JCI
#Thanks, <UNK>, and good morning, everyone
Before I get into a detailed review of the businesses, let me start with a quick integration update on slide 7. Over the last few months, the Buildings organization has gone through an impressive amount of change, and we've made a considerable amount of progress towards aligning the new leadership structure in the most optimal way possible with a focus on accountability for growth
We now have the management teams of our operational structure substantially in place and we'll now focus on building out the team structure over the next several months
Another area we've discussed with you is the need to substantially pay down the merger-related TSarl debt
As <UNK> referred to earlier with the announced divestiture of Scott Safety and sale of ADT South Africa, we will be able to make a considerable reduction to the $4 billion of debt
This will enable us to move more quickly on some of the heavier lifting restructuring and synergy actions
I wanted to take a minute to thank the team and the thousands of employees of both Scott Safety and ADT South Africa
I have had the pleasure of being involved with both of these businesses for over a decade, including my tenure as President of the Tyco Global product segment
It's never easy to part with such great leaders and colleagues, but I am confident they are in good hands and that both businesses will continue to be successful in the future
Before I get into the progress we've made on the cost side, I thought I'd highlight a couple of key cross-selling wins in the second quarter
We had a major win in the New England region to supply an array of building solutions in a new distribution hub being built by one of our large airfreight delivery customers
In this situation, our legacy SimplexGrinnell sales team leveraged their strong relationships in the region to provide a lead to a legacy Johnson Controls team
Working together, the two teams were able to secure contracts for the fire alarm system as well as the HVAC and building control system
In the institutional space, a legacy Johnson Controls Account team in coordination with the sales teams across SimplexGrinnell and Tyco Integrated Security submitted a joint bid for a fully integrated solution multi-phase expansion project at a major university in Texas
As a result, we were awarded the contract for the first phase providing our Metasys building automation system, York air handling units, Simplex fire alarm system, as well as access control and video surveillance
Not only is this phase a great win, we're well positioned for the next phases of the project
Both wins are great examples of how our teams are coming together to collaborate and provide integrated solutions that solve more complex customer problems
Turning now, to the cost synergy side
We continue to run ahead of plan in Q2, delivering roughly $70 million or above $0.06 in year-over-year savings
This is roughly $20 million in incremental savings over last quarter and is slightly ahead of our internal targets
Given the progress we've made year-to-date we now expect to achieve synergy and productivity savings at the high end of the $250 million to $300 million range I provided to you in December
With roughly $0.11 achieved through the first half, we now expect $0.07 in the third quarter and $0.09 in the fourth quarter totaling around $0.27 in savings for the full year
As I mentioned last quarter, the integration of two large organizations requires a lot of heavy lifting, commitment and leadership
Not all decisions are easy, but we have a strong team, leading the process, ensuring we execute on decisions made and we move forward to the next step
Both the integration team and the businesses continue to be guided around four main objectives; grow, integrate, change and operate
We're making great progress and I couldn't be more proud of how the teams have come together and what they have accomplished over these past eight months as a combined company
I look forward to keeping you updated on our continued success
Let's turn now to a review of the businesses starting with Building Technologies and Solutions on slide 8. On a reported basis, Building sales grew 1% over the prior year to $5.5 billion in the quarter, as 3% organic growth was partially offset by the impact of FX and net M&A activity
The 3% organic growth was led by solid growth in our field businesses
When you look at the Field side of the business, which represents about 65% to 70% of total Building sales, organic growth was up 4%, with underlying growth across most regions, led by strong growth of over 3% in North America
When we look at the pieces within our Field business, we saw another strong quarter of organic growth in our applied HVAC business, which continued to grow in the mid-single digit range
Fire and Security, the legacy Tyco Installation and Service businesses grew in the low single-digit range led by mid-single digit growth in North America
Some of the areas within our Field businesses have put pressure on our organic growth rate in the first quarter, stabilized in the second quarter including both performance contracting and industrial refrigeration
Looking now at our Products business, which represents remaining 30% to 35% of Buildings
Sales declined just under 1% organically year-over-year, a sequential improvement from the 3% decline we saw last quarter
We continue to see very strong growth in our residential and light commercial HVAC business, which grew at a high-teens rate organically, benefiting by a significant amount of new product launches, something we expect will continue into 2018. The strength in U.S
residential and light commercial HVAC was more than offset by a mid-single digit decline in our Hitachi business, simply related to the timing of shipments, which we will see come through in the third quarter
Additionally, our Fire and Security product businesses are stabilizing
The mid-single digit, year-over-year decline we saw in the first quarter has moderated to a 1% organic decline in the second quarter
On a sequential basis, Fire and Security product sales are growing
We've seen encouraging signs that the short cycle industrial markets have bottomed and we would anticipate some inflection across the businesses in the second half
Buildings' EBITA declined 1% year-over-year to $628 million
The segment margin decreased 30 basis points year-over-year to 11.3% as strong synergy and productivity savings were more than offset by planned incremental product and channel investments as well as mix during the quarter
Turning to orders and backlog on slide 9. Total Buildings orders increased 2% year-over-year organically, driven by a 3% increase in Field orders, partially offset by a 1% decline in our quick-turn product orders, which as I mentioned earlier was already felt within our product sales growth in the quarter, given the book and ship nature of that business
In terms of order activity we saw continued momentum in the U.S
market with stable growth in non-residential construction verticals year-over-year
We had a strong quarter of order activity with solid growth in our commercial and institutional verticals
As we have discussed before order growth in our Field business is lumpy, and can be impacted by the timing of large projects
The legacy Tyco business included a very large order in the prior year, which impacted the year-over-year comparison in Tyco orders by 3 percentage points
Backlog of $8.3 billion increased 6% year-over-year, excluding the impact of foreign exchange and M&A
In summary, we continue to make significant strides in improving the fundamentals of the business
We are streamlining the organization, investing in our product and service innovation and driving commercial excellence
As a result of these initiatives, coupled with our order pipeline and backlog, we are well-positioned for increased growth in the second half of this fiscal year as well as strong margin expansion
Turning to Power Solutions on slide 10. Sales increased 7% year-over-year on a reported basis to $1.7 billion driven by the impact of lead pass-through, which benefited powers top line by roughly 8 percentage points
Organic sales were down 1%, driven by warmer weather in both North America and China, which negatively impacted aftermarket demand
In addition, we had a tough prior year comparison in China associated with the timing of the initial volume build in our Chongqing plant
Overall, total global unit shipments decreased 3% year-over-year driven by aftermarket shipments, which declined 3%
Global start-stop shipments continued to expand with a 36% increase year-over-year, including another quarter of significant growth in China and the Americas
Power Solutions segment EBITA of $303 million, increased 7% on a reported basis or 12% excluding foreign currency
Power's margin expanded 10 basis points year-over-year on a reported basis including a 220 basis point headwind from the impact of higher lead costs
Underlying margins excluding the impact of lead, increased 230 basis points year-over-year, driven by productivity benefits as well as favorable product mix, primarily related to higher Start-Stop battery shipments
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 third quarter and remainder of the year
Good morning
Yeah, <UNK>
I think to understand the third and fourth quarter, I think we need to drill into the second quarter and then I'll walk you to what you can expect here in the third and fourth quarter
So in the second quarter, the guidance we provided was for a modest increase in the margin rate in the second quarter
And so what happened was, when you look at the margin that came through we're getting tremendous productivity in costs savings as it relates with the synergies, that's coming through, that's 50 basis points
The investments that we're making both 30 basis points and when you drill into that, I would tell you across the board we're getting great traction with those investments
Whether it be in the applied space with our chiller investments, whether it be in the DX space with the work that we're doing in resi and in small commercial, in the control space with our launch of Metasys 8.1 and there's the Verasys platform
And then across the Fire and Security businesses with the new investments we're making where in spite of the pressure that we've had with the heavy industrial, high-hazard we continue to make great progress there
The second piece is that we had a project, a very large project that we took a significant charge here in the second quarter that has impacted our margin rate by about 20 basis points
And then the last, I think, is most important as we project third and fourth quarter, is the unfavorable mix, which is about 30 basis points
And when you think of that mix, our growth, the 3% growth that we achieved in the second quarter was driven by install
And as you know the install revenues come through at a lower margin
And that, at the same time, when our product business was down about 1%
So as you project going forward and that was roughly 30 basis points which drove the 30 basis point decline in total
So as you project the third quarter and fourth quarter, we have inflection in our products, we see continued momentum in the legacy BE product businesses
We start to see, we – sequentially we are seeing growth in the Fire and Security product businesses and they'll continue to accelerate in the third quarter and fourth quarter and so that is good mix coming through
And then as the <UNK> talked about, seasonally we start to get our pickup in service revenues in the third quarter and fourth quarter which is good mix
And then with the, just the nature of the business being higher volume in the third quarter and fourth quarter, we get nice leverage on that volume
And so as we look at now third quarter and fourth quarter, we're positioned to deliver about a 90-basis point improvement in margin rate
And that ultimately supports the overall margin rate that we projected for the company for the year
Yeah, <UNK>, let me start with Hitachi
So starting there we do see from a second quarter to third quarter last year, we had a timing of shipments that ultimately now this year has pushed to the third quarter
That's going to give us a nice lift within the legacy BE product portfolio
When you look at products in total, just pure volumes, and that starts with the – the demand that we see in the – in the order rates that we're seeing across our – across all of our product businesses accelerate in the third quarter and fourth quarter
And as I've been – we've been talking about in the legacy Tyco product businesses, we've seen sequential improvement continuing every quarter
And although, we have been – we went from mid – down mid-single digits in the first quarter, down low single digits in the second quarter, we're going to inflect here in the third quarter and fourth quarter
We're seeing continued acceleration with the end markets recovering that we support
So, that gives us a lot of confidence with that mix coming through, as well as service
When you look at the – the service business across both sets of businesses coming together
Think about it this way
We've got a tremendous field organization, that now has come together, that have a combination of customers that they are serving and now we can take our combined capabilities to be able to do a lot more for the customers that we serve
And we're already seeing some of that traction come through
And so, we are very confident that we're going to see an uplift there with that mix in the third quarter and fourth quarter, typically, it's a seasonal high for us
But above and beyond that, we believe that with some of the revenue synergies that we see, we're going to be able to capitalize that in the second half
And that again would be very positive mix to the overall portfolio
No, <UNK>
As we look at all of our product businesses, we've been performing and continuing to maintain and grow share across all of the segments
So there is no concern there as far as losing share
When you look at the type of product businesses, there was similar type pressure within the Scott Safety as it relates to the heavy industrial, high-hazard business
Recall that we had bought the IST Business, which gave us a bigger portfolio, bigger footprint into that end market, that has been somewhat pressured here short-term
But again, we're beginning to see a very nice pipeline of orders or activity in orders coming through, and that will also inflect here in the second half of the year
As far as the growth or the
So, Jeff, just to go through each of the segments, so when you look at Buildings and what we're seeing not only in the – we're building a very strong pipeline
We're beginning to convert at a higher rate that pipeline and that's positioned us to continue to accelerate the revenue that we achieve
Now remember there was a large shipment last year in Hitachi that moved from second quarter to this year's third quarter, that's going to be a significant contributor to the pickup in organic growth this year
And then with what we see coming through based on what's been booked, we see continuing at or above the rate that we're currently at in the third quarter and being able to continue to accelerate in the fourth quarter on that conversion that gets us to roughly, it's roughly 2.5% for the – roughly, kind of mid – 2.5% to 3% for the year within the segment
So, we're feeling very good about our ability to be able to execute on that
In the Power business it really depends on how the lead fluctuates and how it's reported
But at the end of the day, we're right now seeing a roughly mid-single-digits in the third quarter
We typically have our seasonal high in the fourth quarter and based on what we see today, that's going to be very strong in the fourth quarter
So as we look at the total year, we're still in the 4% to 6% range for the organic growth in Power
So overall we feel very good about the activity that we see, how we're converting the market activity and ultimately the position that we're in to be able to deliver on the second half
Yeah
So, we're going through a major integration of our field force in North America, and certainly, we're going to be positioned as a leader across all of our domains
And what's been nice is, while we're going through that process, the teams are working within their current structures in how they're continuing to serve customers
And while we're integrating all of our systems and processes, have found ways to be able to leverage the customer base that we serve today
And then, as new opportunities are coming up, we're getting kind of first look on those opportunities with the other domains that we are not serving those customers with
And that is simple as that
That's what this was
We have a strong relationship in one of the businesses, working with this customer, and then have gone forward to say, this would – this is what our total capabilities are and what we can ultimately do
It came through one bid opportunity that we put all of our capabilities together
And because of that, we can maintain our fundamentals, while we're getting the additional growth by putting all of our capabilities together
So, we're seeing this, a lot of this activity, across our entire field, and that's what's building a pretty robust pipeline of opportunities that we're beginning to covert
Yeah
So <UNK>, what I would say in Power Solutions, we've done a really nice job driving productivity, continued productivity, as well as we're benefiting from the mix, the higher mix of the AGM
And so that has enabled us to offset the 220 basis points of headwind that we had on lead and being able to offset that for the quarter and deliver a margin rates that were up 10 basis points
As you project the year, we're going to see continued mix there with continuing increase in AGM shipments and that'll continue with all of the capacity we put into place and over the next few years that will continue
And we're still getting very strong productivity
So overall, for the year, when we project the margins, I think it's – we're going to be modestly down for the year
But overall, that's really a factor of the lead pricing
<UNK>, I don't know, if you want to comment?
Just for everyone's knowledge, if you remember, we are now talking about productivity and merger synergies as one bucket
the way back to the EPG conference
That's – that's really our – if you want to go with the framework we're using, it goes back to EPG a year ago, and it's the framework we've put in place
Yeah
So it's in the legacy BE portfolio in North America, very large project that working with the customer we had accelerated the execution of that project and took on some additional charges
And so, with that, we'll continue to work with the customer and it's hard to predict ultimately what we'll recover
But at the end of the day, it's being positioned to deliver on what we've committed to the customer that we're serving, and took some additional costs in the quarter
