Johnson Controls Earnings Call Nuggets: Auto Margin Pressure and Weaker Revenues

Johnson Controls Inc (NYSE:JCI) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Auto Margin Pressure

Rod Lache – Deutsche Bank: A couple of questions. Just hoping you can maybe give us a little bit more granularity on that bridge in automotive experience segment EBIT going from $200 million to $100 million I think based on what you said for the non-qualifying expense that was probably a $20 million headwind and I would imagine that you had a couple million dollars of headwind from FX, but you mentioned that your organic revenue was up. So, can you just help fill in some of blanks there on what actually is continuing to drive that on a year-over-year basis?

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R. Bruce McDonald – EVP and CFO: I am not going to get into like all the detail there, but I’ll tell you what kind of the headlines are here Rod. We’re definitely seeing some margin pressure, so when I talk about our gross margin on a company basis being down, that’s really driven by the auto Europe side of business and really what we’ve got there is, as I’m sure you know, in Europe we just can’t take out the labor as quick as we can in North America because we have to go through a consultation with various works councils and get sort of those signed off. So those are all progressing as we expected, but what you end up getting is the incremental labor flowing through until you can get it outside. So that’s quite a significant headwind there, if you put it in the context of our volumes being down 10%. And then we always talk about in the first quarter of our calendar year tends to be Q4 of our customers yearend and so we typically have lumpiness in terms of commercial settlements that we’re paying or getting from our customers, and those were – from a year-over-year basis those were adverse to us. So those will be the sort of line items.

Stephen A. Roell – Chairman, President and CEO: Right, if I had to just see if can help Bruce a little bit too. If I had to box things for you, I would say and this is going to total a 100%, but about 40% of issues are operational, but it’s not operational in the sense that how we run our plants. In some cases we’re making line moves, we’re shipping production different locations, we’re doing a lot more of that to get our efficiencies up. That cost hit us in the quarter. Probably 25% of our issue is commercial, as Bruce described, and probably 20% is volume. So again we still have the ability as we come throughout the year to improve our results and this grew primarily by addressing some of the operational cost we are recurring.

Rod Lache – Deutsche Bank: Okay. And on Building Efficiency, how material was that contract gain, it sounded like you had something that was non-recurring in there?

R. Bruce McDonald – EVP and CFO: There is about 3 or 4, so when you actually in our Q when you sort of see the pieces, there is some lumpiness in there, but then that impacts about $10 million.

Rod Lache – Deutsche Bank: And the decline in orders that you are seeing Building Efficiency, does that not, you are still working off of your backlog that you were reporting at year-end, I’d imagine here. Does that sort of manifest itself in 6 to 9 months, is that when we start to see some of that play out?

R. Bruce McDonald – EVP and CFO: I guess maybe one thing to make you folks feel little bit better about that, if you actually look at the solution, and Steve talked about the solutions little bit in his comments. If you actually look at our order intake in solutions, that’s really what’s driving bulk of the decrease it was down by over 40%. Those projects tend to be very, we got a lot of big ones that we are working on and they tend to revenue fairly slowly, so I wouldn’t get overly concerned about the orders being down 9, so we got a big problem coming out to us in say Q3 and Q4.

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Weaker Revenues

Ravi Shanker – Morgan Stanley: Steve, the $0.93 that you are expected to earn in the first half is that in line with where you were thinking at the end of last year or has it got a little bit more second half weighted in terms of earnings?

R. Bruce McDonald – EVP and CFO: I’ll take that one Ravi, Bruce here. I’d tell you if you sort of look at our plan here, Q1 we came in a couple of cents better than we were expecting and it’s kind of what really drove that. I would tell you that our revenues came in a little bit stronger than we thought. In the second quarter here, if you look at our outlook, it’s probably $0.03 or $0.04 sort of weaker than we thought and that would really be around the delays in flexing out the labor. So, generally speaking, I mean we did provide guidance that Q1 and Q2 would to be down significantly and maybe we could have done a better job, because if you sort of look at what the analyst models were for Q1, it wasn’t too far for our internal plan, but for Q2, folks were down high single-digit and I guess I wouldn’t think that significant.

Stephen A. Roell – Chairman, President and CEO: Ravi, I guess maybe I think that that maybe it’s confusing people even those that were at the Auto Show this week. If you’d ask the analyst I think what they are seeing for European volumes, production volume in 2013. I think numbers were like 2%, 3%, 4% down and that’s true for the calendar year, but that’s not true for our fiscal year because if you look at how it – the cadence. Q4 is expected be up considerably as the projection is part of IHS model as we look at 2013. If you just look at our fiscal year and using the same IHS model, it’s not down 2%. It’s down 7%, 8%. And so I think some of our numbers or maybe the cadence has being confused by calendar year versus fiscal year, but as I mentioned in my opening comments, if you just look at the fact that North American production is going to be down in Q2, it’s the only quarter that’s down. We have to bring up 11% then going up 5% and 7% and then European volume we expect to be up as severe as they are. It really is a trough and I’m not sure that the models reflect that kind of downturn, okay.

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Ravi Shanker – Morgan Stanley: That makes sense. We’d follow-up that. Is there any risk that the restructuring plans in Europe get delayed beyond 2Q in terms of getting those permissions?

R. Bruce McDonald – EVP and CFO: No. There’s like normal 90-day type consultation periods. If you think about it Ravi we’re not out doing something that everyone else in our industry is doing as well. So it’s not that we’re an outlier here. I mean it’s generally pretty well-known that our customers are cutting down volumes. It’s being somewhat erratic the way it is being done right now. But we’re not an outlier and we’ve been very successful in the past and if you look at the scale of what we’re doing versus what we’ve done before, we really don’t have any reason to believe it should be problematic.

A Closer Look: Johnson Controls Earnings Cheat Sheet>>