Wisconsin’s largest public company has been undergoing a major transformation over the past two years. Glendale-based Johnson Controls Inc. is focusing in on a more specific, and narrower, set of offerings that it expects will drive future growth.
It started with the retirement of chief executive officer Stephen Roell, who led the Fortune 100 company for six years and achieved record revenues in 2012 of $41.8 billion before he stepped aside in October 2013.
Taking Roell’s place was Alex Molinaroli, a 30-year employee then serving as vice chairman. The ninth CEO in the company’s 129-year history, Molinaroli has undertaken a complicated series of divestments, acquisitions and joint ventures to change the face of the firm. The most dramatic will be the upcoming company split, which is expected to be complete on Oct. 1, 2016.
‘Our own activists’
Before he started in his new role, Molinaroli sat down with Jonson Controls’ board of directors and talked about the environment the company was in, and how to move forward.
“When you have a company like ours, automotive and non-automotive, it’s a very cyclical business,” he said in a speech at RSM’s 2015 Executive Summit in Milwaukee last month. “It’s a great business until it’s not. And today in North America, it’s a great business. And one day, it will not (be). Such a large part of the business being automotive put a huge drag on the rest of the business.”
Molinaroli, who declined through a spokesman to participate in this article, provided strategic insight at the RSM event that is used throughout this piece. He has indicated he will give more detailed information about the company’s restructuring at a Dec. 1 Analyst Day in New York.
Molinaroli has shied away from the media limelight in recent weeks, after his involvement with the perpetrator of a $50 million Ponzi scheme came to light. Despite the negative attention created from that revelation, the company’s board of directors has stood behind their CEO. That speaks volumes about how the board feels about the many changes that Molinaroli is making to the company.
When Molinaroli was speaking with the Johnson Controls board in July 2013, a number of prominent companies had been subjects of shareholder activism, with Apple, PepsiCo and Procter & Gamble all having been recent targets of public pressure to change.
Molinaroli didn’t want to wait around for a shareholder activist to rock the boat at Johnson Controls, he said. He knew the company needed to do something different to get ahead.
“Two years ago, we decided to be our own activists,” Molinaroli said. “It was my goal to not have anyone except our management team and our board of directors decide what’s best for our business.”
And with that, he went to work on shaving the company down and reimagining its structure. The change has been drastic and often dramatic, but he believes it’s necessary.
“If you look at our strategy and why, without a burning platform, we’re going through so many changes—from my perspective, the platform is burning,” Molinaroli said.
But some say there is no threat of an activist investor shaking up Johnson Controls.
“An activist investor doesn’t stay quiet,” said David Whiston, an equity strategist at Morningstar Inc. who covers Johnson Controls. “There’s never been any (Johnson Controls investor) publicly, like a Carl Icahn-type person, rattling the cage.”
Nonetheless, Johnson Controls has been busy making big changes, particularly in the past year. It has made several major announcements regarding its corporate structure in 2015.
In January, the company entered into a definitive agreement to form a global joint venture with Hitachi Ltd. and Hitachi Appliances Inc., through which it will obtain a 60 percent ownership stake in Hitachi Appliances’ more than $2.6 billion global air conditioning business, excluding sales and service operations in Japan.
In March, Johnson Controls reached an agreement to sell its Global WorkPlace Solutions business to the CBRE Group for $1.5 billion. Johnson Controls also sold its interests in two Global WorkPlace Solutions joint ventures to Brookfield Asset Management Inc. In total, the proceeds of the GWS business divestitures were $1.7 billion.
In June, the company began exploring strategic options for its Automotive Experience segment, which contained the $17.5 billion seating division, a $4.5 billion interiors join venture with Chinese firm Yanfeng Automotive Trim Systems Co. Ltd. that formally launched July 2, and some vehicle electronics.
In July, Johnson Controls decided to do a complete spin-off of Automotive Experience to create a new, publicly traded company. It also began a complete review of costs companywide, which resulted in a September announcement that it would cut 2.5 percent of salaried employees, about 3,000 workers, worldwide.
Johnson Controls has formed a number of joint ventures as an approach to entering new markets, Molinaroli said.
“Fifty percent of something is a lot more than zero percent of 100 percent, so we’re proud of our partnerships around the world,” he said.
The joint venture with Hitachi gives Johnson Controls access to Asia’s No. 1 efficiency product manufacturer and its 2014 acquisition of air distribution and ventilation product distributor Air Distribution Technologies gave the company access to the full replacement market in HVAC for the first time, which is an attractively steady revenue stream, said Nicholas Heymann, co-group head, global industrial infrastructure at William Blair & Co. LLC.
“This gives them now access to what is the most consistent part of the HVAC market in North America,” he said. “It’s going to increase their opportunity for market share gains, but also allows them to participate in replacing their original equipment that they previously have had very little opportunity to participate in.”
One of Molinaroli’s main goals is to accelerate the company’s growth in China, where he aims to be the No. 1 or 2 company. Johnson Controls is building a second global headquarters in Shanghai, which is scheduled to open in 2017, and has been increasingly investing in its Chinese manufacturing plants.
“If you want to be successful, you can’t underestimate the importance of China,” he said. “We have no choice now—none—absolutely no choice. It’s a question of us making it a priority.”
The transformation of Johnson Controls hasn’t come without a cost.
As a result of cost consolidation measures and divestments, Johnson Controls’ employment has gone from 172,000 just a few months ago to 130,000 today, Molinaroli said in October.
Many of the layoffs that have occurred have been corporate jobs, most of which are in Glendale, Whiston said.
Earlier this month, Johnson Controls announced it will close its Milwaukee business center in Glendale and lay off 277 employees.
The company also will break its 64-year streak of increased annual sales, but Molinaroli plans to “start a new streak.” That may not be in 2016, as Molinaroli has hinted that the costs of spinning off the automotive segment will be significant next year.
Back to basics
The split will spin off the Automotive Experience division of Johnson Controls into its own entity, leaving the Building Efficiency and power solutions divisions in the legacy company.
“By taking and transforming the company into the HVAC and the power solutions, or battery business, the battery business is going to have a much stronger mix as you go forward,” Heymann said. “You end up with a nice mix shift in their most profitable business and you end up with a much stronger growth profile for their HVAC business.”
Upcoming emissions deadlines in almost every country and the growing use of start-stop batteries to meet those standards will drive growth for the power solutions segment, he said.
Combined, the automotive segment was competing with other divisions of the company for the same resources and capital, Molinari said.
“There’s three disparate businesses,” Heymann said. “They were operating as three separate silos. As you go forward, you’re going to have a lot better cross-leveraging.”
Post-split, the remaining Johnson Controls will look a bit like it did when it was founded to make thermostats in 1885.
“It’s not so much moving back, it’s changing,” Heymann said. “All these companies that have got their heads screwed on right are de-conglomerating. They’re becoming a true diversified company, as opposed to an automotive company that made some other stuff.”
Johnson Controls isn’t a research and development-focused, bleeding edge inventor of new technology, Molinaroli said. It’s an applied product manufacturer—a developer of proven mass market solutions.
The Building Efficiency division will shift to less of a project focus to more of a product sale and distribution model, Molinaroli said in the company’s fourth quarter earnings call in October.
When it comes to building monitoring technology, the segment is positioned well in the emerging Internet of Things space, he said in his RSM speech.
“We didn’t invent the Internet of Things—we just happen to have all the things,” he said. “We are the sensors and we are the actuators and we are the controllers. We save more energy for buildings than any other company in the world.”
The company’s other main offering will be its automotive batteries, of which it makes about 150 million per year for its customers’ brands. From Walmart to Audi, Johnson Controls makes a significant portion of U.S. car batteries. Its only challenge now has been expanding start-stop battery manufacturing capacity to keep up with demand.
The battery business was already No. 1 in traditional lead-acid batteries, and now it has cornered 75 to 80 percent of the market share in start-stop battery production, making it No. 1 in that space as well, Whiston said.
“Their battery business is just fantastic—I would say it’s the crown jewel of the company,” he said.
Batteries are a less cyclical segment than its Automotive Experience division was, since they need to be replaced with regularity in existing cars, and the market isn’t impacted as much as vehicle interiors was by new car production ebbs and flows.
“The remaining operations are going to ultimately have better financial flexibility,” Heymann said, so much so that it could make $3 billion in acquisitions and still hold onto its current debt rating.
A rumored acquisition target has been Reading, Penn.-based EnerSys, which makes batteries used in industrial equipment, Heymann said.
Automotive Experience
The Automotive Experience division reported $22 billion in 2014 revenue, and Johnson Controls has touted its well-established position in the marketplace and in growth locations like China.
Molinaroli describes the spinoff as the final piece of the puzzle he has been solving for the last couple of years.
“It will allow our automotive company to define its future,” he said. “Also, because of some of the capital requirements and capital structure requirements, we weren’t able to invest in some of our other businesses the way we wanted to.”
He confirmed in his October speech that both companies will remain headquartered in the Milwaukee area after the split. The new automotive company being formed does not yet have a name.
Bruce McDonald, vice chairman and executive vice president of Johnson Controls, will serve as chairman and chief executive officer of the new company. Beda Bolzenius, president of the Automotive Experience division, will serve as president and chief operating officer.
The interiors business joint venture with Yanfeng formed the largest automotive interiors company in the world.
“If it was a separate U.S.-based company, it would be the largest automotive supplier in the U.S.,” Molinaroli said, making one-third of the automotive seats worldwide.
Johnson Controls executives will do a road show to explain to shareholders the process of splitting the company and assigning stock before it happens. Molinaroli expects a little stock volatility while shareholders get settled.
One trend that could significantly impact the seating company moving forward is the shift toward self-driving cars.
“We unveiled a new seat in interior technology… when we talk about autonomous driving,” Molinaroli said in the fourth quarter earnings call. “Obviously, autonomous driving and the new technologies that are going into vehicles will play a big part of our seating business in the future.”
Autonomous cars will focus less on getting from one place to another, and could instead be designed as offices or lounges, Whiston said. Interiors will play a big role in those designs.
New digs
And then there’s the issue of the Johnson Controls headquarters. There are some indications that it will be relocated to a new building in downtown Milwaukee.
Earlier this year downtown Milwaukee Alderman Robert Bauman said the company is working on plans for a 50-story, 1.2 million-square-foot corporate headquarters office building near the lakefront in downtown Milwaukee. A Milwaukee real estate industry source confirmed those plans.
Johnson Controls has remained mum on that project, and confirmed only that it is considering plans for a major office development in the Milwaukee area. However, the company and city of Milwaukee this year agreed to split the $500,000 cost of a development feasibility study for a lakefront site. It is unclear when that study will be completed.
“We’re not at a stage where the end date is in sight,” said Department of City Development spokesman Jeff Fleming. “I can tell you that people here and at Johnson Controls are working to move the process forward.”
In his October speech, Molinaroli said Johnson Controls’ headquarters needs to be in a place that is accessible, global (since 75 percent of the company’s employees are not in the U.S.), and competitive with cities like Chicago, Los Angeles and Shanghai.
“So I need Milwaukee to be a place that we can not only bring in and attract talent, but also a place we can bring expats,” he said.
Molinaroli, co-chair of the Greater Milwaukee Committee’s Downtown Task Force, has stressed the importance of investing in downtown.
“What a great time to be in Milwaukee,” he said at his RSM speech. “The (Milwaukee) Bucks (new arena has) something to do with it, but (downtown revitalization is) happening. I would like to be part of that. I would like to be part of helping this city become all it can be.”
At an update on the task force’s progress at a GMC meeting on Nov. 9, Molinaroli emphasized the importance of working together with business and government to transform downtown.
“It’s a moment in time where if we want to pick this ball up and run with it together, it could be messy getting there, but we could really like the outcome,” he said.
Board confidence
It’s worth noting that for as many years as he’s been CEO, Molinaroli has a scandal to account for.
Last year, he was found to have failed to comply with the company’s ethics policy when he engaged in a relationship with a consultant for the global multi-industrial firm. As a result, his fiscal year 2014 Annual Incentive Performance Program payment was reduced by 20 percent.
Molinaroli was also listed in West Palm Beach, Fla., court transcripts as one of a large number of investors who loaned money to Ponzi schemer Joseph P. Zada of Grosse Pointe Shores, Mich. Zada was found guilty in September of 15 counts of mail fraud in a $50 million Ponzi scheme that spanned 10 year.
The court transcripts state Molinaroli gave Zada “millions of dollars” since 2006 and also that Zada lived in a Michigan mansion owned by Molinaroli.
“It’s an interesting quandary that Alex has been … Mr. Change Everything in Two Years, but at the same time, they’ve got a guy who’s going through a lot of changes in his personal life, too,” Heymann said. “He’s been effective at being an agent of change in a company that by and large has been the Rock of Gibraltar in terms of never changing.”
Despite Molinaroli’s personal issues, the board of directors has backed the leader of its momentous change as he sees it through to fruition. Several board members could not be reached for comment about Molinaroli’s leadership, or referred questions to Johnson Controls. A spokesman for the company declined to comment.
And Molinaroli doesn’t plan to comment on the situation, either. He denied repeated requests to comment about both his company strategy and his involvement in the scandals.
Multiple Johnson Controls analysts, including David Leiker, who covers the company for Milwaukee-based Robert W. Baird & Co. Inc., also declined to participate in this article. When asked if he would be the right Baird person to speak with about Johnson Controls, Leiker said: “I am. However, I don’t want to get caught up in the CEO’s news events that may or may not be brought up in your story. Sorry, can’t take that risk.”
Whatever his personal life holds, Molinaroli’s business leadership has been looked upon favorably by analysts.
“If you don’t reinvent how you create value, you will basically be out of business,” Heymann said. “Alex may have a funky set of issues about how he runs his personal life and everything else, but as it relates to a guy who is kind of walking through walls and is doing things to transform this company, he couldn’t have come too soon.”
