Johnson Controls Earnings Call NUGGETS: Battery Business, European Auto Experience
On Thursday, Johnson Controls Inc (NYSE:JCI) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.
Christopher Ceraso – Credit Suisse: A few items, I guess, first on the battery business, maybe we can talk about why you don’t think these pressures continue past Q4. Do you have brought up all the cores that you need or you are just expecting there will be more cores available and therefore the price comes down?
Stephen A. Roell – Chairman, President and CEO: It’s light, nothing more for us. In fact we expect it to be flatter cores. That will be normal situation, it is a function that we have to go into production almost this early to be able to meet the demand, we level our production and it is somewhere actually that almost full production here from July through the end of the year. Just to be able to meet the (indiscernible) aftermarket. And we think it will be, like Bruce described, there is probably a little bit of a pent-up inventory at the aftermarket where it’s not significant and so we expect it will be closer to the hot weather what is doing to the chemistry of the batteries which (indiscernible) them. Maybe (indiscernible) shortest life batteries are in the high key districts like (indiscernible) and Phoenix. So the high key percentage of the Midwest being to the south, it’s in fact we think the batteries (or shorten the) battery life, we expect there for flood of course by the fourth quarter, it shouldn’t continue to be on that. This is just very unusual, Chris.
Christopher Ceraso – Credit Suisse: If someone continue to be on an increasing (indiscernible) demand what you think with the heat that that should happen?
Stephen A. Roell – Chairman, President and CEO: Normal seasonal pattern (indiscernible) okay.
Christopher Ceraso – Credit Suisse: And then also on the batteries, there was a – the weakness in volume overall, outside of any kind of weather issues, is any of that attributable to (30) sites that have been vacant in that market?
Stephen A. Roell – Chairman, President and CEO: No, I don’t think so. I don’t consider it at all.
R. Bruce McDonald – EVP and CFO: It is pretty consistent among space, if you just sort of look at for the competitors who reported sort of (indiscernible) numbers there.
Christopher Ceraso – Credit Suisse: I have few questions on the pension. The guidance for Q4 does not include the change to your pension accounting, right. That’s just the pure change based on the fundamentals?
Stephen A. Roell – Chairman, President and CEO: That’s correct.
R. Bruce McDonald – EVP and CFO: That’s correct. Nor does our guidance include any restructuring.
Christopher Ceraso – Credit Suisse: And then along the lines of de-risking and changing the pension around, have you thought about offering to buyout or shifting to third party annuities that we have seen from some of the OEMs?
R. Bruce McDonald – EVP and CFO: We are looking at offering buyouts to deferred asset, but this is probably something that’s work maybe a year away from.
Christopher Ceraso – Credit Suisse: Then just lastly on Europe auto. Can you maybe sketch out what the path is to improvement here? I mean, you had done these acquisitions and those were supposed to help the margins in Europe and that hasn’t happened. Has that been because the volume is low? Are you feeling, now that you have got more vertical integration you are even more susceptible to volume. Maybe just help us understand what exactly is happening in Europe and how and when it gets better?
Stephen A. Roell – Chairman, President and CEO: It’s fair, Chris. Let me try to – this is a question I expected probably (indiscernible) other callers. I want to take a minute to answer this question appropriately. First of all, let me just tell something, the performance that we would have for the type of transaction is just exactly what we expected. It’s contributing the way we thought, so it’s not the (indiscernible). The issues that we are having are pretty well concentrated in two business as supposed to described, it’s the metal operation prior to the acquisition and the business that we were awarded under the old product schemes, okay, and then curious it is to be a drive. Let’s talk about metals, which is the one that, where we expected the biggest improvement to happen and been able to get there. We have six different operating, I will call them work streams that we are focused on. Where we have identified and have mapped, I’ll call it, that use your comment Chris, probably hundreds of millions of dollars in the next 18 months and they have to deal with improvement in operations that have to do with purchasing, they have to do with commercial negotiations and let me just go into some of how – what they are in detail and then I will come back and tell you why the timing is an issue for us. There are something’s we can get our hands on right away. There is some purchasing opportunities that we have around steel tubes, around motors, we can get our hands on and in relatively quick timeframe mainly over the next 12 months. There are commercial claim processes. There are changed processes that we will get over the long term, the medium term. There are some things that we know we are going to benefit from in 2013, so just a lot lower launch cost and we are going to be (short in) containment cost. It is probably a $50 million year-over-year improvement that we can see today just based on the activity that we have. There are some things that are probably over the medium term and (indiscernible) I’ll walk them through with you. It would include things like how we design for manufacturing, how we standardize our product lines, how we deploy best practices and best processes. As an example, Hammerstein has an outstanding process that they use for both (indiscernible) their tracks and how they (indiscernible) rails and we are deploying that across our product lines. Footprint optimization, what we can do to improve our machine utilization or labor productivity. Those are all mapped in what we call a tracker. I am not thinking about the number, but there are hundreds of millions of dollars we attract. What we are trying to do now as we find what we can get to in the near term quarter-by-quarter in fiscal 2013 these are all mapped and expected to be able to happen by mid-2014. So, we are now trying to do is provide some refinement so I can come back and give guidance to our shareholders what that rate of improvement is in the next six months, the next year and then quarter-by-quarter guidance just like we (could not) tell you. So, it is a blend of near term things, we know we can get our hands on. There are some things that we need to do to improve the long-term position of the business and standardize our product lines, improve our machine utilization that’s all taking place. So, it is not the new acquisitions, it is the business we were rewarded back in 2009 and ’10 that we are trying to improve and making sure that we have the foundation in place and the fundamentals in place to ensure that improve continues in the ’14 through ’16.
European Auto Experience
Brian Johnson – Barclays Capital: Just drilling down a little bit more into the European auto experience. It sounds like the improvement program is in metals, it’s not in Hammerstein or (indiscernible), so it’s an existing metals business. To what extent though I guess couple of questions; A, is interiors still a drag there, we’ve seen (indiscernible) being unable to sell its business due to pressures in the European interiors market. Then secondly, while you are reducing cost, the OEMs are themselves running into profit pressures. What’s your confidence in being able to hold on to these cost reductions in light of pricing pressures and seating. How you are thinking about that as part of the improvement plan?
Stephen A. Roell – Chairman, President and CEO: Let me take a shot on it, Bruce come in also. I guess if you go back to interiors, we still have plants that are a drag. We have product lines that are drag. We are actually looking at exiting some product categories, Brian. I think that the market conditions haven’t changed. Interiors is a sector which has got over capacity and I think most players in that marketplace whether it would be (indiscernible) or some of our other competitors. It’s not a new phenomenon. The industry has been struggling for some time, okay. I believe that we’ve got Bill Jackson focused on that business and that’s what he is focusing right now. We believe that we’ll get some improvement because of that in terms of how we approach the OEs as a standalone business, that’s numbers one. In terms of your comment about the OEs, you are absolutely right. There is some additional pressure, it’s spotty, it’s select OEs. We have turned back business where we weren’t able to meet the cost reduction request that we were given. We continue to have a strong book of business, but I do think that our job is to protect that. I mean we have been in investment and so we have to protect the investment in the markets that we acquired. So from my perspective another way to do that is to be somewhat resistant on price reductions, request and if that shrinks our business so be it. I’m managing that business for returns right now.
Brian Johnson – Barclays Capital: Just kind of within the quarter, given product was only down 5%, it looks like your incremental margins were very high ex currency. So I see the improvement path, but what was sort of the step back vis-a-vis, on year-over-year or sequential basis in the business, was it just volume or were there other things that popped up?
R. Bruce McDonald – EVP and CFO: Remember too, Brian, in that European number, there was also the South America swinging to a loss and…
Brian Johnson – Barclays Capital: Okay, so it’s really the south, so that’s part of that.
R. Bruce McDonald – EVP and CFO: That’s part of that, yeah.
Brian Johnson – Barclays Capital: Is that an improvement plan there, or is that just waiting for better macro real?
Stephen A. Roell – Chairman, President and CEO: No, it is in approval plan we have to put in place, Bruce referenced that.
R. Bruce McDonald – EVP and CFO: I mean if you kind of look at the South America situation, in many way that’s obviously a lot smaller for us, I mean, just the size the South America piece within – if our business downward like 500,000 million to 600,000 million on an annual basis, but if look at kind of the market fundaments is very tough. You’ve got markets have softened, currencies have significantly weakened and the auto industry there is I’ll say more susceptible to import component – imported component which puts a lot of pressure, labor inflation is extremely high and some of the government polices, particularly in (indiscernible) are tough. So I think we are looking at what we can do to improve the situation down there, but we are in a pretty tough market right now and that’s not likely going to change in 2013. Now there are some things that we can do to improve our current position, but our outlook for 2013, and we’ll have a loss there that will be smaller. We are going to take some actions, but we have got to write that out.