Johnson Controls International plc (JCI) Q4 2011 Earnings Report, Transcript and Summary

Welcome and thank you for standing by. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. I will now turn the conference over to Mr. Glen Ponczak. Sir, you may begin.

Thank you, Don, and thank you, everybody, for joining us this morning. Before we begin, I want to remind you of our forward-looking statements. Johnson Controls have made forward-looking statements in this document of presentation today pertaining to its financial results for Fiscal '12 and beyond that are based on preliminary data and are subject to risks and uncertainties. All statements other than statements of historical fact are statements that are or could be deemed forward-looking statements, include terms such as outlook, expectations, estimates or forecasts. For those statements, the accompany cautions that numerous important factors, such as automotive vehicle production levels, mix and schedules, energy and commodity prices and the strength of the U.S. or other economies, currency exchange rates, cancellation of or changes to commercial contracts, changes in the levels or timing of investments and commercial buildings, as well as other factors discussed in Item 1A of Part 1 of the company's most recent Form 10-K filing, which was filed on November 23, 2010, could affect the company's actual results and could cause its actual consolidated results to differ materially from those expressed in any forward-looking statement made by or on behalf of the company. We're joined this morning by Steve Roell, Chairman and Chief Executive Officer of Johnson Controls, who will give an overview of the quarter and of fiscal 2011; followed by Bruce McDonald, Executive Vice President and Chief Financial Officer, to give a more detailed review of the business segments and our outlook on 2012. That will be followed by question and answers. And with that I'll turn it over to Steve.

Okay. Thank you, Glen. Well good morning and thank you for joining us. I'm going to preface my comments by just indicating that our 2011 results that we're sharing with you today and the outlook for 2012 are consistent with the previous guidance that we gave at our Analyst Day 2 weeks ago in New York. I think our press release indicated that, and those of you that went through our models understand that. As I look at full-year results, record sales and earnings, I'm pleased with the fact that we overcame a really mixed macro environment. We did benefit from some global growth in the automotive business industry, but to be honest, there were times throughout the year that we thought it would even be stronger. But nevertheless, we did benefit from that. The building markets did not recover the way we expected. We assumed and it did get good growth in the interim in the emerging markets, but certainly, things like the residential market were much weaker than what we expected coming into the year. And of course, we had that midyear disruption with the Japanese earthquake and tsunami and all the inefficiencies that, that created. But despite that, the fact that we -- despite those conditions, we outperformed our underlying markets, we have double-digit top line growth in earnings in all 3 of our businesses, and we believe we gained share significantly in every one of those 3. I think the other thing that was noteworthy is the fact that there was increased clarity regarding the opportunity for AGM Battery growth in the future to support Start-Stop. I think we've commented on the fact that we invested almost $525 million of capital or committed that, I should say, in 2011 for that growth, it will require much more. But clearly, that opportunity came much clearer to us as the year progressed. It was also a record year of investment for us. It was a record year of capital investments, $1.3 billion, and also the fact that we made the strategic investments in automotive that totaled almost $1.4 billion. Both of those categories are critical to supporting our 2000 [ph] and beyond growth for our business. If I just look at the full-year numbers for our fiscal year sales for $40.8 billion, it's the first time that we exceeded the $40 billion mark, up 19% from last year. Our segment income was $2.4 billion compared to $1.9 billion in 2010, an income of $1.7 billion that resulted in earnings per share of $2.40, a 21% increase over the $1.99 a year ago. If I now then look at 2012, I really just want to reiterate some of the comments I made in New York regarding our confidence going into 2012. Clearly, with that investments -- those investments that we've made in 2011, both the M&A and the capital, we'll start to see some accretion and benefit from those in our 2012 results. We all started the year with very strong backlogs. We had $2.3 billion of new orders in 2011 in our Automotive business, which resulted in a backlog of $4.2 billion in the next 3 years. I think our notes indicate that $1 billion of that launch is in fiscal 2012. Building Efficiency, backlog was up 8% at the end of 2011. It's consistent with the backlog that we needed to be able to achieve our 2012 guidance that we provided to you earlier. I would like to comment on the orders. I know there were -- we noted that the orders in the quarter were flat in quarter -- the year-over-year comparison. I would like you to remember that back in 2010, that quarter, our orders were up 32% in the prior year, and really helped by significant contracts that we booked in the Middle East. I also would just like to comment that we just needed to provide some guidance on how to look at the backlog in orders, and clearly, quarter-over-quarter is not the way to look. It's year-over-year. We have seasonal aspects to both our sales as well as our order take. And so the year-over-year is the right comparison, not quarter-over-quarter. In terms of 2012, then we also expect to benefit from the continued presence that we have in the emerging markets and the investments we've made to grow our capacity and capabilities in those markets. We continue to see good underlying strength in our battery aftermarket, which we think will benefit us and provide stability in our earnings and growth in 2012. And finally, as I've mentioned, we know we have operational improvements we can make. You'll start to see that early in the fiscal year by continuing throughout the fiscal year for us, particularly in the Automotive group. So the combination of those factors is what provides us with our confidence regarding 2012 outlook that we provided to you. Now I'm going to shift back to the fourth quarter. I just have the financial data to go through and then Bruce will go through in much more detail. But for the quarter, our sales were $10.8 billion, up 19%. And if you can look at the segment income at $725 million, a net income of $514 million. You can see our earnings per share of $0.75 per share compared to $0.60 per share into the quarter ended last year, an improvement of 25%. So Bruce is now going to go through and talk to you about the performance of each of the business segments. Bruce?

Okay. Thanks, Steve. Let me just start with Automotive Experience here. We had a very strong quarter here again in Automotive Experience against the backdrop of relatively modest global production levels. If you look at the sales number up 24% to $5.1 billion. On a constant currency basis, our sales were up about 20%. Sales gains, as I talked about versus the production levels, show a continuing trend of gaining share and the impact of launching some of our new business awards. So in North America, you can see our sales were up 7% versus a 6% increase in production. If you look at Europe, and we kind of back out both the impact of foreign currency and the acquisitions, our organic growth was 17% higher than last year -- sorry, 18% up versus last year, and that compares very favorably against that 5% production increase. In China, our sales in the quarter were -- which largely comes through nonconsolidated operations, were up 20%. Again, that compares to $1.1 billion. And that compares very favorably to the 8% growth in production level. From an overall point of view, our sales in China were up for the full year, over 27% to just a shade over $4 billion. Then lastly, in the other parts of Asia, Japan and Korea, we saw a pretty healthy uptick there, really driven by Korea, which was up fairly significantly in the quarter, offset slightly, however, by some softness in Japan. Looking to the segment income line, you can see for the quarter sales or income, sorry, was up 81% to $234 million. Here we benefited from a higher volume that I talked about earlier, the accretive impact of the acquisitions and a meaningful improvement on our European quality and containment cost that we were talking about all year. We're really pleased to see the performance come through in Europe. And as we noted here on the slide, we saw $79 million year-over-year improvement in our business operations in Europe. And our margin for the quarter came in at 2.9%. In Asia, we benefited from exceptionally strong performance in our Chinese joint ventures. And then in North America, we had some margin erosion about 110 basis points reflecting a higher level of launch load in the quarter. And the open -- and we're opening up a new metals footprint here in North America. So those 2 costs kind of dragged down our margins. If we turn to Building Efficiency, you can see sales up about 14% or 10% on a constant currency basis. In terms of where we saw revenue growth, it was pretty broad based. So Global WorkPlace Solutions, we were up 24%; North America, up 7%; Asia, up 17%. If you just look at China, part of Asia, in Building Efficiency, our revenues for the year improved by 39% to just under $1 billion. So we're getting close to that $1 billion level in Building Efficiency. Middle East, you can see up 51%; and Europe starting to see some year-over-year momentum here, that were up 9% in the quarter. And you can see on the bottom of the chart, we talk about our Global Equipment business. In the quarter, chiller sales were up 19%. In terms of talking through our orders, as Steve indicated earlier, our orders were flat versus last year, but we kind of have some tough comparables with that up approximately 30% of last year. It kind of deep dived the various regions. We did see strong growth in Latin America, where we're up 39%; Asia was up 18%; Europe up double digit to 10%; North America was where we were sort of flattish. There we were kind of negatively impacted by a 2 or 3 very large solutions jobs that we thought we would book in the fourth quarter that we expect to slip into the first quarter here. And in the Middle East, we were down 56%. And that's kind of the area where we're struggling with the year-over-year comp. In 2000 -- in this quarter last year, we were up 56% -- or 57% and that came right back down this quarter. So we had a few large jobs last year. Overall, the Middle East continues to be very robust. For the year, orders there were up 23%. In terms of our backlog, Steve indicated earlier backlog is up to $5.1 billion or 8% higher, and that's consistent with our guidance and supportive of the outlook that we have for 2012. In terms of segment income, up 1% to $278 million. Margins as you can see on the slide, we know margins excluding Global WorkPlace Solutions were 9.3%, and that, as you know, our goal in Building Efficiency is our margins get to 10% excluding GWS. In terms of the performance in the various regions, we saw a strong growth in Asia, where our profitability was up 27% and North America Systems, which was up 13%, I'm sorry, and Middle East, where our profitability really driven by the higher revenues up 50%, driving our other segment income up 34%. This was largely offset, however, by lower segment income in our North America Services business, which is kind of impacted by a few things. One, contract reserves in our Solutions business, some costs associated with the EnergyConnect acquisition that we completed in the quarter, and some infrastructure investments that we continue to make to grow our Solutions business, our sales levels and our infrastructure outside of North America. In terms of GWS, we saw some headwind there as we were adversely impacted by startup cost on about $1 billion of new business at a sort of annual run rate that we launched in the quarter. In terms of Power Solutions, you can see sales up 19%. We had a very, another solid quarter here in Power Solutions, with unit volumes being up about 3%. Revenues in the Power Solutions were helped by both foreign exchanges, about a 5% contributor to that growth, and higher lead pass-through arrangements, which was about 7% or $88 million in the quarter. As we've noted here on the slide, aftermarket volume was up about 4% and OE is up about up about 2%. Geographically, if we kind of look at our volumes, we were sort of flattish in North America, and here, where we saw some destocking in the aftermarket channels. In Europe, our volumes were up 20%. Almost all of that was in the aftermarket sector, and Asian volumes improved by 7%. In Building -- sorry, Power Solutions, most of our investment in our growth initiatives continue to remain on track. We continue to see the benefit of our second North American sell-through coming online that's impacting our margins. Our third smelter will come online in the second half of 2012 in South Carolina, and we continue to make the investments as Steve indicated in terms of our AGM capacity where for 2012 we expect our units to more than double to $7 million. In terms of the income of $213 million, up 17% last year, if we adjust the lead pass-throughs, our segment margins were up about 60 basis points year-over-year. Our 2011 results benefited from higher volumes, richer product mix and the impact of the recycling investments that I spoke of earlier. As many of you know, our manufacturing operation in Shanghai was forced to stop production here late in the fourth quarter. We're working with the government and the various regulatory bodies in China. Our current outlook for that facility is it will not be open in our first quarter, and we're hoping that we are able to restart production in January. So that's going to give us a little bit of headwind, which we've factored into our guidance here in the first quarter. I flip over to the financials. I'm going to talk about the financials excluding items, and we have a few adjustments, none of these are very material, but I just want to make sure I highlight those. So for 2011, we backed out a net gain from some non-recurring gains in Power Solutions associated with our joint venture in the buyout of Saft. We have a $30 million -- and we also have $43 million of restructuring charges, primarily associated with Building Efficiency where we're looking to do some SG&A reductions and $30 million non-recurring income tax benefit associated with the release of some valuation allowances. In 2010, we had some similar one-time items. We had a $37 million gain associated with the acquisition of a Power Solutions joint venture and a $19 million impairment charge in our Automotive Experience business. I'd also note that we aren't pulling out in here acquisition-related costs associated with the Automotive acquisitions. Those are about $10 million in the quarter. That's kind of the run rate that we see running through our P&L as we get into 2012. So those we're baking as normal ongoing costs. In terms of our revenue, if we'd make all those adjustments, our revenue was up 19%, as Steve indicated earlier, to a record level of $10.8 billion. On a year-over-year basis, if you back out the impact of the euro, which was about 9% stronger, our underlying sales growth, excluding FX, was 15%. In terms of our gross profit in the quarter, you'll see we're down about 50 basis points. And this is really just business mix. If we look at our margins on a business-by-business basis, we saw about 110-basis point improvement in Automotive Experience, primarily driven by the improvements in our European operations. And Power Solutions, despite the lead pass-through implications, margins were up 50 basis points. And there is where we're seeing the benefit of vertical integration and the improved product mix. And in Building Efficiency, where we struggled with some of the contract-related charges and the growth in Global WorkPlace Solutions, that's where our margins were down about 160 basis points. So net-net, we're down 50 basis points, but good solid improvement in both Auto and Power Solutions. Look at SG&A, up about, you can see, about 11%. If you look at SG&A as a percentage of revenue, declined by about 70 basis points to 10.1%. And I would note that we do continue to make significant levels of investment in some of our growth initiatives like innovation, emerging market infrastructure, IT initiatives and things like that. In terms of equity income, you could see a big increase here, 32%. Here is where we really saw the benefit of the performance of our Chinese joint ventures in our Automotive business. And overall, if you look at our segment income of $725 million, you can see our segment margin is up about 20 basis points on a year-over-year basis. Turning to Slide 11. Let me just comment on our financing charges down slightly in the quarter versus prior year. This level of financing cost is around where we expect to run during 2012. We expect net financing costs to be in that $50 million to $55 million on a quarterly basis. And generally speaking, we're seeing lower interest rates offsetting higher debt levels associated with our acquisitions. In terms of our underlying tax rate consistent with our guidance, it was 19% in the quarter. And that was 1 percentage point higher than last year where we had an 18% effective tax rate. Again, you can see on income attributable to noncontrolling interests, we had a charge of $35 million in the quarter versus $28 million last year. That's really just the impact of our Automotive joint ventures being more profitable this year than last year. Then lastly, our earnings per share at $0.75 for 25% higher than the prior year. I'd like to maybe just spend a minute in terms of our balance sheet and provide some commentary on sort of how things are shaking out here. So if you look at our cash provided by operating activities, you'll see it's $587 million versus $46 million last year. What I would like to point out is these numbers include the impact of our discretionary funding of our retirement plan. And so you really need to make those adjustments to have, to show our numbers on a comparable basis. In the fourth quarter of this year, we had a discretionary contributions of $175 million versus $440 million last year. So if you kind of make those adjustments, our true operating performance in the quarter was $763 million, and just make the same adjustments for last year that's a year-over-year improvement of cash from operating activities of 57%. In terms of working capital, again this is where the pension and retirement funding falls through. So you really need to adjust that. If you do make that adjustment in the quarter, cash from working capital was a source in the quarter of about $45 million. We'd had hoped this would come in a little bit higher. I think at the last call, we talked about a number of $300 million to $400 million, that's going to continue to be a focus for us and we expect to make some improvements here as we get into the first half of 2012. In terms of our capital expenditure, you'll see there's a pretty significant increase, up 70% to $425 million in the quarter, and this is kind of the level that we're going to be running at and as we get into 2012. So guided to CapEx and that $1.7 billion to $1.8 billion range, we're going to see this level of CapEx on a go-forward basis. The other thing I'd point out in our statement of cash flows is we did have $145 million outflow associated with the buyout of Saft in the quarter as well. That will flow through the acquisitions line. Overall, if you look at our balance sheet, it continues to be extremely strong. Our net debt to total capitalization at the end of the quarter here is 31%. We certainly have a strong balance sheet which gives us the ability to invest and take advantage of attractive growth opportunities when they arise. Then lastly, I'll just comment on the 2012 outlook, and as Steve indicated earlier, there is no change to the full-year guidance that we gave a year ago. And I guess I just want to provide a little bit more clarity in terms of the phasing of our earnings, and I guess in retrospect, we maybe should have done this during our earnings call -- sorry, our analyst meeting. But right now, we see our earnings being slightly back-end loaded here. So for the first quarter, we're looking at earnings to be in that 60% to 62% range -- $0.60 to $0.62 range, I'm sorry. If we kind of look at our -- some of the underlying fundamentals in auto, volumes remain stable. They're holding up pretty well. Our operational performance continues to show good progress. We're pleased with how Europe came out and we're entering 2012 at a run rate to support the improved level of profitability in automotive. In Building Efficiency, our backlog's in exactly the same spot we thought it would be, and so we expect to see good flow from our backlog in Q1, and as meaningful pickup in orders associated with our solutions projects here in the first quarter. Our Chinese operations, generally speaking, are performing pretty well. However, as indicated before, we do expect our battery plant to be closed for the first quarter here, and that's worth about $0.02 or $0.03 a share in terms of the negative impact that we have to overcome in the first quarter here. We are substantially increasing our investments in some of the key areas, product development, innovation, IT investments and overseas infrastructures. So those costs will be ramping up throughout 2012. And I think overall, we're feeling pretty good about the start of the year, and we're pleased with how things are going. So I think just financially before I turn over to questions, I think the kind of key takeaways here, we had good solid double-digit top line growth in all 3 of our businesses. We demonstrated a meaningful improvement on our European margins and we feel good about the progress in addressing some of the cost and containment issues that have been lingering with us for most of 2011. Our acquisitions are performing well and are on track to be accretive in 2012. We feel we have good order momentum in Building Efficiency despite some of the lumpiness that was in the fourth quarter here. We are continuing to increase our level of investment in organic and M&A initiatives, and we have a strong balance sheet to be able to take advantage of opportunities to deliver superior shareholder value when they arise. So with that, Glen, maybe I'll turn it over to you for the Q&A.

Yes, Don, we're ready to take questions.

[Operator Instructions] Our first question comes from Chris Ceraso. Christopher J. Ceraso - Crédit Suisse AG, Research Division: Just a couple of things. First, you mentioned that you've got couple of things that are dragging here on the first quarter, but on the flip side, are you going to get any help from the Japanese OEMs, your Japanese customers trying to catch up and produce some extra units? Have you quantified how much that might help you in this fiscal first quarter?

Chris, so far, I would say we've seen very little improvement in our order books from the Japanese customers to a level above the run rate prior to the tsunami. So as we sort of look here at Q1, we're not seeing a lot of that yet. Christopher J. Ceraso - Crédit Suisse AG, Research Division: Fair enough. And then the second question is on the pricing initiative that was talked about at the analyst meeting. Can you give us any color on specific actions that you're working on? And then in particular, in the GWS business, where do you think you can get this as you improve pricing? It's kind of break even-ish now. Do you think this can get to a 2% or 3% or 4% business? What is a GWS-type business capable of doing if you can fix pricing there?

Chris, this is Steve. There are 2 things. First of all, I think I would tell you initially, a lot of our focus on the pricing side is really our performance Contracting Solutions business were we deliver a value and an outcome, which is not the GWS business. That's really where our first focus is, okay?. In terms of the GWS, the business I would like to think, that can generate a 2% to 3% margin and that's in recognition of all the passthrough that we have. Okay? That's really where we have to focus. So we are talking about what we need to do to improve that, but that's probably where I would expect that business to generate its margins long-term, okay? Christopher J. Ceraso - Crédit Suisse AG, Research Division: And what's the timeline, Steve? When do you think you'll start to see the benefits from this in the Contracting or Solutions business?

It's going to take a while. I would say probably, in the orders that we book later in this year, and probably not realized in terms of our margins until 2013. So the 2012 guidance that we gave and the margin improvement really does not assume a lot of assistance from pricing in this time frame in the near term.

The next question comes from John Murphy.

One quick follow up on Chris' question on the Japanese schedules. I'm just curious, you're seeing a marked improvement in the schedules in your first quarter versus the last 2 quarters. Is that correct? And do you see sort of an acceleration as you get into your second quarter, which would be the first calendar quarter of next year?

John, let me just make sure everybody's clear on that. We're definitely seeing a pickup, especially versus our Q3, and to some extent, Q4. But what we're not seeing is, if you go back and look at our schedules that we have right now versus the schedules that we had pre-tsunami, there's not an awful lot of pickup. So they're not producing at a level that it would let them rebuild their dealer inventory at a meaningful amount.

Remember, Chris, this time we're launching the [indiscernible] and the Evans our volumes haven't come back that strong. Okay? That's a Tundra. Yes. That's the name of the joint, pickup trucks.

Okay. Got you. Second question just on Europe. Obviously, you guys are doing a great job of containing cost and rationalizing your own business over there. Just curious what you're seeing from customers, if there's any help or rationality coming from pricing or contract changes in Europe, or from your competition, maybe getting a little bit more aggressive on restructuring their capacity as well?

John, I'm not aware of anything. I'm just trying to think -- I was over in Germany last week and met with every one of our, let's call, customer business units. And I'm not -- from our conversations, I don't recall anything really being rationalized by our competitors, and/or -- well let me give you one comment. There is some concern about, again, some of the interior suppliers and their financial viability. That did come clear. We're going to have to watch that. There may be an opportunity, but that's from the interior side, not the seating side. But beyond that, I'm not hearing a whole lot about our competitors doing a lot of restructuring or the OEs.

The driver behind our improvement in Europe is 100% within our control. It's bringing down the containment cost that plagued us all through 2012 and we made great progress in the quarter there. And then the acquisitions and the synergies that we expect to get from the acquisitions are very accretive to our margins.

And then just lastly on the EPS guidance, it looks like it's about almost a 22% pickup year-over-year. I know you guys highlighted that the first quarter had some challenges. Is the pickup through the remaining 3 quarters a result of the reversal of the pressures in the first quarter? Is there any other real good stuff that you see coming in the last 3 quarters of the year?

Well, I think, I guess like I said in my comments, our guidance, we knew we had some headwinds in Q1 associated with the launch of the metals facility in our North America and European -- our North America business. That's going to be a little bit of a headwind here for the first quarter. And we knew that. We suspected that our Chinese business was going to be shut down for the first quarter, our existing plant. So we sort of factored that in. But I think when you kind of look at the cadence of our quarterly earnings, the other big thing to remember is we were severely hit with the tsunami in Q3 of this year, so you're going to see a pretty big pop when you look at the third quarter earnings versus last year. So I think if you look at the consensus estimates that we had, guided to 20%, 22% higher, the phasing in the various analyst models is basically 20%, 22% higher every quarter. I think what we're saying is, listen, Q1 are not going to quite be that high and Q2, 3 and 4, are going to be slightly higher than the full-year average.

Yes. I think, Bruce, also the timing of the benefits from the M&A, and some of the capital expenditures really just fall in those last 3 quarters, okay? Gain more momentum as the quarter goes on, year goes on.

The next question comes from Brett Hoselton.

Wanted to talk a little bit about the Automotive Experience business in Europe. Beta outlined at the Analyst Day a new margin target of 6% to 7%. My first question is, is that the target you're shooting for in Europe?

Brett, let me go back. Beta's guidance was 7%, 8%. It was historically 6%, 7%. And took it up to 7%, 8% for the longer-term based on the addition of the metals transactions, okay? But your question really has to do with Europe and I don't see any reason why Europe cannot be at that level. We've looked at our disciplines and our processes. Something that maybe that is not well known. On November 1, we'll have a new COO that's joining our automotive group. When I say COO, that is for automotive, not for the company. It's Rainer Schmueckle, who was the COO at Daimler over their Mercedes car business. He was responsible for the turnaround at Freightliner. And I brought him on. If you recall, we had a conversation about a year ago on this phone call, where we talked about whether or not we needed additional capabilities in our European operation. Actually, his role is global. He'll actually be overseeing our manufacturing operations for all our component businesses, he'll oversee all of our global engineering, all of our global quality. And again, at the time I described the fact we just needed more capacity and more capability. So Rainer comes on effective November 1. He's actually met with our people. And his leadership will help us in terms of just helping drive process discipline throughout our organization.

As we think about that improvement from where you're currently at, the 2.9% to that target, you've talked about part of it being operational improvements, part of it being volume. My question is how far can you go from the 2.9% on simply the operational improvements and how much do you need, how much you're relying upon volume to get to that 7% to 8%?

Well I would say, at least 3 -- I'm going to use the number 3/4. 3/4 of it has got to be driven off our own operations. And I don't need a lift from volume to get there. And I think that right now, Brett, some of our volume is hurting us. As Bruce mentioned, we do have higher, particularly, engineering cost. I guess I would say if I looked at the quarter, engineering cost was probably our biggest drag, just based on the launches we've got. And as you saw, over half of our backlog over the next 3 years, the launch is still Europe. But I think we can get ahead of that and get our process discipline in place. That will make a big difference.

The next question comes from David Leiker. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Bruce or Steve, in the Battery business, if I'm doing my math correctly, when you take units, currency, lead there's 4 points, 400 [ph] bps that are left. Is that price which seems to be driven by mix?

I think, I believe the math is we're up 19%. I think if you take out FX and lead were up 7 and our unit's volumes was up 3, so that difference would be mix and pricing. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: How much of that would be price versus mix? Do you think?

I don't have that off the top of my head. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: And is the mix driven by the aftermarket OE mix or is it driven by AGMs starting to have an impact?

I don't think there's a lot of AGM in there yet, David, Okay? There's some but I wouldn't say that would be driving it, okay? I'd say it's the mix of the product lines. That's what I hear when I talk to our customers like at Interstate Battery [ph]. That's what they tell me, their mix is what's helping them. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then the AGMs start to drive that equation by the end of the fiscal year or do we see it earlier than that?

It will start impact us on a quarterly basis, but it doesn't come in with a bang because we're sort of going up a 3-year kind of upward slope, so.

Yes. I think it's just the $1 million or $2 million [ph] additional units in '12 here, David. And then we're putting in capacity for the '11. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: And in the Building Efficiency, can you talk a little bit of some color on that reserves on the contracts that you ended up incurring here in the quarter?

Sure. I guess we -- every so often, we have some difficulties on a contract and these tend to be anywhere from 3- to 5-year old type contracts and there's a lot of times there's ongoing discussions with the lawyers, maybe there's some legal wrangling going around. But we kind of settled, I'd say, 3 or 4 large client disputes, some were I'd say our operational performance didn't hit the original contract terms in the quarter. We took charges of about $10 million to $12 million associated with 3 or 4 sort of older contracts.

I think, David, 2 things. Unfortunately we do have these kind of contracts when we have very complex transactions. But I think what we did in the quarter maybe to stand back and look at it in a bigger realm, so I think we used it to really get these behind us, number one. The same thing was true with the restructuring. We decided that the restructuring that we planned for 2012, we decided to accelerate to 2011 when we had the one gain. So we did some things in the fourth quarter to really set up the future. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Okay. Great. And then one last item here on China. Your business over there today is predominantly seats. What's the path in moving beyond that, interiors, electronics and metals, I would suspect, at some point?

Well, you're right. We are primarily seating there, but I think we're #2 or #3 in interiors and we have a substantial backlog of new interiors business. In fact, probably, a disproportionate amount of our growth is on the interiors side. In terms of electronics, we're just continuing to chip away. We were, if you sort of go back 1.5 years or so ago, we only had one electronics joint venture, and now we have 3. So it's just going to be a steady progress.

On the metals side, obviously some of the -- they use the Keiper recliner and some of their capabilities. Obviously they're designed more for the high end of the market, but there's a very good technical capability there to design a product which would be appropriate for the and fit the Chinese market, that's what we're working on. So I think you'll hear over the next couple of years, David, the fact that we're designing product specifically designed for the cost points that we need to hit in China.

The next question comes from Colin Rusch.

Can you talk about the opportunities that you have in South America for the Building Efficiency division? We are seeing some substantial population growth. And you mentioned expansion of commercial real estate capacity at the Analyst Day. Can you just talk about the magnitude of South America in those trends?

Right now, if you look at South America, what's for us is primarily Brazil. We've had a little bit of a tough 2011. Our business, we tend to have a lot of business in South America, associated with industrial refrigeration. So we sell to some of the large food processors, poultry and beef in particular, and that industry kind of got overbuilt a little bit. But as we go forward, we're kind of expecting pretty big things around some of the Olympics and the World Cup opportunities. We've booked a few large contracts, that were about 20 stadiums in terms of improving security, some of the security systems at those stadiums. So we're expecting a very strong growth in 2012 in Brazil particularly, for Building Efficiency.

Because [ph] of booking orders probably...

Right. Right. And the Olympics, Olympics, same thing on the Olympics.

And just a follow up on multiple device solutions for micro-hybrids as you move up the scale. Can you just refine a little bit on when you might look at implementing a 2-battery solution for micro-hybrids in either Europe or North America?

Colin, it's Glen here. I don't know that we've got, we can be that precise here because that's really going to be driven by the OE launch of next generation Start-Stop vehicles. So I guess until the customers start talking more publicly about when they're going to get to the high idle shutdowns and some other Gen 2, Start-Stop technologies, I don't know that we can be more precise than we've been. Other than it's not going to be in the next year or 2 where you see any sort of significant move. It's a little bit further out than that.

The next question comes from Ted Wheeler [ph].

Back on the reserve or the charge in performance contracting, now did that also increase reserves in that? I know you carry reserves against contracts. Did you increase your reserves as well or is this just a charge of $10 million to $12 million that flowed through?

These are charges, I'd say commercial settlements.

So there's no need to adjust because obviously you...

Ted, I should make sure there is no confusion. I can see where we could have created it. These had nothing to do with energy saving shortfalls. That should make that clear, okay? These are really, really beyond that. They're more complex.

Okay. And on the auto, North American auto margins, we have 7% first half and 3.5% second half. You talked about startup costs, I think a metals plant impacting the fourth quarter. Where will those fall as we go into this year and next? And what should we think about in terms of North American auto margins?

Well, I think at the Analyst Day, we were saying we felt that auto margins in North America will be fairly flat for 2012 on a year-over-year basis. Ted, I'm not sure your math was right. I mean maybe we could take that up after the fact in terms of your first half, second half. I know, for instance, here in the fourth quarter our margins are 4.2%. Timothy J. Denoyer - Wolfe Trahan & Co.: Right. Okay. So they're closer to 4%. I was kind of exaggerating.

Yes. I can't recall off the top of my head where we were in Q3, but also keep in mind, also we have the summer shut down in our fourth quarter as well. So we had a little of that pressure there. So I'm not so sure you can kind of put that as maybe you portrayed it in your introductory comments.

Well, I guess you're seeing modest improvements in volume, and I guess I was sort of thinking your margins might creep up. But anyway, flat is the prognosis for this year.

For 2012, yes.

I guess just one other, if I may. After the working capital fourth quarter, I know there were some one-timers, but could you scale the confidence in $900 million of free cash flow this year? I mean is that slipping a little bit as we kind of go into this year?

No. I think we feel very confident about that. In fact, I would hope that some of the fact that our sort of working capital levels are a little bit higher than we were hoping here as we ended 2011. That maybe gives us an opportunity to make some further improvements next year.

Ted, if I can just give you a little more color and the rest of the people on the call here about working capital. If you look at our -- the elements of working capital. I'm just going to use receivables. Receivables at the end of September, the day sales receivables were actually 2 days improved over where they were a year ago at this time. And I would tell you that our over 90-day past due is at the lowest level it's been in 4 years. So receivables are in pretty good shape. Where we fell short is in our payables. And again if I'm going to find some place where I've got an issue, I got to go attend to, that's one. The second thing is inventory. We still know we've got pockets of inventory in parts of our business we can improve. Some of that, unfortunately is inventory that's on the water to some big jobs in the Middle East. It's our inventory based in our Building Efficiency business in China. So we know where the pockets are. But I think that, I don't want to imply that what you're seeing is not so much a function of process breakdown as much as just there's some fundamental reasons why we have inventory on the water, et cetera, okay? But we know we have room to improve and will continue, but I think maybe the audience wouldn't assume that we had a receivable improvement of 2 days. The quality is so good.

The next question comes from Jeff Bencik.

I have 4 questions around one issue. In terms of the -- Bruce, if you can address the plant closing in China. What gives you the confidence that it will reopen in January? That's the first question. And then second question is, how many of your plants have been checked in approved? So that's not an issue or a risk going forward. The third question is how many of your competitors have been shut down? And then finally, does that benefit you in terms of pricing and share gains?

Yes. Let me take a shot at that. Steve, maybe can throw into it. So first of all, the actual specific reason our plant has been shut down is because we have an annual quota in terms of the amount of lead that we can process. And we have exceeded our quota. So that quota we expect will be renewed. We have no reason to believe it won't. And so as a result, we believe we'll be able to reopen our plant starting in January, albeit at a lower level of production than we were operating in the past. So that's kind of number one. And I guess I certainly wouldn't want to take away to be we are 100% confident because we're not. We're working with the authorities and that's our expectation but we're not 100% confident. Secondly...

I think maybe another way to add to it, Bruce, is that we're also developing contingency plans in case something happens where we can't. So that's really what we're focusing on right now.

Right. Your second question is about how many of our other plants has sort of been checked and approved? Well we only have one other plant that's open, and it's a totally different animal. The existing plant that we have was a plant that we acquired when we bought Delphi's battery business. So it tends to be in an urban area because the cities of Shanghai's kind of grown up around it. Our plant that we have just finished construction on is in a much more rural setting. We have a much more bigger land buffer like our other plants. It's all our equipment brand-new and it's operating at a level that's consistent with the environmental standards that we operate here in North America, which are a fraction of the level of the current Chinese regulation. So we feel pretty good about our plant there. We do have -- I mean that plant is operating and we expect it to ramp up production here as we go through the year. In terms of the overall environment, there's been several hundred battery manufacturers that have been closed. I don't know, I haven't gotten a mix of how many of those -- because not just automotive battery manufacturers. And in terms of the pricing environment, we do think there is an opportunity to increase prices because right now, there is a shortage in the market.

In fact, we have announced -- I'm not going describe the magnitude but we announced significant price increases on the China market in recognition of the demand and supply issue and the cost of supply. I think I would just again reiterate the way we operate our plants, I'm going to be a little defensive on this point, the way we operate our plants in China are the same way we operate around the world, in terms of our emissions and blood lead -- what's called blood lead levels in our workers, we monitor that very closely. So we're confident that our operations are operating in a safe fashion. And we do believe that long-term that's going to give us tremendous advantage because as we put on more and more capacity, I think the way we operate and how efficient we are is going lead to -- we'll be able to have an advantage.

The next question comes from Himanshu Patel. Himanshu Patel - JP Morgan Chase & Co, Research Division: Couple questions. First, just I wanted to go back to the Analyst Day. I think there was a chart on European auto margins for full-year 2012 being sort of in the high 4% range. And you're exiting last year at 3%. So can you just talk a little bit to the trajectory of how we kind of get to the kind of high 4% level for the full year because, I mean, it would sort of imply a 6% exit rate for this year. But is that lumpy or is it sort of linear?

I don't have in front of me the quarterly cadence. I do know that you should expect a significant improvement quarter-over-quarter. We don't jump up to that 6% or upper 4% level here in Q1.

First of all, the acquisitions we told are accretive [ph]. They're going to be help a to us, that's number one. Number two, the fourth quarter is a quarter that's impacted by the shut down period in the automotive industry in Europe. Those 2 I can think of and then just the fact that as we look at the year and our ability to shed those inefficiencies that we had throughout the year in terms of our operations, those 3 are pretty big factors, Himanshu. Himanshu Patel - JP Morgan Chase & Co, Research Division: Steve, I appreciate your comment on getting GWS to maybe a 2%, 3% margin business. I'm just wondering just more strategically, is there any room here to consider narrowing the focus of that business? I realize it's never really been a good consumer of capital, but it must be a pretty reasonable drag, use of management resources. I mean, it's 1/3 of the Building business. It seems like sometimes it's about half of the growth that the division puts out. I'm just wondering how are you thinking about this business over the next couple of years.

Couple things, Himanshu. The first thing is that need -- if you look at where the strength is in the markets that it serves, one of the obvious ones is it does a lot of work with the pharmaceutical industries. And what I'm trying to make sure is that we get to pull through from the rest of our operating units within control. That's the first thing. So we normally don't -- we don't see that and you don't see it in that business, but there is what's called a pull-through aspect that's important to us. Now having said that, I need to see more of it from our business, but I think pull through of our traditional business through the GWS contracts is critical, number one. Number two, there's probably some business that you can say we probably should just take on, on a management business. And what I mean by that, we typically take contracts as our customers ask us to take them based on a full scope, offering us what the RFPs came out with. But I'm wondering if we couldn't be a little more aggressive in terms of just getting a management fee. And while that would help margins, it would lower our growth rates. And that's why again we have to isolate the non-GWS business from the rest of the building. But I do think there's ways that we can leverage our procurement better than we are. We're putting in better information systems. I think there's a number of things that will give us operating efficiencies as we go forward. Himanshu Patel - JP Morgan Chase & Co, Research Division: Do you guys have any metrics that you could share, just on sort of where has that pull through been? I don't know how to think about it, but maybe for every dollar of GWS sales and converts stacks cents [ph] of pull through and kind of where you may want to get that to.

We have the information, but I really don't want -- I'd be hard-pressed completely to talk... Himanshu Patel - JP Morgan Chase & Co, Research Division: Okay. And then I just wanted to clarify, Bruce, I'm sorry if I misheard this, was there a comment earlier, did you say you were looking to do some SG&A reductions in the Building business?

Yes. That was the -- that's what the restructuring charges are mainly addressing. We're not re-footprinting or closing a plant -- it's SG&A reductions. They are really around...

Those were in the fourth quarter.

That we took. Himanshu Patel - JP Morgan Chase & Co, Research Division: Okay. I noticed orders in the Building business were up 10% in Europe. I was a little bit surprised to see that. Is that just a easy comp issue or are you guys seeing some strength there?

I mean, it's still not great. I mean, I'd say we've done a few things, launched new products for that market. To some extent, we do have some easier comps there. It's certainly not booming, but you know what, we'll take it.

It's a tough market yet. I would say that we've added some significant talent in that business in the last 12 months, and that I think is what's going to help drive our growth there.

The next question comes from Colin Langan.

Actually following up on the SG&A item. I mean that $40 million, what makes it one-time in nature? Because a lot of times, you actually kind of keep those in consolidated numbers.

Well we just call it out, just given the size of that, Colin. So I guess you could argue whether it should be in our output, but it's pulling forward stuff that we would've incurred over several quarters and we had some one-time, as Steve indicated, we had some one-time benefits, so we thought we'd go ahead and do it.

Colin, maybe to say it differently, these are things that are -- were our discussion. We didn't have to take these. We didn't have to take them in 2012. But we believe by initiating these actions, we actually get better cash flow in return for the future. But clearly within our discretion of timing and when.

Okay. And what kind of actions are they, these are headcount reductions or consolidation of facilities or these are headcounts?

There's a couple of branch closures here and there, some countries we're sort of scaling back. But largely, they're headcount-related reductions.

And therefore they have good near-term paybacks.

Okay. I noticed the equity income is quite strong this quarter. I mean is that a new run rate or is Q4, I think the last couple of years has been a stronger quarter for equity income? And how much of that help was Saft in the quarter? I guess that would've been a negative in the past. Is that now fully consolidated for the full quarter?

In the quarter, Colin, we bought Saft out on the September 30 or 29. So we have the equity losses from Saft flowing through the whole quarter of this year and whole quarter of last year. So that wasn't a year-over-year delta. The improvements really driven by the Chinese, our Chinese joint ventures in automotive. And you're right. We do tend to have a very strong fourth quarter. So you'll see our equity income be higher than last year as we get into 2012. But it's not going to keep up at this current level. We can't take Q4 x4.

On China, I mean, a lot of people are worried about that market slowing. What is your view of your profitably there? I mean, is it kind of at peak levels at this point or is there risk if that market slows down?

Clearly, they would be. But I think at this point in time, we'd have to say that we're using the best information we have. I think the auto industry assumption now is, I think, Bruce's 8% for next year. And that's, I think, fairly realistic. When I go over there and meet with the OEs, I think they believe that their lull is 8%. And I guess I look at longer term and this is a market which in my mind is going to be a $30 million market, whether it's in 2018, 2019 and that's really what we have to invest for. So I'm not concerned about the next 6 months. I'm more concerned about making sure we're ready to take advantage of the growth in that market for the rest of the decade.

Okay, Don. We need to cut it here at the top of the hour. So Steve, Bruce, thanks for participating this morning. Thanks, everybody, for calling in. Dave Urban and I will be available today and tomorrow and whenever if you need any follow up. Enjoy the rest of your day. Thank you.

This concludes today's conference call. You may disconnect at this time.