Johnson Controls International plc (JCI) Q1 2013 Earnings Report, Transcript and Summary

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

Well, thank you, Mary Ann. Good morning, everybody. Thanks for joining us. Before we start here, I'd like to remind you of our forward-looking statement comments. We will make statements in this presentation that are forward-looking and therefore, are subject to risks and uncertainties. All statements in this presentation other than statements of historical fact are statements that are or could be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In this presentation, statements regarding future financial position, sales, costs, earnings, cash flows, other measures of results of operations, capital expenditures or debt levels and plans, objectives, outlook, targets guidance and goals are forward-looking statements. Words such as may, will, expect, intend, estimate, anticipate, believe, should, forecast, project or plan, or terms of similar meaning are also generally intended to identify forward-looking statements. Johnson Controls cautions that these statements are subject to numerous important risks, uncertainties, assumptions and other factors some of which are beyond the company's control that could cause Johnson Controls' actual results to differ materially from those expressed or implied by such forward-looking statements. These factors include the strength of the U.S. or other economies, automotive vehicle production levels, mix and schedules, energy and commodity prices, availability of raw materials and component products, currency exchange rates and cancellation of or changes to commercial contracts, as well as other factors discussed in Item 1A of Part 1 of Johnson Controls' most recent Annual Report on Form 10-K for the year ended September 30, 2012, and Johnson Controls' subsequent quarterly reports on Form 10-Q. Shareholders, potential investors and others should consider this factors in evaluating the forward-looking statements and should not place undue reliance on such statements. The forward-looking statements included in this document are only made as of the date of this presentation and Johnson Controls assumes no obligation and disclaims any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this document. Talk a little about agenda here before we get started. Steve will give us an overview of the quarter and some market highlights as well. Then Bruce McDonald, our Executive Vice President and Chief Financial Officer, will talk more specifically about business results and the financial review. And we just talked to you a month ago, today, actually in New York at our Analyst Day, so our presentation here at the beginning is a little abridged from what we normally do by maybe slide or so, so that will be a little shorter. We'll keep the same amount of time that we normally do for questions and answers, but we expect to end the call about quarter of the hour. And with that, we'll turn it over to Steve.

Okay, thank you, Glen. Good morning, and thank you for joining us. As Glen mentioned, I'm just going to make some very general comments about the macro environment that we had in our first fiscal quarter. If we look at automotive production in North America, I think most of you are well aware of the fact that it was a strong North American quarter for the industry, with production up 11%. And production continued to inch higher in China, where it was up 3%. The biggest issue we have is what we talked to you about at the Analyst Meeting, which is the softness in Europe. And in the quarter itself, the European production was down 9% year-over-year. And of course, there was also some softness in South America. In terms of the -- I hate to be a meteorologist, but talking about winter weather as we -- in the battery side, what we saw was the warm weather really didn't impact our service [ph] until probably late December, where the stocking period was complete, and there was no additional stocking because of the warm temperatures. As you're well aware, in the early part of January, again, temperatures were generally warmer throughout the country. It's just been very recently that we've seen the downturn in terms of the cold weather. And of course, we're seeing -- we expect to see some significant weather changes next week with severe cold. So that will help us. Right now, the stocking level at the distribution is a little higher than we would expect, but more towards normal periods -- than normal levels than not. And what we would expect is that given the weather that's coming, we would expect that we would not experience what we did a year ago, which was the mild weather continuing all the way through the January-February timeframe. That bodes well for us because that says that as we go to the second half, we'll see a more normal stocking period. We wont have the core issue that we experienced a year ago. In terms of the HVAC and controls business, there clearly are lower U.S. and European commercial shipments. Demand is soft in both of those markets. China still remains positive. We see good signs from China. It was a market that we had some concerns about coming into the fiscal year. But right now, the order rate and activity we see continues to be positive in China. There's a comment in the slide that we sent to you regarding November ABI being up. But probably the one I should highlight most is McGraw-Hill, who came out most recently and is still forecasting softness in both equipment and the controls market for calendar 2013. So that's still a concern to us, and we see that in our activity. Our backlogs are very comparable with what they were a year ago. Our -- we have mixed results in terms of our -- at this time in terms of our pipelines. We see some softness in systems. We see some strength in solutions, so it's a mixed bag at this stage. And of course, we're watching the consumer confidence indices just to see what's happening. And of course, they're mixed right now across various geographies. Turning to the absolute quarter. Sales of $10.4 billion were comparable to the quarter a year ago. Segment income was down from $621 million a year ago to $541 million. These numbers are consistent with the guidance that we provided to you at the end of our first quarter call -- excuse me, our year-end call back in October. We had guided to the range that we had performed, and we had fairly good visibility as to what was going to take place at that time. Net income and EPS then of course followed the shortfall in net income, where -- in segment income, where net income was down from $424 million to $354 million and EPS went from $0.62 down to $0.52. But again, they were consistent with what we expected when we guided -- gave you guidance back in October. In terms of our second quarter outlook, we're now providing guidance that says that EPS will be between $0.40 and $0.42. Let me tell you some of the things we highlight here is that Western European auto production will be down 14%, just to give you some sense for what we see. That -- second -- and the second half of the year is expected to turnaround, where it's expected to be down only 3% and 1%. But nevertheless, we have a real trough here in production in Q2, our fiscal Q2. The same can be said about North American build. Right now, the North American build is expected to be down 2% in the quarter that we're in. But in the Q3 and Q4 of our fiscal year, it's expected to be up 5% and 7%, respectively. So as you start to think through the cadence of our quarterly earnings, the European and North American auto production is 1 of 5 key elements that really will help drive that delta, okay? We also just highlight here briefly that some of the restructuring costs that we incurred, particularly the nonqualified, are going to be in Q2, and we do have significant launch activity as well in the quarter. We continue to look at the full year and feel good about our -- the guidance that we provided to you when we met in December. And we're still projecting that segment income will be up 10%, and that the EPS range will be between $2.60 and $2.70. We're reaffirming that -- reconfirming that guide to you today. So with that, I'm going to let Bruce go through the business segments, and we'll come back and open it up for questions. Bruce?

Thanks, Steve, and good morning, everybody. Starting off with Building Efficiency here on Slide #6. We had a good financial quarter for Building Efficiency. So if you think about the last 3 or 4 quarters, we're sort of on a trend here of seeing relatively soft top line growth, but a very healthy expansion in our margins. And we saw that again here in this quarter here. So if you look at the overall numbers, as we highlight here, our sales were flat at about $3.5 billion. Foreign exchange really for Building Efficiency wasn't a factor here in the quarter. So generally speaking, a fairly flat quarter. If you look at that geographically, Asia was up 7%; GWS, Global Workplace Solutions business was up 4%, though this was offset really with softness in Latin America, Europe being the sort of 2 biggest markets that were down. If you look at North America, we're down about 7%, and we continue to see softness in discretionary project work and delays in booking new solutions business. Just commenting on residential, which flows up within one of our subsegments here, in the quarter, we are benefiting from the upturn in that market. Our revenue was up 16% and unit shipments were up about 9% in the quarter. So we are seeing the uptick that the players are seeing on the residential side of the market. Looking at our orders and backlog, as Steve indicated, our backlog was flat at about $5.1 billion. If you look at our order intake in the quarter, it was down 9%. Again, a mixed bag geographically here. Asia kind of led the way. It was up 12%. So we continue to see good growth there in Asia. In fact, we're seeing that sort of accelerating. In the Middle East, which tends to be fairly lumpy, we're down about 8%. In North America, we are down 16%, with both systems and solutions being down double-digit. Although I would note that if you look at our service business, it was down only 1%. So we're starting to see some signs of improvement in the order intake in our service business. And I'd just kind of remind folks that that's one of our highest margin businesses, and for a long time now, we've been talking about delays in discretionary project work, so that's an encouraging sign. Elsewhere, geographically, Europe and Latin America were down 13% and 15%, respectively. If you look at the segment income, 19% growth to $172 million here in the quarter. If you look at the margins in Building Efficiency, we had an 80 basis point improvement, up to 4.9%. The sort of main drivers, I guess, would be twofold. It'd be, one, the benefit of the pricing initiatives and some of the cost reduction and restructuring activities that we're starting to deliver impacts the bottom line here. I'd also note that we did have some favorable commercial settlements on some of our contracts in the quarter. Turning to automotive on Slide 7. I guess our automotive business overall, we came -- it came in a little bit softer than our expectations, really driven by Europe. If you look at the sort of drivers there, it's really delays in flexing out our direct labor workforce. I'll talk a little bit more about that later on. From a sales perspective, you can see we were down about 1%. Because a large portion of our business is based in Europe, the euro in the quarter was about $1.30 versus $1.35 last year. So on an exchange adjust basis, we were up about 1% overall. If you look at that by product lines, Seating sales were up about 2%, again, adjusted for inflation. Interiors was sort of flat. And Electronics, which is the most heavily exposed to Europe, we were down about 5%. In terms of China, we sort of made it -- one of our takes here commenting on the momentum that we're seeing in China. Really terrific quarter over there. You can see that our sales, which mostly come through nonconsolidated joint ventures, were up about 21% in the quarter, up to $1.4 billion. So we're pleased to see that. And that really is in comparison to passenger car production in China being up about 3%. If you look at segment income, down -- roughly half of what it was a year ago at $101 million. Steve touched on some of the factors, but maybe a little bit more color here, higher engineering and product launch costs and operational efficiencies. If we look at Europe, we continue to see near term profitability pressures as we face delays in flexing out our labor. So you look at our results here in Europe, they're kind of flowing through as we expected. We talked about the -- having about $0.08 to $0.10 of non-qualifying restructuring cost. Those primarily fall us -- for us in the second quarter. It's probably $0.02 or $0.03 in this quarter and $0.06 or $0.07 in Q2. We didn't expect that we would be able to execute some of our social plans and things like that in the first quarter. That sort of falls here in the second quarter. So if you think about auto, what you're kind of seeing here is a little bit of labor inefficiency in the first quarter as we wait for our social plans to get approved. In the second quarter, we'll see less of that. It will be done by the end of the quarter, but we will have the substantial -- the bulk of the non-qualifying costs flowing through in the second quarter, and hence, the weakness of our second quarter outlook for automotive. If you look at the business by product line, we did well in Interiors. We started seeing the benefit of some of our cost reductions. We've lowered our losses. But nevertheless, if you look at our overall margins, they're at 1.9%, about half of what they were a year ago. Geographically, I mean, we're sort of phasing that out, but just to provide some color there, we saw good improvement in our underlying profitability in both North America and Asia. Those were both higher on a year-over-year basis. Europe continues to be the challenge. Our margins in Europe were about negative 4.5%. In terms of Power Solutions, on Slide #8, you can see our sales were up about 4%. If we adjust for foreign exchange and lead differentials, our underlying revenues were up about 7%. OE volumes were up 9% and aftermarket volumes were up about about 1%. And as Steve indicated, if we just look at the North American aftermarket, which is our biggest sector, in the quarter, unit volume shipments were down about 4%. And as Steve mentioned, we were up year-over-year in October and November. We really saw it drop-off in December. From a bottom line perspective, you can see we're down about 3% versus last year, but a very strong quarter with margins of 16%. We're really benefiting from the volumes. The benefit of our vertical integration, in particular the Florence, South Carolina starting to come online here in the quarter as we expected an improved pricing that we took last year. So that's sort of flowing through as a benefit on a year-over-year basis. And then the only comment I'd make maybe here is if you looked back at our slides from last year, we did have a nonrecurring equity gain in 2012. That obviously makes for the year-over-year comparables a little bit difficult. Just turning to the financials on Slide #9. As we talked about earlier, revenues coming in at 10.4% (sic) [$10.4 billion], a 1% increase adjusted for FX. If you look at the gross margin, you'll see we're down about 20 basis points on a year-over-year basis. We saw margin expansion in Building Efficiency, and that was really offset by the lower gross margins that we saw in automotive business in Europe. You can see SG&A, a small increase on a year-over-year basis. If you look at it as a percentage of sales, it's up about 20 basis points to 10.1%. All that increase is really investments that we're making in innovation and new products and our emerging market infrastructure. Equity income at $85 million. You can see is sort of down versus last year. That whole delta is really attributable to the slightly higher investments in some of our joint ventures and then that onetime gain in Power Solutions that I referred to earlier. Then lastly on Slide #10 here, just going through the net financing charges, up about $61 million. That's kind of the run rate that we've been operating over the last 3 or 4 quarter -- or 2 or 3 quarters, I'm sorry. It's up versus last year. If you recall, we did a bond issuance in Q1 of last year, and so you just sort of see in the -- us terming out some of our debt. So we have slightly higher financing costs, those generally in line with the guidance that we provided at the beginning of the year. In terms of our tax rate, we had a clean quarter, 20%, which is the same level as last year. You can see income attributable to noncontrolling interest, down about 5%. And that really reflects the buyout of one of our minority partners in our plastic joint venture here in North America. And then lastly, you can see our earnings per share at $0.52 were down about $0.10 from last year which really attributable to the shortfall in the segment income. So with that, I think we'll open it up for questions.

Yes, Mary Ann, we're ready to take questions.

[Operator Instructions] Our first question comes from Rod Lache of Deutsche Bank.

A couple of questions. Just hoping you can maybe give us a little bit more granularity on that bridge in the Automotive Experience segment, EBIT going from $200 million to $100 million. I think based on what you said for the non-qualifying expense, that was probably a $20 million headwind, and I would imagine that you had a couple million dollars of headwind from FX, but you mentioned that your organic revenue was up. So can you just help fill in some of the blanks there on what actually is continuing to drive that on a year-over-year basis?

Yes, I mean, I'm not going to get into the -- like all the detail there, but I mean, I'll tell you what kind of the headlines are here, Rod, is -- we definitely seeing some margin pressure. So if you -- when I talk about our gross margin on a company basis being down, that was really driven by the auto Europe side of the business. And really what we've got there, as I'm sure you know, in Europe, we just can't take out the labor as quick as we can in North America because we have to go through a consultation with our -- with the various works councils and get sort of those signed off. So those are all progressing as we expected, but what you end up getting is the incremental labor flowing through until you can get it out. So that's quite a significant headwind there, if you put it in the context of our volumes being down 10%. And then, we always talk about, in the first quarter of our calendar year tends to be Q4 of our customers' year end, and so we typically have lumpiness in terms of commercial settlements that we are paying or getting from our customers, and those were -- from a year-over-year basis, those were adverse to us. So those would be the sort of line items.

Rod, if I had to just -- see if I can help Bruce a little bit, too. I think if I had to box things for you, I would say -- and this isn't going to total 100%, but about 40% of our issue is operational, but it's not operational in the sense that how we run our plants. In some cases, we're making line moves. We're shipping production to different locations. We're doing a lot more of that to get our efficiencies up. That cost hit us in the quarter. Probably 25% of our issue is commercial, as Bruce described, and probably 20% is volume. So again, we still have the ability, as we've come throughout the year, to improve our results in this group, primarily by addressing some of the operational costs we're incurring.

Okay, and on Building Efficiency, how material was that contract gain? It sounded like you had something that was nonrecurring in there?

Yes, there's about 3 or 4, Rod. So when actually in our K -- in our Q, sorry, when you sort of see the pieces, there's some lumpiness in there. But the net impact is about $10 million.

All right. And then the decline in orders that you're seeing in Building Efficiency, does that not -- you're still working off of your backlog that you were reporting at year end, I would imagine here. Does that sort of manifests itself in 6 to 9 months? Is that when we start to see some of that play out?

Yes, a little bit. I guess, maybe one thing to maybe make you folks feel a little bit better about that is that if you actually look at the solution -- Steve sort of talked about solutions a little bit in his comments. But if you actually looked at our order intake in solution, that's really what's driving the bulk of the decrease. It was down by over 40%. Those projects tend to be very -- we got a lot of big ones that we're working on, and they tend to revenue fairly slowly. So I wouldn't get overly concerned about the orders being down 9%, so we've got kind of a big problem coming at us in, say, Q3 and Q4.

I would agree.

Our next question is from Ravi Shanker of Morgan Stanley.

Steve, did the $0.93 that you're expected to earn the first half, is that in line with where you were thinking at the end of last year or has it got a little bit more second half-weighted in terms of earnings?

Well, I'll take that one, Ravi. Bruce here. I would tell you, if you sort of look at our plan here, Q1 we came in a couple of cents better than we were expecting. And if you kind of look and say, "What really drove that," I would tell you that the -- our revenues came in a little bit stronger than we thought. In the second quarter here, if you look at our outlook, it's probably $0.03 or $0.04 sort of weaker than we thought. And that would really be around the delays in flexing out the labor. So generally speaking, I mean, we did provide guidance that Q1 and Q2 would be down significantly. Maybe we could have done a better jobs, because I -- because if you sort of look at what the analyst models were for Q1, it wasn't too far off our internal plan. But for Q2, folks were down high single-digit, and I guess I wouldn't think that's significant.

Ravi, I guess the other -- maybe I think that maybe is confusing people, even those that were at the auto show this week. If you would ask the analysts, I think, what they're seeing for European volumes, production volumes in 2013, I think the numbers were like 2%, 3%, 4% down, and that's true for the calendar year. But that's not true for our fiscal year, because if you look at how it -- the cadence -- Q4 is expected to be up considerably as -- the projection is part of the IHS model as we look at 2013. If you just look at our fiscal year using the same IHS model, it's not down 2%, it's down 7% to 8%. And so I think some of our numbers or maybe the cadence is being confused by calendar year versus fiscal year. But as I mentioned in my opening comments, if you just look at the fact that North American production is going to be down in Q2, it's the only quarter that's down after being up 11%, and then going up 5% and 7%. And then European volume is expected to be off as severe as they are, it really is a trough. And I'm not sure that the models got -- reflect that kind of a downturn, okay?

That make sense. A quick follow-up to that, is there any risk that the restructuring plans in Europe get delayed beyond 2Q in terms of getting those permissions?

No, no. There is just like a -- there's like normal 90-day type consultation periods. There's nothing -- we aren't -- if you think about it, Ravi, we're not out doing something that everyone else in our industry is doing as well. So it's not that we're an outlier there. I mean, it's generally pretty well known that our customers are cutting down volumes. It's being somewhat erratic the way it's being done right now. But we're not an outlier, and we've been very successful in the past. And if you look at the scale of what we're doing versus what we've done before, we really don't have any reason to believe it should be problematic.

Our next question comes from Tim Denoyer of Wolfe Trahan. Timothy J. Denoyer - Wolfe Trahan & Co.: A couple of questions on Power Solutions. I guess in the outlook for the fiscal second quarter, are you expecting margins on a year-over-year basis to be down? It seems like to get down to $0.42, that's essentially what we have to assume. And I realize there's a tough comp year-over-year in the first quarter, but can you give a sense of why that might be?

Tim, well, first we haven't said anything about margins, but let me just make sure we understand the seasonality of our business. Volumes drop off from Power Solutions as a normal period. We're through the stocking period of October, November to midway December. So our volumes drop off at Power Solutions. I don't know of any reason why our margins drop off, okay? Timothy J. Denoyer - Wolfe Trahan & Co.: No, I'm just saying in terms of year-over-year margins?

I think -- I don't have the numbers in front of me, Tim, but I do think that we -- if you take out the impact of foreign exchange and [indiscernible] of the year, okay, we're looking at Power Solutions' margins being up about 50 or 60 basis points, okay? If you think about really where that -- what's driving that, it is really going to be -- one of the biggest -- it's sort of 2 big drivers. It'd be, one, the savings that we'll make from the increased recycling in Florence. And then you'll recall, in the back half of last year, we talked about having about $40 million or $50 million of headwind as we built up our lead core inventory as a one, sort of like a nonrecurring onetime hit that we took and that sort of goes away. So most of the power -- I mean if we look back to last year, Power Solutions had a great Q1 and Q2, exceptionally high margins that were -- are tough comps on this thing for us. And the real drivers of the year-over-year improvement are coming in the back half of the year.

Right. From an absolute standpoint, the only thing that we have to watch, too, is that lead price. We always look at our data without lead, without FX. Lead prices have skewed up, so we have to definitely watch that, but we normalize that in our -- in how we look at our data. Timothy J. Denoyer - Wolfe Trahan & Co.: Sure, understood. And in terms of -- I think you may have touched on this in your opening comments, but in terms of the supply of cores, given the mild weather, is there a risk that the smelters may be a little bit underutilized over the next couple of quarters? How do you see the inventory right now?

I guess -- and Tim, I guess I'm trying to project here, okay? But I mean, I think that what we're seeing is a -- we expect to see demand pick up. The cold weather should help us out here, the severe cold that's going to hit next week and this week so. And the rest of the country, I mean, what's happening now in Alabama, what we're seeing in California. So we expect to see the core issue not being an issue. We don't expect that right now.

And I think, Tim, some of our competitors have made very similar comments. So our core inventories, we're starting to see them pick up here in the quarter, a noticeable improvement. I know one of our competitors made similar type comments, so that -- I think it's low risk.

Our next question comes from Brian Johnson of Barclays.

Just want to, I guess, drill down further on Automotive Experience. I guess a couple of questions. You seem to be a little bit below the IHS-CSM consensus. It happened to be where we are. Are you seeing anything in production schedules or kind of where inventories came out of calendar 4Q that lead you to be a bit more conservative in calendar 1Q?

Which -- are you talking about Europe or North America?

Yes, Western Europe, or European auto production. And also the broader Europe picture when you include Eastern Europe and Russia, which are a bit healthier, right?

Yes, yes, well, I would -- if you sort of look at the -- we're basically using IHS, Brian. So if I just...

Okay. So this is -- right. That's because you're doing Western?

Yes, so we're looking at Western Europe being down about 14%, and I guess if you said East, which is around -- which is like 3.1 million, and that compares to 3.57 million last year. And Eastern Europe, it's down about 3%, about 1.7 million to just above 1.6 million. We -- those are sort of the industry numbers. And like I said in my comments, we've tended to see the volumes come in a little bit better than the overall industry when you're looking at year-over-year. And the factors are really, we are underexposed to the French and Fiat, we were [ph] less than -- less exposure to those customers, and they've tended to trail the market. And on the higher-end vehicles that are -- like the, let's say the BMW and Mercedes in particular, where they're manufactured in Germany, and I know there is some softness in exports to Asia, but less so to North America, but those have a lot more content, and we sort of benefit from that. So in Q1, that -- and even all of last year, that sort of made it a little bit better than the industry for us.

And then my second question is -- and it's similar to the operational walk question, which I guess we have to wait to Q4. But if you separate the operational issues into the flex time and just appropriate staffing for the level of build versus the operational issues we've been talking about most of the last fiscal year around the metals businesses and the inefficiencies in the yields, what kind of progress, if any, has been made on those issues? What's the year-over-year improvement there? And then what's the cadence of that through the year?

We haven't really described that magnitude, okay? I think, although the only thing I've alluded to, Brian, so far is the fact that, if you recall the STEP program that Beda referred to relative to the metals operations specifically, we expect to see a couple of hundred million dollar year-over-year comparison for the full year, okay? It does play -- it does pick up, as you would imagine, throughout the year, so it's a cadence that improves as we go through the second, third and fourth quarters. And we do see that happening, okay? I think the -- sometimes, I'm a little bit fearful that we put too much weight in terms of some of the operational experience, and then everybody thinks they have to do with machine utilization and scrap and things of that nature. In many cases, it's really our decisions to relocate equipment to the east and to move lines and actually incur those costs. They're not surprises to us. They're costs that we're accruing to help benefit future productivity. What I do see is in terms of our launch efficiencies, we get a scorecard that looks -- allows us to look at every single launch. And let's say that we've got -- pick a number, 80 new launches that are coming up in -- that are significant, and we color code those. And 2 of those are red right now, out of the whole group. So we feel very good about how -- what our cadence is in terms of our readiness for launch. The fact that we shouldn't incur a lot of issues, and we're not. We're still ensuring that we deliver the quality to our customers, and that's our -- still our biggest objective as we go through this. We're not -- we're seeing a significant decline in our premium freight, where we had to incur cost to maintain delivery levels. That struck off significantly. So the cadence isn't -- I guess the improvement is not at the level that we'd like to have, but nevertheless, it's at a fairly substantial improvement year-over-year. And we expect to see that continue in the third and fourth quarter. That's one of -- that's again one of the key second half versus first half stories.

Our next question is from David Leiker of Baird. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Can you talk in the Building Efficiency business a little bit about the color in the pipeline, and where you get a request for a proposal to -- actually goes in your backlog and what you're seeing there, what kind of dynamics you're seeing there?

David, I'm not sure -- you're talking about the time dimension, or... David Leiker - Robert W. Baird & Co. Incorporated, Research Division: The pace of order activity, booking activity across that pipeline, across the different -- you track it at 7 or 8 different spots between...

Yes, I'm sorry. So maybe let me just talk about the pipeline itself, okay? We have a tendency to look at it 2 ways. I look at it from a vertical market perspective. So I can look to say -- and that's probably more important to me David, to be honest, than anything else in terms of what's strong and what's not. Let me go back to give you some backdrop. If you look at the data from McGraw-Hill, it was sort of interesting to me in terms of the projections I gave you earlier regarding equipment and controls. And in general, let me just tell you what they're saying. They're expecting about a 7% drop in equipment shipments this year, and this is again domestic, and they're seeing about a 15% drop in controls and fire and security products. That's what they're projecting for '13 versus '12. And then when you get into the detail, they were forecasting that that softness would incur primarily in higher ed and in the government, both federal and state, okay? So that's what they've projected from the sample and the verticals. So now we go back and look at our pipeline, and we can -- this is -- again, for those of you that aren't familiar with this term, it's really the bidding activity we have in various states, and we can look at it and get a sense by vertical market across several different business categories or contract categories. If we just look at our systems business, which encompass our equipment and controls, what we see is that softness in state. That's probably our biggest concern right now is the softness in the state government activity. We see some softness in health care. We see flatness though in higher ed, Fed and K-12, which is a good -- which is good for us. And we actually saw some decent orders booked in those same very verticals in the past month. In our solutions business, which is more tied to our performance contracting business, that's where we're seeing some pick up. We're seeing it in the federal, K-12, and then more importantly there, we do see good state business, which makes sense to us. So the state government side there is stronger. So I guess what I would tell you -- and the solutions business typically is a longer cycle sale. So going back to your other comment, we do see that. We saw a number of contracts that got pushed from Q1 to Q2. We had 3 solutions contracts we booked in the first 4 days of January. So we did see some movement there, David. But that's the only thing I can tell you. I don't see a general, what would I would call it, lengthening of contracts or decision-making in our normal systems business. It's more in the performance contract, so the very large contracts. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: So it sounds like that this backlog number probably goes lower before it stabilizes. Is that right?

I'm not sure -- well, it's already stabilized. I mean, it's the same as it was at the end of a year ago, which is a good point. I mean, that was a record level of backlog, and we still enjoy that level of backlog. So I think the key is maybe getting it out of backlog, not on our pipeline, but getting it out of backlog and getting it actually executed. There's probably a little bit of softness there, and that's probably why our sales volumes were softer in the first quarter, okay? David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Okay, great. And then there's one other item. If we look at the Power Solutions business, and shipment is up 3% and your revenues, when you adjust them, up 7%. Is all of that difference there coming from AGM mix starting to show up in the revenue line?

It would be some of that, David, but I would tell you, the bulk of it is probably the pricing that we did. I mean, if you recall last May timeframe, we talked about -- we were implementing like kind of an environmentally -- we were upgrading our smelters and raising our prices to compensate for that, so that's fallen through.

David, also Asia was up pretty significantly, a good double-digit sort of growth across OEM and service and aftermarket. So that was another component to that as well.

Our next question is from Joe Spak of RBC Capital Markets.

I just -- headed back to Automotive Experience for one second. The margins were obviously soft. It sounds like there's still some challenges in the second quarter. So to get back to the high-3s for the year, which your guidance at the Analyst Day sort of implied, it almost seems like you need to be over 5% in the back half of the year, and to be honest, that's a level we haven't seen in quite some time. So I'm just wondering for the overall company guidance, has there been a little bit of a shift maybe to some of the other segments coming in a little bit better and maybe a little bit taken out of auto?

For sure. I mean, if you think about this quarter, like I said, we came in a few cents higher than we thought we would here, a couple of cents. And auto came in, was a little bit softer. The other 2 were stronger, so yes.

But for the full year guidance, I guess?

A little bit [indiscernible].

I guess it's probably too early to say.

Yes, but it's -- I would say not a lot, Bruce, at this time. No.

Yes.

Our final question comes from Rich Kwas of Wells Fargo Securities.

Just 2 quick ones. Mix in Europe. At the auto show this week, some of the suppliers were saying mix had stabilized in calendar fourth quarter in Europe. What's your sense right now, what you're seeing?

When you say mix?

Vehicle mix. Not so much the unit volume, but just the mix of the vehicles being produced.

The segment sort of stuff? Is that what you mean, Rich?

Yes, yes. I mean, yes, exactly. Segment stuff, A, B, C, D, et cetera. It seemed like there was a pullback late in calendar -- end of calendar Q3 and through Q4 and that seems -- some of the suppliers indicated that it stabilized, so just curious what you're seeing.

Well, I guess maybe the one I would comment on, and I would just say just because of our diversification over in Europe, I would say that's a real factor. But the one that's most important for us is like I was talking about earlier, the luxury segment because we have a lot more content in that. And I know there was some worries around export strength, and that's held up very well. So in North America, the market's strong here and the high-end German exports are performing well. And I know there's a lot of concern going into this year about China and that market slowing down. The exports from Germany into China have not deteriorated markedly. So maybe -- those will be the important drivers for us, Rich, and...

Okay, so it kind of sounds like it's was -- it's been a nonfactor for the most part in terms of what you're seeing right now.

Right.

Okay. And then just last quick one, working cap, so there were some improvement on a year-over-year basis, Bruce. You still thinking potential positive working cap benefit this year? I know you were kind of thinking neutral-ish, maybe plus or minus, but any updated thoughts?

I mean, we are pleased. We didn't put anything in about our balance sheet, but we have felt good about that. As you said, the working capital outflow was quite a bit lower than last year. We typically have an outflow in Q1, the biggest thing being kind of like incentive compensation and like commission-type payments to our sales teams that typically flow in the first quarter. But yes, we feel -- I think we're still looking at plus or minus $100 million on working capital for the year. And the other thing I guess I would point out is if you did -- do look at our balance sheet, we obviously had 2 -- we have 2 normal quarterly dividend payments in the quarter because we pulled forward our January payment into December to help out our shareholders on the increased tax there. So we'll pick that up in Q2 because we wont have a dividend.

Okay, and then one last one question on price for battery. That was instituted in May of last year, right? So do you fully -- you kind of half anniversary it in the June quarter and then you're done by September, right?

Yes.

Yes, that's fair. So just to wrap up, I just have a few comments I'd like to make. And this is really -- maybe let me address some of the second half outlook projections for us and why. I mentioned earlier, I made reference to the fact that there really are 5 things that I would point to that give us confidence in our second half, but let me just go through those. The first is, as we've described and talked about today is the auto production, and the fact that right now in the current quarter that we're in, this should be the lull and everyone is expecting, including all the analysts, that we'll see a pickup in the second half both in Europe, as well as in North America. Secondly is the margins. I think we've described the fact that at Building Efficiency we're expecting to see a nice improvement in margins for the full year. I've been very impressed and pleased with the work that Dave's team has done. They've taken some initiative here again to control cost, yet again in the event that there's softness. So we've done some good contingency planning in BE, and I feel comfortable just like we've demonstrated last year that we'll see nice pick up in margins in the second half from BE, just as you saw in the first quarter. In the Power Solutions side, we've got a couple of factors. Bruce has alluded to Florence. We think -- if you recall last year, China was a drag for us. We talked about AGM pricing and those volumes picking up. We shouldn't have the core issues, so we expect all those factors to contribute to our second half for Power Solutions. Automotive, the key there is the improvement in our execution operations, in addition to the production volumes, and we feel we're getting some good traction in terms of the improvements there, particularly in our metals business. And Bill's doing a good job of stabilizing our Interiors business. And then finally, as you recall, we had the restructuring that we took in the third and fourth quarter, and we'll get beyond the nonqualified cost in the first half, and we'll start to see the benefits in the second half. So those are the 5 factors I would describe to you that give us some confidence in our performance and our outlook for the year, okay? So again, thank you very much for joining us, and let's hope for cold weather all the way through the East Coast next week, okay? Take care.

This does conclude today's conference call. You may disconnect your phones at this time.