Synergies And Productivity Initiatives To Help Johnson Controls In The Third Quarter

Johnson Controls (NYSE:JCI) is set to report its third quarter (ended June 2017) earnings on July 27. The company is expected to report earnings of 71 cents per share on revenues of $7.72 billion. As per the guidance provided by the company, sales of $7.7 billion and an EPS in the range $0.70 and $0.73 is anticipated. Margins are also expected to improve in the quarter as a result of savings, as well as the pickup in volumes seen in the second half of the financial year, enabling better leverage.

In the second quarter, while the company was able to deliver a beat on both earnings and revenue, the stock price fell in the aftermath, as a result of the updated full-year guidance provided. JCI knocked down its organic growth forecast to 3%, from an earlier expected range of 2.5% to 4.5%, and trimmed its EPS range to $2.60 to $2.68, from $2.60 to $2.75 earlier. Below we’ll highlight some factors to look out for in the earnings.

Savings To Boost Earnings

The company was able to deliver significant progress on the Buildings organizational structure, post the merger with Tyco, in the second quarter. While approximately $50 million in savings were expected as a result of synergies in the quarter, JCI saw a benefit of around $70 million, or above $0.06 in year-on-year savings. Such a figure is roughly $20 million in incremental savings over the first quarter. This also resulted in the company reporting 2% organic growth, with 3% registered in the Buildings segment, offset by negative 1% in Power. Given the significant progress made by the company, the synergy and productivity savings should be expected to be at the higher end of the $250 million to $300 million range provided by the company back in December. The company has attained benefits to the tune of $0.11 through the first half of its financial year, and now expects $0.07 in the third quarter, and $0.09 in the fourth. This would total up to $0.27 in savings for the full financial year.

Growth Potential Of China

Johnson Controls recently opened its second global corporate headquarters in Shanghai, China, supporting the enormous growth opportunities present in the country, as well as in other regions in Asia-Pacific. Already well-established in China, the company continues to accelerate its growth there through plant openings, key customer partnerships, joint ventures, and strategic agreements. Johnson Controls’ CEO Alex Molinaroli, while speaking with CNBC, has also stated that the company is bullish on China’s prospects, despite its  ups and downs. The company expects double-digit growth from the country in the next one to three years, given the high GDP growth rates witnessed there. China’s economy grew at a rate of 6.9% in the first quarter, despite the pace of growth slowing down in recent years. JCI is also looking to make in-roads in the Indian market, one of the fastest growing major economies of the world.

Johnson Controls has formed a joint venture with Binzhou Bohai Piston Co., an auto parts affiliate of Beijing Automotive Industry Group Co. (BAIC Group), to build its fourth automotive battery plant in China. This plant will manufacture both conventional flooded, and absorbent glass mat (AGM) battery technologies. AGM are technologically advanced car batteries that are more expensive than a conventional lead acid battery, but are better equipped to handle the strain of frequent engine restarts and the ever-increasing load placed on car batteries. They are employed in vehicles with the start-stop technology, which, while being fuel-saving, can tax a car battery since the electrical system still uses the energy from the battery when the vehicle turns off.

JCI considers the growth in the country to be attractive, and the new joint venture will position the company to take advantage of the market opportunity, as China is expected to be the largest automotive battery market in the world by 2020. Furthermore, in China, there is a large demand for auto part technologies that can improve fuel efficiency, and the demand for AGM batteries is expected to soar, as they increase fuel efficiency by up to 5%. Currently, this technology is present in between 5% and 10% of the Chinese automotive market. This figure is expected to rise to 50% during the next five years, according to Alex Molinaroli, CEO of Johnson Controls. 50% would imply about 15 million new vehicles that will be equipped with start-stop functionality in China, saving an estimated 1.2 billion liters of gasoline per year. It also reduces greenhouse gas emissions by 2.8 million metric tons per year. This is also key, due to the increasing regulatory trends which have been putting pressure on automotive manufacturers to reduce their carbon emissions.

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Have more questions on Johnson Controls? See the links below:

• Johnson Controls Beats Expectations, Trims Guidance
• Why Did 3M Acquire Johnson Controls’ Scott Safety?
• Will The Merger With Tyco Result In Improved Margins For Johnson Controls?
• Adient To Rely On China For Growth In The Future