Operator: Our next question comes from Jeff Sprague from Vertical Research. Jeff, your line is open.
Jeff Sprague: Hey, thank you. Good morning, everyone.
George Oliver: Hey, Jeff.
Olivier Leonetti: Hey.
Jeff Sprague: I just wanted to actually come back to, I guess, a couple of topics that have already been addressed, but just to really kind of clarify. First, just on the notion of margins improving on kind of acceleration of execution out of the backlog, it doesn’t seem like that’s what you’re guiding. I don’t know if you updated the volume forecast for the year. But I guess your guide sort of assumes kind of little or no volume growth. So I guess the first question is, is it that you expect acceleration to happen, but you’re not quite willing to guide that way yet. Or is there some governing factor, supply chain, labor on the job sites, that sort of thing that you’re looking to get past first?
Olivier Leonetti: So if you look at the margin acceleration, which is a byproduct of the backlog conversion, as you said, Jeff, that is not really a variable associated with unit volumes. If you look at the field business, which is about $16 billion of revenue for the enterprise, this is more and more a business which is solution based, where you need less and less a relevant measure solution because we sell services, we sell sustainability, we sell indoor air quality. So the margin acceleration is a byproduct of just the conversion, and we are planning to your point, for volume to be growing low-single digits, about 2% for the back half of the year.
Jeff Sprague: Great. And then
George Oliver: A comment on that, Jeff, as we have instituted over the last two years, the significant improvement in our ability to strategically price and then make sure that we’re within that pricing, we’re incorporating future inflation. So as we’re costing in these longer-cycle projects, making sure we have the right cost and the right terms and conditions and the like, that has significantly improved. And so when we look at what’s going to turn in the next three quarters, a high percentage of the projects that are going to turn are in backlog. And the margin is as we have been working through the older backlog that was priced prior to the inflationary period, that is becoming less and less. And so we’re confident that what’s in the margin in backlog is a significant step-up.
Now it’s just our ability to be able to minimize disruption, get more precise relative to the material flows that support these projects. And by doing so, we accelerate the velocity of the turn. And what that does, it gives us higher productivity and then also, from an inventory standpoint, our ability to be able to recognize revenue with the execution on a shorter cycle. So that’s a big element. And so I think we’re cautious relative to the continued improvement that we’re seeing in those factors, but we’re confident that the margins that have been booked are going to in turn and be significantly improved over the course of the year.
Jeff Sprague: And thanks for that and that partially addresses my second question. But I did want to come back to kind of projects and mix. So you pointed to kind of large projects being mix negative in the quarter. And I think a lot of the kind of OpenBlue healthy buildings, indoor air would inherently often be larger projects. Is it an issue that the stuff that’s coming through the backlog is also as you say, maybe wasn’t priced appropriately for the inflation that was coming but also just inherently had less of the newer stuff embedded in it? Really want to kind of understand if we’re waiting on big projects to come through that. In fact, when we convert them, they’re margin-accretive to the equation.
George Oliver: I mean it’s actually the opposite, Jeff. We €“ when you look at our core, we have focused our field-based business on our strategy to really differentiate and capitalize on the growth vectors, which is ultimately the energy reduction, the healthy environment and then overall automation of building. Making sure that everything we do is deploying our core capability, core technology, getting it connected and then ultimately converting it to a service. So by doing so, it has refocused the business so that we’re €“ the value proposition is greater with what we do. And taking out a lot of the historical contracting that we might have done that ultimately was low margin and didn’t convert to services, there’s a much higher focus on leveraging our core, obviously, leveraging digital and then ultimately delivering on outcomes that historically hadn’t been achieved.
And so I think from that standpoint, when you look at our applied product business, we’re up €“ it’s up double-digit with the applied products flowing into our channel, which ultimately is helping us create a bigger installed base. It’s also getting the connectivity to that base, which then drives us to be able to create new value propositions with the data that ultimately we use from that installed base.
Jeff Sprague: Great. Thanks for the color. Appreciate it.
George Oliver: Thanks, Jeff.
Operator: Our next question comes from Nicole DeBlase from Deutsche Bank. Nicole, your line is open.
Nicole DeBlase: Yes. Thanks for taking my questions. Good morning, guys.
George Oliver: Good morning.
Nicole DeBlase: I just kind of wanted to pick off where Jeff just left off because I’m not sure I’m totally getting it. So I mean, if we think about €“ it seems like unfavorable mix was the big cause of the weaker margins in the field business this quarter, but it seems like you do have confidence that then unfavorable mix will not be a factor throughout the rest of the year. So I guess, what is the risk that larger projects come through, again, greater than you expected in the second quarter to the fourth quarter driving then unfavorable mix again? That’s the piece that I’m just not getting. Thank you.
George Oliver: Yes, a simple fundamental is we track how we book and what was booked from a cost standpoint and how does that tie to the value proposition and then how it turns. And so Nicole, when we talk about mix, on a forward-looking basis, you have a much €“ every quarter, you have less of the older projects that maybe didn’t incorporate the higher inflationary rates that we now have experienced over the last 18 months or so. And so when we talk about mix, it’s part of that as well as our ability to be able to then €“ everything we’ve been booking from a strategy standpoint is more aligned to how we create an installed base and ultimately get a recurring revenue from that installed base with service. And that is €“ when we talk about on a go-forward basis, that continues to improve, recognizing that we still have projects that will be turning that didn’t necessarily have that factored in.
Nicole DeBlase: Okay. Thanks, George. That’s really helpful clarification. And then the second thing I just wanted to hit on is the gross €“ sorry, the Global Products margins have been really impressive and I think a big driver of upside or offset to field weakness for several quarters now. I guess like what’s the confidence that you can continue to improve Global Products margins from here. At some point, do you kind of see somewhat of a margin ceiling? Thanks.
