JCI
#Thanks, <UNK>, and good morning, everyone
Let me start on Slide 7, by providing an update on the integration
The new organization structure in Buildings is now in place
And we have selected the best athletes and have asked them to play new positions on the field
Region by region, business by business, we have completely realigned the leadership structure in order to eliminate cost and redundant layers of management as well to optimize sales and service productivity
Naturally, this degree of change in a merger of this size brings with it the potential for short-term challenges as the players familiarize themselves with the playbook
With this in mind, we made a deliberate strategic decision to move as quickly as possible to implement our new organizational structure, recognizing this may result in a few false starts in the near-term, but will result in a winning strategy in team in the medium and long term
We remain fully committed to achieving our synergy and productivity savings targets
And have made great progress during the quarter delivering roughly $80 million or about $0.07 in year over year savings
We continue to track towards the high end of the original $250 million to $300 million range in cost energies and productivity savings for the year
With roughly $0.18 achieved through the third quarter, we continue to expect to achieve $0.09 in the fourth quarter, which would total $0.27 in savings for the full year
I am proud of the work we've done across the organization and the significant progress we are making on achieving merger-related costs energies
As I review the regional performance in Buildings, I will touch on some cross selling wins
Let's turn to Slide 8. On a reported basis, Building sales in the quarter were flat versus the prior year at $6.1 billion, as 2% organic growth was entirely offset by the impact of FX and net divestitures
Our field business, which as a reminder represents about 65% to 70% of total Building sales, grew 1% organically year over year with mixed performance across the regions
We saw continued momentum in our global applied HVAC business, which grew in the mid-single-digit range
Fire and security, the legacy Tyco installation and service businesses, declined in the low-single-digit range partly due to a tougher comp with the prior year
Let me quickly walk through the regions, starting with North America
As many of you know, North America is the largest region for both legacy businesses and therefore creates the great opportunity for growth from both a top and bottom line perspective
This is also the region that has undergone the most significant amount of change
At the beginning of the third quarter, we put in place a new regional organizational structure, which combine fire and security with HVAC and controls with 27 [P&L] [ph] leaders
The structure eliminates an organization layer, while increasing our sales management and selling capacity
This now gives us an opportunity to make sure our processes are consistent, that we harmonize the way we go to market, where it makes sense and we take advantage of scale
These leaders are a mix of legacy Johnson Controls and legacy Tyco leadership, who know a lot about where they came from, but have a learning curve with the rest of the business
This added a bit of pressure to the quarter
Organic revenue growth was flat year-over-year, with orders down 4%
Keep in mind, order activity can be lumpy and when adjusting for the timing of large orders, year-over-year order growth was relatively flat
As we've now been operating in this structure for a few months, we are continuing to make progress improving the level of depth and expertise of the P&L leaders
Although there has been some short-term impact, I am very pleased with the progress that has been made over the quarter, including the success we have had with cross-selling wins
We designed and implemented a new sales operating model to enable our customers to buy, how they want to buy
For example, during the quarter, we won a large project in the healthcare vertical
The fire team secured the order to install a fire detection system in a new building as well as the retrofit work in two existing buildings
Embracing the one team approach, the fire team brought in their HVAC colleagues, who are able to successfully displace a large HVAC competitor
Moving to Asia Pacific, we had a strong quarter all around, despite the concerns of softening macroeconomic conditions both organic revenue growth in orders were up in the high-single-digit driven by China and Northeast Asia
Contributing to the growth was a strong increase in service revenue
We've added additional technicians in China and Japan
And we are seeing nice growth as a result
Additionally, the team had several cross-selling wins in the quarter, which contributed to the high-single-digit order growth
For example, the team secured a nice win in Hong Kong for cooling systems in 19 rail stations
By leveraging cross business relationships, the team was able to secure this win over a seeded competitor
Moving to EMEA, the macroeconomic indicators are mixed across the region
Within our businesses in Europe, low-single-digit growth in Continental Europe was partially offset by a decline in the UK, resulting an overall modest growth
The Middle East on the other hand continues to be challenged
However, the decline has moderated to the mid-single-digit
Lastly, Latin America continues to grow organically, primarily driven by our subscriber business
Overall, orders in the EMEA region were down modestly
Looking now at our product business, which represents remaining 30% to 35% of Buildings sales increased 4% organically year-over-year
A nice sequential improvement from the 1% decline we saw last quarter
We continue to see very strong growth in our North America residential and light commercial HVAC business, which grew high-single-digit organically, benefitting from a significant amount of new product launches, despite beginning to lot more difficult comparisons
Our Hitachi business also grew high-single-digits organically aided by a recovery in the timing of shipments, we discussed last quarter
Additionally, as expected our Fire & Security product businesses have stabilized and our holding flat with prior year
Trailing EBITA increased 7% year-over-year to $908 million
The segment margin expanded 110 basis points to 15%, a strong synergy and productivity savings modest volume leverage in favorable mix more than offset planned incremental product and channel investments during the quarter
Turning to orders and backlog on Slide 9, total Building orders increased 1% year-over-year organically, up 3% when adjusting for the timing of large orders, driven by 4% increase in product orders, which drove the revenue in the quarter given the book and shift nature of that business
Field orders were flat with the prior year and strong growth in Asia Pacific was partially offset by a decline in North America and EMEA, as I previously mentioned
In terms of the order pipeline, we are seeing continued momentum in the U.S
market, with stable growth in non-residential construction verticals year-over-year
And expect to see orders growth in our North American field business next quarter
Backlog of $8.4 billion was 3% higher year-over-year, excluding the impact of foreign exchange and M&A
In summary, the teams are coming together as well, having been very engaged with every member of the team through this process
I remain convinced that the strategy of this combined entity is going to continue to unlock significant value for customers, employees and shareholders
Tuning to Power Solutions on Slide 10. Sales increased 6% year-over-year on a reported basis to $1.6 billion, driven by the impact of lead pass-through, which benefitted powers top line by roughly 8 percentage points
Organic sales were down 2% driven by 3% decline in global unit shipments with declines in both the OE and aftermarket channels
OE unit shipments declined 6% versus last year with particular weakness in the U.S
and EMEA related to lower OEM production volumes, which declined at a similar rate
On the aftermarket side, which comp for roughly 75% of our volumes, unit shipments declined 2% year-over-year
Weakness in the aftermarket channel was more prevalent in EMEA and China, where customers delayed order decisions based on the drop in LME lead prices throughout the quarter
Given the typical restocking that takes place in the late summer months, we expect low to mid single digit organic growth in the fourth quarter
Global shipments of start-stop batteries continue to expand with 17% increase year-over-year, despite a difficult plus 22% prior year comparison, including another quarter of significant growth in China and the Americas
The decline in EMEA was tight to the lower level of production in Europe
Power Solutions segment EBITA of $304 million increased 8% on a reported basis, or 7% excluding foreign currency and lead
Power's margin expanded 40 basis points year-over-year on a reported basis, including a 120 basis points headwind from the impact of higher lead costs
On an EBITA dollar basis, lead was a slight tailwind in the third quarter
Underlying margins excluding the impact of lead increased $160 basis points year-over-year driven by favorable price mix as well as productivity benefits partially offset by lower volume leverage
Now let me turn the call over to <UNK> to walk through corporate and the consolidated financial details of the quarter, as well as our outlook for the fourth quarter
I would say that, when you look at the Buildings organization, you've taken two very large organizations
And although we talk about legacy JCI, legacy Tyco, we're running these businesses across the globe together
And so you can imagine from a leadership standpoint, the changes that had to occur
And I am more confident than ever, the way that the teams have come together
And the sales management, sales capacity that we've created, while taking out layers of management that, that is going to translate to accelerate the acceleration of orders and growth
Our pipeline, although we didn't convert in the quarter, we see a very nice pipeline built across the globe with opportunities and the quoting activity as a result of that pipeline is increasing
So I'm developing more confidence every day that as we put these organizations together, building off of the strong customer relationships that we had within the legacy structures, working together now into operating system, we're now seeing that coming through
Sure
So if you start - let me start with North America, because that's certainly the big focus area
At the new organization that we put together, we freed up a lot of resources that we took out the layers of management to put back into sales management as well as selling capacity
We're putting the businesses together, we got a little bit behind of our hiring plan with our sales force
But we're significantly increasing our sales capacity as we speak and then with the work that we've done, the team has done a nice job in putting together prophecies in the field
As we're now leveraging the existing customer base that we serve to be able to better serve the customers with a complete portfolio
And I talked a little bit about that in my prepared remarks, making it simpler for the customer to be able to buy from us the total capability
So when you look at the pipelines that have been developed across the globe within our direct channels, we're beginning to see that
Now there's a timing of conversion as we go through this
But it gives me confidence are based on what we see, we're going to begin to see an improvement on a go forward basis
And our product businesses, the team is done a really nice job, not only making sure that we've got, we're leveraging the channel - our direct channel, but also expanding our indirect channels across each one of our product businesses
So not only are we investing in our direct sales capability
But we're also expanding our channels, you'll see that some of the bright spots during the quarter and our DX business with a very difficult compare - last year were up about 17%, were up another 10% this year
That is really an output of some terrific work has been done in expanding our channel to be able to capitalize on the growth in the market share
So what I can tell you across the board, it's certainly a key focus and being able to not only get world class sales management but increasing capacity in our direct channel as well as our indirect distribution that will enable us to be able to capitalize on a broader part of the market
Yeah, <UNK>, this is <UNK>
As you said, we're getting really good traction with the new products that we're bringing to market
And when you look at the performance across our portfolio, I think that's beginning to show, whether it'd be in the residential, like commercial or across applied, as well as within our controls
And that's where a lot of the investments are being put in
What I see going forward as we continue to gain the momentum, we're going to continue to reinvest and look at incremental investments that we see as - given the success we've had in each one of these segments that we see a lot of opportunity with the investments we're making
So we're going to, obviously, take that into account as we're beginning to accelerate and gain market share, but it gives us a lot of confidence that with the investments we are deploying we are beginning to see the growth come through and it's coming through at very attractive margins
