Johnson Controls International plc (JCI) Q3 2012 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. Now I will turn the meeting over to Vice President, Glen Ponczak. Sir, you may begin.

Thank you, Pat. Well, good morning, everyone and thank you for joining us. Before we begin in the call today, I'd like to remind you that Johnson Controls will make forward-looking statements in this presentation pertaining to its financial results for fiscal 2012 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 and include terms such as outlook, expectations, estimates and forecasts. For those statements, the company cautions that numerous important factors such as automotive vehicle production levels, mix and schedules, energy and commodity prices, the strength of the U.S. or other economies, currency exchange rates, cancellation of or changes to commercial contracts, changes in timing or levels of investments in 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 November 22, 2011, 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. In a few moments, I'll turn it over to Chairman and Chief Executive Officer, Steve Roell, who will give us an overview of the quarter and some of the market conditions. After that, Bruce McDonald, Executive Vice President and Chief Financial Officer, will do a more in-depth review of the business results and provide an overview of the financial performance in the quarter. That will be followed by questions and answers, and we will end at the top of the hour. And with that, I'll turn it over to Steve.

Okay. Well, thank you, Glen, and good morning, and thank you for joining us on the call. This morning, in our third fiscal quarter results, we reported that earnings were up 50%, record levels for the period. And I just want to start by expressing my appreciation to the JCI employees, that listen to this broadcast, for their contributions to our results. But I also want to quickly acknowledge that we fell short of the guidance that we provided on the call just 3 months ago, and we'll go through some of the details that led to that. But during the quarter, there were many times where we were confident in our ability to achieve that 20% growth that we projected. But ultimately, the slowdown in the European market and the escalation of lead cost in our Power Solutions business were just too much to overcome. Now, I guess, I would just as a comment here tell you that, that the shortfall from the guidance we provided to you, we could easily explain just by -- simply by the Power Solutions business shortfall in lead. And I'll explain to you what that is in just a second. If we look at the numbers, in terms of the results, sales of $10.6 billion were slightly higher than last year. If we adjust for foreign exchange, our growth was 7% year-over-year. As the slide indicates the impact from a standpoint of pure dollars was about $515 million just due to FX. Our segment income increased 14% to $615 million. That yielded net income of $466 million, a 15% increase. These are all non-GAAP numbers. We think these are the more accurate numbers to look at. EPS was $0.64 per share. You can see there how they compared to the $0.56 a year…

Okay. Thanks, Steve. Well, good morning. As you'll note in our press release, we did have a couple of nonoperational items this year and last year and I'll maybe just talk on those. So for this year, they netted to a charge of about $0.03. And as Steve indicated in his comments, some $52 million of restructuring charges. And we also had some nonrecurring tax benefits of $22 million, which reflect valuation allowance releases in certain foreign jurisdictions associated with improved levels of profitability. In the year-ago quarter, you'll recall we had a $0.04 charge associated with the acquisition of Keiper. And so as I really talk through the 3 business segment here, I'm going to exclude these items from my comments. So starting off with Building Efficiency. I'd say, overall, superb quarter here, especially when we look at the state of the major markets that they participate in. Sales were down 2%. If you back out foreign exchange, we are actually up about 1%. We saw good revenue growth in both GWS, which was up 7% in Asia, up 7%. Again, those numbers are without foreign exchange, although this was largely offset with softness in Latin America, Europe and the Middle East. In aggregate, if you look at our North American businesses, I mean, I'm talking about our systems and services business that focus on the nonresidential markets, we were down about 2% in the quarter. Residential was a bright spot for us. That's one of our higher-margin businesses. And you can see on our slide, we've talked about the fact that our revenue was up 24%. On a unit shipments basis, we're up about 20%. I guess, what I would note, if you look at the mix within our residential business, what you're seeing is the sales of…

Great. Pat, we're ready to take questions.

[Operator Instructions] Our first question comes from Chris Ceraso with Credit Suisse. Christopher J. Ceraso - Crédit Suisse AG, Research Division: A few items. I guess, first, on the battery business. Maybe we can talk about why you don't think these pressures continue past Q4. Do you have -- bought up all the cores that you need, or you're just expecting there'll be more cores available and therefore, the price comes down?

It's the latter. There'll be more cores. In fact, we expect there are going to be a lot of cores. That would be the normal situation. It's just a function that we have to go into production almost this early to be able to meet the demand. We level our production, and so we're actually at almost full production here from July through the end of the year just to be able to meet the stocking required by the aftermarket. And we think it'll be -- even though, like Bruce described, there's probably a little bit of a pent-up inventory at the aftermarket right now, it's not significant, and so we expect that because of the hot weather and what it’s doing to the chemistry in the batteries, which it destroys them. And maybe for those of you that are on the phone that don't know that industry, the shortest lives of batteries are in the high heat districts like Vegas and Phoenix. And so the hot heat we're seeing throughout the Midwest and the East and the South is, in fact, weakening the batteries or shortening the battery life. We expect there to be therefore a flood of cores by the fourth quarter. It shouldn't continue beyond that. This is just very unusual, Chris. Christopher J. Ceraso - Crédit Suisse AG, Research Division: It's somewhat contingent then on an increasing replacement demand, but you think with the heat that, that should happen.

Or just the normal seasonal pattern will do it, too, okay? Christopher J. Ceraso - Crédit Suisse AG, Research Division: Okay. And then also on the batteries, there was -- the weakness in volume overall outside of any kind of weather issues, was any of that attributable to price hikes that have been taken in that market?

No, I don't believe so. I don't sense that at all. Yes, it's pretty consistent amongst the -- if you sort of look at some of the competitors who have reported sort of similar numbers there. Christopher J. Ceraso - Crédit Suisse AG, Research Division: Okay. And I have a few questions on the pension. The guidance for Q4, that does not include the change to your pension accounting, right? That's just a pure change based on the fundamentals?

That's correct.

That's correct.

Nor does it incur any -- nor does our guidance include any restructuring.

Yes, just aberration.

Because we really haven't sized that yet, Chris. Christopher J. Ceraso - Crédit Suisse AG, Research Division: Right, okay. And then along the lines of derisking and changing the pension around, have you thought about offering buyouts or shifting to third-party annuities like we've seen from some of the OEMs?

We're looking at offering buyouts to deferred vested but that's probably something that we're maybe a year away from. Christopher J. Ceraso - Crédit Suisse AG, Research Division: Okay. And then just lastly, on Europe auto, can you maybe sketch out what the path is to improvement here? I mean, you had done these acquisitions and those were supposed to help the margins in Europe, and that hasn't happened. Has that been because the volume is low? Are you feeling, now that you've got more vertical integration, you're even more susceptible to volume? Maybe just help us understand what exactly is happening in Europe and how and when it gets better.

That's fair, Chris. Let me try to -- this is a question I expected from probably most people on the call here, so I want to take a minute to answer this question appropriately. First of all, let me dispel something. The performance that we have for the Keiper transaction is just exactly what we expected. It's contributing the way we thought. So it's not the Keiper. Issues that we're having are pretty well concentrated in 2 businesses, as we've described. It's the metal operation prior to the acquisition and the business that we're awarded under the old product schemes, okay? And interiors continues to be a drag. But let's talk about metals, which is the one that -- where we expected the biggest improvement and haven't been able to get there. We have 6 different operating, I'll call them, work streams that we're focused on where we've identified and have mapped, I'll call it that, use your comment, Chris, probably hundreds of millions of dollars in the next 18 months. And they had to do with improvement in operations; they had to do with purchasing; they had to do with commercial negotiations. And let me just go into some of how -- what they are in detail and then I'll come back and tell you why timing is an issue for us. There's some things we can get our hands on right away. There's some purchasing opportunities that we have around steel tubes, around motors that we can get our hands on in relatively quick timeframe, meaning over the next 12 months. There are commercial claim processes; there are change processes that we'll get over the long-term and the medium-term. There are some things that we know we're going to benefit from in 2013, such as lower launch cost,…

Brian Johnson with Barclays.

So just drilling down a little bit more into the European auto experience. It sounds like the improvement program is in metals. It's not in Hammerstein or Recaro, so it's in the existing metals business. To what extent though -- I guess, a couple of questions, a, is interior still a drag there? We've seen Visteon being unable to sell its business due to pressures in the European interiors markets. And then secondly, while you're reducing costs, the OEMs are, themselves, running into profit pressures. What's your confidence in being able to hold on to these cost reductions in light of pricing pressures and seating? And how are you thinking about that as part of the improvement plan?

Okay. Let me take a shot and I'll let Bruce come in also. I guess, if you go back to interiors, we still have plans that are a drag. We have product lines that are a drag, and we're actually looking at exiting some product categories, Brian. I think that the market conditions haven't changed. Interiors is a sector which has got overcapacity. And I think most players in that marketplace, whether it be Visteon or some of our other competitors, are -- it's not a new phenomena. The industry has been struggling for some time, okay? I believe that we've got Bill Jackson focused on that business, and that's where -- that's what he's focusing right now. We believe that we'll get some improvement because of that in terms of how we approach the OEs as a standalone business, okay? That's number one. In terms of your comment about the OEs, you're absolutely right. There is some additional pressure, and it's spotty. It's select OEs. We have turned back business where we weren't able to meet the cost reduction request that we were given. We continue to have a strong book of business. But I do think that our job is to protect that. We've been in investment, and it's our job to protect the investment and the margins that we acquired. And so from my perspective, the only way to do that is to be somewhat resistant on price reductions requests. And if that shrinks our business, so be it. I'm managing that business for returns right now.

What -- and just kind of within the quarter, given that production was only down 5%, it looks like your incremental margins were -- decremental margins were very high, x currency. So I see the improvement path. But what was sort of the step back vis-à-vis on a year-over-year or sequential basis in the business? Was it just volume, or were there other things that popped up?

Well, remember, too, Brian. In that European number, there's also the South America swing into a loss and...

Okay. So it's really the South, so that's part of that?

That's part of that, yes.

And is that an improvement plan there or is that just waiting for a better macro real?

No, it is an improvement plan we have to put in place. Bruce referenced that.

I mean, if you kind of look at the South America situation, I mean, it's, in many ways -- I mean, it's obviously, a lot smaller for us. I mean, just the size of South America piece within -- our business now is like 500 million to 600 million to on an annual basis. But if I look at kind of the market fundamentals, it's very tough. You've got -- markets have softened. Currencies have significantly weakened, and the auto industry there is often more susceptible to import components, imported components, which puts a lot of pressure. Labor inflation is extremely high and some of the government policies, particularly in Argentina is tough. And so I think as we are looking at what we can do to improve the situation down there, but we're in a pretty tough market right now, and that's not likely going to change in 2013. Now there are some things that we can do to improve our current position, but our outlook for 2013, is we will have a loss there. It will be smaller. We are going to take some actions, but we've got to ride that out.

Ravi Shanker with Morgan Stanley.

Steve, if I can ask you, why -- if you can give us any more color on why you delayed the Analyst Day. And if there are any particular milestones or data you're looking for that will help you kind of form your outlook for 2013, or is it more of just giving your restructuring and your operations a little more time to improve?

No, I think it's the former. I think, really, we're just trying to get a better sense for what kind of environment we're going to be operating in. I mean, the other thing we could have done is walk in and said listen, on these assumptions, this is what we think. We just think that we'll have a better chance to refine those assumptions. I think, in general, the investment community will have a better chance to also be focused on 2013. I truthfully think that we're concerned that oftentimes we go out and, really, I say people, there hasn't really been a strong focus on 2014 at that point in time because there's very few companies that have gone out and really talked about it. And so I think we just feel that we're better equipped to give you guidance for Q1 in the fall, talk about maybe some of the things we’re seeing and the assumptions that we're beginning to focus on for 2013, and then come back and give you better -- we just think we can provide better information. We certainly know last year that was the case. And last year, things were a lot more stable than they are today. But clearly, those 3 months would have been significant for us in terms of understanding what environment we are in.

Yes. I think, Ravi, if you look at the numbers right now between the contents board and the major banks, including your firm, I think what people have right now is GDP growth in North America next year of somewhere in the 1.5% to 2%. I think there's pretty tight cluster there. And those numbers are coming down. And on that basis, I think, we'd feel pretty good providing what we think is going to happen in our businesses. But if you then look at the -- between the sequestration-related spending cuts and the exploration of the Bush tax cuts, which are big items, and quantify those, those add up somewhere between 4%, 4.5% of GDP. So now that takes your 1.5%, to possibly minus 3%, and that's a very different economic picture here in North America. It’s unlikely we're going to know the answer to that between now and when our normal Analyst Day would have been, which is early October, but we just elected to push it back here a couple months.

Understood. Just looking at BE in the quarter, your margins were much better than we expected. Can you help quantify how much of that was some of the SG&A and cost initiatives that you had? And how much of that was driven by just the improvement in resi?

Yes, I would say if you kind of look at residential and last year, we -- within our Building Efficiency numbers, we had a large -- we had a onetime benefit in residential. We had a onetime hit in our Latin America business that's largely offset. But if I strip that out, and what you would see in the residential is we did see a nice pop-up in profitability, but the fact that the mix moved to a lower margin product, our profitability was little changed from an ROS point of view. So that really didn't drive it. The big area for us was in service. North America service, we saw a nice improvement in our profitability there. Sort of think about last year, it was kind of cool, especially in the early start of the cooling season. Really saw the benefit in margins there, which was labor utilization and the pricing improvements that we saw that came with the -- our IT investments in that business. That was the sort of biggest driver.

But, Ravi, I think the fact that all 5 segments were up in BE, we just explained to you, it really was broad-based.

Got it. And finally, Bruce, you pointed out that the FCF should be viewed x the pension contribution. Can you just help us with what cash flow will look like in the fourth quarter? You've had some pretty big cash-generating fourth quarters in the past. Is it going to be something similar, or do we expect something similar like...

No, no, we expect to see a very strong Q4. We aren't making any -- we're sort of done from a discretionary pension point of view. So we won't have anything there. As I said in my comments, our capital expenditure is going to be in the sort of $300 million range. That's a big reduction versus the run rate that we've had for the last 3 quarters, and it's a big improvement versus what we had in the fourth quarter of last year. We do have some -- expect our working capital levels are going to improve by a couple of hundred million, and we have a few sort of smaller non-core assets and properties that we're selling. So we expect pretty strong improvement in the fourth quarter.

Peter Nesvold with Jefferies. H. Peter Nesvold - Jefferies & Company, Inc., Research Division: So I just want to talk about the Power Solutions business for a minute. This is not an area where I'm an expert, but we've heard some channel perspective that believes that JCI's move towards vertical integration is actually helping to drive up lead prices, that a lot of the third-party smelters that you would have historically sold to are kind of out in the market, trying to secure lead and therefore, pushing that up. Do you think that's accurate? Is that part of what's happening here? And if that's true, why does it -- why would it reverse out so quickly?

No, that's not what's happening. And I think it's more a factor that the activity in retail, as I described, I think, is the bigger issue. The fact that they're just -- and we've talked that -- we've looked across 4 or 5 different aftermarket customers and it's the lack, of course, coming back. That's what's driving up the prices. We're not -- we haven't ramped up enough at this stage in our own internal smelting to really drive that up.

Rod Lache with Deutsche Bank.

This is Pat Nolan on for Rod. Can we just go back to Europe for a second? I know you talked about the metals business, but you also highlighted the new business launches from 2009 and 2010. Prior to this quarter, you were expecting that most -- the most difficult launches were largely behind you, and we were going to see the containment cost start to taper off. Is that not what occurred in the quarter? Can you help us frame what was the run rate of containment cost in the quarter versus where they had been running? Are the launches basically getting -- are the launches tracking worse than you expected?

No, I don't think launches are tracking any worse from what we expected. I think some of the containment costs that we had on the prior launches where we had expected to shed, we probably haven't shed those costs as quickly, Pat, okay? But there's nothing there to point to in the new launches, okay?

All right. I mean, can you give us any kind of framing of where your containment costs are tracking in the quarter?

Do we have that number, Bruce?

I don't. Yes, I don't have that handy. I mean, we can follow up with you, Pat, on that. As Steve said, it wasn't a down. It wasn't a variance, okay, versus what we thought. I mean, we -- like I said at the last call, we have 3 or 4 problematic launches. Those are flowing through as we expected. They were in mainly in the Europe side of our business versus the North America. You kind of saw in our North America numbers, we were kind of depressed last quarter and the quarter before because launches there, those snapped back, profitably snapped back there nicely. But maybe one other comment I'd add on Europe that we haven't talked about is, not a big issue for us, but it's something that we are worried about is the sort of distresses that we see in our supply base. And we do have some headwinds associated with that, and that's the area that as things -- if things deteriorate more there, it's going to become a bigger and bigger headwind for the industry, not just Johnson Controls.

Pat, just let me comment on, not to what you just said, Bruce, but I do think that, that one thing that we've really done well in the last 6 month is get our hands around our launches, in terms of our launch teams. I mean, I think we've staffed them adequately, I think we've got tremendous oversight, and they aren't as complex. I mean to be honest with you, there were some extremely complex launches and product configurations. So I feel better about what we used to describe. But to your point, Pat, I would hope to see some prior -- some better and faster improvements in our ability to reduce our containment cost. Our quality is good, and we're getting high marks from our customers on our quality. It's just a function we've got to shed some costs, okay.

And you -- prior to this quarter, you were expecting the European margins to get above 3% in Q4. Can you just give us an update on that? That seems like a pretty big bridge from the negative 1.5% to this quarter.

Yes, that's fair. That's fair. And I think if you look at and part of the reason why -- we're not going to hit the 3%. Part of the reason why I think we're -- we are more cautious, and I went back and tried to -- maybe actually quantify this. If we look at some of the delta in Q4, I would attribute as much as $0.03 to $0.04 to our -- or just our thoughts regarding commercial claim resolutions to this timeframe. One of the earlier questions from, I think was from Brian, had to do with OE resistance. And I don't think it’s resistance as much as they're just slow walk-in claims and things of that nature. And in the past, we would have always had a very strong fourth quarter in terms of claim resolution. I think we've had it baked into our forecast, but that's not going to happen, I'm sure. It could happen, but we've assumed that it does not. And that's our biggest delta in terms of our margin assumptions for Q4.

Got it. And just lastly on the lead impact, the $40 million you saw in Q3, is the inventory -- bigger build in Q4 bigger so that $40 million could be a bigger number?

No, it's going to be, I would say, in the $30 million to $40 million range.

Yes, it could be -- and it could be less because we think this thing could -- this thing should start to improve by September. October, November, December, it's real obvious if it's going to, okay? And, in fact, to some extent, we're surprised we're still seeing it in July.

Rich Kwas with Wells Fargo Securities.

Question, a broader question on Europe. IHS came out with their forecast the other day for calendar year to be down 6. I know there's a lot of skepticism out there regarding that number. It sounds like you’re a little skeptical on that. I know you're on a different fiscal year end. But, Steve, what are your thoughts there? Do you think there's a lot of downside risk to that forecast?

I think it's what we're trying to get our hands on, Rich, okay? I -- we've sort of been trying to revise our forecast as we get information from the marketplace, okay? So we're trying to watch our major exposure. We're broad-based with the German customers, along with Opel and Ford. As Bruce mentioned, we don’t have a lot of exposure to the French. But I think we're looking at the mix, trying to understand what's taking place. We're trying to guess what's happening in -- the fact that U.K. and Germany is holding up at that, they're still growing. We're still trying to figure out if that's going to continue. But my sense is that I'm more worried about the level of decline that could happen in the South. I think France is the one I'm most concerned about. I think Spain, we've already -- probably we're down there already. But I think Italy and France will be the 2 markets, Rich, that I'm most concerned about. I don't think I want to comment yet in terms of whether I agree with the minus 6, okay?

Okay, all right. And then on the Building Efficiency side, very good margin performance this quarter. It sounds like -- should we expect similar rate of improvement year-over-year for the fourth quarter?

At this point in time, I can -- best guess I can give you at this point in time is that they're going to improve at least 100 basis points in the market in Q4.

Okay. And then just looking at -- I know that we're going to be a few months away from getting an outlook for '13. But, Steve, the sustainability of this margin improvement, how comfortable are you with that, or is that kind of in flux right now as well?

You're talking about within Building Efficiency?

Yes, within Building Efficiency.

I think that's where we'd like to get a better handle on. I think -- let me go back. I think we have a very good handle on our cost structure as we go into 2013. The thing that's going to be important for us -- and I'm only going to give you leading indicators, okay? We would hope to come out of this quarter with our backlog up 6%, 7%, 8%, if not, more. That's the key, Rich. That's what I need to see. And probably the category that we need to see it in is in the what we would call the solutions business or performance contracting. It's something that's lagged the last 4 or 5 months for us. The data we have from our field is saying that they expect that to recover here in Q4. That's the one we're watching. That will be the key, whether we're up 4% or whether we're up 8%, 9%, that then will dictate whether we get the margin right next year, okay?

So, Rich, one -- maybe just a little bit more there. Just -- I would just keep in mind, when we went into this year, what we talked about for building efficiencies about 50 basis points of margin expansion. And we -- if you look at where we were in Q1 and 2, we were sort of flattish or down slightly. And we talked about the fact that we are fronting some of our investments in like Panoptix and things like that. So we're pretty comfortable with our outlook here for the fourth quarter that will be -- will get that 50 basis points and maybe another 10 or 20. But the path for improvement for building efficiency because so many of our investments are in SG&A, that glide path, we're not backing away from. So we're not going to be up 120 basis points next year. It's going to be that 50 to 60 basis points. That's our trend line.

Okay, understood. And then last one from me on FX. Are you assuming current trends – current conversion rates in the guidance for fourth quarter?

Yes. We use 122 here for the fourth quarter.

Sanjay Shrestha with Lazard Capital.

First question is on the Building Efficiency side. So this is a very impressive improvement on the GWS side. Was there anything onetime in the quarter here, or what kind of lead to that 86% improvement in the operating margin there?

Yes, I know there isn't anything of a non-recurring nature there. I mean, I would -- it is a big improvement, but I would still temper that with the fact that if you look at the absolute margin level in GWS, it's still below where we'd like to see. So it's bounced back strongly, but it's still not in that -- in the sort of 2.5% to 3% range that we expect.

I guess I would just make a statement in general though about Building Efficiency. There really were no unusual items this quarter. This was one of the cleanest quarters. The quality of that earnings is very, very strong.

Okay, okay. That's great. And one quick follow-up then, guys. So when we think about your Power Solutions, right, clearly, lead price is sort of what it is, and you guys are saying it's going go away, hopefully, by one quarter. Now as we think 12 months out, right, so with this incremental benefit from lower prices, how do you think about how that business grows when the aftermarket comes back? And where does the margin go because all the drag is sort of now going to be behind you guys after a quarter. How should we think about that business in 12 months out?

Yes, let me start, and then Bruce, you jump in, okay? I guess twofold. Let me explain volumes first. Whenever we've seen the type of January through March period where we had depressed volumes due to weather, typically, it has continued slightly depressed again in the quarter that we're in today and then up, and then it pops in the fourth quarter. That's going to be interesting to see if that happens. So -- but regardless, this is going to normalize. It always has. And so I hate to talk about weather extremes, but we do expect a very, very strong fiscal 2013, start in terms of volumes. That's number one. Number two, in margins, we've guided higher margins partially because of some things we've done. We've invested in vertical integration, and that's a big one for us. We also have, we believe, some improvements that we'll have from some cost that we incurred last year in China that will be year-over-year. So as we think of 2013, we expect the margins to improve in power, primarily because of higher volumes, better utilization, vertical integration and then avoidance of the Chinese year-over-year softness, okay, that we had and cost that we incurred last year.

Joseph Spak with RBC Capital Markets.

Just to quickly follow-up on Power Solutions, and I'm glad you mentioned China. I know that -- I think the plant partially reopened. So I'm just trying to think a little bit of margin trajectory in the fourth quarter from the third quarter and the different headwinds. Clearly, the lead issue still -- lead is still is an issue. But shouldn't the pricing come up a little bit and then also some more cost savings from China. So do those totally offset, or is it still a net negative headwind from lead?

I guess, we will see the negative headwind, but when you look at the year-over-year delta, so we do expect to see some margin expansion here in the fourth quarter in power. I wouldn't say that China would be a big part of that. But the biggest issue is going to be the pricing. We did announce pricing here in the current quarter that we're in, some of it went in, in May; some of it went in June. So if you just look at the benefit that we get -- in the fourth quarter where we’ll get and we have it implemented across-the-board. So we get the whole benefit here in the fourth quarter; that is going to enable us to offset some of the headwinds that you're referring to and we’ll get back to that path of margin expansion here in the fourth quarter.

Okay. And then just to be -- the $40 million headwind this quarter, I mean, it was -- is the majority of that because you were ramping up South Carolina? Like had you already been ramped up...

No. None of it was.

That South Carolina ramp up really starts -- is a Q4 issue, not a Q -- and so if you think about that, say, $40 million we talked about in lead in Q3. In Q4, we said $30 million to $40 million. You probably should think about 1/3 of that is going to be because we ramp up the new facility, and 2/3 of it will be the high cost of cores.

Can you talk about what your, I guess, internally-sourced lead goes from to once that facility is fully ramped up?

Well, it's -- the recycling centers are -- roughly speaking, give us a benefit of about $50 million a year at current lead levels. So that's kind of the delta that we'll get from South Carolina.

But Glen, I think we have all our smelters up. What is our internal source of our leads right now?

50% of our…

…is there, okay? That's probably from what it was 2 years ago. 15% before we built the 2 smelters, okay?

So we're going to have to cut it off there, Steve. Final comments?

Sure. Yes, just a couple quick ones here. I -- first of all, we apologize for the fourth quarter results that we're projecting here, okay? We, hope we have conservatism built into them but believe me, our people are -- have not given up. We will do everything we can to deliver results on the fourth quarter. We're focused on fiscal 2013 where we feel our fundaments are good. We're just trying to understand the macroenvironment that we're operating in. Don't read any more into the delay in the Analyst Day than the fact we want to provide you the best information we possibly can. We'll do what we can in the call at the end of Q4 to sort of tell you what we see in the environment, how we're thinking, and give you some of -- maybe some of the assumptions that we're thinking about on a preliminary basis. So we'll try to give you at least the stage setting for what we see, okay? So, again, thank you very much for the call and again, we feel very good about our long-term fundamentals, and we're just frustrated by the near-term as you are, and we apologize for that. Thank you.

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