The following is a transcript of a presentation given by George Oliver – Tyco – CEO at an industry conference.
Thanks, Alex. Good morning, everyone. Great seeing many of you at our welcome reception last evening. What I thought I would do is transition to the integration process and how well we are positioned to be able to deliver on the synergies that we communicated as part of the deal. We are now 3.5 months into the integration process and as Alex said earlier, couldn’t be more excited about the significant value that is going to be created through both the cost sell synergies as well as the revenue synergies.
Alex talked about the compelling strategic combination here that will ultimately position the new company to change the game in the space that we compete in. What I am going to talk about is how we now deliver creating a dollar of earnings per share over the next three years taken into account all of the operational improvements that each of the companies had committed previously within their operating plans combined would be $650 million of deal synergies to be able to positioned to deliver over $1 billion of cost out.
A significant amount of value is going to be delivered through what was already committed within the net total savings within the current productivity plan, $300 million by JCI; Tyco will deliver net total savings of $100 million and combined with the $650 million will create over $1 billion of cost savings, most of which is very much within our control.
So we put together an integration team. It has been over three months, we took some of the best leaders from both of the companies that have come together to work together with two of our best leaders working together on this effort. What I would say is in the early stages being able to assess our cost structure, identify opportunities and most important put together firm plans and being able to deliver not only on the existing productivity plans but now with the synergies that we identified as part of the merger to be able to deliver on the total operational benefits of over $900 million.
We broke it out into three key buckets. The first is consolidating the G&A structure to be able to deliver $400 million of savings. The next is taking the very strong progress that each of the companies have made within their procurement processes to deliver sustained savings, enhancing that with the combined buy and being able to leverage that to deliver $275 million of savings.
And last is to take the significant structure that we have across our operations and being able to integrate that structure, simplifying what we do to support our customers and then being able to consolidate our functional activities to be able to deliver significant savings of about $225 million. Overall, about $900 million of net operational savings.
Let me talk a little bit about how we deliver on each one of those elements. Our G&A structure and the combined G&A structure is about $2 billion of cost savings, it is made up of our core functions, HR, finance, legal, IP as well as some other G&A.
Now as we look to consolidate and leverage this combined structure, we are positioned to be able to deliver $400 million of net savings. Now much of this will be delivered by reducing the duplication of the public company cost, being able to consolidate and streamline our functional activities and we have made a lot of progress in this area already being able to create shared services, being able to combine associated services to enable our field to be able to better support customers and grow the company while we are delivering significant operational savings.
The next big bucket is in procurement. When you look at our combined spend, the combined spend is over $12 billion. As I said earlier, each of the companies have made significant progress in being able to sustain savings on their procurement over many years. By putting the two procurement activities together, leveraging the scale, we can then apply our best practices from both of the companies to deliver significant savings.
When you look at how it is broken down, 25% of our procurement is the direct materials, 45% indirect and then about 30% that we incurred to support the field. By leveraging the scale and deploying these best practices, we will be positioned to deliver $275 million of net savings.
The third big bucket is the $8 billion of cost base that is made up within our business units and this is broken down into manufacturing, engineering, commercial operations as well as branch overhead. We have the opportunity to leverage the Johnson Control operating system, to be able to standardize these processes, improve these processes with Lean Six Sigma which positions us to be able to capitalize on significant opportunities across each one of these operations.
In manufacturing for example, the Johnson Control Manufacturing System across all of their manufacturing base, we have a tremendous opportunity to leverage their scale, their success and deploy that across the Tyco manufacturing footprint.
In engineering, there is duplication of R&D as well as software development. This will enable us not only to enhance our capabilities but also to be able to free up significant resources.
In our commercial operations, both companies have made significant strides in enhancing their commercial structures, driving commercial excellence, being able to streamline the commercial operations to be able to drive productivity within the sales channel and being able to free up resources, now being able to integrate both commercial structures allows us to be able to take that to another level to again free up significant resources.
The last area is in the branch overhead. When you look at our direct channels and the overlap that we have within our field operations, gives us an opportunity again not only to enhance and capitalize on the customer opportunities but being able to take all of the resources supporting those units, putting them together into shared services which enable us to be able to leverage the scale of the combined company. All of these activities position us to be able to deliver $225 million of net savings.
Now when you look at the performance of both companies over the last three years, there is a proven history of operational execution.
Looking at Tyco, we have improved our segment operating margin by 230 basis points over the last three years and it has been mainly driven by strong restructuring and productivity initiatives, complemented with the strong sourcing savings that we have had off of our buy. When you look at the JCI performance, very strong performance with 250 basis points of improved segment operating margin and a lot of that again driven by strong restructuring and productivity initiatives enabled by the Johnson Control Operating System, improving processes and driving leading manufacturing capabilities.
That also has complemented the significant M&A transactions that they have been able to integrate very successfully.
This is what gives us confidence that with the two companies coming together, gives us tremendous confidence that we are going to be able to continue to drive the transformation and the execution of these benefits, building strong fundamentals to free up the resources that are going to be required to be able to support the growth while we are continuing to deliver strong margin expansion.
So in summary, it is a compelling combination with significant value creation. As I said, I am more excited today as we look at what the potential cost synergies and revenue synergies are. We’ve got a strong portfolio as a global leader in building automation, controls, fire security, HVAC equipment and energy storage systems. We have a strong balance sheet with balanced capital allocation and as Alex showed you, a very diversified exposure across the business cycle with significant service and aftermarket revenue.
With the plans we have in place to deliver over $1 billion in initiatives within our control, we are going to create a dollar of earnings per share over the next three years. And that more important the work that we do to create this new structure is going to create the capacity that we are going to be able to support the growth and capitalize on the trends that are occurring in the space that we compete in and be able to sustain strong earnings growth as we take the company forward.