Question and Answer with Alex Molinaroli – Johnson Controls and George Oliver – Tyco

5/17/16

StreetInsider

The following is a transcript of a question and answer session given by Alex Molinaroli – Johnson Controls and George Oliver – Tyco at an industry conference.

Unidentified Audience Member

If my memory serves me as the ex Chairman of the Shingo Institute, JCI has won more Shingo prizes than any company in the world which is not something that I can say about Tyco. What gives you the confidence that you are going to be able to take that mindset and transplant it beyond the restructuring and consolidation and sourcing kind of things?

Alex Molinaroli – Johnson Controls – Chairman and CEO

What mindset? Elaborate what you are referring to exactly. Mindset of what?

Unidentified Audience Member

The mindset of truly thinking beyond what I would call (inaudible) kinds of restructuring, maybe common sourcing?

Alex Molinaroli – Johnson Controls – Chairman and CEO

So here’s my observation. My observation is that Tyco has their eye on the ball. What I kind of observed in this whole process is that it has been an incredibly busy organization. We have been busy the last three years, it is not like people haven’t been working but three years because we have been doing a lot of transactions and reshaping our portfolio. I think the Tyco organization has been going through a transformation that is over a decade. And what I see is over the last three years George has done a good job of being able to put the seeds in place to build a foundation to be able to put in place the kind of processes that we are very comfortable with.

I think and George, you can speak for yourself, what I see when George comes in, of course George’s background with General Electric and some of this team’s background from different places, what they see is an opportunity to take what they are already doing and move into some processes that might be a little more mature.

And what I have always found is when you do this if you’ve got the willingness to share and find best practices, then you will very quickly get there and I haven’t seen any push back at all. And you would be surprised, we have this checklist that we go through, what is at Johnson Controls that we would like to share, what is at Tyco we would like to share and it is a pretty balanced checklist quite frankly. It is not something that is all Johnson Controls.

I think that where we have the advantage and George alluded to it is we’ve just had stability over a longer period of time and so the opportunity is for Tyco to take advantage of that.

George Oliver – Tyco – CEO

Yes, we have made great progress with the Tyco Business System. Now certainly we are not at the level that Johnson Controls is at with their expansive manufacturing footprint. Based on my experience not only previously within GE but the work we have done in Tyco, we are already now leveraging the framework that they utilize. We are beginning to measure our operations and rate our operations similar to what they do and very quickly right from day one, we are going to know what the opportunities are and how we take the combined structure, integrate the combined structure and successfully deliver on the synergies.

Unidentified Audience Member

Maybe for George and Alex collectively, but I think you made the point at the day that you announced a deal that the synergies were in fact not to replace the productivity that each had on board and you laid that out for us today. But maybe could you elaborate, does getting those opportunities become easier because of this deal, do they become accelerated or somehow less costly?

And then the second part of the question is if I go back to the synergy number itself, one could argue it is still quite conservative. If I put power aside, it is 2% of sales of the building related companies. We have certainly seen much bigger numbers than that out of similar transactions.

Alex Molinaroli – Johnson Controls – Chairman and CEO

So I will start this and, George, you can add in. I think what you see today is a framework that if everyone gets comfortable with I think it only gets better from here.

I also think my view of this is it becomes very, very difficult because of what we’ve both got going on for us to be able to say even a year from now this is going to be because of the acquisition and merger and this is going to be because of Hitachi, and this is going to be because of ongoing efforts that we both have. What you are seeing is we are establishing a framework that allows us to say we are going to get more and whether we would have gotten more and which bucket you put it in, we are going to probably get less toward which bucket and use it off this foundation of $1 billion. And so the $1 billion is what we will start talking about. And then I would expect you will see more, not less from there.

But resetting this framework that allows us to truly integrate and not try to keep score with all the ongoing initiatives is important. So everything you just said I would say yes, yes, yes. Easier to do, I think there is more to be had. I think it is going to be difficult if we do this right to be able and probably not the best effort in the world to figure out where it all came from but I do think there is upside.

George Oliver – Tyco – CEO

What I think it does, Jeff, when you look at the way we have done this because we have had a tremendous team working on this assessing their cost structure, our cost structure initiatives that they had underway, initiatives that we had underway and then making sure that we are be in a to deliver all of that on combining with the 650, 500 of which is the operational savings that we can generate as part of the merger.

And it gives me the confidence now with the structure that we are putting together that I think we are well-positioned to deliver on those synergies and as we begin to learn more, as we begin to work together, there is potential upside to that.

Unidentified Audience Member

Thanks. Just on the revenue synergies point. I guess when you go around to buildings trade shows and so on, you often hear about open standards, the interoperability of the different companies and brands controlled and equipment. You seem to be implying maybe that has reached its peak or do you think the value of the sort of walled garden approach is going to increase? Is that right or am I missing something about how you are getting their synergies on the (multiple speakers)?

Alex Molinaroli – Johnson Controls – Chairman and CEO

I think it will always be there. Systems are more open. Ironically what is happening with the security problems people are having, systems are actually becoming more closed. But what I think we are talking about is integrating even more tightly than that. Because when you have an open system and they say I’ll let my stuff talk to your stuff, that means I’m going to let my stuff talk to these things and let you have limited access and be able to do limited diagnostics and have limited control.

When you have a system that is truly integrated, I mean being built off the same platforms, using the same firmware and software with the end in mind, the integration is going to be so much more tighter. In fact it will probably come all the way down to the device level. So instead of having three devices in a room, maybe you will have two or one because you don’t need all three. That is a much tighter integration than when you talk about my system can talk to your system. Only in the out years that is the kind of stuff that we are talking about. It is much more disruptive.

Unidentified Audience Member

Just have a question on the numbers. When you do the math on the background you gave us, the pro forma for 2016 seems to be around 270-ish, 265, 270-ish? Is that the right pro forma EPS number?

Unidentified Company Representative

Yes.

Unidentified Audience Member

With no deal amortization? What is the kind of reported number do you think with the deal amortization? Okay, 230. So basically we are using that 16 base adding on the buck and then whatever growth you get on top of that. So with the deal amortization I mean if you strip that out, you are getting to something that is close to $4, not including growth, the 270 plus the dollar?

Unidentified Company Representative

Yes, that is about right.

Unidentified Audience Member

Will you guys include restructuring? Are we going to continue to include restructuring in the numbers like we have done with Tyco in the last year or so and would you think —?

Alex Molinaroli – Johnson Controls – Chairman and CEO

Probably not.

Unidentified Audience Member

Okay. Probably not. And then one last question just for George. When you look at the percentages of the cost base, 2% for procurement, 3% for the branch stuff, that seems relatively low relative to what you have done kind of back to Jeff’s question. Are there any reasons why the experience going into this would be different than what you guys did over the last three years when it comes to the types of savings and the playbook you are going to apply here?

George Oliver – Tyco – CEO

Not at all. We are applying the same playbook as far as making sure that we are going to capitalize on all of the success that they have achieved within their JCI Operating System with what we have done with the integration of our branches. And what I see initially, we are doing a lot of work to make sure we are totally grounded within the combined structure. We are going to deploy the same playbook and I truly believe that we have high-level confidence that we will be able to deliver on what we have committed and we are going to continue to work to deliver more. And that is what ultimately we are trying to achieve.

We have made a lot of progress when you look at the cost out in both companies that has contributed to the significant margin expansion over the last three years. And that is going to continue and I think it is going to give us a lot of capacity to make the re-investments that we need to make into growth while we are continuing to deliver improved segment operating margins going forward. I think we are very confident of that.

Unidentified Audience Member

So the (inaudible) operating savings, in the total world, we have a cost saving number and that is then netted to investment levels, whatever else to a net number at the moment, does that net number come through the bottom line?

George Oliver – Tyco – CEO

These saving charts that we showed you in each one of those buckets are net total savings within those buckets.

Unidentified Audience Member

And then you mentioned quote unquote good free cash flow conversion. What is a good ambition for the new JCI ex Adient free cash flow conversion on (inaudible)?

Alex Molinaroli – Johnson Controls – Chairman and CEO

Combined. So I think Tyco is running 90 to 100 in that bandwidth. We have been around 65, 70. I think we would improve — I think we will start with an 8 with an aspiration to get to a 9 in front of it. But we have got some work to do. I mean there is capital investments underway with Power Solutions that we need to make sure that we understand but I think that is the kind of range you should think about.

Unidentified Participant

We have talked about a lot of big things so maybe we will go back to the micro a little bit. I mean one thing that I have picked up is that perhaps York’s vitality, particularly on the residential HVAC side, has some problems that may cause more need for product investment. Definitely picked up a lot of chatter from distribution being concerned about that.

And then maybe, George, you could speak a little bit about reinvesting for growth because obviously it is great with all of this cost synergy but there is going to be — have to be maybe a recommitment to some of the smaller things in the context of this integration.

Alex Molinaroli – Johnson Controls – Chairman and CEO

So I will address the York question. You didn’t have to go to distribution to hear that, I would have told you that. Clearly the business has been underinvested for quite some time. You are seeing us make those investments and in fact, we even talk about you are starting to see those investments flow through the product line and we are paying for the investments we didn’t make. There is no doubt about that.

And I mentioned in my comments that the Tyco merger does not fix this problem for us. But it is also something that needs to be fixed. It is not something that is going to say we have got this other thing to do and we are going to let that atrophy. We have got to get that problem solved and stable because if we don’t, it is going to have implication across the board, you can’t — you sound like you are familiar with the business. If you are familiar with it, you know that it is like pulling a thread. If you start having too much weakness in any one part of that product segment, you move to light commercial, light commercial moves to your heavier equipment and so it is something that we have to fix.

So I acknowledge where you are at. You didn’t have to go there. You could have come to me and I would have told you that.

George Oliver – Tyco – CEO

So the second part of the question is the capacity for reinvestment?

Unidentified Audience Member

Yes, (inaudible).

George Oliver – Tyco – CEO

So we have been on a journey here as we have been investing in R&D and a lot of our spend in R&D is software as we have been transforming our portfolio. That has been continuing and that is going to continue with the combination as well as we have been enhancing our commercial structure. We have made tremendous progress in the last 18 months in enhancing. We have been putting more salespeople into our channel and we have been enhancing their capabilities with our E3 initiative. That all continues, the investments that we are making that is going to now be able to capitalize on all of the investments that we have been making to accelerate our growth.

We have been hit with a couple of tough end markets that have been challenging for us but that hasn’t changed our view relative to how we position our portfolio to be able to accelerate growth and deliver sustained earnings improvement here going forward. And I think with the combination with what they have done within JCI, I have tremendous confidence that we are going to be able to continue to make the re-investments while we are delivering very strong margin improvement and delivering on the dollar of earnings per share growth over the next three years.

Unidentified Audience Member

Could both of you comment on – for the ERP setups that the company has and what the issues will be as we merge them because I know on the Tyco side, there has been a massive consolidation program going on going back from the legacy days. But Johnson Controls has more than a few mergers of its own to deal with and may have been taking a different path to consolidate their system and how the two paths look as they (multiple speakers)?

Alex Molinaroli – Johnson Controls – Chairman and CEO

All I can say is the ERP question so we were like great Tyco is going to solve our ERP problems. So the first thing I said to George, thank you for your ERP system. He said that is not me, wrong guy. So we both are in a position that we need to take in fact if you are following Johnson Controls we paused our ERP implementation because of the Adient spend and then ultimately because of the Tyco merger because we need to have a more integrated plan.

So I think it will have an impact on our long-term investments. We both have workable systems but we both have – I’m not sure who has more complexity quite frankly. We don’t know the answer to that but we both have work to do.

George Oliver – Tyco – CEO

My sense based on what I have seen here in the last 3.5 months, very similar starting points, very complex. What we have been doing within Tyco and JCI through their operating system is working to drive process excellence prior to making the investments required to simplify the IT structure.

We have been making a lot of progress within Tyco with taking our existing structure and getting it to a level that as we standardize our processes and we can make the investments that ultimately simplify our ERP structure, I think JCI has been making similar type progress.

This is a journey, there is a lot that can be done with other deployments for instance within our E3. We are standardizing and simplifying all of our commercial activity within the sales force environment. That now is creating better data that ultimately now leverages the ERP structure that we have in place. Those are good examples that allows us to be able to standardize process, get good data inputs and then ultimately make the investments required to simplify the ERP structure.

Alex Molinaroli – Johnson Controls – Chairman and CEO

Some of the things that we will have to do in order to get the synergies even if it is not the ultimate solution, we have gone through a pretty mature shared services model within Johnson Controls. We have three shared services globally that almost all of our transactions run through.

One of the things that we will have to do fairly quickly is figure out how do we integrate that either with the ultimate solutions or with an intermediate solution so that we can get some of the synergy numbers that are in front of us.

So it is not like we don’t know what is in front of us. We had mapped out our processes, we were on our way to an ERP system for the entire company but now of course we have got the merger we have to understand each other’s business a little bit better.

Unidentified Audience Member

Two things. One, how are you guys going to divide and conquer over the next 18 month’s transition period? And then secondly, how do you think about batteries remaining in the portfolio. Why does it make sense going forward?

Alex Molinaroli – Johnson Controls – Chairman and CEO

So I will start so there’s more work to do than even two people can do. I think that if you look at even the way that we set this thing up, I mean George ultimately being responsible for the company, the most important thing for George to do is to be able to get himself ingrained into the business and the integration of the business itself to make sure it is successful now but in the future. And it is just going to make him even more effective long-term.

So you think about where George will be spending his time, it is going to be in the operations of the business making sure that we set it up for success early on but also set it up for long-term success.

As it relates to Power Solutions and I think over time we are going to make sure that we continue to assess that and anything else in our portfolio, I believe it has a strong potential and future. I think that a big part of what we need to do is make sure that people can see what we see, give us the feedback and make sure it is an investment that makes sense for the company. But quite frankly I would say it is the wrong time to even think about it because I don’t even, I look at the business today and I don’t think people understand — maybe we haven’t done a good job of articulating the value that is already there today, much less the value for the future.

George Oliver – Tyco – CEO

So I would add that we have been working hard to make sure that we get the right structure, the right leadership and the right process that will enable us to be able to be successful in doing the jobs that we do. And so a big focus as I laid out from an operational standpoint, there is a lot of work to be done and I feel great about the team. Alex and I are totally aligned relative to the structure that is going to be required. We are assessing our leadership so that we have the best of the best in all of the key positions and then it is going to be the intensity, the operational intensity that we drive that will position us to be able to deliver on the benefits.

I couldn’t be more excited. I think this is going to be a great company. It is going to change the game and the space we are in. It is going to create a tremendous amount of value not only to the cost synergies but also the revenue synergies that Alex articulated. And I would tell you to reinforce what Alex started today that all of our constituents couldn’t be more excited, our customers, our employees and hopefully all of our shareholders with the value that is going to be created through this combination.

Unidentified Participant

Thank you very much.

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