you are exceeding your plan, so I am curious if we now have a new target.

George Oliver, Chairman and Chief Executive Officer

Service has become central to our operations. We have an impressive service base exceeding $6 billion, with around 55% of that being recurring revenue, and we're making significant strides. We're not only increasing our market reach but also enhancing our technology and incorporating more digital content into the solutions we offer our customers. We are targeting the previously underserved installed base. With a strong existing customer base, we see a substantial opportunity and a competitive edge thanks to the technology we are implementing, which really adds value. Our service has an attractive margin profile, approximately double the company's EBITDA margin. With the investments we've made, we are not just launching new projects; we are also increasing connectivity and achieving higher service attach rates while targeting the installed base that we had not previously engaged. This year, our efforts have raised the attach rate to 40%. We are making significant progress with this installed base and are committed to improving by an additional 300 to 400 basis points in 2022. This improvement is linked to the new services we are introducing to the market; we will launch 20 new service products and offerings in 2022 across our domains, utilizing technology and data insights. This will help our customers meet their clean air, fire and security, as well as sustainability objectives. This will be a major focus for us. According to our guidance, we are on track to exceed market expectations and anticipate outperforming by approximately 200 to 300 basis points moving forward.

Gautam Khanna, Analyst

Do you have a sense for the upper limit, though, in terms of what that attach rate could get to? 40% goes to 50% goes to 60%, what do you think the upper limit is?

George Oliver, Chairman and Chief Executive Officer

Yes, we believe that our technology and capabilities allow us to clearly differentiate the performance of all the installed equipment, presenting us with the opportunity to pursue the entire market. That said, some customers do perform their own maintenance, but we anticipate providing a level of service to the entire installed base. We are focused on attaching to new projects and achieving a high attachment rate. As we revisit the installed base with these service offerings, which create significant value, we have the potential to pursue all of it, and we expect to reach a 70% to 80% attachment rate in the next few years.

Olivier Leonetti, Chief Financial Officer

The attach rate on new products is indeed very high and very much representative of the quote that George has mentioned, 70%, 80% attached.

Operator, Operator

The next question will come from Josh Pokrzywinski of Morgan Stanley.

Joshua Pokrzywinski, Analyst

First question on supply chain. George, any revenue or orders, for that matter, that got pushed out as a function of what's going on in the market? And then on the kind of bottlenecks that you guys see, does field labor become an issue as we go through '22?

George Oliver, Chairman and Chief Executive Officer

Yes. Let me start with the first question there. When you look at what we've done here in the last year, given all of the volatility, I would say that our team is operating at top quartile; we've been able to navigate and stay ahead of disruptions. We've been working closely with our suppliers and with our customers, and ultimately, we've been able to deliver on our commitments. We're going to stay proactive. We do believe that in the quarter, there was probably an impact of about 1% to 2% on top line as a result of the shortages that hindered our ability to convert all that we could have. But overall, the team has done a great job working with suppliers to mitigate the impact and ultimately secure the critical materials. Now as it relates to labor, because of our growth rates and the like, we have had a program management team globally to ensure that we're positioning ourselves to get all of the critical talent needed to support the growth strategies we laid out during the Investor Day, which we feel very good about. Overall, I feel very good, given the volatility and our ability to attract and retain the talent we need, ultimately working with our suppliers and customers to mitigate the impact of shortages.

Joshua Pokrzywinski, Analyst

Just a quick follow-up for Olivier. Can you spike out what price and costs are individually in '22?

Olivier Leonetti, Chief Financial Officer

So in '22, the inflation we are planning to have is about 3% to 4%. For '21, it was about 2%. The exit rate in '21 was a bit higher, but for the full year of '22, we expect 3% to 4%. To answer your question on price/cost equation, we have a great pricing practice at Johnson Controls. We have been price/cost positive in the second half, and we are planning to be price/cost positive in '22 as well, including in Q1.

Operator, Operator

The next question comes from Scott Davis of Melius Research.

Scott Davis, Analyst

George, do you mind talking a little bit about this Accenture and Alibaba deal? What exactly are you doing for them? What's the scope? Can it widen out beyond China? Is this some sort of experimental test and if it goes well, you move on?

George Oliver, Chairman and Chief Executive Officer

Yes, Scott. We talked a lot about this at our Investor Day. When you look at what we're doing with OpenBlue and the technology and the domain and expertise that we bring to buildings and infrastructure, we are building out our ecosystem. We are working closely with Accenture relative to their capabilities and how we go to market, ultimately driving a full holistic solution around sustainability, then working locally with Alibaba and working with Daniel Zhang to get the technology required to be successful within the China market and be able to serve those customers with our full holistic solutions. We believe the market opportunity is multibillions. It ties back to our ability to drive decarbonization and provides more healthy buildings and ultimately connected buildings that drive different outcomes within the infrastructure we built. We are very excited about the partnership and deploying our holistic solutions is critical to executing.

Scott Davis, Analyst

Okay. Helpful. The labor availability issue, has that been much of an issue for you on the install side? Is that a risk in '22 increasing? Or is it decreasing risk?

George Oliver, Chairman and Chief Executive Officer

As I said earlier, we've done really well in our ability to attract the talent that we think is critical to being successful. We've had typical challenges, but overall, I feel good in our positioning to deliver on the commitments we've made. We also use contractors or subcontract labor. We've ensured that we have the right labor in place for our direct labor or through our contracted labor. We've managed this risk well and continued to position for success.

Olivier Leonetti, Chief Financial Officer

An additional point is that our productivity program is ramping, which would impact COGS this year, based on increasing the productivity of our field operation, including engineers. This program is also helping us manage the labor availability challenges you have mentioned.

Operator, Operator

The next question comes from Jeff Sprague of Vertical Research.

Jeffrey Sprague, Analyst

Two from me, if I might. First, just back to service. I just wonder if you could talk a little bit about the phrase I use, the calorie count. Not only is the attachment going up, right, but a clear focus is to add additional services and the like. I just wondered, to what degree that's showing up and what you're putting in your backlog? And what that might portend as we look forward another year or two?

George Oliver, Chairman and Chief Executive Officer

When you look at this, service has become a central focus for the entire organization. The investments we make in products as well as now with OpenBlue translate into recurring revenue that creates more value for our customers, with good returns. The traditional service business has come back nicely post-pandemic. The accelerator is what we're doing with digital and the new OpenBlue offerings. That all helps us increase attach rates, along with additional services, taking intelligence and applying AI to deliver these new service offerings. Through 2021, we delivered 15 new service offerings, many tied to healthy buildings and sustainability, which have built a tremendous pipeline of opportunity that we are now beginning to convert. Service orders are up 7% above the 2019 levels, and we see that momentum continuing. We believe we are well positioned to continue to build backlog, creating more recurring revenue and sustaining very strong margins on that service going forward.

Jeffrey Sprague, Analyst

And then I'll take Olivier upon his offer to elaborate a little bit more on price. It does look like, on a price/cost basis, you are doing a bit better than some of your peers. I just wonder if you could unpack a little bit kind of equipment price versus service price and how you got ahead of the curve. And is one side or the other of that house, service versus equipment, really driving the equation?

Olivier Leonetti, Chief Financial Officer

Price/cost is one of the foundations of our operating model. We have been executing very well on this front. Some of the levers we are using include pricing projects as we anticipated inflation, modifying our contract agreements to allow pricing adjustments, identifying parts of the market that are less sensitive to price, and providing great value to our customers through decarbonization, sustainability, and indoor air quality. Our backlog is now shorter, allowing us to adjust pricing faster, and our workforce is incentivized to drive pricing. All of this results in the positive outcomes we are experiencing.

Operator, Operator

The next question comes from Pat Baumann.

Pat Baumann, Analyst

A quick question just on the organic growth path for the year, starting off at mid-single digits in the first quarter and then accelerating to 7% to 9% for the year. Can you talk about the levers there? Is it supply chain relief? Is it a ramp in pricing or something else?

Olivier Leonetti, Chief Financial Officer

Right. In the growth, we mentioned high single-digit organic growth, with pricing contributing about 3% to 4% of that number. Regarding the growth vectors, services are expected to grow 6% to 7%. Install is a strong business, particularly from retrofit, expected to grow about 6% to 8%. Global Products we expect to grow in the low teens. Our team is actively launching new products, with many using heat pump technology. We are leveraging the secular trends impacting the industry: decarbonization, indoor air quality, and digitalization in building space. We are excited about our opportunities ahead.

Pat Baumann, Analyst

I appreciate the clarification. What I was really asking is, for the first quarter, you're expecting growth in the mid-single digits. For the year, you're guiding for a 7% to 9% increase. What accounts for the increase from mid-single digits in the first quarter to that higher single-digit growth for the year? Do you anticipate growth to accelerate throughout the year?

Olivier Leonetti, Chief Financial Officer

Yes, we do. The growth vectors are going to deliver more sustainability, which will drive more growth. Service will drive more growth. The acceleration of various work vectors will be at play across the year.

George Oliver, Chairman and Chief Executive Officer

There's still a little bit of pressure similar to what we saw in the fourth quarter relating to our ability to convert, but it remains minimal.

Olivier Leonetti, Chief Financial Officer

It's worth noting that the first half typically represents about 30% of the total year. We believe we'll be in the mid-30s in the first half, considering supply chain constraints factored in that statistic.

Julian Mitchell, Analyst

Just wanted to touch on incremental margins and sort of operating leverage. So it looks like you're dialing in maybe a mid-20s rate for the year, closer to 20% incrementals for the first quarter. Is the key headwind sort of, for the year, just all about price/cost? Anything else to call out?

Olivier Leonetti, Chief Financial Officer

You're right. The incremental in the P&L are in the range of mid-20s, so 25%. Adjusted for price/cost, it would be in the 35% range, meaning we are aligned to what we had communicated to you. Our productivity program is intact. We expect to save about $230 million this year, which will flow to the bottom line. Additionally, we'll have a 30 basis points improvement in margin.

Julian Mitchell, Analyst

And then just secondly, maybe switching to the revenue line. Maybe just fill out in a bit more detail the assumptions for organic growth this year. What's underpinning the sort of Fire & Security assumptions versus, say, Commercial HVAC in terms of applied and unitary?

Olivier Leonetti, Chief Financial Officer

The Commercial HVAC will grow slightly faster than Fire & Security. Fire & Security is going to grow well as well, but I anticipate that Commercial HVAC will see slightly higher growth due to its strong digital offerings.

George Oliver, Chairman and Chief Executive Officer

It's important to note that on the short-cycle Fire & Security business, it's coming back nicely. We saw our products business up 9%. We’ve got great backlogs there. The field-based business has been a little slower on the recovery because they don’t have the focus on clean air and all of the work we did with our HVAC and a lot of focus on sustainability. We see some nice trends here. Through the course of the year, we’ll continue to accelerate, but it will be short of where we see Commercial HVAC to be for the year.

Deane Dray, Analyst

I would like to follow up on Julian's first question and ensure I understood Olivier's response. The question concerns the clarification on underlying margins, with EBITDA expected to be up 70% to 80% in fiscal 2022. The cost reduction program, which amounts to a net of $230 million, should contribute 90 basis points if my calculations are correct. Does this suggest that the underlying margins are worse, or is it simply a matter of being conservative at the beginning of the year?

Olivier Leonetti, Chief Financial Officer

You're correct. If you factor the impact of COGS and productivity program, the impact is close to 1 point. You will factor also Silent-Aire in the equation, which is dilutive in rate. We see today, net of price/cost, we end up with a margin expansion higher than 100 basis points, 110 to 120. Our margin profile is improving because of the value of our offerings, and our productivity program is well on track.

George Oliver, Chairman and Chief Executive Officer

As we look at this business, we have a lot of conversion coming from what would have been a conventional business to now incorporating that business into differentiated solutions. We have a pipeline that we are working over $1 billion.

Olivier Leonetti, Chief Financial Officer

This part of the pipeline at Johnson Controls is the one growing the fastest by margin.

Noah Kaye, Analyst

Just a capital allocation question. Obviously, you provided a lot of color on the framework at Investor Day. But for 2022, can you first comment on the M&A pipeline strength, whether you're seeing some HVAC consolidation opportunities or other growth opportunities that are interesting?

Olivier Leonetti, Chief Financial Officer

In terms of free cash flow, we are a 100%-plus free cash flow conversion company. We're targeting to grow dividends in line with earnings and deploy about $1.4 billion in buybacks in '22, more or less equally distributed among the 4 quarters. We expect M&A will add 1 to 2 points of revenue growth while remaining within our leverage guide of 2% to 2.5%, focusing on services, digital decarbonization mainly. The pipeline is growing nicely, and we are pleased with the progress being made.

George Oliver, Chairman and Chief Executive Officer

This acquisition aligned directly with our overall capital allocation and M&A strategies. We are extremely pleased with the progress we're making. The data center market is substantial, and we see strong growth ahead as we innovate to serve their needs.

Operator, Operator

At this time, I would like to turn the call back over to George Oliver for closing remarks.

George Oliver, Chairman and Chief Executive Officer

Let me wrap up the call here today. I want to thank everyone again for joining our call this morning. As we discussed here this morning, we had a very strong finish to the fiscal year. The underlying momentum we are seeing in our businesses is extremely encouraging. As we enter fiscal 2022, it's important to note that the growth accelerators are ramping and are well on our way to achieving our fiscal year '24 targets that we laid out back in September. We all look forward to continuing our discussion, speaking with many of you soon during the conferences. On that, operator, that concludes our call.

Operator, Operator

Thank you all for your participation on today's conference call. At this time, all parties may disconnect.