Johnson Controls CEO Stephen Roell: Doubling Down
October 13 2009 by Jennifer Pellet
Named CEO of Johnson Controls in October 2007, Stephen Roell took on the post just before a turnaround in the company’s fortunes. At the time, Johnson Controls, which manages building systems and makes auto parts and batteries, had reported more than 60 years of uninterrupted revenue growth. Yet by the end of Roell’s first year on the job, the Milwaukee, Wisconsin-based company was in the midst of a massive restructuring—closing down plants, trimming its employee base and streamlining operations.
It wasn’t enough.
“The housing market and automotive markets in the U.S. were slowing down at the time, but not nearly to the degree that we now see,” recounts Roell, who joined the company in 1982 as operations controller for its systems and services division. “So this March, when things proved harder than we had thought, we had to go back and make further changes.”
Still, those early efforts proved fortuitous, allowing $38 billion Johnson Controls to weather a massive automotive industry decline. While total annual auto sales have since dropped from over 15.5 million cars to the mere 8.3 million anticipated for 2009, the company is already back to running a profitable business selling car seats and interior parts. Better still, the trimmed-down company is now positioned to benefit from an auto industry recovery, says Roell, who notes that many of its competitors lacked the balance sheet strength necessary to restructure. “They’re still sitting there with the employment and capital investments necessary for a 13.5 million build,” he says. “But we will go from losing money at the beginning of this year to making money at the end of this quarter. And when the industry recovers and we get back to a 13.5 million volume in North America we’ll generate mid-double-digit return on investment capital.”
Roell also sees continued growth in Johnson Controls’ battery business. The company is a market leader in lead-acid car batteries, with a 70 percent share in North America, approximately 35 percent of the European market and a growing presence in China and Korea. It’s also investing heavily in hybrid battery technology. “I see ‘battery’ being a big story for us in the next three years by virtue of the stabilization of that industry and the investments we’re making in the cost side to drive margins, as well as current and hybrid technology,” says Roell.
But Johnson Controls’ strongest growth prospects are on the building management side of its business— products and services that optimize energy use and improve comfort and security. The division designs, produces, installs and maintains heating, ventilating and air conditioning systems, as well as management systems, controls and security systems for large corporations. “Our specialty is understanding and delivering what a building needs,” says Roell, who notes that 75 percent of the division’s revenue comes from its work on existing buildings rather than new construction. For example, retrofitting existing buildings with systems that boost energy efficiency— including a current project to update the Empire State Building— is a growing business.
Coming into 2009 with a more than $4 billion backlog of business— 90 percent of it overseas—insulated the company’s building management division from the effects of the global economic downturn. Those projects are expected to carry the company through the current new construction lull, which, ironically, Roell attributes partly to the U.S. government’s economic stimulus program. “The $12 billion stimulus funds actually slowed things down because people are waiting to see if they will be recipients,” he explains. “And then it will take time to get projects to the building stage. We’re just now bidding on about $800 million worth of projects out of approximately $2 billion out there.”
Once past that lull, says Roell, the building division’s potential is strong. “Macro trends in energy conservation, interest in facilities management and the focus on renewables all drive into what we do,” he says. “Once we get through this 18-month pause, I can see double-digit growth from the building part of our business for a long time to come.”