The following is a transcript of a presentation given by Alex Molinaroli – Johnson Controls – Chairman and CEO at an industry conference.
Good morning, everyone. So I have quite a few slides to go through so I’m going to try to go through as quickly as possible so we can get to the Q&A. But I also wanted to make sure that as we go through this there’s going to be pieces of the presentation we are going to try to strategically set up how did we get here. We will talk a little bit up out the ongoing synergy opportunities if you think about why is this a good idea beyond the obvious, industrial synergies, why from a long-term perspective this makes sense and make sure you understand how we see the world. And our idea and I think George will definitely represent this, because we are of like mind, as we get closer and closer to this, we like it more and more. And I think that will come through in a whole bunch of different ways as you look at not only what we are able to capture in the near term but what we see strategically.
Let me jump into it, I’m not going to make you read all this. You can read this at your own the leisure but we definitely have more disclosures than most people so if that is a measure of success, we are way ahead.
So what I wanted to do is just give you a little bit of context and I’m going to blow through this because I can’t give it the time that is deserved. When we have our opportunity and we haven’t picked a date yet but sometime in late fall, early winter probably similar to what Johnson Controls has done with their Investor Day, we will have an Investor Day and I think at that point we will get a chance to talk strategically about where we see – where we see the world going and why this combination makes a whole lot of sense both for Tyco and Johnson Controls and for the new Johnson Controls going forward and how we are positioning ourselves.
But I just wanted to remind everyone there are some things that are happening that are fundamental in our world and it goes directly to the spaces that we both participate in and those fundamental shifts how does it relate to demographics, how does it relate to technology, how it relates to the urbanization of what is happening in the world, and this shift of population in the middle class is growing particularly in Asia. And the statistics I’m not going to go through them, they are undeniable and they are going to be a super cycle that is going to last for many, many years, decades, that is going to be important for each and every one of the companies that you talk to when you think about the future, how well are you positioning ourselves for where the puck is going to be, how the market is going to evolve, not just what are we going to do today.
So this build up just so that you understand where this came from, a year ago we had our strategy meeting at Johnson Controls and we talked about what was the final pieces of our transformation and what are we trying to set up as it relates to a platform moving forward and what was going to be important to us going forward.
This is an eye chart. I don’t want you to get – and you have the slide so you can spend some time thinking about it and I think over time this will evolve because of the acquisition. But what I want to get you to understand is we think about our business as a $450 billion market opportunity, not that we serve all that market today. But we think of our business in two ways, the core of our business being buildings which is how this all works together, and then our energy business today, our energy storage business.
I’m going to break this down just a little bit, not spend too much time but to help you understand when you start thinking about what is next, so what is the point, where might you be going, how does this all fit together not only from a tactical near-term perspective but from a long-term perspective.
So I’m going to spend just a moment talking about the core of our Energy Storage business and how we are positioned. So if you look at your chart, you can see in this wheel chart what you basically see is that we see the market in a very broad perspective. However, if you look at where Johnson Controls participates today, a very narrow slice of the market that we participate in and we participate in a very deep way. So where we participate in the energy storage market is a very, very deep business model, a franchise if you will, around certain aspects of the market. And it really has given us the opportunity and a platform for us to do other things.
So over time what you will see and what you are seeing us do is we are making investments in lithium ion mostly focused in the motive area but we also have conversations around are we going to move into the stationary battery market, is that an opportunity both for traditional technologies and also for new technologies?
The first movement in that direction for us outside of our automotive or motive core has been around distributive energy systems and we have a small team in place where we are leveraging our branches to go out and sell these as a part of our different distributed energy storage systems, so lithium-ion solutions and in fact, I hope some of you are coming to our June 13 Investor Day where we are going to talk to you about Power Solutions in some real detail, talk to you about the core business that we have today, why we think it is an attractive business but also what the opportunity is for us to grow that business moving forward.
So when we think about our business in Power Solutions what we see is a deep participation and market leadership around a core, moving into other adjacencies, this is mostly organic here and moving fairly rapidly into a distributed energy player so focused quite frankly on buildings in our building’s core.
So let’s talk about buildings because I think this is where the conversation should be talked about as it relates to our merger with Tyco. Why does it make sense? I’ll give you a little bit of history.
So when Johnson Controls thinks about our buildings business, we think of two things. We think of the core of technology and the distribution around those technologies and the core of our business, the original Johnson Controls if you look at your chart you will see that this essentially is our building automation controls business system, this is what this represents. This is prior to the York acquisition that was 10 years ago. And we have in particular a North American branch network that is very unique. It is a very unique, very strong go-to-market and market access with some very strong relationships that exist. It has been a core of our business since Warren Johnson invented the Company 130 years ago so it is a very mature market access solutions oriented selling and account management organization. And it is why that we have a strong — sort of begets our products and our products begets our distribution, it is why we have such a strong presence in the institutional space. Because those are the type of customers that want a heavy touch solutions orientation, they look at their buildings as assets. That is why our branches are important to us and that is why we are pretty strong in branches.
So the investments that we have made over time, York being one, there are a couple of things that are kind of interesting when you look at this chart. Two things happen here and this is really important is we start to fill out our portfolio that we can sell more products to our customers and we are able to — you will see this space here — start integrating our building automation and controls technologies to equipment. So one of the things that has happened over time is even though we sell equipment and even though we sell controls, when you get into the HVAC part of our business, those have become integrated. You buy controls with the equipment, you buy equipment with controls. Those systems become integrated and now no longer are you just controlling that equipment, you now have deep access of the information about what is happening with that equipment, how do you want to service it, how do you want to feed that information back into your product development and what can you do with that information. So that becomes very much an integrated platform for us. Equipment, controls, the integration of those devices.
The other thing that happened I don’t know if you noticed this is our North American branch blew a bubble there, just get a little bit bigger because we became more capable. And so when we acquired York, the size of our branches doubled, we doubled the size of our branches and we fully integrated. So our North American branch network you can’t find a York office, you can’t find just a Johnson Controls office. What you find is Johnson Controls which includes our York organization.
And so it is a fully integrated system and when we come back and talk about Tyco that is one of the reasons why we get a little bit of confidence because we feel like not the same but there is a lot of similarities when you talk about what are the pitfalls, what are the opportunities and what are the challenges for us to be able to integrate moving forward.
Because for us, Tyco and Johnson Controls, this is not just a product play.
ADTI, so you can see we start filling out our portfolio. Our ADTI acquisition around mechanical equipment is for us to go down market and pivot. The branches didn’t grow on this one. What you see here is this is an opportunity for that and for Hitachi for us to have some products and product access outside of our core channels and outside of our strength which is usually at the high-end complex. Because as you know, Johnson Controls and one of our challenges and opportunities and strategic initiatives is for us to become more capable at the midmarket and light commercial residential. That is not solved by the Tyco merger. That is still an opportunity and a challenge for us when you think about HVAC equipment.
One of the things that you will hear is depending on how you are positioned you could hear from other people in the same space and say this doesn’t make as much sense for them as it may for Johnson Controls. It has a lot to do with the fact that we both, Tyco and Johnson Controls, have similar channels, dealing with similar type complex customers and customers that see their buildings as assets.
As you go through distribution, people buy — they buy air conditioning equipment, they buy fire alarm systems or components, they are buying security devices and they might buy temperature controls or thermostats. As you move up that value chain and the customers become more complex that is where this thing makes the most sense strategically.
And then Tyco, so what you see here is you see that as we bring Tyco in, the opportunity not only to sell more but it is going to be an opportunity for us to be able to start integrating those capabilities into the systems that we already have and that is the long-term opportunity for us. And you may have noticed the North American branch got much bigger because that is an opportunity for synergies and for us that is going to be real and it is a part of the value that we have both in the near term and the long term.
And then of course distributed energy is where the connection between our energy, our Power Solutions business and our Energy Solutions business for us to add value to our customers. So this is strategically, a very, very quick overview but just gives you a feel for why for us this makes sense not only in the near term but also in the long term.
When you think about buildings, there are core systems in a building that are important. You’ve got to have lights, you have to be able to manage the power, you need HVAC control systems and you need the building automation system, you need a fire alarm system and you need something around safety and security, a security system. It all looks different depending on the building.
And then you have other things but the core of all buildings has those systems and what we see and I think what you will hear from us and people that participate in any of these core systems is there will be a convergence of technology over time that will allow that to be not only lower-cost but more meaningful. We think that being the leaders in fire, security and building automation systems gives us a platform to be a real participant as that market converges. In fact, we should be in a position to be able to drive some of that convergence particularly in the fact that we have a channel that is going to be able to market.
But what is most important is, it is not going to be a monolith. So when you think about an integrated set of technologies, it is not going to be the same need of nor for the same purpose if I’m in a school, if I’m in a retail application or if I’m in a hospital. So it is a very customer driven thing.
If I am in a hospital, I am all about healing people, I’m all about being able to manage that process more effectively. What kind of information, data and processes are going to be important and technology can be integrated to help healthcare with that mission.
Tyco has done a bunch of things that you can think about that George can articulate around retail where they have gotten into the core of the business so no longer are you competing on the commodity of I’m trying to sell you a security system. You are now talking about you are in the revenue stream of a customer, just trying to help them run their business more effectively.
An office building, an office building what is the opportunity to use your facility much more effectively and efficiently in a much more productive way? That would come down to how your offices are designed, where are your people, where do they work the best, what kind of information can you collect to be able to help the customer run their business more efficiently and effectively.
Schools, same thing. So these are the kinds of tailored solutions that you will see over time that if you are in the technology business, the sensing capability, our ability to gather information, our ability to hear and understand what our customer is trying to achieve means that we will have tailored technology solutions and service solutions for each one of these vertical markets. Those are the things that you can expect.
Over time, you will hear us talk about here is what we are doing in the healthcare market, here is what we are doing in the education space. Here is what we are doing in the retail market. That is the way that we will start talking about this business because the technology is going to enable those solutions. And so those kinds of applications allows you not to compete with I am selling tons of air conditioning equipment, I’m selling a fire alarm system that is code and compliant. Now you are selling something different, now you are in actuality solving problems for a customer on their business side of the equation whatever that is.
And so what you will see over time similar to what you hear from George when he talks about his retail solutions, is we will have solutions that are going to be deeper and deeper inside the core of our customers’ business. That would be the strategic view of where we are going.
So what does this look like? If you look at this year’s numbers, 2016 pro forma, you’ve got a $30 billion Company; of that $30 billion, the preponderance of that is in the buildings business.
I think what you will understand about us is — and we will talk about it over time is — we are going to have the scale to make this work. I think over time we will just keep talking about it individually and together to help you understand that our connection throughout the value chain both from a technology standpoint and throughout the value chain where we are touching our customers make us uniquely capable to not only get to near-term synergies out but it is going to be able to give us a first mover advantage to be able to help solve these problems for our customers and get that feedback into our product development cycles so that we can build products that are going to help advantage our customers.
Where are we in this process? So we are right here. Everything seems to be going on track. I had an opportunity to tell some folks we don’t have feedback yet, the official feedback from Europe but otherwise pretty much we’ve got all the approvals, we’ve got MOFCOM approval here in the last week or so, United States on track. I don’t expect any issues in Europe. We don’t have that. But other than that from an approval standpoint we are in pretty good shape.
We need to get our prospectus and S—4 turned a couple more times so we can have a shareholder meeting. Right now it is tentatively — dates aren’t really scheduled but we know that it will be late July, early August is likely when the two shareholder meetings will happen and we are looking to close on October 1 and on October 31, Adient will be spun off.
And just to give you a little comfort on Adient, we will have an operational day one so internally we will be running Adient as a separate company come July 1. So we should be in pretty good shape. That gives us four months to make sure of any of the unforeseen and I guess probably more IT issues than anything else that we are able to work through. So I’m feeling pretty comfortable about where we are on Adient.
What you can expect for us. I won’t go through this. You have read it I am sure at this point and this shouldn’t be news as it relates to the company that comes out what we will look like. And to understand what is going to be important for us, we are going to continue to make the right investments in the business and also make sure that we are shareholding friendly as it relates to how we allocate capital.
We don’t have the details around that now. So you guys can ask all the questions you want and I think what you are going to hear from us is as we get into it and clearly understand what we have in front of us and look as a new management team, we will make sure we provide more and more guidance to you. But I just wanted to make sure because we are a little bit different places — we have been doing some share buybacks, Tyco hasn’t been in a position up to this point. If you look at our dividend structure, Tyco has a little bit better dividend than we do. We are going to make sure we harmonize this but we are going to make sure we put this in a way — put our capital structure in a way that’s something that you would expect and I feel pretty good about our ability to take advantage of the strong cash flows that we will have as a Company moving forward.
A little bit of time on this. A lot of questions about how cyclical is our business, what is the geographic representation. So one of the things that you should get out of this, not only is it a service business and when we get together the ones that are going to be there in June — if you are able to come to Milwaukee, what we are able to — hopefully able to communicate with you is because what is represented up here is our Power Solutions business which is an automotive aftermarket centric business; 80% of that business is a recurring revenue stream. The assumption being that we keep our customers.
I think you will get a good sense for why that is the case when you understand how the market is structured, what our business model is. But remember buying a replacement battery is not a discretionary purchase, it is something that you can only put off for 60, 90 days. At some point you are going to have to make a decision to purchase that battery and we want to help you understand the way that we see this business is 80% aftermarket, 20% OE and then a changing mix of technology so an opportunity for growth.
A little bit about the synergies. I talked about this already. The first thing you should see is that we are going to be immediately moving the needle as it relates to us cross-selling our products and services. That means taking advantage of those relationships, taking advantage of the strong North American branch network that we both have, making sure that we make it easy for our customers and easy for our people to be able to cross sell. It is not going to be anything that is going to require new technology. What it requires for us is to get people aligned around that objective. I will come back to that in a second.
The next thing is we will be talking about technology being packaged over time in a much more coherent way. There will be some technology integration applications in this two- to four-year window. But when you look out here, here is where we are talking about advanced technologies, reinventing our space, reinventing our space so that we are not out selling technology against technology. What we are out doing is helping customers run their businesses more effectively.
And so if you look at this waves of innovation and waves of opportunity near-term versus long-term, what we see is this is a sustainable opportunity for us and the more success we are having being able to adopt this the more investments you can see for us in this space and further technology offerings in buildings.
Who are we going to sell to? So when we get a chance maybe at the quick Q&A, you can ask some questions but we have talked to these customers so that is what we have been doing over the last two or three months. We have been talking to our customers and our customers are telling us this makes sense. We understand it. We understand who you are and we understand who you are. We understand that products and services that we build. We know when we buy, who buys. We have gone through and mapped that out and we understand the opportunities in front of us and so we are going to size that for you over a period of time so we can come back and talk about what you can expect.
And the way that that should show up is in share gain. We are not going to create new opportunity. I think in the long-term they will be creating new opportunities. We are providing technologies that people are going to want in order to help their businesses. In the near-term we are going to talk about gaining share.
If you look at this, this is a York slide if you go back over time, what we pulled this slide from a review of our York acquisition and so this is what gives us confidence.
So what I want you to pay attention to is we had a very targeted effort and I actually worked, I was running North America for our Controls Business at the time so I was a part of this whole process. What we saw was we were able to gain share in both equipment and controls in the near-term 2006 to 2008 so that is that first wave of selling and then over the long-term. You can see what kind of share that we were able to gain over time without being able to reinvest technology. What is going to be important is for us to make it easy for us to accomplish that with our customers.
So I wanted to give you some reference points — because people also ask, why do you feel like you can do this? Well, I know it is not the same but it is not that different either when you start talking about the kinds of things that we are going to do. And I feel confident we are seeing the same kinds of opportunities today if I go back in time when I was engaged in the York acquisition, the same kind of opportunities for us to have some near-term wins and long-term benefits.
Then of course we are going to make it easy for us and for our customers. We are going to continue to add value and then we are going to differentiate ourselves as best-in-class not only company from a shareholder perspective but from the technology we provide for our customers.