Johnson Controls International plc (JCI) Q4 2015 Earnings Report, Transcript and Summary

Welcome, and thank you for standing by. At this time all participants are in a listen-only mode. Questions will be taken at the end of the presentation. [Operator Instructions] This call is being recorded. If you have objections you may disconnect at this point. I will now have the meeting over to your host, Mr. Glen Ponczak, Vice President Global Investor Relations at Johnson Controls. Sir, please go ahead.

Thanks, Abby [ph], and welcome everybody to the review of Johnson Controls fourth quarter fiscal 2015 earnings. If you have not already received it, you can get the slide presentation at Johnson Controls.com. Click the Investor link at the top of the page and scroll down to the Event Calendar section and you'll find the PDF there. This morning Chairman and CEO Alex Molinaroli will provide some perspective on the quarter followed by Executive VP and Vice Chairman, Bruce McDonald, who will review the business results, and then Chief Financial Officer, Brian Stief, will review the company's overall financial performance. Following those prepared remarks will open the call for questions to end the top of the hour. Before we begin I like to remind you and refer you to our forward-looking statements disclosure that's in the news release and also the slide deck. We remind you that today's comments will include forward-looking statements that are subject to risks and uncertainties and assumptions that could cause actual results to be materially different than those expressed or implied by such forward-looking statements. These factors include the potential impact from a planned separation of the automotive experience business and business operations after these results, required regulatory approvals that are material conditions for the proposed transaction to close, the strength of U.S. automotive economy, automotive vehicle production levels, mix and schedules, energy and commodity prices, currency exchange rate and cancellation of or changes to commercial contracts as well as other factors discussed in Johnson Controls' most recent annual report on form 10-K for the year ended September 30, 2014 and Johnson Controls subsequent quarterly reports on 10-Q. The company assumes no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this presentation. And with that, I'll turn it over to Alex.

Good morning, everyone. I want to jump right in to slide number four. It is a busy slide, but we have been busy and I think it's indicative of all of the things that we have going on and the pride that I have in of our people. So our fourth quarter we continued most importantly with our ongoing improvement in each one of the businesses and our EPS guidance. We've made significant progress across our portfolio transformation. As we remake this company and ultimately as we create two great companies, once we spin our automotive business. In the face of some real headwinds in each one of our businesses and the company as a whole we've achieved margins in the quarter and margins for the year we've never achieved and I'm incredibly proud of our entire team. If you look at our slide four you'll see our improvements in our margin for the year is 120 basis points and our EPS improved 14% to $3.22. The slide also does a really good job of putting into context the ongoing transformational actions that we've taken up to this point. It goes back a couple of years since we began this journey and then specifically in the fourth quarter you can see we completed the sale of GWS and consummated the Hitachi joint venture. And of course the largest and most significant action that we currently have and that we've had under way is the spin of our automotive business which is planning to be spun off on October 1, 2016. If you move on to slide five, a couple of more data points already discussed: our segment margin improvements and our EPS gain but probably more importantly is the underlying health of the individual business operations. If you adjust for FX our segment sales were up 5% and our income was up 16%. Slide six. I've already talked about our record fourth quarter and key portfolio actions. I'd like to point out that these business improvements aren't happening just because everyone at Johnson Controls is working harder. We continue to work smarter. We're utilizing the principles found within our Johnson Controls operating systems and we continue to focus on managing the anticipated cost structure and the new operating models that will be necessary to run the remaining Johnson Controls and also our new automotive company independently. We are doing this simultaneously while we are able to achieve our results. I'd like to talk a little bit about our end markets in China. Bruce will talk more about this it will be happy to answer any Q&A but we do have good news. By the time we got to the end of the fourth quarter in China automotive market we were able to see that the dealer inventories began to get depleted and that sales began to move and we are actually feeling much better as we move into the fiscal year as it relates to China sales and so what we saw as a tough quarter began to get a lot better as the months went on in July, August and September. One of the important things that I've had an opportunity to see in some of the pre-reports is I'd like to talk about our VE backlog. We actually have a slide on that but first, I want to give you a takeaway. In the core of our business of selling equipment and controls through our branches is growing and because of the changing nature of our business one of the things that's become more and more important for us is that as we become product and distribution dependent our backlog - and I will give you more color on this in a slide or two - is becoming less and less of the most important metric. Certainly our sales are important, but if you look at revenues they've continued to increase even though we have a backlog that's been under pressure. It has to do with the mix of our business. I'm also incredibly excited to talk about the fact that we have our Hitachi deal done and simultaneously we have already released our VRF product, one of the leading VRF products in the world. We've already put ourselves into a leadership position in China and in Asia and now, we've released that product for sale and have already begun selling the product in North America. If you look at our battery business specifically, if you want to look across the region, but if you look at our AGM sales we will talk about that in more detail but essentially we are selling every battery that we can make and those sales are incredibly robust. Moving on to slide seven. On slide seven you can say we've put it into the quarter's perspective. We've had another strong quarter and if you look at our 150 basis points of margin improvement within our segments, it's something that we continue to be proud of and I guess the context I would like to keep that in is that we've done this quarter after quarter over the last couple of years and we continue to see improvements in all of our businesses and our ability to execute. On slide eight, it's a complicated slide but I think it's really important because it seems to be one of the things that is giving people pause about where we are in our performance and our continuing here. I'm actually very pleased about what's happening with building efficiency. If you look at our building efficiency orders, Europe and Asia were down and we expected that but what we are really surprised at is at the end of the quarter and in September - which is usually a very large month for us for the Federal Government; there were some political realities that were the case and still the case specifically in September around the continued resolution - all orders for the Federal Government business in North America were down 37%. That all actually really happened in the month of September. Hopefully some of this work will come back over the next few months and that assumes a constructive resolution in Congress around the federal budget, but this one is out of our control. As you think about us and you think about our orders moving forward, our pipeline is robust. We expected to have a much different set of numbers. The Federal Government continued resolution discussion and challenged us with something that caught us by surprise that was outside of our control. If we look at it and take it in context, orders and branches were up 4%. If you look at our pipeline, that's 4% over the year if you look at our pipeline, going forward, we still continue to see single digit growth in our pipeline moving forward. The other thing that's important to note is that in the past, backlog was always an important measure of our business and building efficiency. And it was because our dependency on our branch and projects business. As you all know, people that have followed us in the past, three quarters of our future sales usually came through our backlog and it was a good predictive measure. Since we've made our acquisition of ADTI, we've increased our distribution sales and now with the inclusion of Hitachi joint venture moving forward, that backlog information as we become less and less connected certainly correlates and it's important to have a backlog. But it will be less important as we talk about our sales moving forward. Our truck way sales were up over 4% for the year our distribution sales were up, the ADTI sales were also up. All of those things are not reflected in our backlog. You can see that if you look at the disconnect between our sales number or our actually revenue number and what our backlog numbers were in the past. One thing that's not on the slide that I would really like to point out is that the pull-through activity that's happening with CB Richard Ellis, something we probably should bring more focus on in the future and I think it's something that should become a topic, is something we are pleased with. It's actually started quicker than we thought. It actually began before we even closed the deal. A lot of that probably won't flow through our backlog either because it's dealing with individual customers and individual facilities. But we're seeing a real uptake in orders in a very large pipeline and backlog of opportunities. I'd like to talk a little bit about our growth opportunities and just give you some examples. If you go to slide nine, we are in the midst of launching many, many products expanding our channels. I'd like to talk about a couple of our products that we've introduced over the last quarter. Specifically, around our residential and light commercial business. You see the Champion LX series. We also upgraded and enhanced our flagship security product offering which is the P2000 Access Control System. And we've also launched some online tools for our residential contractors to help them be more effective and efficient and able support the consumers more effectively. End power solutions, we announced a new plant to be built in China in Shenyang, six million units and we debuted in Frankfurt a new generation of advanced start stop products that include both active in lead acid and lithium ion chemistries. In China we also signed an MOU with DAIC to support them and their partners for their growing needs for start stop batteries. Finally we recently formally announced our lithium ion distribution energy storage solution. We've already have presold and actually installed some of these systems and it's a launch we're actually leveraging the technology that we have from building efficiency with the distribution resources we have. I'm sorry, with the technology at power solutions and leveraging the distribution that we have at building efficiency. Moving on to slide 10 and automotive, lots of new products and launches. If you look at some of the product launches we have within our automotive business we continue to provide new products for our customers, personalization products that are becoming more and more important for new a generation of customers. We've launched our BMW 7 series in the Czech Republic, our core product portfolio and our mechanism family, very important part of our strategy moving forward. Our T-3000 recliner and our Hydro adjuster being released globally for multiple customers. And then Frankfurt we unveiled a new seat in interior technology talking about the future when we talk about autonomous driving. Obviously autonomous driving and the new technology going into vehicles will play a big part of our seating business in the future. Lastly before I turn it over to Bruce, I'd just like to point out that we have an incredible momentum in each one of our businesses. And we're going to continue to focus on our operational excellence through our Johnson Control's operating system, improving margins, lowering our cost and increasing our quality. And we will do that in the same time we go through our automotive spend activities. Our pipeline of investments is strong, and if I think about what's happening with our ACE separation, and you'll get more color on this when we see you in December. We're on track, on schedule, on task and this time next year we'll be talking about two powerful new companies. So I think that overall if I look at our progress over the last two years, we're well on our way to be the - to = be a leading multi-industrial company. With that, Bruce? You take this from here.

All right. Well thank you, Alex. And I think as I go through the business operations you're going to - what you're going to see is despite the fact that we've had a lot going on from a portfolio perspective, that our business leaders and all the people at the company have really been focused on delivering solid year-over-year results here. So if we start on slide 12, we were really pleased with building efficiencies results here in the fourth quarter. You can see sales of $2.9 billion were approximately the same as they were last year. Though stripping out foreign exchange, we had organic revenue growth of 5%. In North America Systems and Service, our business was up 6% year-over-year and we saw good strength in our Branch business, though that was offset by some of the softness in the Federal Government business that Alex talked about earlier in his comments. We finally saw - we've been talking a lot this year about the Middle East. We finally ran up against some more favorable comps, so Middle East business were up nearly 54%, Asia was level with the prior year, Europe was down 3% and Latin America, which continues to be very, very soft, was down 16%. If you look at our segments earnings in the quarter, $351 million. We're up 5%. And as we've noted here on our slide, backing out foreign exchange, it was up 8%. The year-over-year improvement would really be due to higher volumes and favorable price and product mix. The margins, which was a real strong story in the quarter, up - were up to 12.1%, a 60 basis point improvement versus last year. I would point out that this was the first quarter where ADT - the ADT acquisition has been in both sets of numbers, so that business, you'll recall, closed in June of last year. So this quarter we had a clean comparable quarter from a year-over-year basis, so the incremental benefit of ADT isn't what drove the numbers here. It was really just business performance. And then lastly I would just note for the full year, BE margins were up about 70 basis points, so I think we're pretty pleased that despite the fact that we saw some currency headwinds and some of the markets didn't recover like we thought they were going to going into this year, the business delivered segment margin improvement of about 70 basis points, which was about 20 basis points better than the guidance that we gave at the beginning of the year for building efficiency. Turning to slide 13, in power solutions for the fourth quarter, our sales were down 6%. Though again adjusting for foreign exchange, we saw organic growth of 3%. In terms of unit shipments in the quarter, we're up about 1%. Europe and North America were each up 1%. Asia was up about 4%. AGM continues to be a huge benefit and you can see our growth is accelerating here in the quarter. We were up 44% to just under 2.9 million units. And then if you look at our mix between aftermarket and OE, aftermarket was up about 1% globally and OE was up 2%. Segment income in the quarter, you can see nice improvement, up 5% to $340 million. And again if you took out the impact of foreign exchange, we would've been up about 11% on a year-over-year basis. And an exceptionally strong margin performance in the quarter, up about 200 basis points to 20.2% I would just caution folks that, that's not - that level of margin improvement, while we're pleased with it, it is not something that's sustainable. So we don't see our business continuing to sort of grow at that level. So the 160 basis point improvement for this year, we sort of went into the year guiding to 50 basis points to 60 basis points of improvement on a year-over-year basis. The power solutions team, in the face of some of the headwinds that they had around foreign currency, I mean just did a great job for us. And then lastly on page 14, I'll just talk a little bit about automotive. As Alex mentioned in his comments, our interiors joint venture closed at the beginning of the quarter on July 2, so this is the first quarter that we are reporting our automotive results showing interiors as an equity investment, in other words our interiors business is de-consolidated. So when you look at our sales and we'll will see this for the next three quarters, our sales were down 21% in automotive, though if you were to back out the impact of foreign exchange and the de-consolidation of interiors, our organic growth in automotive was 3%. That is slightly lower than the industry production environment where we're up about 5% in North America and Europe. The reason for that really being some business discipline and recording process primarily in North America. In China, you will see, and here you'll see a bigger number now we're talking about our sales being up about $2.3 billion, up about 27%. That's because we are now picking up the Chinese portion of the Yanfeng joint venture here. If you were to sort of adjust for that what you would see in China was our underlying sales were down about 3% and that compares a little bit favorably to the industry production environment which was down about 5%. Spending a bit time on our interiors joint venture which closed in the quarter I would say we were pleased with how that business has started out. The numbers are looking pretty good there, from a topline perspective. I looked at the sales in the quarter, about $2 billion, so they were down about 2%, 2% or 3% versus the prior year. Though if you looked at that by region you'd see quite a different story. In our interiors business North America was up 14%. Europe was at about 16% really as a result of some of the new business launches we had. And then China was down 16%. So pretty mixed picture from a topline perspective in interiors. In China, it has been a hot topic lately. I know there's a lot of comments about what's going on in the market and I thought maybe I could share some perspective. I personally was in China three times in the last four months so maybe I could just comment on some of the things we're seeing and some of the discussions that we are having with our partners and customers. First of all, I would tell you the passenger car market, which is where we tend to compete, is holding up better than the other overall market. Though in the quarter it wasn't a big difference, about down 4% versus 6%. We have very little content on the light commercial vehicles so we are primarily exposed to the passenger car side. Many of our customers cut production in the quarter significantly more than sales, which led to inventory de-stocking. We continue to see the SUV and luxury car segment doing very well on a year-over-year basis and right now the market is in a little bit of a transition where the Chinese own brands are picking up shares at the expense of some of the transplant customers. I would also commend our joint ventures on doing a great job in flexing their cost base down in light of lower production and to give you a feel for that, if you were to look at our China seating business in the quarter, the equity income was a $5 million year-over-year decline. So even though our sales were down 3% the impact to our bottom line here at JCI level was about five million. So a nice job flexing the cost base. And then lastly as Alex talked about we did see production improve sequentially throughout the quarter and as you sort of look at this dealer inventory level stabilizing here and with some of the benefits that we expect to see as some of the government incentives kick in on small vehicles. We do see double-digit scheduling, production schedule increases ramping up here into the first quarter of last calendar quarter here. So I'm pretty optimistic that the worst is behind us here in China and we're going to start to see modest to mid-single digit type growth. Lastly I'll just comment on segment income, which was up about 4% after adjusting for the adverse impact of foreign currency in the quarter. If you look at the margins, our margins were about 6%, 120% basis points higher than last year and here we are really starting to see the benefit of some of the restructuring actions that we've taken over the last year or so. And then the benefits we're getting in our plans from the introduction of Johnson Control's outputting system. Maybe I would just point out, I've seen in some of the early notes a little bit of confusion around the margins, and what the segment margin expectation was in automotive and maybe just give a little color there. As it relates to interiors, we showed segment income of about $10 million, which was down I think from $40 million the prior-year. Just a few things I would point out there. What you are saying in that line item is the after-tax income from our Yanfeng joint venture. Previously, that number would have been a pre-tax number, so that's worth about 15% or 20% is sort of the effective tax rate in that joint venture. We've also got about $10 or $12 million of separation related cost in the JV. So that's the cost of setting up new IT systems and things like that. And then lastly what you see in that line item is the wind down cost that we have with some of the retained plants. That's a loss and we expect that's going to continue for the next three to four quarters. So overall, a solid performance from automotive. A solid performance from all three of the businesses and with that, Brian, I'll will turn it over to you and the financials.

Okay. Thanks, Bruce, and good morning everyone. As you saw the press release and as outlined in the appendix to today's slide deck, the Q4 results from continuing operation include five significant non-operational items which resulted in a net charge of $1.04 in the quarter. And I'd like to touch quickly on those five items. First of all we had a non-cash mark-to-market pension and post-retirement charge of $422 million. The way to think about that and I think we've mentioned this before about half of that roughly relates to the fact that we had to adopt some new mortality tables in the pension calculations and that caused right at about $200 million impact tax. And then there was also with the August and September investment returns, we got hit hard in those two months and we ended up for the entire year having about a $200 million difference between expected investment returns and our actual returns. So all a 420 charge. Secondly, we had a restructuring charge in the fourth quarter just short of $4 million that related primarily to the automotive business and then some non-cash impairment charges we took as well. The third item would be a gain from the formation of interior's joint venture that Bruce referred to. That net gain was $145 million. Interiors is reported in our continuing operations but we've excluded that 145 from what I'll talk about this morning. We also have as we have in prior quarters the transaction integration and separation cost associated with all of our portfolio actions that we're taking. And the last item would be net tax expense charge that was taken as a result of the tax effects of the previous four charges or credits that I mentioned as well as planning around foreign cash repatriation that was done in connection with a couple of the transactions. So as I talk through the financials this morning, I'll exclude those items from my comments and also remember that in the current year, GWS has been reported as a discontinued operation and we've done that on a comparable basis in fiscal 2014 and you may recall as well, electronics as a discontinued operation in 2014 also. Last item that Bruce mentioned was the formation of the auto interiors joint venture which was formed on July 2. So we de-consolidated that in the quarter and we now maintain a 30% equity interest in that venture. So as I go through the income statement movements I will refer back to the impact of the interior de-consolidation. So overall, fourth quarter sales were down 12% at $8.7 billion, but that was due to the de-consolidation of the interiors business which was $900 million and unfavorable foreign exchange of $600 million really across all three of our businesses and that was primarily the euro. Excluding the impact of those two items, consolidated sales were up 3% and up across all three of our businesses. Gross profit for the quarter was 19.6% which is up 160 basis points from last year. We really see the continued benefits of the shift in product mix as well as the ongoing benefits we are seeing in the Johnson Control's operating system initiatives. SG&A was down 12% year-over-year. Again this was due primarily to foreign exchange and the de-consolidation of the interiors joint venture, and we also had some benefits from certain of the cost reduction actions that we've taken beginning in the fourth quarter here and as we move into fiscal 2016. Equity income of $105 million was 14% lower than last year, and that was due to the fact that in the prior year, we did have an equity interest gain related to one of our joint ventures. In the current year, the Interiors joint venture income of $10 million that Bruce referred to, which is an after-tax number. That was offset by some shortfalls and certain of our Chinese Auto Seating joint ventures. Overall, fourth quarter segment margins were 10.7% or 150 basis points better than 2014. So really strong operational performance across all three of our businesses. During turning to slide 16, financing charges of $73 million were $7 million higher than the prior-year quarter. That was really the function of average debt levels were a bit higher this year throughout the year. As far as the tax rate, both 2014 and 2015 have an underlying tax rate of roughly 19%. And if you look at income from - attributable to non-controlling interests, that's down $12 million, and that really relates to some of the reductions that we've seen in earnings at our Automotive consolidated joint ventures as well as the deconsolidation of the Interiors business. So overall, EPS of $1.04 is a record, up 7% versus the $0.97 of a year ago. Turning to page 17, I'd like to just spend a few minutes on some balance sheet and cash flow highlights, and then spend a couple minutes also on our Q1 guidance for fiscal 2016. So during the year, we executed share repurchases of $1.4 billion. In that $1.4 billion, of that, $400 million was in the fourth quarter. And we also paid throughout fiscal 2015 about $700 million in dividends to our shareholders. So at this point in time if you look at our share repurchase program, we've executed on about $2.6 billion of our $3.6 billion authorized level. GWS divestiture proceeds in the quarter were at $1.4 billion. And if you think about where we really use that cash, we had about $400 million in tax audit settlements. And just as a point of reference, that $400 million that was paid really closed out about 33 or 34 open tax years in the United States, Germany and Mexico. And it's going to be - it's a positive thing as we move toward the Auto spin as well. We also made some voluntary pension contributions of about $400 million, and of course, the Hitachi joint venture that Alex referred to that closed on October 1, that was about $550 million in cash. So that's kind of the way to think about the GWS divestiture proceeds. As we move into 2016, our balance sheet remains strong, with net debt to cap of 36.7%, which is about 400 basis points better than last quarter and comparable to 35.7% that existed at the end of fiscal 2014. Net debt is $6 billion at 9/30/15 and reflects a net debt reduction in the quarter of about $1.3 billion. And our adjusted cash flow for the year was about $1.4 billion as we've outlined in the appendix to the deck. Capital spending of $1.1 billion was $200 million below plan, and that was primarily due to timing and some deferred projects at Power Solutions and BE. As far as fiscal 2016 guidance, our strong fourth quarter provides us good momentum as we enter the year, and we expect earnings per share in Q1 of $0.80 to $0.83, which is up 8% to 12% from $0.74 last year. I would point out that this guidance, consistent with our practice this year, does exclude transaction, integration and separation costs. And I would just note that given the size and complexity of the AE separation and spinoff, the separation costs in fiscal 2016 will likely be significant and we'll provide some more color around a range of those costs in the December meeting. Also in the December analyst meeting, we will provide more details on the full year guidance. And with that, Glen, I will turn it over to you.

Great. Thanks, Brian. Abby, I think we're ready to take calls here. I don't know how many are in the queue here, but just so that we give more people a chance, if you can keep it to a main question and a follow-up. And then if you've got more, get back into the queue, that would be helpful. And, Abby, we're ready to take questions.

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Robert Barry. Your line is now open, sir.

Hey, guys. Thank you. Good morning.

Morning, Robert.

Good morning.

Yeah. I guess I wanted to start on the Building business in North America. I mean it looks like the orders slowed. I guess a lot of that was the government. The comps also got a lot tougher. So maybe can you just update us on how you feel about the momentum and kind of the key nonres verticals for the Nonres Applied business? And specifically on that government piece, I mean things are looking a little brighter on a budget deal. I mean how much line of sight do you feel you have to a kind of book of government business that could flow through if in fact things move forward with the contemplated deal?

Yeah. That's a great question. Well first, I hope it came through in my comments. It was a very frustrating - literally because of the - because of when the end of the fiscal year happened. I believe it was like over the weekend, a lot of this came to light at the very, very end, as it relates to the continued resolution and what that meant to the different agencies we do business with. They actually didn't realize that they were going to be curtailed because of the uncertainty. So you're right, the budget looks like it's going to get resolved. We're not sure what the resolution exactly is going to be. We would expect some of these projects to come back soon. But we also know that some of them may not come back right away because a lot of these projects are the type of projects that come at the end of the year when agencies find that they have additional funds in their budget. So I think it's going to be a mixed bag of us being able to get some of these projects in earlier than waiting for the end of the year. But it certainly wasn't something that we expect. The good news on any of this, if there's any, is that these projects typically are very large and very, very slow moving, so that's not going to have a real huge impact on us this year. But it was disappointing because we have such a strong pipeline and such a lot of momentum in that business. The team was just really deflated when they were kind of dealt this curveball here over that weekend. But the pipeline is as strong as it was when we talked about it two quarters ago. And last quarter, what we see is secured pipeline. It looks very strong, particularly in all - in the institutional vertical markets. We continue to add salespeople, and so I think what we're going to - we'll continue to see growth. I would consider - I think what I hope everyone takes away from this is this is not a change. What this is was something that was just something we couldn't predict and for us we do an awful lot of business with the federal government, so it was a significant blow to us. But I'm just as strong, if not more bullish because if you look at where, we talked about one quarter, and then two quarters and three quarters and I think we're - our line of sight is over the next couple quarters, we should continue to see strong orders.

Gotcha. And maybe just a question on the Power business. Really two questions. If you could address the slowdown in the growth in the aftermarket? And then on the margin in Power, can you kind of bridge that gap between the guide of 50 bps and the 150 bps that you did? And to what extent specifically was there any change in planned investment spending that caused that much stronger performance in Power? Thanks.

Yeah. Yeah. I don't know that it was planned investment spending. I do think that what we can't predict at the end of each and every quarter is when - how our customers are going to order - get it where they get ready for - as they get ready for the winter months. What I would expect, in fact I was with one of our customer yesterday, is what I would expect is that some of the profits that we saw in this quarter may have been in a different year next quarter, so I think it's a little fungible quarter-to-quarter. But as it relates to the slowdown in the aftermarket, I think what our team is seeing overall - let's use North America I guess as the best proxy. Is they're seeing a 3% to 4% growth. And in fact our team would tell you right now they're struggling to get batteries to be prepared for the winter. We're really concerned about our service levels so absent whatever is going to happen with the weather I can't really control that. Our biggest challenge right now is to make sure that we do have batteries to be prepared. So I think that's good. And then AGM as far as where we are on that is we are capacity constrained. We're building as fast as we possibly can and hopefully we have to get through the allocation. All in all a positive

Yeah.

I think one point around the investment, we are opening up our plant in China, our partnership AGM batteries out of China. So there is going to start to be some heavier investment in China next year versus this year around some of those new capacity adds.

That's true. Yeah. I did see actually - that's a good point, Bruce. I did see in some of the forecast that we have some launch costs in China specifically and as we start to use our global network for batteries, we probably are going to have some additional expense cost as we move batteries around versus capital cost.

How much of a headwind is that?

We'll talk more in December.

Yeah.

We'll give you more detail around...

Yeah. I really don't - I really - I guess with the numbers I saw, I really don't know if I got to the root cause of it. It's not something that to be concerned about.

Okay. Thank you

Thank you. Next question is from Julian Mitchell. Your line is now open, sir.

Hi. Thank you.

Hi. Good morning.

Good morning. Just a question on the segment margins within building efficiency. You had a good increase in Q4 and through the year. Just wondered if you could parse out at all how much of that was driven by price net of raw material costs? And how the hedging works and what kind of benefit you think you'll see in Q1 from that effect?

Yeah. This is Bruce here. You kind of broke up a little bit. I don't have - and we usually don't like to talk about pricing versus commodity but commodities would have been a benefit with them trending down throughout the quarter but I would say equally that's not unique to Johnson Controls and so our competition would've been faced with the same tailwinds there and that tends to be reflected in how people look at quoting. So I don't think it's a big deal. I mean I think probably the best way to think about it is we've pretty consistently said that we see our glide path in BE margins around 50 basis points a year. When sales tend to be soft, we tend to do a little bit better job because we don't have to sort of ramp up resources in advance of new business. We are adding salespeople. I mean I think we talked about that a little bit on our last quarterly call but it would really be and if we have flat topline performance, we can do a little bit better than the 50 basis points. When we start to see it turn, you probably see a little bit worse than 50 basis points. So that's kind of the best way to think about it.

I'd just add to that. I think in the fourth quarter the building efficiency team did a pretty good job of addressing early on some actions it was going to take from an SG&A standpoint and there was a benefit in the fourth quarter from some of those actions that they were able to accelerate versus some of the other actions that relate to the restructuring charge we took in the fourth quarter likely won't happen until sometime during fiscal 2016. So there was a bit of a benefit there as well.

Thank you. And then just my follow-up question is on the Asian business within building efficiency. Yeah. The revenues were flat at currency orders down slightly. I think China is a pretty high-margin business for you in that segment so maybe just give some color on not the auto side but what you're seeing on the building side in China right now.

Yeah. So let me give this a little bit of that. I don't want to call victory. Bruce's conversations around the automotive business I think is something because of our unique relationships that we have. We probably had more visibility into exactly what's going to happen. I can tell you we got more positive comments but I would call it anecdotal versus something that in automotive where we would see something more structural happening. So the phone calls have been better. The anecdotes have been better but I certainly don't think we're out of the woods yet in China as it relates to the building business. Now all that being said, remember we just went through the Hitachi joint venture. So our presence in China has changed dramatically. We have a new party at Hycincs in China. We participate much more broadly in the market and I think we have the opportunity to see some increases because of that new participation and new products that we can cross sell. But we haven't really identified that. So I think that we may be able to do better than the market as we move forward because we have new products that we can sell through with multiple channels

Right. Thank you.

Thank you. Our next question is from Emmanuel Rosner. Your line is open.

Hi. Good morning, everybody.

Good morning

Wanted to ask you first about the automotive spin off. So if I heard you right I think it's scheduled for a about year from now, which obviously is a decent amount of time. I was curious if you could just give us some color on I guess what does the process look like? What do you have to accomplish in order to be able to get that done? Why does it take so long? But also, how do you reassure clients and customers, the auto makers in particular that about the future? I mean, some of your sitting competitors seem to imply that they are taking advantage of the uncertainty and they're getting more business as a result. So what can you do over that time period to sort of like make everybody more comfortable?

I'm going to turn this over to Bruce because he's so deeply into this, but I just want to address that last piece as it relates to what our competitors may or may not be saying. I'm not privy to that but I think that that's probably - I actually think that our position with our competitor is probably more about the fact that the way we manage the business today, not about who we're going to be tomorrow. Because if you think about how we manage the business today, we've very selective in the way that we allocate capital and how we compete within the Automotive business, particularly the Seating business in North America and Europe. That doesn't necessarily mean the way that Bruce and his team will run it in the future. So I think that when you hear our competition talk about it it's probably less to do about the spend and more to do about the fact that as a whole Johnson Controls has had a capital allocation strategy that may have benefited. That's the only way that I can relate to that comment. But as far as how they spend is going and why it takes so long I think Bruce probably has a couple of facts that he can give you.

Well, it's taking longer than I would like to happen but I think just to sort of walk you through sort of the main work streams. First of all and probably the most complicated is the separation and establishment of new corporate entities. So unlike say a divestiture where we're pretty used to say carving something out and selling it and have had a fair amount of experience over the last couple years doing that. Here we have to do all the separation work but also set up the corporate functions starting from scratch. And so that's a big work stream. The IT systems are always a challenge and again, we're used to sort of separating them out and automotive tends to be fairly separate here at Johnson Controls. There's not a lot of co-mingled systems or assets. But again, on the corporate side, we have to set up brand new systems from scratch. So that's kind of - what really drives the timing. I think if you look like we have, Emmanuel, in terms of how long some of these spinoffs tend to take, as we looked out in the market, we've seen sort of nine month would be a quick one, 9 or 10 months to 18 to 24 months would be a slow one. And we tend to be I think given the size of it nearly $20 billion, 35 countries, we have 225 plants, 75,000 employees. So in the scheme of it I would say we're a large complex separation and I think the timetable that we've established is pretty aggressive given the complexity. I mean, I would say it's on the shorter end of normal and it's on the much more difficult than normal.

Okay. That's helpful. And then just my follow up on automotive again. I guess the margin came maybe a little bit lower than we would have expected. And I realize there's a lot of moving pieces now because obviously the denominator is just a consolidated sales but on the numerator you have the consolidated earnings, you have now the interior earnings, you have the China earnings that are not consolidated. Can you maybe give us directional comment on how the performance for margins was for these different pieces? North America and Europe filling up down and then China filling in the interiors?

Yeah. I don't have it on the top of my head. I think and maybe we can follow this one up, Emmanuel, but I'd say just look at that seating margins were up 90 basis points in the quarter, 5.9% versus 5% last year. Interiors, in my comments I talked about some of the noise that's in their around the wind down cost, the fact that it's flipping from pre-tax number to post-tax number now. The fact that we've got cost to set up the new joint venture flowing through those numbers. So you're quite right, there's a lot of noise. We do intend next year to continue to show seating and interior separate. And I think as we sort of hit our stride on getting the JV set up here, I think it's up to us to maybe do a bit better job educating folks on what the interior piece of it is going to look like, because I think that's where the confusion is coming about. I think the street had auto margins being about 70 or 80 basis points higher than we came in at. And I think that was because they sort of looked at last year's segment income in interiors and figured that would repeat. And that's where you see the 30 million year-over-year delta. So I think there is a lot of moving points and it's something that we can do a better job, and we will in Q1.

Yeah. I think one of the things that we'll do as part of the December analyst day is we'll kind of unpack both the consolidated and unconsolidated automotive sales and related margins. So we'll get into that in a bit more detail in December.

All right. Thank you all.

Thanks.

Thank you. Our next question is from Richard Kwas. Your line is now open, sir.

Hi. Good morning.

Hi, Richard.

Good morning.

Alex, I wanted to touch base on your comment about backlog. So GWS wasn't included in backlog, and resi and the light commercial stuff. And you're implying that backlog is going to be less relevant. But if I look at the business as a whole, GWS wasn't part of it. So why is backlog less relevant going forward here? I understand the ADT piece. That's now in the business. That's not part of backlog. But it just seems like from an institutional standpoint, your mix hasn't changed all that much. So it still should be pretty relevant. So I just wanted to get some additional color from you on that.

Yeah. I guess what I would say is first off, as I thought about GWS, I never really thought about it in the context of being part of the BE and the construction projects. What I mean by that is that the way that we're going to market, the way that we're selling our products, whether it be ADTI, whether it be our Hitachi products, whether it be our strengthening of the other products that go through distribution not only in North America but around the world, we've gone through a place where 75% of our business used to be backlog ex, not including GWS. Just separate GWS out. Now it's something that's around 50% or less and probably continuing to be less and less. And so what I just wanted to say is that over time, we're going to have to make sure that we don't - that we continue to give you the information that you want to see around our projects and our projects business moving forward. But our projects business moving forward will continue to be important, but it won't be the dominant part of our business in the future. And so that's really what the comment means. In fact, you can see our ongoing sales have continued to increase adjusted for FX, and our backlog has been under pressure. And so I'm just pointing out that that's becoming more and more disconnected. That's it.

Okay. So is that more kind of differences in how you've gone to market here in the past year or so with new opportunities and what not?

Absolutely. I think it speaks to when we talk about having multiple channels, multiple ways to getting to the market and serving the market more broadly than just the complex market and becoming much more of a product company. I think all of these things, this whole conversation is really an outcome or an attribute of how we're going to go to market and what kind of products we're going to sell. We'll become more and more talking about our product sales and less and less pivoting on the contracting part of our business. That's all.

Okay. And then [indiscernible]

Not that we're restricting the [indiscernible].

We're not getting rid of it. I don't want to go over it. I'm just saying the mix is changing. That's all.

Okay. And then just broadly speaking on M&A, there's been some speculation around the business that would fit the power solutions here recently and you talked about trying to expand your scale in the midmarket light commercial residential, et cetera. How are you thinking about this right now with the transactions? There's still work to do with some transactions but how are you thinking about the landscape right now and where you see capital deployment going here within the next year or so?

Great question. So we're going to talk about - this is a good pivot to talk about our December analyst day. We're going to have, you know, all of these conversations are going to be in real detail because one of the things you should expect from us is that I don't think we've done a great job. I do think our capital allocation strategy has become much more robust in the last couple of years but I think philosophically we need to talk more about that. We'll do that in December. How are we going to make these decisions? What process and insight analytics and what metrics are we going to use? Not only what parts of our business need to be levered because they have strength as it relates to adding geography and technologies but also where we have gaps and how we would do that and what kind of metrics we'd be? Because I've gotten a lot of feedback from individuals I'm sure, you also, to make sure that we continue with a disciplined capital allocation strategy and we'll talk about that in December. So I think that you should keep that in mind understanding that we know that we need to add capabilities and take advantage of some of our portfolio to make it stronger. We also have realized that we need to make responsible capital allocation choices. More in December.

Okay. Thank you.

Thanks, Richard. We have time for one more, operator.

Okay, speakers. Our next question is from Ryan Brinkman. Your line is now open, sir.

Hi. This is Sumit for Ryan. Thanks for squeezing us in. I just want to go back to the sleeping margins. You've seen a good increase in the margins. I'm just curious where are you on the restructuring savings and should we be expecting that margin improvement to be sustainable or are the margins going to flatten out going in FY 2016?

Yeah. It's Bruce here. I think it would be normal for us here in December. We'll give our margin expectations by business for all three of our businesses in December. So that's - and sort of hold off on that.

Okay. Can you just share your thoughts on where you are on the restructuring process in terms of the getting savings there?

Restructuring for the company?

For seating.

For the seating. Yeah.

Yeah. Well it plays right into the margins so I think we'll just leave that until the December meeting.

That's fine and just a follow-up. Thanks for your comments on the China market regarding automotive. Just curious, again, if you're seeing any delay in new programs or new launches coming to the market because of the slow down or is that really something that's not playing out at all?

I think I would say not so much on any launches at this point in time but I do think there are a couple of OEs that are rethinking or possibly going to defer some capacity increases.

Okay. Great. Thanks for taking our questions. Thank you.

Thanks very much.

Thank you.

So thanks everybody. Couple closing comments, Alex?

Yeah. Just a couple. I mean, first, it's become an enjoyable broken record to thank our employees for everything that they've accomplish over the last quarter and now you got the opportunity to thank them for what we've accomplished over the last year. It's quite outstanding. I certainly don't want to leave anyone out when I think about whatever our employees accomplished in each one of our businesses. They performed extremely well in each one of our geographies depending on what they've faced. They face with different challenges and opportunities and I think we've got opportunities. We've exploited them and I think where we had challenges we went over to mitigate those challenges. And then if you look at our corporate teams and our teams that are supporting our portfolio transformation, not much can be said except I think each one of these transactions and each one of the things that we've accomplished I feel absolutely proud of what we've been able to make happen, not only from the standpoint of the time that it took to do it but the outcomes. We hopefully get to see everyone in New York in December. I think it's going to be an important meeting, one of the most important meetings we've ever had in New York because we're going to talk about the remaining Johnson Controls and our strategy moving forward. So we'll bring more and more clarity around that. We're going to give you details around the automotive spin, which I think there is a need for everyone to understand that so it can help you put the right values down in your models as you move forward. And once again I just want to thank you for your interest and hope you have a great day. Take care.

Thank you. And that concludes today's conference. Thank you for participating and you may now disconnect.