In this Research Note, we examine the Johnson Controls business, based on their Q4 earnings release, conference call, investor presentation and 10K, reporting financials year ending 30th September 2022.

Johnson Controls International plc (JCI), headquartered in Cork, Ireland, is a pure-play smart buildings player, serving a wide range of customers in more than 150 countries. They have a very significant market position across HVAC, building controls, fire, security and services, enhanced by a comprehensive equipment portfolio and substantial installed base.

Compared to the prior year, reported sales for the year increased approximately 7% to $25.3 billion and grew 9% organically, in line with the high end of their guidance. Approximately 37% of sales originated from the Global Products portfolio. The global Building Solutions field businesses accounted for the remaining 63% with 39% of sales originating from installations and 24% of sales from service offerings.

Johnson Controls has 4 reportable segments of which Global Products has the largest revenues with $9,373 million in FY 2022, a 10% increase on the prior year. Sales growth was driven by broad-based demand for commercial and residential HVAC and fire & security products and strong price realization. By product type, HVAC equipment and controls software account for 72% of Global Products revenues, while fire and security products account for 25% and industrial refrigeration equipment is around 3% of revenues.

Building Solutions North America segment revenues increased 8% to $9,367 million, due to higher volumes and prices ($672 million) and incremental sales related to business acquisitions ($22 million), partially offset by the unfavourable impact of foreign currency translation ($12 million). The sales increase was led by strong growth in the HVAC & Controls platform.

Building Solutions EMEA/LA segment revenues decreased 1% to $3,845 million, due to the unfavourable impact of foreign currency translation ($269 million) and business divestitures ($22 million), partially offset by higher volumes and prices ($214 million) and incremental sales related to business acquisitions ($38 million).

Building Solutions Asia Pacific segment revenues increased 4% to $2,714 million, due to the net impact of higher prices and lower volumes ($178 million) and incremental sales related to business acquisitions ($42 million), partially offset by the unfavourable impact of foreign currency translation ($121 million) and business divestitures ($1 million). The increase in sales was led by strong demand for HVAC & Controls and Industrial Refrigeration equipment. By region, the sales growth was driven by sales in China.

In FY 2022, the company significantly expanded their OpenBlue suite of digital services and offerings, spanning across a breadth of devices from connected chillers, industrial refrigeration equipment to connected controls and BAS systems. To date, they have enhanced the existing connectivity of almost 11,000 chillers through OpenBlue, representing a 106% increase year over year.

Their digital services offering also includes the Foghorn and Tempered solutions acquired during the year. And in the fourth quarter, they launched OpenBlue enterprise management solution for Alibaba Cloud, supporting their expansion of smart building solutions into China.

According to the FY 2022 10K report, the company acquired several businesses for a combined purchase price, net of cash acquired, of $323 million. These were not individually itemized in the annual report.

Memoori has seen a notable acceleration in M&A with nine acquisitions reported during FY 2022, as we highlighted in our recent articles in 2 parts mapping the company’s strategic direction. The group has augmented technology offerings in physical security, fire detection and suppression with six bolt-on acquisitions which have also expanded their regional presence in the UK and Ireland.

Significant acquisitions to enhance their OpenBlue portfolio were Foghorn, a developer of Edge AI software, Tempered, a US cyber security startup and Asset Plus, a specialist UK provider of energy reduction and zero-carbon measures for UK public sector environments which will further enable Johnson Controls to deliver a turnkey net zero offering to UK clients.

The forthcoming sale of the Global Retail business, first announced in Q2, was confirmed in the 10K Report. No further details have been announced. Sensormatic Solutions, the global retail business of Johnson Controls, provides critical insights into retail inventory, shopper experience and loss prevention, featuring the Sensormatic, ShopperTrak and TrueVUE brands.

At its heart, JCI is still very much an equipment company, with installation and service accounting for the vast majority of revenue. Like many of their competitors, they are trying to accelerate the development of high-growth Software-as-a-Service business via their OpenBlue platform. But as for any large company, digital transformation is very difficult. They have made some good bolt-on acquisitions (e.g. Foghorn Systems and Tempered) and investments recently (e.g. Nozomi Networks) which should significantly improve their software offerings. It will be interesting to see how quickly they can grow their software revenues and increase their profit margin.

This article was written by Daphne Tomlinson, Senior Research Associate at Memoori.