When a company reports its quarterly earnings, management often presents just a sketch of how the company performed. But equally important for investors is the conference call, where management's commentary provides the full picture of the company's recent performance. Let's look at some highlights from Johnson Controls' (NYSE:JCI) most recent conference call to help discern the full picture for Q3 2016.
Hitachi is a hit
Looking to expand its building efficiency segment offerings -- air conditioning and refrigeration in particular -- Johnson Controls entered into a joint venture with Hitachi in 2015. Based on the Q3 conference call, the endeavor is a resounding success. In addressing the joint venture, Alex Molinaroli, Johnson Controls' chairman, president, and CEO, reported:
Our Hitachi joint venture continues to exceed our expectations and I'd just give you a little bit of color on, if you look across the regions we are seeing strong performance in China, Japan, and Taiwan and we are starting to see some opportunities in North America as we've made significant investments in both product and sales.
Excluding foreign exchange, the building efficiency segment reported a 48% year-over-year improvement in segment margin -- an improvement which management attributed "primarily to the volumes in North America and Asia and the contribution of the Hitachi joint venture."
That's putting it mildly. According to the company's 10-Q, the joint venture with Hitachi yielded $826 million in sales for the quarter and $111 million in segment income.
Just the start of start-stop?
Management's enthusiasm for seizing the start-stop vehicle market opportunity is no surprise. Earlier in the summer, it announced its intent to invest $780 million from 2015 through 2020 to expand its absorbent glass mat (AGM) battery manufacturing capacity.
Found in start-stop vehicles, whose engines shut off when the engine is idle, AGM batteries are designed to handle the additional stresses placed on them as the vehicles maintain power to other systems until the driver releases the brake or clutch.
What does come as a surprise, though, is the success the company is already recognizing from its AGM offerings. According to management, "start-stop growth, which is the future of our business over the next five years" increased 22% year over year during the quarter, driven primarily by the Americas and China, which increased 78% and 79%, respectively.
Things are already rolling
Come Halloween, as millions change their appearances and transform into ghouls and goblins, Johnson Controls will also be changing its look. Less macabre, Johnson Controls anticipates Oct. 31 will be the first day of its new identity -- the first-day absent of the automotive interiors business, which it's spinning off into the new entity, Adient. Although Oct. 31 will be the first day Adient is operating as a separate, legal company, Bruce McDonald, Adient's chairman and CEO, reported that the company is well ahead of schedule:
So for all intents and purposes, we are operating independently within Johnson Controls, we've got a four months kind of running in parallel health until we get to our true separation which will be at the end of the October.
Besides adhering well to the expected timeline of events, management is also crediting itself with how well it has been able to execute the transition in terms of staying on budget. Previous estimates had targeted separation costs between $400 million and $600 million, and according to McDonald, management is "tracking well within those estimates."
Although it was glad to report its success in beating Q3 estimates by $0.04 and reporting EPS of $1.07, management was especially keen on identifying the factors that will contribute to its future success. In doing so, investors have a clear list of items they can track to also gauge the company's operations.
For one, Hitachi significantly contributed to growth in the building efficiency segment, but management expects the growth to continue. Likewise, AGM revenue growth in both the Americas and Chinese markets drove gains in the power solutions segment, but management believes there's plenty of market opportunity left to seize. Look in the coming quarters for continued increases in sales for start-stop batteries, for slowing growth could suggest management's enthusiasm for expanding production capacity may have been misguided. And lastly, investors should keep an eye on how well the Adient separation is progressing. If November rolls around and the company is not operating on its own, Johnson Controls may be looking at separation costs exceeding the planned $600 million.