Coordination Out Loud: Volume 7: Analysis of Public Statements from Johnson Controls CFO at Morgan Stanley Conference

Published on Oct 20, 2021

Special Note: Coordination Out Loud is a series of articles that analyze select corporate transcripts through the lens of Joseph Harrington’s landmark paper, “Collusion in Plain Sight: Firms’ Use of Public Announcements to Restrain Competition.”

The paper concludes that antitrust enforcers can be more aggressive in bringing cases around evidence of public invitations to collude by conducting a rigorous analysis of executives’ public communications and categorizing those statements into three different categories.

In the series, we will sort statements into the categories laid out in Harrington’s paper: Category 1. Firms announcing that their competitive behavior is contingent on future conduct of a rival. Category 2. Firms forecasting industry or rival conduct.

Category 3. Firms recommending that the industry behave a certain way or otherwise commending or criticizing prior industry or competitor conduct.

The Capitol Forum is interested in any and all feedback related to the statements in our analysis. Johnson Controls (JCI) Comments at Morgan Stanley Virtual 9th Annual Laguna Conference (September 15, 2021)

Joshua Charles Pokrzywinski, Morgan Stanley, Research Division – Equity Analyst

And just understanding that spot prices only tell part of the story, a company the size of Johnson Controls has contracts and hedges and purchase agreements and all sorts of things that sort of operate as a lag. When should we see basically the spot rate of activity, whether it’s material or freight or some of the other big inputs?

Do those really just peak out more like early next year given the timing? Or do you feel like you’re reasonably close to where the current market is today in your P&L? I know there’s a lot of inputs, so it’s a little unfair question. But when do you start to really kind of lap the real inflation in the system and realize that versus where you are today?

Olivier C. Leonetti, Johnson Controls International plc – Executive VP & CFO

So you said that we don’t really know, right? So we’re tracking commodity pricing like everybody else. Some went down, some went up again, aluminum being one of them because of coup d’état in a country far away in Africa, so we are surprised all the time.

But we believe today that we have achieved probably a top. And what is important is this industry traditionally has been very disciplined in terms of pricing. So at Johnson Controls, we have been leading price increases in the industry. And usually, our peers have followed through 2, 3 weeks afterwards.

And if you look at the past, it’s very unusual for this industry to decline pricing when competitive pricing is still getting better, which might happen. So potentially, we could have a [sic] good news for the industry and certainly for Johnson Controls going forward as and when commodity pricing start to decline. [emphasis added]

Capitol Forum Analysis

Leonetti’s comments appear to fall into both categories 2 and 3, where firms forecast industry conduct and also recommend certain actions.

At the outset, Leonetti notes that Johnson Controls’ peers have usually followed the company’s price increases within a few weeks.

From one perspective, that’s simply describing prior conduct. But that description is preceded by a seeming commendation of that status quo, in which he notes that it’s “important” that “this industry traditionally has been very disciplined in terms of pricing.”

Leonetti adds that historically “it’s very unusual for this industry to decline pricing when competitive pricing is still getting better.” And although that’s again arguably simply a description of past conduct, it’s followed by a forecast: “So potentially, we could have a [sic] good news for the industry and certainly for Johnson Controls going forward as and when commodity pricing start to decline.”

That statement could hit the coordination sweet spot, by not only forecasting industry conduct—in this case keeping output prices steady while input prices decline—but also clearly commending it. Not only that, but Leonetti describes that scenario as good for both the industry broadly and his company specifically, in a statement that seemingly treats the two questions as tied at the hip.

Johnson Controls’ primary business is constructing fire detection and suppression systems, HVAC products and services, and security equipment in commercial and residential buildings. The company relies heavily on raw material inputs such as steel, aluminum, lead, tin, copper, and polypropylene.

Some of those inputs have had dramatic price increases in recent years. “In fiscal 2021, commodity prices could fluctuate throughout the year and could significantly affect the results of operations,” the company said in its most recent annual report.

Johnson Controls’ North American operational headquarters is in Milwaukee, but its global headquarters is in Ireland due to its $16.5 billion, 2016 acquisition of Tyco—an inversion deal that significantly lowered the company’s tax liability.

Johnson Controls has a market cap of $50 billion and reported $6.3 billion in net sales in its most recent quarter, an increase of 19% over the prior year.

The company is not currently the subject of any known antitrust investigations according to its most recent annual report.

Expert Opinion/Analysis

Joseph Harrington, Professor of Business Economics and Public Policy at Wharton

I believe this announcement is anticompetitive in intent. The Johnson Controls executive is seeking to coordinate with competitors to adopt or perpetuate a price leadership arrangement. Economists recognize that price leadership arrangements result in higher prices because a price leader will enact larger price increases under the expectation that competitors will match, rather than undercut, those increases.

Stephen Calkins, Professor of Law at Wayne State University Law School

The problem is that it is very hard to prove a Sherman Act Section 1 agreement. Were [the] quoted language challenged in a Section 1 suit, Johnson Controls would surely argue that it was just factually describing history and then commenting on what might happen in the future without agreeing to anything. Without more, they would probably win.

But the quotes by themselves suggest that competition is not working well in this industry, so I hope very much that the FTC is aggressively monitoring the industry and looking for a facilitating practice that violates FTC Act Section 5, which does not require an agreement. The FTC lost the Du Pont facilitating practice case, but the agency should try again to develop this area of law. It should proceed on a bi-partisan basis—this is not a Democratic or a Republican issue, and the FTC will be better positioned to win a case if it is supported by all or all but one commissioner.

It’s possible that the quoted language could support an attempted price fixing case: the argument would be that Johnson Controls is asking its rivals to maintain high prices even after costs recede.

I don’t know enough to appraise how strong that case would be. But there is no doubt that this is an industry that should be watched and involves an area of law that should be carefully and cautiously developed.

Official Comment from Johnson Controls

Johnson Controls did not respond to requests for comment