Ladies and gentlemen, Vice President, Investor Relations, Antonella Franzen.
Good morning, and thank you for joining us here at the Mandarin Oriental in New York and for joining us via live webcast. We're very excited to be here with you all today to share with you the opportunity ahead for Johnson Controls. Before we get started, I want to start with a few housekeeping items. First, in the event of an emergency, we ask that you please exit at the doors behind you and you bear to the left for the stairway. The restrooms are also located in the foyer area.
And we do again ask that you please do silent your cell phones for the courtesy of our presenters. We will be providing certain forward looking statements. We ask that you please read through our forward looking commentary and cautionary statements. In addition, we will be using various non GAAP measures during the course of our discussion. I do want to remind everyone that we will be reporting amortization as a separate line item in our P and L, and therefore, you will hear various references to EBIT as well as EBITA.
When we refer to Johnson Controls as a whole, those references will be to EBIT and when we refer to the segments or the businesses, those references will be to EBITA. Quickly, I'd just like to show you the agenda. Alex is going to kick things off with a strategic overview. Then Kim is going to discuss the megatrends and how they impact Johnson Controls. George is going to give us an overview of the operations as well as the integration.
Then after a short break, we're going to kick things off with Jeff who's going to cover the benefits of JCOS. Trent's going to give us an overview of Asia Pacific. And Brian's going to wrap things up with a financial overview before we head into Q and A. So with that, I want to thank you again for joining us. And with that, we're going to officially open up this morning's session.
Thank you.
The future isn't somewhere we are going. It's something we are creating together, today. We are a collaboration of cultures, of minds, of ideas, a champion of human progress in a changing world. Our tools are knowledge, insight, technology and systems, but our purpose is to meet needs that never change. The simple human needs, empowerment and comfort, safety and security, these are the things that matter most.
They guide our choices. They shape our business. They drive our growth. We're stepping into a new time. It's our time.
We understood the connected world before the world did, the intelligence of built environments and new mobilities, the harnessing of energy to power them, the systems to protect them, the workplaces, classrooms and operating theatres, the cars and vehicles and airports that link them, the individuals who thrive in them. And we understood that planet Earth is the space we all inhabit, the vehicle we all ride. This is day 1 of an unprecedented growth of cities and infrastructure. What we do has never been needed more. There's a place for us at the very center of tomorrow.
We at Johnson Controls, we're here to advance the human experience by creating the smartest environments and energy solutions in the world. And today is just the beginning.
Ladies and gentlemen, Chairman and Chief Executive Officer, Alex Molina Rolle.
Good morning, everyone. Good morning. Can you hear me? All right, there you go. Good morning.
I was thinking I was reflecting this morning about this conversation that we're going to have and the fact that for all of you had an opportunity probably to meet with most of you over the last few months, both myself and George. And this day has, depending on your perspective, been long in coming or it really came really quick. It depends on the day, but I know it's really important. And the other thing I reflected on is that each and every one of you, because I've done this a few times where you come to these analyst meetings and the first thing that happens is everybody goes to the back and looks at Brian's numbers. So everybody's come back and you're all looking at you putting your models, putting Brian's numbers And that's important.
And in fact, in the end, that's what our commitment is. But what's most important to me is that as we get to the as we have this morning's conversation, that you get a set of we're bringing into the kitchen a little bit, you get a set of understanding about what it is that we're doing and how we're doing it and why we have confidence in the numbers that you're going to see and what the opportunity is. So as we go through this morning, I ask you to really pay attention and of course we'll have the opportunity for Q and A later in the day. And the things that I look for is, does this make sense? Is what these folks are doing?
Does this make sense? Do these numbers make sense? Does the strategy make sense? The end markets that we are participating in, are those the right ones? And do we have the right are we the right company to be able to meet the objectives we sat in front of us?
And then is this team, is this team coming together? Do we have a team that's the best of the best, the best of 2 organizations that are coming together in order to be successful? And as you walk away, and I know this, I know each and every one of you will be looking at a few things. You'll be looking to say, does this make sense? Do the numbers make sense?
And do I have confidence that this team can be able to pull it off? And so my objective is to give you some grounding in that, set up the rest of the day for the rest of the Johnson Controls team And then make sure as we wrap this up at the end of the day, get your feedback, get your questions, so we can talk about not only what the opportunity is, but with some of the gaps, what are some of the challenges. We're going to be completely transparent about where we are in this journey and where we need to go. So I look forward to today. And as we get started, 1st, I'd just like to bring you to a perspective of who are we, this new Johnson Controls.
And so this is the leadership team that leads the company, and I'm going to add to this in a minute. Let me kind of just go through here. A few of these folks are going to be presenting today, but let me just kind of walk do a walk here. Grady Crosby, I don't think Grady is here today, but Grady leads our diversity, government affairs and public affairs, and he's a legacy Johnson Controls individual who had a similar role at Johnson Controls before the merger. Simon Davis, I don't believe Simon is here either.
He's our CHRO. He is a legacy Johnson Controls employee, been with the company for many, many years. Kim met Kath Kupris. Kim, many of you may know Kim. She is the CMO of the new organization and had the same role at Legacy John's Controls.
Judy Reinsdorf, I know Judy is not going to present. No, Judy is here. Judy, if you raise your hand, she is here. She is probably here watching us, watching you, making sure that we are all disclosing things properly and she's put out her eyes on us pretty carefully. So if you watch Judy and you watch her facial expressions, I think you'll be able to tell how we're doing.
But Judy is a legacy Tyco and part of the new team and well, welcome Judy to the new team. And John Repko, who is not here today, is our CIO and had a similar role at the Legacy Tyco Organization. Brian Stief, who many of you know is our CFO and is the CFO at the Legacy Johnson Controls Organization. And Jeff Williams, Jeff Williams is our Vice President of Engineering Operations and had a similar role at Legacy Johnson Controls. And of course, you all know George Oliver, who is the CEO of Tyco as our COO and President.
A few people that we that report to George as part of the extended leadership team our business unit presidents, and I think they're all here today. Amanda, if you don't mind, if you could stand up because you guys would probably know them or want to cost them in the hallway. This is Joe Wallachie. For those that had the opportunity to come to our Investor Day in the summer for Power Solutions. Joe Allke leads our Power Solutions business.
Johan Pfeiffer, Legacy Tyco, Johan has a similar role at New Johnson Controls, leads our European, Latin America, Africa, Middle East Business. Rod Rushing, where's Rod? Rod leads our North American operations, which is a combination of Johnson Controls and Tyco. Bill Jackson, Bill Jackson led the building efficiency business prior to the merger and now leads our products business. I'll get into what all this means in a little while and make more sense.
And Trent Neville. And Trent has 2 jobs. Trent is our Asia Pacific leader for the company, so he's setting up our infrastructure for the company in Asia Pacific. And he has a dual role where he leads our building and technologies group in Asia Pacific, specifically as we go through the integration. So that's the extended leadership team.
So as we came together as a leadership team, this is the group that was working together to make sure that we can fulfill the commitments that we're making to our customers, to our shareholders and to our employees. As we came together as 2 companies, it was a culmination of a journey if you look over the we'll just pick a period over the last 3 to 4 years, where both companies have really gotten themselves in a position to take advantage of this opportunity. If you think about the legacy Tyco organization, after the ADT spend, a real focus on being able to make the remaining Tyco, the new Tyco organization and operating company, real work that George did with his team to hone in the operational capability of that company. And so if you look inside of Tyco, you see the kinds of things similar kinds of things that we talk about at Legacy Johnson Controls around the operating system they put in place. And that was everything from their field organization to their commercial processes, their back office and manufacturing processes and an awful lot of work that was done there over the last 4 years to get that organization, I think, in a position to be able to actualize this merger.
Johnson Controls different, but similarly got itself positioned really from a perspective of being able to change our portfolio from a portfolio of multiple businesses, heavily weighted to automotive. And so if you look at what happened over the last 3 or 4 years, if you take our consolidated and unconsolidated businesses, we either divested, acquired, spun over 40,000,000,000 dollars worth of businesses over the last 3 to 4 years. So we've been fairly busy. And so as we look at this opportunity, it's really an opportunity for us to get focused as a new company and a new company that I think can create a tremendous amount of value. So we're not going to spend a lot of time talking about the past, but I do think the past doesn't form the future.
And so as we do talk about our future, we have to acknowledge where we came from because that comes with a bunch of strengths, a bunch of opportunities and a bunch of set of tools and processes that I think are uniquely positioned us to be successful. And we may refer to some of that as we go through the presentation because a big part of this is making sure that you feel comfortable that we can actually do what we say we're going to do, actualize this vision, because I think it's pretty exciting what we have in front of us. So as a new company, and I think you've seen this slide before, this is a frame that we probably won't this will probably be the last time you see this frame. This is a reference to how we got here. These 2 organizations and this is the organization, the legacy organization that without the automotive business, so this pro form a organization, where you have a $20,000,000,000 remaining Johnson Controls merging with a $10,000,000,000 Tyco organization.
And I'll come back in a few slides and talk about how do we reframe that business to make sense, because this is not how we go to market. This is just a perspective of where we came from, not a perspective of where we're going. Now what's important? And this speaks to the things that I want you what I want if I'm successful at the end of the day, other than the fact that you internalize our numbers and you understand the opportunity we have in front of us, If I'm successful, you're going to say, this team can actually make this happen. That not only has a great plan, but it's a great team.
And if we'll be honest with ourselves, and a team doesn't make in 9 months. And if you really want to be honest, we couldn't become a team in 9 months because we've only been together truly as an organization for 3 months. So what do you do? How do you make this happen? This has to be built on a foundation.
Johnson Controls is 130 years old. It's 130 year old company. It's got a foundation that's there and we need to take from that all the things that are positive. Tyco has a rich legacy. You bring those two things together, and we both have different context.
We have different perspective. We have different experiences. So the last few months, in between all the things that we had to do, one of the things that's most important is this individual, a set of individuals that I just introduced to you. We got together as a team multiple times, and we said, what is the company that we want to build? What is the legacy that we want to have?
How do we want to behave? What's important to us as it relates to our mission, our vision and our values. Both companies had these things. And I'm not going to take you through all of it, but there's a few things that I do think are important. Safe, comfortable and sustainable, very clear if you look at both companies, you think about Tyco and safety and security, you think about Johnson Controls, same thing, safe and secure and sustainable becoming a big part of not only what's important to us, but what's most importantly, what's important with our customers.
Many times you'll hear us refer to our customers in this, and I'll come back to it in a minute. Our mission, helping our customers win. I had the opportunity over the last 9 months to travel with George as we went and met with most of you actually, because for many of you, you wouldn't know me because there was a different set of folks that followed John's Controls. But as we get it had the chance to go with George and talk about George's vision of for Tyco, and I think about Johnson Controls and us moving forward, helping our customers be successful because in the end, in the end because of the unique attributes of this company, because we do have our own access to the market through our own channels, our ability to sell solutions, solve customer problems, understand and engage with our customers at that level, it's what's going to make us uniquely successful. It's very it's not that all customer all companies say they want to help their customers be successful.
I would tell you that it's an imperative for us because of the fact that we the way that we access the market from a primarily is with Johnson Controls individuals. We have individual relationships with our customers. Those individual relationships with our customers, it's important that we truly understand their business, that we truly understand their challenges and we help them be successful. Kim is going to come up and talk to you about the market trends and inform that because in order to serve our customers, we have to have the right products, we have to anticipate the issues and challenges that they're going to have and we have to build those programs, products and capabilities in order to serve them more successfully. And so as we talk about that, when we talk about a frame that Johnson Controls is going to use, as we look at the world 10 years out.
That's the way that we think about the world. We could look at it longer, but it gets pretty hard to see. But at 10 years, you can look out and you can say, what are the trends that are going to inform our business? Where should we invest? What things are going to change?
What do we need to do in order to be successful? And then we have a 5 year financial and strategic plan. So we have a 10 year view and a 5 year plan. So we're going to talk a little bit about that 5 year plan. And then as it relates to our financial objectives, we typically work in 3 years.
And of course, we have an annual plan just like everyone else. But when you think about how we pull these things together, we inform ourselves over the next decade, we plan over the next 5 years and our financial plans are together around investments, typically in that 3 to 5 year period. And then values, you can imagine 2 companies coming together and then 2 leadership teams be forming. And quickly, we didn't have a whole lot of time to stare at each other before we needed to get busy. We need to get to where we could articulate to our employees who are we, what's important to us and what are our expectations of each other.
Was there expectations of each other? And quite frankly, probably the most important thing is, what's the relationship going to be between myself and George Oliver? And how are we going to be successful? How are we going to behave? What's important to us?
And you think about what's important to individuals, first thing is integrity. And that's not something that was no different than from when you think about the strength of Tyco and the strength of Johnson Controls. And then a few other things, purpose led. We need to do things for a reason, not just do them because we can, do them for a reason. That's going to inform our strategies.
The customer needs to drive everything that we do. So whether it's because the customer individual customers or as we think about where the market is going, we have to have a view for that. Because the customer will help us articulate what business we need to be in, where we need to do it and how we need to make those things happen. Future focus, we talked about our 10 year plan, one team. A lot of talk about one team.
And what I would tell you is and I ask you to test that, I think that we've got a long way to go, but I'd tell you I'm really impressed with the way that both teams have come together in order from a positive perspective to be able to seek to understand so that we can become truly powerful organization and actually actualize the value that's in front of us. So when
we look at the opportunity to be successful because of that And that's our brands, our technologies and our footprint. I'll come back to that in a little while and spend some time. And the other thing is that we have an opportunity and I think that you understand that. I've had the opportunity to meet with many of you. We understand that the opportunity is right in front of it.
It's not hard to figure out how we can create value for our shareholders. It's not a difficult it may not be easy to do, but it's certainly right in front of us. And I think that's something that we can articulate and that you clearly understand. So now let's reframe. We're not going to talk about legacy Tyco and legacy Johnson Control.
Let's reframe this business. And as you think about this and you think about the company and we'll talk about it in near term and long term. When you think about the company, we organize ourselves in 2 segments. We're going to talk about the world
ourselves in 2 segments. And we're going to talk about the world in those 2 from those 2 platforms, and we're going to organize our business around these 2 segments. So the two segments we have is our Power Solutions business. That is the same business that we had, it's the business that we continue with and it has its own sets of challenges and opportunities and investment criteria. We'll separate that, and there'll be a lot of discussion around our building technologies and solutions.
That is the BE organization combined with Tyco. So when George talks to you about what we're doing around the merger and where are the synergies, think about it this way. Think about it, we have corporate synergies. That's something that's in our control. And then think about our Johnson Controls operating system.
Jeff Williams will talk about that. That's an opportunity for us to create value across the enterprise. But a lot of the real integration opportunity fits within Building Technologies and Solutions, and that's where we're really reorganizing. So if you think about where the battlefield is now, where the opportunity, it's in within this Building Technologies and solutions. So more to come on that later today.
So who are we? And I think that many of you know this, but I'll just walk you across the world here a little bit. Both Johnson Controls and Tyco have franchise organizations within North America. We're coming from a position of strength, leader in security, fire, HVAC controls and then, of course, our Power Solutions business. All of our businesses in North America are franchise strength.
A little bit different than you get outside of North America. So when you get to Asia, Johnson Controls has typically had a larger footprint and really is the leverage point for this merger. And then when you go to Europe, it's the other way around. Tyco has a much stronger footprint and it's an opportunity for us to leverage that. So when you think about synergies, we think about the synergies that are and the opportunity in front of us in North America.
We're playing from a position of strength. We'll talk about revenue synergies in a few minutes. It's going to be where the bulk of that comes from early on because we're playing from a position of strength. And then you look at the opportunity for growth. Trent is going to talk about Asia Pacific, China specifically.
It's an opportunity for a leverage of footprint that exists within Johnson Controls. And then in Europe, the same opportunity exists, but that opportunity exists to leverage the legacy Tyco footprint. Then you get a sense of the statistics of where we play and where our revenues come from. So we'll drill down just a little bit. I'm not going to spend a lot of time because you're going to get a lot of this, but I'll just make a couple of points here.
I think George has the same slide and he'll have a little more detail around this. But if you look at these two businesses, it just gives you a little bit of the high level financial profile of this business. But what I would get out of this and then I'll get off the slide and move on, but if you look at these businesses, there's they're pretty durable. We start with our buildings business. We have a products business, and a lot of those products are delivered through our channel.
And then we have recurring services. So when you think about this business on an ongoing basis, it's able to weather and take advantage of cycles, a heavy institutional focus from to a large perspective. We talked about the geographic footprint, but I think that what you've got is a business that's pretty durable through cycles. And then our Power Solutions business, which I know many of you are learning about, it's primarily an aftermarket business. Technology is provided through the OEs and then replaced through the aftermarket.
So a lot of times when we talk about our Power Solutions business, even though this is a product business, the aftermarket is more of a recurring stream. It's the nature of the business if you think about what choices do you have as a consumer when you need a new battery. So you know this, I just want to remind you that this business is one that can weather cycles
pretty well.
So when you think about this company, why would you invest in it? First is that the value that we can create is something that we have it's in our control. So and this commentary will come back later on when we talk about capital allocation. But a lot of the value that we can create is right in front of us. It's our opportunity.
It's our entitlement. It's an opportunity that we have, whether it be in the cost or revenue side that we don't need new products and services in order to provide. We have those. We are going to have new products and services. We are going to provide new technologies and we are going to have greater access to the market.
But what we have in front of us allows us to be able to achieve the objectives over the next few years. And as we invest, we have the platforms to invest in. We don't need a new platform. We have the platforms for us to invest in. So whether it's the platforms in order to extend what we already do or add value to add it to the adjacencies, the platforms that we work within are plenty for us to grow.
And I'll put some context around that. And then our commitment is that as we move forward, we will continue to look at how we allocate capital and make sure it's as shareholder friendly as possible in order for us to balance the capital requirements for the business, but also the needs of our shareholders. Another proof point, both companies have gone through the last few years, and it's not as if we don't know what to do. And it's not as if we don't have a track record to say that we're willing to do the things that we need to do in order to create value for our shareholders. And if you look at the last few years, this is a look back and it takes an account both of the operational improvements and the portfolio moves that have been made by both Johnson Controls and Tyco over the past 4 years, you can see that this business has changed dramatically.
So that I think that you should have feel some comfort that this leadership team, this management team is not one that want to run away from not only the opportunity in front of us, but any challenges that we have. And I think that we don't have to look to anywhere else except for our own experiences that both Legacy Tyco and John's Controls have stepped up to be able to create the kind of value and the kind of company that we have today and that we can create the commitments that we're going to make is one that we feel comfortable making because we have these experiences, these experiences that we can draw on. And we have a framework. Jeff Williams is going to talk about that framework. We have an operating system that we certainly feel confident that can do a few things.
One, it can help improve the businesses that we have. So whether it's our commercial processes, our back office business processes, our manufacturing and supply chain initiatives, our procurement processes, we have a set of processes that allow us to improve the business that we have, allow us to organically and successfully invest and allow us to if we make an inorganic investment, allow us to integrate businesses more effectively. It's not as if we don't have a way. We have a way. And in order to take advantage of that we have an infrastructure and a set of processes to make that happen.
I think Jeff is going to dig into that a little deeper and just give you some proof points of some of the things that we're already doing. And I'd just like to remind you, we've been doing this while we've been making these portfolio changes. I'm incredibly proud of the team that we have not used any of these activities that we have at corporate as an excuse to not deliver on our financial results quarter to quarter, year to year over the last 3 years. These are the next few slides you've seen before, but I'll just remind you. Because we have we are absolutely sure that we have the right platforms in which to grow, informed by these megatrends that Kim Metcalfe Cupris will go over today.
We believe that we are in the right space. The spaces that we're in and the geographies that we serve are fast growing. You'll understand that as we go through the rest of the day. But these two platforms that we have represent over our planning horizon $400,000,000,000 of market opportunity. That's plenty.
That's plenty of opportunity. Now all that can't be done with a set of products and services we have today, but we understand what it is that we need to do at least in the current environment in order for us to take advantage of the opportunities in front of us and the opportunities that could present themselves. And so we don't believe that we need to move outside these adjacencies. We need to work within these platforms. The first platform we have is our energy storage platform.
And if you recall, these we call these our dinner plates internally. But if you recall, this is the set of products, services and solutions that we have access to in the market we serve today. And what you see here is where we actually serve the market. So we're pretty strong in the transportation market. We serve the stationary market, but not in a way that we have the same strength of our automotive, but it's an opportunity for us to leverage our scale and footprint.
And so if you think about the future, and I guess the way that I would think about this if I were you is, as I look back on the way that we've communicated the past few years, we've pretty much told people what we're going to do, and we've executed against that. And if you see, you're going to see a level of consistency with us as we talk about what our opportunity is, where we're going to participate, what our gaps are, what our challenges is, what you'll find is that if you look back retrospectively is we're telling you what we're going to do. We're telling you where our opportunities are. And what we believe is we have the opportunity to leverage a franchise business that we have around footprint, technology and end markets in order to grow. There's plenty of opportunity for us to grow that's within the scope that we have today organically.
But when you think about adjacencies, we have a footprint and a capability that can be leveraged in a market that's growing dramatically. Little more complicated is our Buildings business. When you think about our Buildings business and the kinds of things that we've done over the past few years and in this perspective, I'll put in both Johnson Controls and Tyco. But if you go all the way back to 2006 when we acquired York, it's when we decided that we just didn't want to be a controls business, we wanted to serve the market more broadly. And so when we acquired York, we started to integrate our controls and our equipment, started to serve the market more broadly.
It gave us an opportunity, but it also informed us that we had some gaps. And so we looked at being able to extend our market to more third party channels, ADTI. And then as think about this, this Asia perspective, this 10 year view, it's very clear to us that technology is shifting in this market. This is in the HVAC part of the market. And in order for us to be successful, 10 years, 5 years out, we did not have all the technology that was going to be required in order for us to be successful.
So it depends on what kind of race that you're running. If you're running a marathon, we needed more technology. If you're running a few lap race, then we were fine. We just needed to build out our channels and some of our capabilities. But as we looked at the market, the Hitachi joint venture made a lot of sense because the technologies that are coming from Asia and the size of the Asia market are pretty important to us.
And so as we have integrated that more and more over the last year, it's been far exceeded our expectations. And I think over time, what you're going to see is those technologies are not only going to be Asia technologies, but they're going to be central to what we need to be successful in the mature markets, including North America. And so we have plenty of opportunity. And then finally, with the merger with Tyco, we'll be able to serve building technologies more successfully. So let's talk about that for one second.
When you think about building technologies and you think about the core of what's happening, why would you believe, why would anyone believe that what's going to happen within the building, the commercial building is anything different that's happening in your home and in your car and in your pocket. It's not any different. It's not going to be a 1st mover, that's for sure. And it has lots of reasons why it may take longer. And I can go through the reasons, but I can tell you it's inevitable.
It's inevitable that building technologies will collapse within buildings because the value will be derived. And Joska Trolls, with his merger with Tyco, has said that we are going to be at the center of that. And so when you think about systems within buildings, the core systems that we now have around security, life safety and building automation is core to every building. There are other systems, we can have a debate about that, but these systems are core. And what we're seeing is, and we're seeing it today, our customers are telling us that we're on the right track.
And so I don't have any doubt, none, absolutely no doubt. This really comes down to time. And I think we have the opportunity to be a leader in this. And so the position and the flag that we put in the ground around these two companies coming together uniquely positions us to exploit that opportunity. Does it mean it's guaranteed?
It just gives us the opportunity to exploit it. George will talk about that a little bit, but let me give you a perspective and then also give you not only a perspective, but what can you expect. What can you expect, so this is just not gibberish, it's not rhetoric, this is real, over the next 3 years. So right away, first thing on the headline is $500,000,000 run rate this is news, by the way, dollars 500,000,000 run rate of revenue savings in this time horizon, so 2020. So we haven't talked about that.
Everyone's been asking, so where are the revenue Where are the revenue synergies? Not only have people asked for the revenue synergies, people said, well, no, you can't do it. It's not going to happen because other people have said they can't do it. They have not been successful. This has nothing to do with other people being successful or not being successful.
That has to do with the fact is that we have a business model that's very unique. And our business model that is unique allows us to take advantage of this opportunity. That was the theory, that was the hypothesis. And I can tell you, and George will go over it specifically, is it's real. We have I have as much confidence in this $500,000,000 as I do in the $500,000,000 of cost synergies.
There is no doubt in my mind, and you'll see it, it will come through, that early on that our customers are moving faster than we are. Our customers are asking us to be able to provide more products and services. They'd like to have more technologies, but we're not there yet. So the next wave of this is we're going to integrate the way we go to market, integrate our solutions, at least from a commercial perspective and at some level at least have the products be more integrated and how they operate interoperable. And then over the long term, when you think about 4 years, then these technologies truly will collapse.
The platforms will collapse. And it will give us an opportunity to create even more value. So when you think about how we're organized internally, we're organized to seize this opportunity. So internally, we have an organization that's region by region, allows us to take advantage of the near term opportunities and have our channel to the market. And then we've organized ourselves around products and those products allow us to have a product plan that can actualize this vision.
So as we move forward, you'll hear more and more. George will talk about this later on today, but I'm pretty excited about what I see. The other thing that's important to understand is that we know that we're not done. The slide on the left here is the here's the slide, I think, is when we finally started to get a little clarity around our message at the EPG conference where we talked about the fact that we had synergy opportunities and ongoing productivity opportunities, one did not replace the other, the $500,000,000 of synergies, the productivity opportunities and the tax savings that came about because of the structure of the deal, those things were all intact. And I think when we had that conversation in the summer, I think people felt, okay, I get it, I understand.
What I tell you as you go through the 2020 period, we see another $100,000,000 worth of opportunity. The question you're going to have is that synergy or productivity? And I just would tell you, yes. Because by the time we get to that period, it's going to be pretty hard to be able to sort out what's synergy and what's productivity because what we're going to be doing is
operating as one organization. So as we build confidence, we'll continue to
talk about what the opportunities are in front of us. But as you start thinking about our future, kind of update you on where we are as we look at the opportunity in front of us. And I think probably the most exciting thing of this is that how confident we are around revenue synergies. So when you think about the next 18 months, it's one thing to say that we're going to actualize this vision. What are some of the things that you can expect and some of the things that you'll know that are going on?
The culture of these two organizations need to come together. It's one thing to say that we have as a leadership team that we're coming together. It's another thing to say that our 130,000 employees, about half and half by the way, Johnson Controls, Legacy Johnson Controls and Legacy Tyco are truly going to be build 1 company. And so that's pretty important. And so there's an awful lot going on to make that happen.
Because in order for us to embrace the changes that we're going to be able to need to embrace, we have to be able to communicate to all of our employees and make sure that we get ourselves aligned around the vision. Mission, vision, values as a fundamental. The next thing that you would expect is that we're going to continue to deliver on our operating and financial plans. It's not good enough to be able to talk about a vision that we're going to have. It's most important that we as we do that, that we deliver.
And you should expect consistent delivery from Johnson Controls. We're going to advance this integrated strategic plan. So I would tell you today, I'm introducing to you a plan for a plan. By the time we get together next year, what you're going to see is a pretty strong plan around our portfolio, the enterprise portfolio because we have a new portfolio and the strategic vision around this connected buildings. You should expect that from us.
And so it won't be a plan for a plan, it will be our plan. Continue to look at the portfolio, we talked about that and you should expect over a period of time a disciplined capital allocation strategy and a set of metrics that would go with that. So let's talk about capital allocation. Organic investments, you know those organic investments, I'll talk a little bit about that. Dividend, we have 2 dividends, 2 dividend structures within the legacy Tyco and legacy Johnson Controls.
Brian and Steve will talk a little bit about our dividends. And as we go forward, we are going to make sure that we have the dividends competitive with our peer set. Strategic M and A, think about it within the platforms that we discussed. So when you think about what is it that's important to us, you'll understand our gaps, you'll also understand our opportunities. And as we move forward, there shouldn't be a whole lot of surprises.
But also think about as you think about our portfolio and we look at our portfolio moving forward, we will continue to evaluate the portfolio that we have to make sure it's the right portfolio that we're investing in the right thing, not just because they're good businesses, but they need to be good businesses that for us. And then share repurchases in the near term, that's not something that's really on the table, but in the long term, that should be a part of our capital allocation strategy. Organic investments. There's going to be no surprises here. Our Power Solutions business has a tremendous amount of organic investments in the next couple of years, which you should expect when we have made investments within our Buildings business.
And I would expect as we understand technology better that you'll see technology investments within our buildings business as we understand the platforms that we need in order to be successful in that 4 year out horizon, because we don't have everything we need. We need to make sure that we make the proper investments. And so you'll hear more and more about that, But there'll be an Asia centric piece of this along with a product perspective. And then we'll continue as the market continues to seem like it gets healthier and healthier to invest in our sales force and our channels. So as we move forward and you're looking for some metrics to understand what is our perspective around M and A.
I'll just pick up a few highlights on this chart here. First off is any deal from our perspective needs to be supported by cost. It needs to be an opportunity for growth, but we need to see the cost opportunity. So that would tell me that that would inform you that we would think that these things are fairly near adjacencies in order for us to be able to get the cost synergies out of any sort of deal. Accretive by from an EPS perspective by year 2, return our weighted average cost of capital by year 3.
Our operating system needs to be relevant. And so if we if our operating system is not relevant, then we won't be able to get the cost synergies. And so it's not something that we probably can be able to meet the metrics that we set forth. And it needs to be it needs to complement our existing platform. So it's within the framework that I just gave you.
So as you think about the kind of investments we would make moving forward, I think it should be fairly clear, shouldn't be a lot of surprises around where is the field of play and what are the set of financial metrics that we look at. And then from an internal perspective, what kind of pressure testing that we do to make sure that we are able to make these investments accretive. And what should you expect? So over this horizon, 12% to 15% EPS growth. Brian will spend some time kind of taking that apart for you.
But I think it's something that's certainly within our control. And I feel fairly confident we have the right team in order to make that happen. And then as I close-up here, it's important to realize that we'll continue to invest in this business. We're in this for the long haul. So as we move forward, and we'll keep highlighting that, whether it be organic investments, whether it be investment in technologies, but we'll continue to reinvest to make sure that we're in a position to win in the long run.
And so you're not going to see us make choices that forfeit our future. The future of this organization needs to be built on a sound set of fundamentals and a set of reinvestment that allows us to be a strong company for the long haul. So let me close-up here. So why are we positioned to win? So I think we are we've got a strong set of businesses positioned in the right market.
And whether that would be end markets, whether it be because of the fact that we're serving the trends of the world and we're right in the sweet spot of all the megatrends that are happening, and we're geographically investing in the places that are growing, I feel pretty good about where we are. I wouldn't trade our position with anyone else. Execution, we have a track record of delivering. I have no doubt. Confidence has been able to being built over the last few years as I've had the opportunity to lead this team through probably well, I don't know, probably, undoubtedly the most amount of change has ever happened within Johnson Controls in our history.
And we've been able to deliver quarter to quarter, year to year. I have no belief that that will change, no hesitation. And then last, shareholder value. I mean, as we have an eye for our future, we understand that we understand why we're doing this. And we're understanding how we're being measured.
And I think we'll be able to create the value that you would expect and be able to capitalize on the opportunities in front of us. So as we go through the rest of the day, Ken will come up and talk to you about the megatrends. I hope that what you get out of this is we have the right strategy, we have great end markets, most importantly we have the right team in order to make this happen. I believe it. So I hope at the end of the day that you share the enthusiasm that I have.
And the other thing that I look for is, how far are these guys today as far as becoming one team? I'm surprised, pleasantly, not that I knew what my expectation was. I've done a lot of things in the last few years the first time. This is the first time I've ever done anything like this. And what I can tell you is, it's hard.
But it's not only it's worth doing. And I think our people see the opportunity. And I couldn't be more proud of not only the legacy colleagues, but the new colleagues I have. And I think that that's going to come through when you listen to our team talk here today. So anyway, thanks a lot.
With that, I'll turn it over.
Ladies and gentlemen, Vice President and Chief Marketing Officer, Kim Metcalfe Cupris.
Good morning, and welcome to Johnson Controls. Thanks for joining us this morning. As Alex said, our strategies at Johnson Controls are informed by key sets of megatrends that are particularly relevant to the industries that we serve, the products and services that we deliver and the environments in which we operate. And we are constantly looking at these things in the context both of what's relevant for our business today, but more importantly, how are these trends shaping the future of tomorrow that we're building day by day through the products and services that we bring to our customers. What we wanted to do with this part of the presentation is really just to provide a little bit more depth in some of the topics that Alex has already teed up, but then to provide context for the rest of the presenters this morning.
As George and Trent and Jeff are talking about those specific components within our operating plans, they all really connect to these trends. So,
we're looking at the opportunity that Alex has described. Now if you joined us last year, you heard me talk about 4 primary megatrends at the time and those are really still very consistent. We'll talk about each of these individually. This year we have added a 5th. The 4 that we talked about last year were demographics, global urbanization, energy and digitalization.
And I think I called it technology last year. And we'll go into both aspects of that again this year. Global urbanization, energy and digitalization. I think
I called it technology last year, and we'll go into both aspects of that again this year as we're talking about it. The only change really at this level is that we've added a 5th component, which is sustainability and regulation. This has always been a secondary driver for us and when you get down into the depths of each of our operating businesses, regulatory environment is particularly important to the industries we serve. But because of the escalating nature of regulation and the inevitable move towards sustainability as consumers demand more and more sustainable solutions and the world needs more and more of the sustainability offerings that we provide, we've decided that it needs to be up at this level as a a primary driver of its own. It's always been in the picture, it's just a little bit more visible now.
You'll notice across all of these and as I go through this presentation, we'll see a lot of interdependency, a lot of connectivity. The themes are threads that go throughout and that's purposeful. They're connected and they lead one to another and they lead directly into the business strategies that you see across our platform. So let's go into each of them in a little bit more depth. First, when we talk about demographics, it is generally conceded that the global population continues to rise.
It's rising at an aggressive rate. However, it looks like in the next 30 years, probably between 2,035 to 2,040, global population should peak at about 8,500,000,000 people. Now most of that growth is happening in emerging markets. So when Trent talks to you about the growth in Asia Pacific, it's where our investments are, but it's also where the global population is moving. All of these megatrends we're talking about are happening globally, but they're happening in spades in Asia Pacific and right now, particularly in China.
When we talk about global population growth, it's obviously an important driver for us. But under the subtext of that, the thing that's more important is the growth of the global middle class. Over the next 15 years, by 2,030, the global middle class is expected to double. And when we talk about the global middle class, it's a little bit more conservative than some of the other companies that you might cover, because we define personal income at our threshold of about $20 a day or $7,300 per year. And we do that because the economic models that we follow and our own statistical analysis shows us that there is a very strong correlation when you have critical mass in a population of those kinds of GDP levels where you're suddenly now making the tipping point beyond basic personal needs of shelter, food and clothing and you see good parts of the population being able to invest discretionary income into shelter, into convenience, into safety and comfort and those are the things that we do.
There is also a strong correlation with the social structures and the institutional construction and transportation infrastructure that happens when we hit that tipping point. And so those are critical things that we're looking at, because it's easy to talk about broad emerging markets and where the population is going to be. But we're concentrating our investments and our attention on those regions where the developing middle class shows the greatest penetration and next level of uptake and then success of maturity for the products and services that we deliver. The other consideration here is 2 things as it relates to the characteristics of this global population over the next decade or so. 1st, very strong correlation with education.
We'll talk about technology later, but it's expected that this next wave of middle class participants are going to be as or more educated than those who have come before them. Part of that is being driven by technology because they're leapfrogging the job skills that they are using. But you're also going to see continued investments in educational infrastructure, which is a big market for us. So around the world, we're going to have growing populations of students at all levels being educated and they need places to do that, they need technology infrastructure to support that. In addition, we're seeing an aging population and this in fact, is a cause for concern as well as a cause for opportunity.
And we're not going to get into the social implications of this or the tax policy issues. But at 66% ratio, the working population to the general population in 2015, that was the peak. Never again in the current outlook will we see as large a percentage of the population actually of working age. And so much bigger increases in dependency as it relates to the very young, but more importantly, the very old. So again, healthcare, other institutional settings, and when we talk about the implications for our business models, how we support the operating systems that we have related to skill gaps and knowledge gaps.
So we talked about most of these components on this page as it relates to the implications for Johnson Controls. As the middle class rises, so does our opportunity. They may ask for different kinds of products and services than we provide in North America or Western Europe, but they're asking and need the kinds of things that we do. And therefore, the combination of a global footprint and a global basis of capabilities along with regional presence that is tailored to the markets that we serve with solutions that are appropriate for them is incredibly important to our success. That growth is centered in Asia Pacific today, but other emerging markets are relevant for us around the world.
The investment in infrastructure is something that you're going to continue to hear us talk about throughout the day as we talk about urbanization and then we talk about the business operating plans. And then we've got this shifting demand for workforces that have to be more flexible. Where the opportunity is, is not necessarily where companies have their big locus of capable people. And so having a global footprint, having good technology infrastructure and having an operating system that allows us to move into those spaces with speed, with consistency, with quality, with discipline is incredibly important for a global company to bring advantage to our customers and to bring advantage to our shareholders. Closely related to demographics is the trends toward global urbanization.
This huge increase in population is not happening in a wide spread even distribution across the geographies that we serve. It's happening in cities. By 2,030, 80% of the world's population is going to live in cities. 160,000 people are moving into cities every day. And that's driving huge requirements for investment in infrastructure.
By 2,030, we're going to see $90,000,000,000,000 of investment in infrastructure to support global urbanization. Now that includes cities that are building around the world. It also includes a lot of investment in deferred maintenance in urban infrastructure renewal that has not been attended to over the course of the last decade or more in mature markets in North America and Western Europe. When we talk about this dynamic, I want to explain this chart a little bit because I know it's a little bit busy. What we've tried to do here is visualize for you where is this happening, because it's really important that when we talk about, okay, this opportunity is developing, it's really important that we know where it is and how we can address it.
So on this chart that you see, we've been actually able to map where the projections in population growth really concentrating. The white dots are those cities around the world today that have a population of over 1,000,000 people, and they're sized to the projected size of those cities in the next 10 years. So you can see some of them are at about 1,000,000 people and are expected to stay about 1,000,000 people. Others are sized at about 1,000,000 people or could be 10x that or more over the course of the next decade. Then the other dynamic that's going on in this chart are these little gold circles.
And those are indicative of what we call urban clusters. And the dynamic here and it's important particularly in developing economies is that cities are not just growing in an even distribution across regions. They're growing in concentrated areas around clusters where they can share infrastructure, where they're developing new natural business dynamics around supply chains and trade. In some cases, this is formalized with regulation. It's definitely driven by infrastructure.
It's definitely driven by dynamics with the populations that are within them. And you see a much different dynamic and a concentration of opportunity, which is really important when we consider how are we going to serve them. It's a lot more efficient for us to understand that the growth that's happening in China is really being driven by the triangle between Shanghai, Hangzhou and Nanjing. Now obviously, it's growing around the whole country. But when everybody reacted to the slowdown in China, there was a lot of overreaction because they were looking at what was happening in Tier 3 and Tier 4 cities.
When this growth opportunity, particularly in our industries, gets that concentrated, now we know it's not about what's happening to China as a whole that's important to us. It's what's happening in the cities that we serve and in particular, the mega clusters that are developing and forming the bulk of the opportunity and demand for our services and products. So let's talk about urbanization. I mean, this is at the heart of who Johnson Controls is. It's at the heart of where Tyco used to be.
And so as we come together, we're uniquely positioned to provide technologies and solutions that the world needs. We've got a growing sophistication of owners and occupiers. So even when we look at the technology that's in buildings today in China, it's very low tech. But there's growing appreciation for the benefit of the technology of those buildings. And we see increasing amounts of retrofit, and we also see rising standards for performance and expectations of how those buildings are going to perform going forward.
Natural evolution, good for Johnson Controls, good for our customers, and those are the kinds of things that we're helping to influence as these economies develop going forward. We're also starting to see different business models, which challenge the way participants play in these opportunities. So public private partnerships, when you've got these enormous investments in infrastructure and forward city planning are really requiring companies to work together in a cooperative manner to work across boundaries and to work on collaborative solutions. A demand for smart city solutions because they can't afford to invest the same kind of historic infrastructure that other more mature markets today had done in the past. So we're leapfrogging, leapfrogging the kinds of investments and looking for different kinds of solutions.
If you may have heard our recent announcement about the Johnson Controls Hall of Fame Village, we're excited about that because partnering with the Professional Football Hall of Fame on the new development of that village is going to be a living showcase for us, where we can show and demonstrate for our customers how these things come to life. With buildings of all type in a very concentrated area, it's a small scale example of the kinds of large scale things that we're doing in real cities around the world. And George is going to share some examples of those with customers we're working with today. We've got highly concentrated markets, so it's easier for us to make our investments in a very focused way and to be effective and get the return on those investments. We're also, of course, then going to see translations of that into the implications for our supply chain and our value chain.
And longer term, we continue to look at what are the implications and opportunities to leverage our infrastructure to support and benefit from sharing economies as opposed to being potentially a victim of them. In order to support cities and in order to support growing populations, we've got increasing demands and different kinds of demands for energy production and energy distribution. Over the course of the next 20 years, we're going to see the capacity around the world increase dramatically with investments in terawatt production rising from 6 terawatts today to about 10 in 2,035. The more important component in this is you see a dramatic shift in the mix. While all of these categories grow in absolute capacity, renewables and their percentage of the general production population increases by double digits.
And that trend is going to continue. 60% of energy consumption comes from buildings and automobiles. A lot of the energy that is consumed today is wasted. And the opportunity for us to leverage more efficient batteries, more efficient energy management systems, more efficient equipment is tremendous. Dollars 6,000,000,000,000 of the $90,000,000,000 that I talked about is going to go into energy alone.
The opportunity for us to help optimize that spend, help it be faster, help to minimize it through efficient use of those resources is something that our customers are asking for on a continual basis. And the introduction of renewables into their formula is going to increase the demand for energy storage. We see it happening today. And I think George is going to go through some numbers of what we're seeing just in our distributed energy storage incubator, where we're leveraging our controls and energy storage technology to support this nascent space. We see a lot of demand growing there, and it's a place that we really think that we need to play.
So the implications for us, I think this is one of the most straightforward megatrends. Whether a customer's motive around energy is just to make sure that they have good supply or to save cost or to be more sustainable in their energy strategy. Johnson Controls plays on all of those dimensions. The technology we provide today in our core businesses has inherently been part of the value proposition that customers have sought from us. As these systems become more and more sophisticated and their needs become more and more ambitious, the convergence of technology, the connectivity to district infrastructures, different grid systems, different off grid energy storage opportunities are all significant areas of business for us today as well as innovation and growth opportunities for us in the future.
Just to make sure I didn't miss anything, I do need to also touch on vehicles just a second, because as we talk about our start stop technology is directly connected here. The controls technologies that we're using across the businesses we are finding is transferable, so it's another source of infrastructure. And when you think about that connected or connected and connectivity space between the two frameworks that Alex showed you in buildings and energy, it's not just the blue box that we have out in the hallway. We're doing some very great innovation in that space. But increasingly, we're looking at connected infrastructure and connected solutions across these environments, and it's directly relevant to the things that we're working on in our development pipelines.
And of course, it opens up adjacent market opportunities for us. So we talk about sustainability and regulation. The targets are increasing globally. We have talked about the implications of regulation setting the floor for performance in both our battery business and our chiller business for a long time. Government regulations and consumer demand are driving increased attention not only to economy, but also to emissions reductions.
So it's the amount of energy consumption from a cost and a resource scarcity perspective that's emotive, but environmental quality is increasingly becoming a primary driver and a paramount element in the regulatory environment. Of course, everybody is familiar with the Paris Climate Change Agreement and the substantial reductions around the world that countries have committed to in order to achieve that 2 degrees of saving in global climate change temperature. 3x the amount of carbon emissions that are happening in the increases in mature economies are coming from the developed world, and they need the technologies that we can provide to help them meet these objectives. So whenever we talk about the floor, the adoption rate, the penetration of new technologies, we're always looking at the regulatory environment and what's going to be required across the suite of alternatives in terms of those penetration rates. So when Joe talks about start stop technology and start stop batteries or when Bill and the team in Chillers are talking about alternate refrigerants in their introduction into chillers or we talk about the connected requirements and performance requirements in our controls and fire and security systems, all of those regulatory drivers are incredibly important to us.
And we take an active role in setting standards and in driving those standards to optimal levels, because they're the right thing to do, they're the right value for our customers and they create competitive advantage for Johnson Controls, because it's harder for others to compete. Start Stop is a great example. Urban efficiency and green building technologies are other examples. Another one that I'll show us a video of here at the end of my presentation is about the circular economy. And what will be unique about that is not only is it about recycling for environmental protection, it also plays a key role in the commercial model for our battery business and our supply chain.
The last trend is around digitalization. And as I talked last year, there are really 2 dimensions to this. 1 is the digitalization or the technical convergence of the technologies within our products and services. And the other is the implication of digitalization within our operating models and within our value chain as a company. 1,000,000,000 and 1,000,000,000 of sensing devices all around the world.
This is the Internet of Things. This is the world of smart connected products. And as you think about what goes into buildings, what goes into vehicles, Johnson Controls between the combination of our legacy building efficiency products in the HVAC world and the Tyco life safety, fire security and retail solutions, we have probably more sensing capabilities in the built environment than any other company around the world. The opportunity for us is to take the infrastructure, the data analytics, the control technologies today and optimize the performance of those systems even more and to do that with an eye toward higher levels of performance, higher levels of value added capabilities through data analytics and value added services as these industries continue to evolve. You can see on this curve, which is one that a lot of other companies use as well, that buildings and manufacturing, which are our part of the whole environment of these industries, are relatively behind as it relates to the adoption rate and the disruption rate of technology.
It's because we've got long lifecycle kinds of products and infrastructure products. But even our space is speeding up, and we're in a great position to take advantage of the trends that are inevitably going to occur. We're extracting and creating value from those today, but we're also really in a great position to be shaping them for tomorrow. The other thing that we see when we bring these things together, and this is has long been established is that through the convergence of technology in buildings, there's a huge amount not only in energy efficiency that can be gained, but also in productivity. So typically, if we put controls into a building, just the facility management part of that building will extract at least 15% improvements in productivity.
Now when you start adding these other building systems and you've got converged infrastructure and converged interfaces, your facility management productivity goes up, but also all of the other people that are operating in that building benefit from improved productivity as well. And so that's a big part of how the smart connected building is at the center of our strategies and is going to be driving a lot of our priorities going forward. We've added advanced services like the retail solutions business in Tyco or some of our energy optimization capabilities within building efficiency that are bringing more and more value out of the data that we're able to collect, translating that into both strategic benefits and operating and economic benefits for our customers. Of course, this raises a whole new host of questions around cybersecurity, the degrees of autonomy that we want to have within systems and augmented intelligence and virtual reality. All of those things in cybersecurity is the core of what we're doing, but all these other capabilities are just untapped emerging capabilities that we don't even really know how to commercialize yet.
And that's what's exciting as we think about how those can be further embedded into our operating models and how they can help advance the smart buildings of the future. So just to conclude, before we're going to play a video here in a second, as Alex told you, we got $450,000,000,000 worth of opportunity in the 2 strategic platforms that we've articulated for ourselves. We work across those platforms, across multiple horizons and really try to prioritize where are the near term opportunities as we're building for a longer term future. In the near term, we've got very strong core businesses with plenty of growth in their immediate field division and you'll see that reflected in the operating plans and the growth objectives that we have. At the same time, we're building out our solutions capabilities.
We're expanding capabilities that we have in a very strong way in North America and expanding those into Asia Pacific and leveraging the footprint that we have in Europe to bring more of our collective technology and bundled solutions to market. With a longer term view of sustained growth across an incumbent position rooted in these markets, that's going to leverage technology, but also continue to be a basis for growth for Johnson Controls as we're providing products, as we're providing technologies, as we're providing domain expertise that translates into solutions and value added services that really provide competitive advantage for us and for our investors. So we're very bullish about our position today. I think as we go through the rest of the presentations, George will talk about the operating business plans. He'll give you some great examples of the trends that I've talked about coming to life.
And then after the break, when Trent and Jeff are talking in more depth about the operating system and Asia Pacific in particular, you're really going to see how we bring this out of the clouds at a 30,000 foot view and really down to the way that we run the business every day, all day, every day of the week. So to close my presentation, I'm going to share one short video. I mentioned that it's about circular economy. And this highlights our battery recycling component of our power solutions business. We are one of the largest battery we are the largest processor of lead, the largest we're really proud of what we do.
But as you watch this, I want you to also remember, this is an embedded inherent part of our commercial and operational system. And so the economics of this circular economy are winners on all aspects of the triple bottom line. And this is an incumbent advantage that we have that really creates winning capabilities in our battery business. So let's play that video.
Early tomorrow morning, billions of people will wake up to billions of alarm clocks. 17% will start their day with a dark roast. 21% will choose low fat over non fat. Throughout the day, hundreds of millions of tons of milk chucks, glass bottles, aluminum cans and newspapers will be recycled. And the only product recycled more will be the conventional 12 volt car battery.
Every day, after powering up to 25,000 cold engine starts, car radios, navigation units, safety systems, engine management computers and headlights. Hundreds of thousands of hardworking car batteries will need to be routinely replaced. And every day, Johnson Controls will turn nearly 200,000 old car batteries into new ones. Up to 99% of the raw materials can be saving 90% energy and greenhouse gas emissions. Around the world, a closed loop system for car batteries will be completed.
The world's most successful example of a circular economy. Johnson Controls is shaping tomorrow by creating a smarter, more sustainable global economy today.
Ladies and gentlemen, President and Chief Operating Officer, George
Oliver.
Good morning, everyone. It was great to see many of you this morning and be able to catch up. I'm going to have the opportunity it's really exciting for me to be here to talk about the new JCI. And I'm going to give you an update on all of the business operations as well as the tremendous progress we've made with the integration over the last 11 months, integrating JCI and Tyco. So as Alex said, we are off to a great start with the combined company, staying focused on our short term priorities to successfully integrate and capture the synergies, both the cost synergies as well as the revenue synergies staying focused on our customers, not letting the integration get in the way of our ability to be able to continue to serve our customers and capitalize on the significant growth opportunity that we have ahead.
It's taken the best of both from both companies and putting those into place in the new operating models that enable us to be able to accelerate, create speed, ability to be able to deliver more value and ultimately accelerate growth. And most important, which Alex talked about, is driving the cultural integration with over 120,000 fully engaged employees across the globe. And most important is what I've done in the past, making sure we've got the right team, the right plan and that we ultimately execute for all of you. At the same time that we're executing on our short term priorities, we're making sure that we're positioned for the long term with 3 initiatives. Positioning to win, We've got incredible businesses that have incredible runway and we have the opportunity to be able to accelerate.
They both have leadership technology and product platforms. They both have channels second to none with our ability to be able to support our customers and they're both supported with very strong brands. 2nd is being able to deliver strong productivity, cost out, in addition to all of the synergies that we've identified with the merger. That enables us to be able to reinvest, reinvest in products, technology, new channels, while we're expanding our margins. And most important, most important now is being able to accelerate growth.
In the building space, taking the combined portfolio, differentiating the type of solutions that we can bring to every vertical market that we support, creating revenue synergies, driving commercial excellence with the Johnson Controls operating system tools. Jeff is going to talk a little bit more about this, but an opportunity to build a growth company where the customer is at the center to be able to deliver growth. And then is making sure that longer term that we are leading leadership through our technology, through our products and ultimately the channel that we put into place to be able to serve our customers. As Alex said and Kim reinforced, when you look at the businesses, when you look at the trends, we are positioned to win with 2 complementary strategic platforms. Let me just give you a brief overview.
Alex had a similar chart to talk about each of the businesses, and then I'll go into more depth into each of the businesses. Building Technologies and Solutions. It's a combination of the legacy JCI Building Efficiency business with Tyco. We are now the leader, leading provider of building technology, products, and we have an unmatched channel being able to bring solutions to all of our global customers. In 2016, we had revenue of $23,000,000,000 combined delivering EBITDA of $2,900,000,000 As Alex talked about, we have a mix, very strong global product mix with external sales, which make up about a third of the revenue.
And we have a direct channel, second to none, where we bring leadership solutions, provide installations, and then most important, capture the annuity, the recurring service that occurs in maintaining those systems over the life cycle. This gives us a tremendous platform to be able to deliver consistent performance playing across the entire building system life cycle. Moving over to Power Solutions. The undisputed global leader, largest manufacturer of automotive batteries, powering nearly every type of vehicle across the globe. We delivered $7,000,000,000 in revenue in 2016 with EBITA of 1 point $3,000,000,000 Alex already mentioned this.
Not only are we a leader in the original equipment, but also with all of our aftermarket partners with 70% almost 75% of our revenue derived in the aftermarket. This again gives us a platform to be able to deliver very consistent performance and growth throughout the cycle. So now combining, to give you a view of the combination of the businesses and what we look like as the new JCI, about $30,000,000,000 in revenue with a very balanced sales mix, which provides a strong base for growth and durability throughout the cycle. It starts with the global product segment, represents a third of our overall revenue. This is where we are a leader in every one of the building domains as well as within our battery business.
Then combine our buildings channel with our installation capabilities, our solutions development capabilities and then add service, which is the annuity on the installations that we put into place. A tremendous opportunity to leverage an unmatched global branch network, differentiate the solutions that we bring to about every vertical across the globe. And then most important, especially in the connected world, in being able to leverage the relationships that we have with our customer base to be able to deliver new services, new solutions that enable us to be able to capitalize on new markets. So let me talk a little bit about Power Solutions. And I am new to this business, but I've been going through a very rapid learning curve.
It is a market leader with strong and expanding margins. Looking at the sales mix, we are a leader in the original equipment as well as in the aftermarket. Obviously, most attractive is the 3 quarters of the revenue that we achieve in the aftermarket. There are over 1,200,000,000 cars in park across the globe. Every one of those cars will require, on average, 3 to 4 replacement batteries.
It is an awesome annuity when you look at the total company. Now as we project the growth for this business out through 2020, twothree of the growth will be driven by startstop as well as the expansion that's taken place within China. The start stop market will grow from 27,000,000 units to 57,000,000 units or roughly about a 20% CAGR over that period. And the original equipment will demand over 50% start stop batteries. Now when we look at the units and revenue growth, start stop will drive a significant portion of that over this period of time.
Johnson Controls will produce 1 in 7 batteries start stop batteries in the 3 largest automotive markets, which are the U. S, Europe as well as China. As relative to China, we're going to move to the number 2 player in China with the capacity that we're putting into place to lead this trend and capitalize on that segment of the market. And then most important throughout the cycle is continuing to drive the Johnson Controls operating system, continue to build on the significant competitive advantage that we have in our manufacturing footprint and distribution, continuing to drive commercial excellence so that we have the right partners in OE as well as within the aftermarket and then making sure that we're leading the industry through our technology and developments, whether it be at the plant level, the components, the components are at the end products. Now I thought I'd share with you what I see as being some pretty significant advantages.
Johnson Controls has been delivering quality products of batteries to customers being able to meet their demands for over 130 years. We are by far, by far the largest manufacturer of batteries, having produced 152,000,000 batteries in 2016, serving customers in over 150 countries. And we're expanding that base now in 2017. 1 in 3 cars today are powered by a Johnson controlled battery. We've got by far, we're truly the only true global battery manufacturer with an unbelievable footprint.
We have 55 manufacturing facilities, 6 R and D facilities, making sure that we're staying out in front of the technology investments. And then we have partnerships with 16 universities across the globe making sure that we're developing technologies to lead the technology continuum. And then we have a best practice with the recycling and a recycled economy here, having recycled 99% of the lead acid batteries produced in the U. S. And Europe in 2016, and that equates to about 8,000 batteries per hour through our recycling facilities in 2016, just an awesome accomplishment.
And last and most important is the trusted partnerships that we have with our OE partners and our aftermarket partners, Tremendous, I've spent a lot of time with Joe and the team in the field. We have tremendous relationships and we've got strong brands to be able to support those partners. Couple of good examples, the LTH brand in Mexico and Nevada brand that we serve our customers in Europe with. So overall, a significant moat, tremendous competitive advantages. It gives me the confidence that we've got a platform that we can reinvest and deliver significant revenue as well as profitability over many years to come.
Power Solutions has a tremendous track record, delivering steady revenue, profit growth. Looking at the numbers over the last 11 years, they've delivered 8% revenue and 13% EBIT growth, pretty, pretty strong performance. And it's been built on a number of strengths. We are the scale and cost leadership that we have in this business is unmatched. The commercial advantages with the strong brands, with the programs that we put into place to drive customer loyalty.
Couple of good examples that I've seen where we've launched commercial programs with our to drive professionalism within our Mexican and Chinese distributor base to really accelerate their growth and give us the opportunity to better serve them. We've launched marketing programs, marketing programs in Europe and in China to educate them to be able to educate their customers on testing their batteries and ultimately replacing their batteries. 3rd and probably most important is continue to lead the industry through technology. We continue to invest in the entire technology continuum and it starts at the plant level through the components that we design and ultimately the products that we bring to market. And all of this is supported with very strong partnerships, partnerships that we have with the original equipment manufacturers, with all of our aftermarket partners.
And what I've seen that is a significant strength is we are a good partner. We have technology partnerships across the globe. We have joint ventures. We just announced the Bohai Piston joint venture in China. That's going to be a big enabler for us to be able to step up to be the number 2 battery manufacturer in China as well as we have long lasting relationships.
Amrajia in India has been very critical to make sure that we've got the right footprint to capitalize on the Indian market. So to meet regulations, the original equipment manufacturers are pursuing a number of electrification strategies to be able to meet their vehicle needs. And we continue to invest to make sure that we're the partner of choice to be able to fulfill their requirements, be able to meet the increasing regulations and ultimately support their business. So starting with flooded lead acid. It's not going away anytime soon.
It's continuing to grow. We're continuing to invest that we maintain our leadership and protect the runway, the huge runway that we see for that product going forward. Absorbing glass mat lead acid is the most durable reliable solution for the high cycling start stop, some of the deepest discharging applications as well as in the most aggressive temperature environments. This will be the technology of choice and one that we're making sure that we continue to invest in the technology and that we have the capacity in place globally to capitalize on the significant growth that we see taking place. And we're also investing in advanced startstop technologies with 12 volt dual batteries with AGM as well as hybrid 48 volt that we're working with our OEM partners to make sure that we're fulfilling their electrification strategies to be able to meet the next generation of platform.
And last is in the high voltage base. The profitability here is very challenging, but I can tell you that we're investing strategically, selectively participating to make sure that as this segment of the market advances that we will be well positioned to be able to capitalize on that market also. So to understand why the low voltage, including the 12 volt lead acid battery is going to be the prominent choice, it's important to understand what the OE build will be and what happens to the overall battery units over the next 10 to 15 years. So as you can see on this chart, on the left, 4% to 7% of the demand will come from the high voltage, be a very small portion of the market as we project out through 2025. What you see here is the significant increase in the start stop from 24% to almost 60%, a significant part of the market.
And all of these powertrains will require a lead acid battery in conjunction with the solution. So if you move to the right, you will see that about 94% of the demand will be for lead acid batteries. And that segment of the market will grow from about 400,000,000 units to about 600,000,000 units as we project out through 2,030, still remaining a dominant technology for decades to come. So let me wrap up Power Solutions. It is an incredible, incredible business delivering significant growth and returns.
It's built off of our significant strengths. We've got a footprint, a cost and scale that's second to none. We've got commercial excellence programs where we've driven customer loyalty. We've got design capabilities to make sure that we're going to lead the technology continuum. And all of that is supported by being a true global player, being able to have the right partners in technology and the commercial partners that enable us to best serve the market.
And as Jeff will talk about a little bit further, how we leverage the Johnson Controls operating system to take that to a whole new level, to continue to accelerate and support the growth while we're delivering very strong returns. The 5 priorities for this business, technology, continuing to reinvest and lead the technology continuum, continuing to make sure that in the mature markets, we're going to be positioned with the right technology and the right capacity to be able to maintain our position in the mature markets. A lot of that will be stop start. In the emerging markets, making sure that we have the right footprint, the right partners, specifically in China, and Trent will talk a little bit more about that. And then taking this unbelievable supply chain and to be a leader in leveraging that capability and bringing it to a whole new level.
And last, and I'm going to talk a little bit about the distributed energy business, energy storage business, capitalizing on tremendous heritage and depth that we have in this technology and finding new ways to be able to open up new markets that will be new growth for the new JCI. All of these initiatives will position the business to be able to deliver a very, very strong performance as we project out through 2020 with a revenue CAGR of 5% to 6% and very strong EBITDA. And Brian, Steve will talk a little bit more during his financial update. Now let me spend a minute before I move into the Building segments, let me spend a minute on the Distributed Energy Storage business. We continue to stay very excited about this business.
It is where all of the success that we've had in Power Solutions comes together with all of the positioning and success that we've had in buildings and being able to leverage a space that we're uniquely positioned to capitalize on. When you project the growth out through 'twenty or actually the next 5 years, it's going to grow to about a $16,000,000,000 space. And most of the growth is behind the meter, where most of our customers within buildings, they reside. And with the channel that we have in place that's second to none serving these customers, we have a unique opportunity to be able to bring the 2 together, bring the technology, bring the channel and capitalize on this opportunity. So our plan is to take the depth and the work that Joe and the team have been doing in Power Solutions and developing these applications, leveraging our channel, making sure that we have the right account, account planning and the like and the skill sets to be able to bring it into our channel leveraging our building automation, being able to be in a unique position to take intelligent batteries, put it together with intelligent buildings and ultimately create a solution that others couldn't produce because of the combination that we have, leveraging a strong cost footprint, the scale that we perform that gives us a cost advantage, and then certainly with all of the reputation that we have within batteries continuing to support that with that reputation.
Our model is to continue to build out the channel, leveraging we have over 9,000 sales folks within our buildings channel. What an awesome access to our ability to be able to serve those customers. A lot of concern about safety within this space with the new solutions with the lithium ion technology. We have the opportunity with our track record to be able to address that and create the confidence in our customer base that we're going to provide safe solutions that's going to be able to serve their needs. We'll be the industry leader from a cost position.
And then most important, as we deploy these solutions combined with what we do in buildings, we have the opportunity to provide the service over the life cycle to be able to be positioned to fully support our customers. And before I move on to buildings, we provided this plan a year ago, I understand. And when I look at what we've accomplished in the 1st year, significant reduction in the cost of the new solutions we're developing. We've filed 15 patents with some of the applications that we're building. Commercially, we've been very successful.
We've secured 8 large projects. And our pipeline from that period of time has grown 10x. So we've got about $300,000,000 of projects that are in the pipeline that we're currently executing on. Very exciting growth opportunity for us and I believe one that longer term will be very attractive for JCI. Let me now transition and talk a little bit about our Building Technologies and Solutions business.
Now this business, as we've said, the legacy building efficiency business legacy JCI building efficiency business coming together with Tyco, revenues last year of $23,000,000,000 EBITDA margin of 12.7%. And if you look to the right, again, what's very attractive is the mix across the overall building cycle, where we have strong products that are foundational to our success with everything we do, and we continue to reinvest. But then the channel that we have to be able to support the customers in this space, having not only the best solutions development capability with what we install, but most important is being local to our customers to be able to provide the service and support to be able to create the most amount of value for that customer base. Now if you look at the growth, we're starting off roughly this year will be in the range of about 3% growth in 2017. And as we've talked about the revenue synergies, which I'll give you a little bit more color on, we'll continue to accelerate as we project the combination out through 2020.
What's going to be most important for this business is integrating successfully, being able to deliver on the cost synergies as well as the revenue synergies, taking an undisputed leading channel that we have when you combine the direct channel across JCI and Tyco now into the new JCI, tremendous opportunity with the intimacy we have with our customers to leverage. And then the reinvestment. And Bill now in his role within the global products, making sure that we're prioritizing our investments so that we're going to be positioned to win in the key markets that ultimately will drive the growth. So what differentiates us? I've already talked a lot about each one of these, but to reinforce 2 or 3 that really matter, that really are different than our main competitors and why with the trends that Kim outlined, we are going to be positioned to win.
We've got an unmatched direct channel with our sales footprint. And today, both companies after the success that we've achieved in the previous years with strong fundamentals have been now adding and building on that channel. We've got position across the life cycle, right, from understanding customers' demands and what their future requirements are, being positioned to be able to address those demands, solve their biggest problems and then put that to work with investments in products, investment in enterprise software that ultimately is going to position us to change the game. Differentiating in the verticals. We have tremendous position across the verticals and every vertical does operate different.
So you might have the fundamental HVAC demand, the fires, the security demand, but on top of that demand, our ability to be able to connect, extract data, apply analytics and solve problems that are more specific to their vertical that enables us to be able to create more value. And then all of that is supported with the performance of both companies with the strong brands that we have in place supporting what we do. Alex talked a little bit about this and I'll reinforce it that we are we provide the most critical building systems within a building. We have the most amount of equipment, whether it be sensors, devices, platforms that exist today in the building. We also are one of very few players that has the full portfolio in how we serve our customers with product technology, with install design and installation capabilities and then the ability to be able to build new services and perform service on that installed base.
And we do it high quality, high repeatability, very confident that we can continue to do that going forward. And the one element that I want to note that is absolutely instrumental with how we take this portfolio forward is the building automation control system. With all of the trends, Alex talked about it, Kim talked about it, with all of the trends, we are in a unique position to take our building automation platform, Medisys, which today is recognized as the industry leader in HVAC and delivering the most efficient HVAC system and are already reinvesting to be able to bring all of the other platforms together into one architecture. Think of it as you have many subsystems that now will be able to be integrated into one architecture that will enable all of these salespeople and our technicians in the field to plug and play, to be able to take a problem, the customers are experienced and be able to without a lot of customization, plug and play and bring a solution to the customer base. It's going to be a big, big advantage.
When you look at our access to our customers, our strength is through our direct channel, again, twothree of our revenues. And because of that, we have unique relationships, not only at the local level, because that's how business is done, but companies that have regional footprints and companies that have global footprints, we are positioned to be able to standardize the work that we do to be able to deliver on their success globally. And through that process, we have tremendous access to the influences that truly set the stage or the standard for how buildings will work in the future. So we have a seat at the table to be able to influence how those trends will play out. Now to give you a sense on the vertical exposure, as we've looked at all of our businesses and the breakdown by regions, what I thought I'd do is try to simplify it because as we look across the globe, HVAC does differ by region.
Fire and Security tends to be more standard because of the regulations in place. So I thought the best proxy was to take a look at North America. North America is our biggest business. It combines the work that we did in Simplex, Grinnell and Fire with the work we did in security with TIS, with the heritage SS and A business with building efficiency, a tremendous footprint in North America. And looking at 4 key verticals in the commercial space, tremendous presence.
And not only have capitalized on the non resi recovery, but now accelerating the opportunity to capitalize on the new demands, security, comfort and mobility. And as we're doing that, beginning to see the increase in investment with the connectivity type solutions. In the institutional space, when you look at our position in the legacy JCI and legacy Tyco, tremendous positions in institution when you look at universities, when you look at health care. And all of these end markets are requiring connected solutions. And so we have an opportunity to invest, not only are they investing in safety and comfort, but again being able to capitalize on solving bigger problems for the customers that we serve in these verticals.
And last is the industrial base, although it's a smaller piece, it is important. Safety is a priority. We've got a strong safety portfolio. And we see with the future investments in infrastructure, we're going to be well positioned to capitalize on that vertical. What I thought I'd do is talk a little bit about retail, and I had a couple of discussions this morning with some of you on how relevant is retail when you look at buildings and the work that we're now doing with the combined portfolio.
It's extremely relevant that this is a vertical where we've taken sensors, devices, infrastructure that has been existing there for decades. And all we've done is put some software in place, extract data, apply analytics, and we've solved much bigger problems. So not only are we a security provider to the facility, protecting the merchandise, but now we're creating insights and intelligence that's enabling our retailer customers to be much more efficient. The same applies to all of the other verticals that we support, taking the same approach, leveraging our controls, leveraging our software and ultimately creating differentiated solutions. So our product portfolio.
We have a very comprehensive product portfolio. Starting at the bottom, a leadership position in the fire domains, in the security domains and in life safety. Build on top of that, the HVAC positions that we have in chillers, direct expansion, air systems controls and industrial refrigeration. And tremendous progress has been made in the last couple of years with the reinvestments that have been made, making sure we have the right product for the right markets, so we can capitalize on where the growth will occur. And as I said earlier, the most important overarching product as we see the future is the Medisys product, which I'll talk a little bit more about.
So Medisys today, because we have a lot of dialogue about this and when Alex and I first got together, this was a significant opportunity that we saw to take 2 unbelievable portfolios, put them together, leverage this piece of the portfolio to explode the opportunities that we see ahead. MedAssist is the building automation system. Today, from a fundamental standpoint, collecting data and coordinating building systems. And not only what I've learned over the last 90 days is that this is viewed as the leader, the most efficient HVAC control system deployed in the customer base today. And now as we look at the combined portfolio, being able to enable use that to enable best in class smart connected buildings.
And we have a lot of that underway, and I'm going to talk through a couple of examples. With the goal of creating intelligence from the experience, real time experience that's being had within the building, being able to take operating data and then provide optimized building performance with the solutions that we provide. And then the last is in the digital world as we all are today with our smartphones, making it easy to interface with mobility, no matter where the user is accessing the system. So why does this matter? And why is this important to the new portfolio?
What it does, it allows us to be able to combine, connect all of our capabilities into one platform that no matter what problem the customer is trying to solve. So from an outside in standpoint, what is it that the customer is looking for us to be able to deliver or be able to help them with? It creates insights. We can provide advanced analytics. We can make sure that all of what works within a building works together.
And then last is that the insight and the intelligence that creates actionable items that ultimately delivers on increased value. Let me talk through a couple of examples. So we've talked about when is this all going to begin to happen. We are integrating today. When you look at what the heritage JCI company business was doing, what Legacy Tyco was doing, We were integrating.
It wasn't always the most simple integration, but we have been doing significant integrations. We have an opportunity to now simplify, standardize the architecture and move with much more speed in how we solve customer problems and ultimately create growth. What I thought I'd do is talk through a couple of examples here. So the first I'd like to highlight is Hudson Yards. Most of you in the New York area understand that this is the largest, largest real estate project ever in the United States.
And I think many feel like it's transforming New York City. Huge project across 26 Acres, 16 buildings. And what we've done, and this has been going on multi years and will continue to advance, it includes solutions for high rise commercial buildings, office towers, high end residential offerings, shopping, entertainment as well as the school system. What's unique about our approach to serving this customer was being able to be at the table with all of our capabilities. So within building systems, our Metasys building management system, combining with video, combining with fire and access.
Not many players with the channel that we have with the product has that position. Using that same infrastructure, we've been able to now integrate with business systems to create an output, ultimately trying to enhance whether it be energy management, space utilization, whatever the demand from the customer is, a unique position to do that. This project is going to equate to about $80,000,000 of revenue for us within the new JCI. The second I thought I would highlight is the work that we're doing in London. And we've been doing working with the City of London for a long time, providing solutions for public safety as well as efficient traffic flow for over 13,000,000 residents and visitors per day.
So you might ask, what are you doing? We're taking we've taken an advanced video platform in our traffic platforms, which has become the core of our solution to be able to successfully deliver safety as well as traffic efficiency. And this has created a very sticky client relationship and an opportunity to continue
to grow.
You'll also see how we've implemented automated traffic enforcement and journey time monitoring systems. So if you would run the video.
Tomorrow morning, 13,800,000 residents of London will wake up to overcast skies and light rain. 291,032 orders of fish and chips will be consumed between breakfast, lunch and dinner. Over 4,000,000 people will mind the gap. 41,002 umbrellas will be opened and 5,189 tourists will ask for directions to the London
Eye.
Tomorrow morning, the technology that helps create one of the safest Olympics ever will connect thousands of closed circuit cameras to over 50 control rooms across the city. The technology that helps create one of the safest Olympics ever stadium and transportation authorities will be able to monitor, share and record public spaces and events in real time. A digital infrastructure to significantly improve everyone's safety and comfort. Tomorrow afternoon, one integrated network of digital traffic enforcement cameras and monitoring systems will create a safer and more efficient road network. Hundreds of thousands of drivers across the entire metro area will better follow traffic rules, resulting in quicker and safer travel and a lower environmental impact.
Johnson Controls is shaping tomorrow by can do.
So now think about the opportunity that we have across the globe, everyone wants to be the leading smart city. We've already demonstrated this type of capability within London and have the opportunity to be able to replicate this many times over as we now pursue additional type opportunities. So let me now transition to the integration. And as I said earlier, we're off to a very strong start. To give you a little bit of color about the integration and what I've been doing over the last 90 days since I transitioned from the Tyco CEO into President and COO of JCI, have visited numerous facilities around the globe.
And one I'd worth it's worth mentioning is the visit that Alex and I had to the Hitachi JV. We went over there at the year, 1 year anniversary to celebrate what had been accomplished, phenomenal. Phenomenal employees, commitment, the strategy that they're executing on, the customers that we met with, a tremendous opportunity is going to be a significant part of the portfolio as we drive growth going forward. Now with a significant amount of our largest global customers, I spent a lot of time with our automotive batteries customers and understanding their demands, how they work and ultimately what they expect in the future. We spent a lot of time in making sure that we get the organization structure right.
So that as we're serving our customers, we're now positioned to capitalize on the revenue synergies as well as being able to deliver the cost synergies. And we've done many in-depth strategy reviews with the business units to make sure that all of the leadership team that we've put into place, which is a combination of the legacy JCI and legacy Tyco, full understanding of the products, the portfolio, so that as we begin to execute on our growth plans and deliver on our synergy plans that everyone is totally informed. And then most important is taking what we've done with the operating plans that were in place and now layering on the synergy targets that we've committed to, to make sure we have an operating plan that is well positioned to deliver on the commitments we made. So the integration team over the last 11 months has done phenomenal work. It was led by Mike Beuchard, Legacy JCI and Bob Roche, Legacy Tyco.
They did a phenomenal job working with over 1,000 of our combined employees to make sure that we got it right, to make sure that we understood each of the companies, we went function by function, understanding structures, headcount, all of the above. And we outlined a plan back at EPG that laid out, at that time, it was roughly about 900 $1,000,000 of operational savings. And we categorized the savings in consolidation, which was G and A reductions, Enhance, which was focused on procurement with a significant that we buy that we have both indirect and direct across the combination as well as then integrating within the field. And you can see today that as we project out through 2020, we're going to be able to be positioned to deliver $1,000,000,000 of net operational savings. Now this does combine the operating plans that were in place within both of the companies prior to the merger combined with the synergies now that we've committed to be able to deliver this amount of savings.
And all of that has been we're positioned to deliver with the deployment of the Johnson Controls operating system across all of what we do. And Jeff is going to give you a little bit more insight into that as we come back from break. But as we laid out during the EPG, we've got firm plans in place across each one of the functions. We're continuing to drive speed, simplicity, trying to drive quality, productivity and ultimately customer satisfaction across all of our key business processes, whether it be design, manufacturing, sourcing and commercial excellence. And by doing so, we're going to be able to come out fairly strong in the 1st year, delivering $250,000,000 to $300,000,000 of those benefits in year 1 and position to get to a run rate of $1,000,000,000 by 2020.
Now just a little bit more insight into the field. We get a lot questions about how do we derive the benefits that we see within the combination of our field. We have a tremendous opportunity to optimize our branch networks with significant synergy opportunities, both short term and long term. When you look at our branch network across the globe, you can see it's fairly significant in what the current state is in 2016. The key elements of our savings reducing real estate footprint, enhancing our logistics and distribution, taking out a lot of overlap that exists, reducing our warehouse footprint, developing shared services to support all of our branches more efficiently, and then leveraging the depth and domain that we have in how we develop new solutions and new installations so that we can do that with more speed and leverage that resource in a much bigger way.
So when we look at 2020, we see a double digit reduction in real estate, much more integrated networks as it relates to our logistics and distribution, hub and spoke with our warehousing, centralized services. We've done a lot of that in both companies, but there's still much opportunity in front of us that we can continue to capitalize on and then creating centers of excellences within our design capabilities. So let me finish with the synergy, talk a little bit more about the sales synergies that Alex outlined. When Alex and I got together well over a year ago and we looked at the combination, phenomenal progress had been made in JCI, addressing fundamentals, putting strong fundamentals in place that we're positioned to be able to grow. We had been doing the same in Tyco, continuing to get the businesses with strong fundamentals.
And when we looked at the combination, saw an unbelievable opportunity to be able to combine the companies and accelerate growth. So it's very important that as every step of the way that we have a business model where the customer is at the center and that we can demonstrate that we can grow with that customer every step of the way. So the growth model that we're deploying is putting the customer at the center, outside in. With the direct channel that we have, no one has the insights that we have to the building customers. And taking those insights and putting those into action with very strong commercial excellence.
Now with our Johnson Controls operating system across these 8 key elements, we continue to have a passion to continue to improve and drive, which is going to be our foundation for success, being able to deliver growth. Short term, we've been very focused on 3 key elements. Alex talked about staying focused on our customer, making sure that every step of the way we're delivering what we historically have delivered and making sure that we have the opportunity to leverage now the combination to do more and be able to create more value. From an account management standpoint, the opportunity that we have with the existing relationships and now bringing the full portfolio into play within that account planning, a tremendous opportunity. And then the channel management not only leveraging the direct channel, but also when we look at our product businesses, making sure that we have the right external channels in place to capitalize on the growth markets.
We now have plans in place across all of these key elements that are fundamental to being able to deliver on the €500,000,000 of synergies that we've committed. And it's delivered through it starts with pretty simple, doing more of what we do today through the combined channel. We have over 4,000,000 customers that we serve today with the combination of the businesses, the opportunity to be able to take fire and security to the heritage HVAC controls customers and vice versa. We've got incentive plans in place with planning in place that ultimately will deliver on those synergies. The geographic reach is taking a very strong Tycho position in Europe and a very strong JCI position in Asia.
Complementing the 2 gives us the opportunity to be able to accelerate where we were weaker prior to the merger. 3rd is this idea of with the controls and the connected building, being able to utilize data, analytics, create new solutions on top of that customer base. And then last, most important is coming up and delivering on one standardized architecture from a software standpoint that enables us to make it easy to how we integrate and ultimately solve customer problems and deliver growth. Very well positioned now with the planning, with the incentives in place to be able to deliver the €500,000,000 in run rate revenue synergies by 2020. A good example here short term is the success that we've had with this P3 partnership, where we've taken our combined capabilities within the portfolio, position that to win a pretty sizable deal, where we're integrating all of the network building management, the low voltage systems, We're performing the building life cycle operations and maintenance functions.
It's a 545,000 square foot facility. And this taking what we're doing in the building and effectively integrating it with the system the building systems has enabled us to be able to win this project. It will amount to about $250,000,000 over 35 years. Last is what I'll end where Alex ended here with the value that we outlined at the EPG back in May. Today, with the update we provided you today, when you add on the sales synergies of $500,000,000 that contributes about $85,000,000 to $100,000,000 of EBIT.
And then being able to project the cost saving synergies out through 2020, we pick up another $100,000,000 of savings. That will contribute about $1,200,000,000 of value and contribute $1.10 of EPS by the year 'twenty. So just to wrap up, I'll end where I started. There's one more slide. And where I started, we have got 2 incredible businesses that are positioned to lead and positioned to win.
And we have an opportunity here that actually complement one another. We have an opportunity to be able to build on that success and ultimately change the game. We know how to drive productivity and cost savings. That's in our DNA in both companies. The opportunity now to be able to capitalize on the merger, to be able to deliver significant more with the synergies, that enables us to reinvest in growth, reinvest in R and D, new products, new channels that will position us to accelerate as well as deliver on expanded margin.
All of this is to ultimately be a growth leader in both spaces. Dan, I can't tell you how excited I am and the work that we've done with Alex across both companies is definitely one company. And I'm incredibly proud, incredibly proud of how our teams have come together, how we're working, how we're centered on the customer to be able to deliver growth in every step of the way, demonstrating respect for one another with how we operate. So I'm excited to be here, excited to work with all of you in my new role, and I am confident that we're going to deliver on your expectations. So on that, I'm going to introduce the first break.
Thank you.
Reasons to believe that you would do the same for me,
On the other side of the street, I knew still a girl that looked like you. I guess that's deja vu. I thought this can't be true because you moved to West in the morning, friends and laugh. Over that one night, it's still the highlight.
Ladies and gentlemen, please take your seats. Our meeting is about to begin.
In the next 24 hours, over 145,000 people will travel through Denver International Airport, A state of the art facility spanning more than 34,000 acres. Passengers will board 1500 planes to 180 different destinations. 21,000 cups of coffee will be poured and 325 people will run to catch their planes. 33,000 pieces of luggage will arrive at the carousels. And 4 kids will forget their teddy bears.
Long before sunrise, passengers will receive airline, public transportation, baggage, hotel and safety updates in real time across 1330 displays and an integrated visual PA system keeping everyone informed and safe. Data from airport networks will seamlessly communicate through advanced technology on an intelligent infrastructure. At the same time, a state of the art heating, ventilation and air conditioning system will keep everyone comfortable through a sophisticated algorithm that optimizes an array of chillers to respond instantaneously to changes in weather and environment. A hyper efficient central utility plant will save 7,300,000 kilowatts of electricity each year. And reduce CO2 gas emissions by £14,600,000 per year.
Johnson Controls is shaping tomorrow by helping create 1 of the world's smartest airports today.
Ladies and gentlemen, Vice President, Enterprise Operations and Engineering, Jeff
Williams.
So good morning. Earlier, when we started the meeting, Alex and George both had the opportunity to really introduce the Johnson Controls operating system. What I'm going to do in this section of operational excellence is really take you in really three pieces. I'm going to define how we started and what really defines the operating system. I'm going to talk about how we govern and how we manage through that as part of the company.
And then thirdly, some proof points and some illustrations of where we are on this journey. 3 years ago, we had a very aspirational goal that Alex shared with the organization and the market, whereby we want to be the most operationally capable company in the world. And the foundation of that is the Johnson Controls operating system. We are well on our way. We're 3 years into the journey, and I hope that what I can illustrate for you is the proof points and the progress that we're making on many of these fronts.
What I illustrate here is a very traditional end to end supply chain. And what's implied in this particular graphic is that when you think about what we design and how we create the products that we manufacture today in our company, It's informed by the megatrends that Kim talked about. It's informed by customers. It's informed by market needs. And when we look across here and you look at the circles, it's around design, what we want to manufacture, what we'll source, how we deliver it to the market.
And when you come around in terms of how we sell, how the consumer and the customer buys our product. And then lastly, around the recovery. And I think 2 great examples of that recovery are either the recycling in our Power Solutions business and or the remanufacturing in our Retail Solutions business. When we look at what that defines for our company, that is the operating system of Johnson Controls. And what I would say in terms of the governance is that when you look at those 8 platforms, I will refer to engineering, procurement, manufacturing and so on, We have an individual in the business in the company that leads that effort of centralizing engineering, centralizing manufacturing and so on.
There are further resources that come from the business that are supplementing, all right, that centralized way of how we can improve our business processes. 11 months ago, in January of 2016, when the merger was announced, Tyco had a very robust operating system. And that what we've done is that now we've had our operating system in place for the last 3 years. Tycho has had theirs for an extended period of time as well. What we've done is now combined the 2 operating systems into 1 and making it a unified Johnson Controls operating system.
The Tyco business system is one that has influenced and informed the holistic Johnson Controls system and it is now unifying how we conduct our business each and every day. And so it's not a Johnson Controls way and a former Tyco way. It is the one way that we advance and progress forward. What this is, is encompassing all aspects and areas of the business. It is a collection of proven best practices from the legacy companies.
It is around enabling through technology and tools. And it is around getting faster and being more agile as well as developing our talent. I think what we can honestly say is that the operating system is teaching the one Johnson Controls way of how we do business and it's certainly enriching the capability of our men and women of our professionals and allowing them to now span over the entire enterprise with their capability. If we have a unified way, if we have the one best way to approach a particular opportunity, that means that you can span very quickly from a Power Solutions to a Building segment and the other parts of our business and not have specific business unit processes or ways. George chewed up this slide to talk about the $1,000,000,000 of savings either through legacy productivity and or the synergy, right, for the merger.
What I will do is go into a little deeper detail in terms of that $1,000,000,000 in terms of proof points in illustrations as to how it is being realized today. But very clearly, we can see improvements in quality, productivity, operating margins, increasing our share, experiences with our customers and then obviously how we pick up the pace and how we improve the speed in which we deliver solutions to the organization. And then lastly, as mentioned, around the agility of our leadership, knowing the one Johnson Controls way and the ability to take that throughout the business. So what have we done in the last 12 months? As mentioned, this was really 3 years it started.
And what I'm just going to give you really a recap of where we've seen ourselves in the last 12 months and again details of which you can relate. Accretive to our financials, I think you can see that in our quarterly earnings. We make reference very consistently to the Johnson Controls operating system applying and providing those benefits. Bridging platforms. When I would go through the 8 platforms of the operating system and you look at engineering and manufacturing and supply chain and procurement, what we're finding is really a gearing effect, a gearing effect that engineering is certainly making manufacturing more efficient.
Our supply base is making the supply chain more efficient. And so when we started, we were very vertical in those particular platforms and now what we're seeing is that gearing effect and that bridging of capability and benefit. Enriching capabilities of our associates, of our team members, of our professionals, that's clear. They're learning the one Johnson Controls way. They're learning a best practice.
And it's certainly improving a number of metrics that I'll share with you shortly in the presentation. Recognized by our customer, the relationships are improving. Again, some more proof points forthcoming. And then lastly, operationalizing the process, making sure that we can document the processes, the tools and the standards and take this with each of the activities that we have in our portfolio and really use this as the common playbook for the improvements. And what I'll do transitioning out of the next slide is around how we're operationalizing the process.
What you'll see on the slide is a pretty standard product and portfolio lifecycle. This whole portfolio balancing and activity. And I would tell you that over the last 3 years, we have been incredibly active in this particular process. And notably, what we are really looking at
is that we're looking at the market and looking at the
market over the last 3 years, we have been incredibly active in this particular process. And notably, what we are really our strength in the operationalization is really in the categories of integration, capturing the value synergies and or addressing the portfolio changes that are necessary for the business. Evidenced, I think you can see on this slide, are a number of transactions that we have done in the last number of years. What we have really added to the portfolio is about $5,000,000,000 by these two examples of Hitachi and or Air Distribution Technologies. And what you could then refer to is our Global Workplace Solutions business that was acquired by CBRE and or the most recent spin with Adient, a $16,000,000,000 global automotive supplier.
The guiding principles that George talked about and what we do is that we certainly have very aggressive synergy targets. We could show that in the activities of these particular transactions, but certainly with the current one that we're integrating, we have aggressive targets. We are committed to our business plans with all this activity in the business. As Alex mentioned, it is we are steadfast in terms of our quarter to quarter results and staying focused on our base business while we have this activity, all right, that is critical. How do we preserve the best from both?
How do we ensure that in this transaction with Tyco that we preserve the best of both companies. Those best practices that embed themselves in the operating system are critical and crucial for making us better. Talent retention, this is key. How do we ensure that the folks that are joining the organization and staying with the organization feel empowered and their job is enriched for us to achieve those goals that we have set out for ourselves. When we run these particular projects and or programs, we have dedicated resources, we have executive sponsorship and it is about speed.
It is about capturing those value synergies and those opportunities as quickly as we can. The process that we have operationalized is this on the screen and it is really 7 key dimensions. It's 7 key dimensions that are shown here, people being in the center and we're applying this to realize those synergy benefits and targets. It is a proven playbook evidenced by what I showed you in the previous slide. It's very structured in its approach.
There are roadmaps holding us accountable. There are a number of metrics that are ensured that we achieve. It is very much execution focused and the governance from a steering committee standpoint is well in place to ensure we're on a cadence that meets the commitments that we're making to each other and the outside world. I'm going to transition to the $1,000,000,000 slide that I showed and that George showed. And that when I look at those value drivers, specifically these four activities, functional excellence, our procurement, manufacturing and lastly marketing and sales, what I want to illustrate is that what we have done, what are we doing and what our priorities are in these coming months.
From a G and A standpoint, again, part of the $1,000,000,000 opportunity and commitment is $400,000,000 coming from G and A, which is defined as our corporate overhead costs and or functional excellence. When I look at what we have accomplished and these are more illustrations and not inclusive of all that we've done, but merely proof points to give you a sense of the activity that we're doing in each of these spaces. When it comes to shared service centers, we have a number of shared service centers that are positioned globally. What we've done in the last year or so is consolidate those by 50%. And so reduce that footprint and that overhead cost and furthermore move that into low cost countries.
As we do that with a set of operating principles and procedures, we have then leaned the process as well achieving more than a 10% productivity, right, of those shared service activities. Operating models, we have to make deliberate choices in terms of how we want to run the business, what is led from the center and what is then put in the business units as a decentralized model. We have done that across all of the dimensions of the operating system And what we're finding is maybe an illustration is that in a particular business in a couple of functions, notably that of HR and Finance, we found ourselves the opportunity to reduce the layers in the organization and expand the span of control by a factor of 2x, driving again value for the company. When I think about and we talk through what is forthcoming in this space, it's around continued merger synergies and it's around further lean end to end processes and it's again network consolidation within the infrastructure of either our engineering development centers and or administrative offices in total. Procurement of the $1,000,000,000 this represents a $300,000,000 opportunity.
It is encompassing our direct, our indirect and our field branch activity. And let me share with you what we've done and what we are doing in this particular space. The ADTI or Air Distribution Technology business as well as Hitachi have shown accretive benefit based upon what we've done in aggregating that purchasing power between the legacy Johnson Controls and these new businesses that we have introduced. 27% improvement year over year in that of direct material. And so what we're doing here is that informed and assisted by engineering, how do we standardize specifications, how do we rationalize the supply base, how do we build cost models that obviously allow us to go to the market more competitively than we had in the past.
When it comes to indirect, we have about $3,000,000,000 of indirect spend for the company. What we have done is that we've aggregated that in total instead of having indirect being procured by the individual business units, it would be something that would be aggregated at the whole of the company at an enterprise level. What we have seen in that space by doing that and rationalizing not only the SKUs or the complexity of the indirect offering as well as the supply base, a 4 fold improvement on a year on year basis. And then lastly, when it comes to manufacturing, and Trent will talk about this, our expansion in China notably, what we've had is that we're putting new capacity in place in China. What we have historically done is we purchased our capital and tooling from those mature markets, notably North America and or Western Europe.
We have put together a center of excellence, whereby we now have developed capabilities of our supply base and we're now purchasing a whole lot more material, capital and tooling in those lower cost markets and achieving significant savings for the company. What's ahead? Again, incremental benefits from our synergy savings, what we're doing from a technology standpoint, have 165 manufacturing plants now. And the issue is how do we allow the manufacturing facilities to buy their MRO and or service items, but how do we ensure that we're cataloging those such that we're narrowing the opportunity, we're narrowing the variety and or the specification that they can buy. We're going to do that through some IT tools that are being installed as we speak.
Asia Pacific Center of Excellence, this is as APAC and our China region grows and more significance to the company. How do we leverage what we've already done and do that on a larger scale. Trade working capital are really terms with our suppliers and how do we ensure that we can maximize that cash flow. Field, dollars 300,000,000 of the $1,000,000,000 defined as manufacturing, supply chain and engineering. Certainly, Rich in terms of what we have accomplished to date and a couple of proof points for you.
We have a playbook. The playbook is called the Johnson Controls Manufacturing System. It is addressing the four walls of how we produce and manufacture product. Regardless of the spirit nature of our products, whether it be a chiller, whether it be a fire system and or a battery. There's a playbook that allows the plant and its plant manager to improve its variable cost, and we've done that year over year by 2x.
22% reduction or improvement in safety. What we have is in safety, we are 95% quartile from our base safety. We compare ourselves to that of the Campbell Institute, which is an elite group of organizations that are elite group of organizations, 30 companies in total that are consisting of NASA, Boeing, Johnson Controls, DuPont specifically, and we are showing that our improvement in safety performance is that of 25% improved. Quality. Quality improved 12%, 70% improvement in employee retention.
And really what that is, specifically, is a high performance work team that we have in the company that is engaging 100% of our direct labor employees and making sure that they feel enriched and they're contributing to the success of the company. Energy savings. Energy of 3x. In terms of what we've done previously, this would be areas of energy intensity, which is a significant improvement. If I look at what's coming, we have a number of footprint and consolidations that are forthcoming in the organization.
We have some duplicity of overhead. We have duplicity of manufacturing and underutilization of manufacturing capacity. Lastly, marketing and sales. Marketing and sales $500,000,000 of top line growth synergies, commercial and revenue. When we look at the highlights in terms of what we've accomplished in the business, George mentioned the 9,000 sales professionals that we have in the organization.
The playbook that we have for commercial excellence is that of something that is improving, A, the customer loyalty, a stickier relationship as well as the ease of doing business, which are incredible opportunities and successes that we are enjoying in the last 24 months. Our pipeline of innovation. Innovation is one that is have a rich history. Both companies have a very rich history. Notably, we have over 10,000 patents that both companies that the combined company possess today.
And that that is something that is continuing and a rich pipeline to fulfill market gaps, to fulfill customer needs and continue to commercialize that opportunity. When we think of the commercial playbook and commercial excellence, it's that of the new hire productivity. This playbook is allowing our 9,000 professionals to be more productive earlier in their hiring and maturity process. And then Trent is going to talk about in much more detail the 35% improvement in market share in China. When it comes to what we're going to do and what we're doing here in the near term, it's around rationalizing even our product brands.
George talked about and showed some details in the battery slide and what we have in terms of our Buildings segment in terms of very strong and reputable brands. What we'll do is with the new integration is it really sort that out and understand what brands give us, right, the greatest opportunity and the market potential. And so that is forthcoming. So in summary, the Johnson Controls operating system is the one way that we operate. It is and has created a solid foundation for the company.
It's allowing us to grow. It's allowing us to achieve the vision that we set out to be the most operationally capable company in the world. It's providing strong results illustrated by the proof points and solid momentum forthcoming. Our leadership is aligned. Our employees are engaged And it and we're going to continue to deliver on that superior performance.
Ladies and gentlemen, Vice President, President Asia Pacific, Trent Neville.
Well, good morning. A couple of months ago, I got an invitation to attend a roundtable breakfast in Shanghai. And the topic really caught my attention. It was about a leading Internet company that had significant growth and was winning in China. Now again, it kind of spurred my kind of peaked my interest because I happen to know that this leading Internet company, their search engine is actually blocked in China.
So what I would learn as I attended this roundtable breakfast, I had an opportunity to meet with the Managing Director of Greater China. What I would learn is, although their search engine is blocked, they actually have a really good business in terms of advertising, very profitable business. But more importantly than that, what I learned is that they have a huge mandate to basically acquire talent and innovation and engineering expertise. In fact, what I would learn is that they're actually looking at in terms of winning globally, it being very important for them to build scale and innovation and engineering talent. And they wanted to do that in a really quick way.
And so the what I would also learn and kind of the summary of this conversation from this Managing Director is that not only was it important for them to do that, but it was an imperative. And from the Managing Director standpoint, they wanted to make sure that this was a focus and they had to do it quickly. So why do I tell you this story? Well, one of the reasons is that I think what you can draw from that story is that no matter what company you're talking about, there's a number of companies like Johnson Controls that have a huge focus in terms of growth in Asia Pacific and China specifically. And no matter which company you're talking about or what aspect of growth you're expecting, one of the things that's key is that you have to be able in order to win, you got to be able to move fast, you got to build and leverage your scale and you have to make and build capabilities to make quick local decisions for your local customers.
For the last 100 years, Johnson Controls have been doing just that in Asia Pacific. But today, you're going to hear about how we have an accelerated pace in Asia Pacific to make sure that we actualize on that growth. So you're going to hear 3 things over the next 30 minutes from me. One is, what are our growth prospects and you've already heard some of it from Kim, but what are our growth prospects over the next really the next decade and beyond? Secondly, you're going to hear about what's our plan to win, specifically in the areas of focus areas and building capabilities.
And then lastly, I'm going to share some proof points with you that exist in the business today that really give us significant confidence around our momentum to achieve our growth agenda. Now again, Kim kind of shared with you the megatrends earlier on in the morning. And undoubtedly, these megatrends really if you could go back a slide, undoubtedly, these megatrends really do inform our business strategy. And no matter where you sit on the planet, these are real megatrends that are playing out right in front of you. But if you're sitting in Asia Pacific, they're significantly magnified.
77% of the global urban middle class growth will ultimately reside in Asia Pacific. That creates a significant demand for our products and services. 50% of the global growth in the automotive battery space is going to it exists today in China.
And of
course, when you think about the construction of infrastructure and buildings, that's going to be an increasing demand for heating and cooling products as well as fire life safety products. Now this chart on the screen here, this map kind of builds out the urban population growth from 2016 to 2026. Every day, 90,000 new entrants cross the line of becoming the new urban middle class in Asia Pacific. And the circles, again, that Kim talked about, she talked about this clustering effect. And this clustering effect is real and it's highly concentrated and really 5 key mega clusters within China, but you see a total of 10 clusters across Asia Pacific.
And this is really informative to our growth going forward because 45% of the growth that you're going to see in Asia Pacific is going to come from these 10 mega clusters. And this really creates for us a triple opportunity. There's the obvious opportunity that we talked about in terms of just general growth, rising incomes, discretionary spend for products like batteries, heating and cooling equipment. But then there's also with the infrastructure that you think about, the opportunity in terms of complex vertical markets as infrastructure starts to build out around the city clusters that we talked about. That's really important for our buildings business.
And then lastly, as we start to develop more Asia relevant products for the voice of customer coming from Asia, that's going to allow our sales teams and our distribution networks to really gain the opportunity to leverage our operating scale. Now I want to talk a little bit about China because it's just so important. If you can't win in China, you can't win in Asia Pacific. And I mentioned complex vertical markets. I think this is really important because and it was mentioned prior by Kim earlier, the general economic slowdown within China.
So there's a number of people that are kind of staring at their shoes and I kind of chuckle at that because it's a 6.7% GDP the last 3 quarters in a row. In North America, we'd probably kill for that. But nonetheless, it's a deceleration of the kind of growth that China is seeing. And one of the first places people go is they look at the construction build and they compare that over the last decade. And so what this chart does is on the y axis, you see construction growth and this is over the next 5 years, the way we see it.
And then rate of convergence along the bottom, the X axis, think technology convergence. In the residential kind of general commercial construction, over the next 5 years, it's going to be relatively flattish. A little bit of convergence in terms of technology, but relatively flat. You peel that onion back one more layer and you start to see these complex vertical markets emerge and they're going to be a big part
of the
business. So while again, while some people are staring at their shoes, we actually look at China over the next 5 years as having great opportunity for us to grow in our buildings business. And it's not too different when we look at the, again, the China slowdown and compare that to our bad business. And it's not too different when we look at the again, the China slowdown and compare that to our battery business. The reason I say that is, well, first of all, and I think it's been mentioned a couple of times already, China will have the largest market by 2020 in the automotive battery space, over just about 100,000,000 units just in China alone.
You can see that there's significant growth that's going to occur over this 5 year time horizon, not only in the OE, but also in the aftermarket. As a matter of fact, aftermarket is going to have 10% compounded annual growth through that 5 year time horizon. That's really important when you think about the car part building out to 216,000,000 vehicles and you think about the turnover and the replacement batteries that are going to because of that. Now one of the things that we've also talked a lot about this morning is scale. Scale is really important, and we think we have a great starting point in terms of scale to build from in Asia Pacific.
When you take the combined businesses that we have in Asia Pacific, about $6,400,000,000 across 48 manufacturing and logistics sites, hundreds of branch offices, sales offices and on top of that, thousands of points of distribution, a significant footprint for us to leverage across Asia Pacific. And when you think about our go to market sales networks, our distribution networks, the idea is that we'd be everywhere where our customers are every day to serve them. And as our customers grow globally, and by the way they're doing that every day, we can grow with them. Over the last year, one of the things we've been doing in Asia Pacific is really streamlining our operations, taking the opportunity to take our functions across all of our businesses, regionalizing those functions to really, in effect, basically change our speed of doing business to the speed of the market. That's really important.
And when you think externally, what we've been doing, and this is over the past number of years, we've been building partnerships. One thing that I've learned in Asia Pacific is you can't go out it alone. You won't win in Asia if you try and win by yourself. It takes great partners to be able to actualize your growth aspirations. We've done a really good job here.
Hitachi, Amraj, they've already been mentioned earlier today. Great partnerships for us, joint venture partnerships. Most recently, and George talked about our joint venture and our power solutions business with Beijing Automotive, a subsidiary with Bohai Piston, another great opportunity where we're adding capacity in the form of our 4th battery manufacturing plant, but also being able to be exposed to literally thousands of points of distribution for our aftermarket business, great partnerships. You shift over from pure joint ventures and you start to think about go to market partnerships like our relationship that we have with Hisense. Through our relationship with Hisense, we have a joint venture, it's called HAPQ.
It's actually a joint venture subsidiary underneath our Johnson Controls Hitachi joint venture. They're the number 2 VRF player in China today. And then lastly, and I want to highlight this because I think this brings to light again kind of another dimension of this whole notion of partnerships, Huawei. Huawei is an example of a partnership, but they're also a customer. If you're not familiar with Huawei, about a $60,000,000,000 information and communications technology solutions provider.
They're a global leading player in that market space. Legacy Tyco and Legacy Johnson Controls both served Huawei prior to the merger. 1 of the first inbound calls that we received was from Huawei after the announcement of the merger. The reason we got that call is because they saw the value of the 2 companies coming together. They saw the value not only for their own facilities and what we did to serve them in our I'll call it yesterday, but more importantly what they saw was the value that they could take beyond that to their customers.
So those conversations have progressed and actually a couple of weeks ago on November 21, we signed an Asia Pacific MoU with Huawei to work on smart city applications as well as to focus on key vertical markets in a number of areas all across Asia Pacific. This is a great example of the kind of co collaboration partnerships that we're looking for. So we've done great work here, but we have to do more to reach our growth aspirations. So this is our plan to win. Think of it a high level plan on a page.
We've already got a lot of momentum, but we've got a lot of work that we need to do as well. And a couple well, I'll just kind of highlight it. The 4 areas that we're focused on is products and services, operational excellence, you heard from Jeff just a few minutes ago around us being able to take the Johnson Controls operating system and really leverage it in Asia Pacific. Business Development and then of course people. I'm just going to highlight a few of these again to bring a little bit of color to the things that we're going to be focusing on in the next weeks, months years.
When you think about the vertical the complex vertical market growth that I mentioned, it's going to be imperative that we not only tailor our products to be able to get after that those complex vertical markets, but then we also take our collective legacy sales force from Tyco and Johnson Controls and put them together to reorient them to go get that growth in those complex vertical markets. Digitalization, we talked a lot about digitalization and that's an opportunity for us to look at our own business models and how we serve our customers tomorrow differently across the whole value chain and how we use that to leverage it with our partners as well. Business development, I want to hit on this just real quickly. One of the things that we're going to be doing and are doing right now is building out muscle and capability around mergers and acquisitions, as well as government relations. When you think about the partnerships that I just mentioned, to be able to do more of that, we have to make sure we're making the right investments to cover the waterfront and the opportunity that that's going to provide us.
And then lastly, people. None of this is possible without our people. And this week, we're actually being recognized as a top employer in China for the 6th year in a row. That's great progress, but we're going to have to continue to do more of that and build out our commercial capabilities, seek out and retain the best people in the Asia Pacific marketplace. Now I want to kind of shift gears and talk about I mentioned proof points, and we're doing some great things in our businesses today.
And I thought I'd start with Power Solutions, because what I want to try and do is bring to life some of the success and the momentum that we're seeing. In Power Solutions, 90% of the global growth in the auto battery market is going to come from emerging markets and 55% of that growth will come from China alone. And as was mentioned, China is going to be the largest battery market at over 100 or right at about 100,000,000 units. And when you look at China, it's a huge opportunity. But if you look around Asia Pacific, there's areas like India, Thailand, huge opportunities for us to focus on for growth.
So as you can see, for our battery business, Asia Pacific is a huge area for us to grow in. Let me double click a little bit further and talk about our aftermarket aftermarket growth in Power Solutions in China. We have a comprehensive plan to become the number 2 market position in our aftermarket business in China, and that's by 2021. And this comprehensive plan really starts out with market segmentation and selection. We've mapped 180 car parks across 180 cities in China.
So we know we've prioritized exactly where we want to go. It then gets into distributor partnering and onboarding. We want to make sure that we can seek out, identify and recruit the right partners to be a part of our distribution network. And then we want to provide them once we can get them professionalized, make sure that they have the right working capital, right market focus, the right relationships, then we want to bring them in to partner development. We want to make sure that we're providing them the right tools, the right field support, the right training and also the right incentives and make them a part of our VARTA club.
This is our think of it as our distributor loyalty program, where we're incenting our distributors to not only sell VARTA batteries, but actually pay them more incentive to sell upsell to AGM, which is a huge opportunity in terms of start stop. And then brand development, we've done a lot of work to make sure that the VARTA brand is recognized as the premier brand in the battery market space in China, and we've made good progress there. And lastly, our commercial operating system. This is where we're putting a lot of rigor in things like key account management, channel management as well as our pricing capabilities and our sales management disciplines. But this comprehensive plan is not the only thing that's going to assure that we gain share in terms of aftermarket in China.
What's also going to help us and what's been mentioned earlier is our leading position in start stop battery technology. Let's take a look at what that looks like.
Tomorrow between 5 am 8 am, 1,200,000,000 people will get out of bed and get on the road. In Europe, 31,000 drivers will be caught in rush hour traffic. 7,233 drivers in North America will finish behind the wheel. 2,300,000 car horns will be honked. 18,900 drivers in Shanghai will wait at the longest red light in the city.
8 70 drivers in Dubai will wish they had left earlier. From Anchorage to Auckland, millions of cars will sit idle and burn tens of thousands of gallons of gasoline without going anywhere. Every day of the week, Johnson controls will help save 1,800,000 gallons of fuel by building the most advanced car batteries in the world. Batteries that will start and stop car engines in a fraction of a second, while supplying more power for safety and comfort than ever before. By 2020, start stop batteries will power over 60,000,000 of the world's vehicles, cutting greenhouse gas Johnson Controls is shaping a cleaner tomorrow by making start stop batteries the new global standard
today. So we're making a lot of progress in Power Solutions, but we're also making progress in our building segment as well. And I want to talk about our Building Technology and Solutions. One of the areas that's a key trend that we see is this trend towards building wide systems integration. You see off to the left, GY Hospital in Shanghai.
This is a 500,000,000 dollars 500 bed hospital. It's actually a joint venture, it's a private hospital joint ventured with Massachusetts General Hospital. This hospital is a little bit unique because they took the opportunity to not just procure the typical HVAC systems, building automation, but they worked with us and asked us to come in and help them to integrate all of their low voltage solutions in this new hospital. This is a key trend that we're going to see more and more of as in the coming years with the digitalization that we've already talked about. Products and technology is clearly another focus area for us and a huge growth opportunity.
When you think about the VRF technology that came to us through our Hitachi joint venture, that not only helped us fill a line card gap in Asia, but it became a line card gap for us
to play with
globally. But beyond that, we're doing some things organically as well. So we've also just deployed to the market a building controls manager. This control platform really is focused on the China market specifically. We developed this based on the voice of customer that came from China.
It's got the right price point and the right feature and functionality. So this is these are examples of what we're doing organically. And when you think about the products that we have and how we solution those with our customers, the bottom two examples really kind of highlight again, some of the trends that we're seeing in terms of district wide heating and cooling, as an example. Smart city and smart building applications, with the example of the Sentosa Smart Island Resort project in Singapore. Again, more of these trends are going to start to happen.
What it means for us is we have to make sure we're tailoring our products for Asia with Asia relevance and at the same time building capabilities to deliver these type of projects within our commercial selling teams. Let me highlight another example and I talked about our relationship and partnership that we have with Hisense and that of our HAPQ joint venture, again a subsidiary of our Johnson Controls Hitachi joint venture. Again, just like what you saw with the aftermarket in China, we have a plan within China to become the number one BRF player with this partnership by 2020 in China. And we've made significant progress, you can see over the years, but aspirations to get to that number one position. And China, the relevance of that is China is the largest VRF market in the world.
And a similar kind of growth platform that we've laid out, it's all about taking our products, adapting them, innovating them for China based on China requirements and continuing to do that in concert with our commercial excellence, making sure that we're providing the sales teams with the right tools, processes and a dual brand strategy across the Hitachi brand and the Hisense brand to get to that number one position. And similar to what I mentioned with Varta Club on our Power Solutions side, having the right distributor loyalty programs to make sure that we're incenting the right behaviors in the right way in the markets that provide us this kind of opportunity. So this is 20% growth through 2020 and you see that the dealer count or distributor count will rise another 16% per year up to 5,500 dealers. This is again a great example of finding the right partner, doing the right things with our products and our technologies to make sure that we're capturing all the growth in the market that we can. This you saw a derivative of this slide Kim as she talked earlier about the digitalization trend.
And I wanted to bring it back because again, I think it's relevant when you think about where the market is going specifically in Asia. And one of the things that you see added on to this slide that kind of makes it a derivative of what Kim showed you is the rate of change of digitalization in developed markets versus developing markets. Why do I show you that? Well, again, it's indicative of where the market is going when you think about integrated solutions. So when you think about legacy Tyco and legacy Johnson Controls coming together, that's all about getting after that 43,000,000,000 controls coming together, that's all about getting after that $43,000,000,000 of HVAC, building automation, fire and security products.
And the way we're going to do that is exactly how George outlined it. We're going to make sure that we're cross selling, leveraging each other's relationships to be able to get after that opportunity. And obviously, at the same time, once you get your sales force optimized, you're going to be able to cover more of the market and we're going to be able to enhance our market share from being able to cover more of the market. But what kind of comes out of this also is this hidden economy of this integrated solutions market that we see in Asia at about $5,000,000,000 and that $5,000,000,000 market is growing at a clip of 15% to 20% per year. This is again a great opportunity for us to take the merger of our 2 companies, organize our selling capabilities, pull the right products, the right Asia relevant products into the mix to make sure we can get after that incremental market growth.
And I'll end here. I want to kind of introduce this concept of our Asia Pacific headquarters. It's going to be opening this summer, actually in the June timeframe. And the importance of this is never before have we been able to operate in Asia Pacific as one integrated region. So we'll be able to take our business leadership, all of our business functions and co locate it in the same headquarters building to be able to serve all of our Asia customer base.
And that's going to be exciting for us internally. But this building is really more than just an internal statement to our commitment in Asia Pacific. It's an external statement as well. And what I mean by that is this building is going to be a living laboratory, a showcase for all of our products and our technologies. If we ever had a government official that ever wondered what does good look like in terms of energy and sustainability, we're going to be able to bring them to this facility and show them real time.
And this building also represents us walking the talk. And what I mean by that is this facility will have 44% energy savings. It will have 42% water savings and 21% embodied energy and material savings. So truly showcasing what good looks like in terms of energy and sustainability. Beyond that, we're also excited about some of the accolades this building is going to have, because it will be a LEED Platinum certified building, it will be a China 3 Star certified building, it will be the greenest building in China.
And we're pretty excited about that. But what we're also excited about is some of the accolades that we've already received. The U. S.-China Clean Energy Research Center has recognized this building as a demonstration project. And in addition to that, IFC World Bank has already given us an award for the design.
It's called the Edge Award and it's all about efficiency and excellence and design for greater efficiency. So this building is we're excited about it for what it means internally for us. We're also excited about what it means putting a stake in the ground in our commitment to Asia Pacific. And when you think about our customers, our partners, our current employees and frankly even our future employees, this recognizes what we're going to do. It gives a nod to what we've already done over the last 100 years, but it provides a vision of the growth that we will achieve in the next coming years.
Thank you.
Ladies and gentlemen, Executive Vice President and Chief Financial Officer, Brian Stief.
Good morning. So we had an opportunity to present to this group 12 months ago. And at that time, we laid out a number of activities that we wanted to accomplish during fiscal 2016. One of the things that we're very proud of is, if you look at the transformational activity that took place, a year ago, we didn't have the Tyco merger on our planning horizon, but we did have the Adient spin off. And if you look at those two transactions, those two transactions were the 2 largest transactions in the company's history, and they were completed within the last 3 to 4 months.
And while at the same time, we completed those transactions, we also delivered on our financial commitments and not just in fiscal 'sixteen, but if you think about the transformation that Alex laid out 3 years ago when he took the Chairman and CEO role, we've delivered every quarter and every year on our financial commitments. And I'm going to kind of take you through what you've heard this morning. And I'm going to kind of transfer that into the financial results that we, as a management team, are going to commit to as we move forward. So I'm going to talk in terms of 5 financial priorities that kind of govern the way I think about things and I think the way our management team thinks about things. And these have been reasonably consistent and will continue to be as we move forward.
First of all, clear portfolio choices. We've made a number of choices over the last 3 years to get to where we are today. I think we've got the foundation built now for growth. And as we look forward, there will continue to be activity in the portfolio that we're managing. But it's going to be both from an acquisition side.
And I think you can also expect some non core asset sales as well as we move forward. Secondly, if you've heard a lot today from Alex and George talking about accelerating organic growth. I think the businesses we're in provide us a platform for that. The 3rd area is to optimize our cost structure and margins. You've seen historically, we've done an excellent job with that.
I think we've got the groundwork laid for more to come through 2020 in that regard. The 4th area and a key area from my standpoint is to improve free cash flow conversion. And then lastly, we'll drive a balanced capital allocation. I'll get into more detail on each of these as we go through my comments this morning. So you've seen this chart in various forms over the last 2 or 3 years, but I'd like to just kind of focus you on the far left hand side here.
In 2013, at the end of fiscal 'thirteen, we were a $41,000,000,000 company and our EBIT margins were 6.3%. And we did, as Alex mentioned, about $40,000,000,000 worth of gross portfolio transactions, acquisitions and divestitures and joint ventures. And you can see what we've moved to at this point in time, which is a $30,000,000,000 pro form a company with 11% EBIT margins. And we've got opportunities to move that forward, which I'll go through as we move through the slides. Secondly, when you think of organic growth, we've talked about this a lot this morning from each of the presenters.
But if you look at the type of businesses that we have, you can see that our aftermarket and service business are over 40%. So those are very predictable common recurring revenues that we have on an annual basis. And when you look at the installation and project business between legacy JCI and legacy Tyco, That's really the backlog business that really allows us at the beginning of each year to reasonably predict through full models what the revenue will be from that side of the business. And then lastly, we've got a products business, which is really your monthly bill and ship business, and again, reasonably predictable. So I think from the standpoint of the type of revenue we have, it's reasonably easy for us to stand here on an annual basis and predict growth patterns.
If you look at the cyclicality of our business, there is about 40% of our business that really doesn't have any cycle associated with it. And then the remaining business is probably mid to late cycle, the way we think about it. If you look at it geographically, about half our business is in North America, about 25% is in EMEA Latin America and the other 25% is in China. And I think what you'll see between now 2020, you're going to see a shift toward the growth that Trent talked about in Asia, if you look at this pie chart in 2020. And then lastly, each of the presenters this morning talked about the end markets that we participate in.
And if you look at commercial HVAC, you look at the auto battery, you look at fire and security, we are really the number one player in each of our end markets. And I think the megatrends that are out there support growth in each of those end markets. So Kim talked about the megatrends on the left hand side. I draw your attention to the right hand side of this slide. We've got a 3% to 4% CAGR built in through 2020.
And if you look at where GDP is, depending upon each geography, you can see North America is in that 1% to 2% range, but you can see China and the rest of Asia has got a CAGR north of 3%. And as Trent mentioned, we've got a lot of opportunities there. So I think we as we look at the next 4 years, that growth CAGR of 3% to 4%, very achievable from our perspective. So Alex showed this slide as well. EBIT margins, what this really does is it takes pro form a Tyco and pro form a John's controls, dials it back to fiscal 2013 and says what were your margins at that time, 7.2 percent EBIT margins on a pro form a basis.
If you look at where we are today, on a pro form a basis, it's 11%, 3.80 basis point improvement. As we go through the deck, I will show you kind of the roadmap that we've established to get another 300 to 3 80 basis points improvement through fiscal 2020. And you can see some of the levers we've pulled. We've done some restructuring. We've worked hard on the JCOS initiative that Jeff has laid out.
We've got strategies in place to divest of lower margin businesses or businesses that don't really fit our long term strategic plan. And we've continued to invest in our core businesses. Jeff talked about the $1,000,000,000 in Johnson Controls operating system benefits. Jeff is somewhat humble when he gets up here and talks about the journey that he has had his team on. I mean, I think 3 years ago when we laid out the Johnson Controls operating system, it was an initiative at that time.
We were still kind of putting the pieces together. We needed to get it embedded in our business. But I can tell you as I stand here today, Johnson Controls operating system is the way we do business today. It is embedded in each of the activities of our global teams. And it's also, as Jeff mentioned, had the opportunity to take the best of what Tyco had from its operating system and incorporate it into the JCOS model.
So here's a walk from an EBIT dollar standpoint. In pro form a 16, we've got $3,300,000,000 of EBIT. If you look at the 3% to 4% CAGR that we're predicting over the next 4 years, that translates into between $500,000,000 $900,000,000 of EBIT. Alex and George both talked about revenue synergies that we see from the JCI Tyco merger of about $500,000,000 as we move through 2020, apply about a 20% ballpark margin on that, you get about $100,000,000 of incremental EBIT there. The $1,000,000,000 we've talked a lot about.
And then we continue to make investments in our business, which is a bit of a it's a positive thing, but it obviously has an impact on our EBIT growth during the period. But the thing that I would point you to as you look at this slide, most of this is under our control. And if you look at the $500,000,000 to $900,000,000 and you compare the opportunities that we have for growth, I think the $500,000,000 to $900,000,000 is also very achievable in addition to the stuff that's directly under our control. So where does that take us? That takes us to about $5,000,000,000 of EBIT in 2020, margins of anywhere from 14% to 14.8%, so up 300 basis points to 3 80 basis points.
And if you look at EBITDA by 2020, that number is north of $6,000,000,000 So adjusted free cash flow, this is an area of continued focus. I think as many of you know, legacy John's Controls has tended to be in that 70% range. I think Tyco was more in the 9% to 100% range. If you put the 2 companies together on a pro form a basis, we end up at about 80%. And by the way, these numbers are adjusted for one time items.
If you look at fiscal 2017, we again expect to be in about an 80% free cash flow conversion rate generating about 2 point $1,000,000,000 of free cash flow. And I'm going to walk you through on the next slide some of the choppiness that we're to see in 2017. And again, these are adjusted numbers, because some of the transactional activity and portfolio changes that we've had are really driving some cash needs as we look at fiscal 2017, particularly from a tax standpoint. But if we look out through 2020, we can see free cash flow in the $3,400,000,000 range at about a 90% free cash flow conversion rate and our steady state objective on a go forward basis 2020 and beyond is to have a 90% plus free cash flow conversion. So let me touch a little bit on some of the significant items that are impacting fiscal 2017.
We've got about $1,600,000,000 and what I would call one time cash needs in fiscal 2017 that are somewhat unique. The first of which there is about $250,000,000 of integration and transaction costs as well as separation costs related to the Adient spin off in the Q1 that we will have to fund during fiscal 2017. Secondly, there is about $150,000,000 of cash restructuring costs that we will fund. So that gets you to $400,000,000 And then there's $1,200,000,000 of tax payments that we're going to make in the first half of fiscal twenty seventeen. And those relate to the Adient spin off primarily and it relates to other smaller transactions that we've done that will require an outlay of that magnitude.
But I would point out to you that the tax planning that's been done associated with those transactions will allow us to recoup about $900,000,000 of that $1,200,000,000 in cash outflow for taxes and about $300,000,000 of that will be recouped, we think in the Q1 of fiscal 2018 with about $600,000,000 recouped by the end of fiscal 2019. So in essence, there is a bit of a prepayment, if you will, of taxes that we knew that we know through capital loss carrybacks and foreign tax credit carrybacks, we will recoup over the next 2 years. And if you look at the benefits of the tax planning that's been put in place versus the cost of money essentially on putting that $900,000,000 in an account with the IRS. You look at it from that perspective and it's pretty clear that it's worth the interest cost on that money. So let me move to balanced capital allocation.
So I think again, the chart on the left here is a pretty consistent message that we've been giving this group over the past several years. I mean, our objective is to maintain a BBB plus credit rating or better. Our targeted net debt to cap ratio has been in the 35% to 40%. And lastly, we try to maintain as much financial flexibility as we can. When we think of capital allocation, we talk in terms of CapEx, a competitive dividend, strategic M and A and share repurchases.
And I'll go through our thoughts on each of those particular areas in the next several slides. But if you think about our longer term objectives here, we've got an elevated reinvestment ratio as it relates to CapEx as we sit here today. And I'll tell you how we're going to work that down over time. We're going to improve our free cash flow conversion that I've talked about. I think the auto cyclicality that was a bit of an overhang for us in legacy John's controls, that's now gone and I think will provide us with an ability to have more balance sheet flexibility, but also to potentially get our credit rating at something above BBB plus And I also think from the standpoint of our net debt to cap ratio in that 35% to 40% level, which used to be kind of a sweet spot for us, I think, with the auto overhang, I think it's going to be pretty easy with the cash flow that we're going to generate to move that up maybe 5 percentage points on both sides.
So let me talk a little bit about CapEx. I think as most of you know, we've got heavy CapEx in Power Solutions over the next 2 to 3 years, particularly in 2017 2018. We've talked about our 3rd and 4th plant in China. We've talked about AGM capacity in North America. And what's happening is those growth investments are resulting in a reinvestment ratio that's elevated from what we would probably think is a normalized run rate for multi But I But I would also tell you that it's a little bit of a double edged sword, right?
As that comes down and that means that we don't have those growth CapEx opportunities out there. And so as we present to you on an annual basis, we may very well come back with growth CapEx in 2019 2020 that makes sense to us and we'll explain to you why it does. But from our perspective, it will from a business case or return standpoint. So dividends, as most of you know, John's Controls legacy had a payout ratio at roughly 30%. Legacy Tyco had a payout ratio of mid to high 30s.
Last week in Ireland, our Board approved a dollar dividend per share for fiscal 2017. That equates at a $45 share price to about a 2.2% return. And it results in a payout ratio given our guidance of $2.60 to $2.75 of something in the 36% to 38% payout ratio. And we'll continue to monitor that as we move forward. I think if you look at some of the top multi industrials, they're probably banging up against 40%.
But I think with other some of the other cash needs that we've got in fiscal 2017, we're going to kind of walk before we run-in this particular area. So M and A, so I think fiscal 'seventeen is probably going to be a bit of a transition year for us. I wouldn't say that we're going to hit the pause button totally. But I think given the fact that we've got the Tyco integration well underway, we've got Hitachi's integration that we need to kind of finish up in fiscal 2017. The separation of Adient as well as the interiors joint venture, we still got some TSAs with those businesses that we need to work our way out of.
So I think from the standpoint of working on prior portfolio transactions, there is some work in 2017. But that doesn't mean that we aren't going to look at strategic opportunities either. I just don't think they're going to be large dollar opportunities in fiscal 'seventeen. I think we'll get back to looking more earnestly in larger transactions beginning in fiscal 'eighteen as we begin to build up our financial flexibility. But if you look at the targets, I think as you heard this morning, we're looking at technology, we're looking at new products, line card products in the building space, we're looking at broadening our global reach and we're looking at adjacency markets that make sense.
Alex touched on some of the criteria, but clearly when we look at the businesses that we're going to have an interest in from an acquisition standpoint, they've structure. And Alex referred to the accretion by year 2 in EPS and the return in excess of our weighted average cost of capital by year 3. And then value drivers, I would just point to, we continue to invest in businesses that we're going to have leadership positions in. There may be some businesses that we acquire along the way that are good businesses, but don't fit our long term strategic objectives. And we'll decide at that point in time whether or not any of those would be divestment options for us.
I would also tell you that by having the tax structure that we've got as a result of the Tycho Johns Controls merger, we've got the ability for M and A in the future to really put in place some optimal tax footprints globally. Share repurchases, if you look back to 2014, both companies had an inflow of cash and both embarked on a share repurchase program. Historically, both companies had really bought back shares to the extent that it offset option dilution. I think that's the mode we're going to be in, in fiscal 2017. We'll probably look in terms of $200,000,000 or $250,000,000 of share buyback and again just to offset option dilution.
But as we move forward, what I'd like to be able to do is tell this group that we've got share repurchase as part of our normal sustainable capital allocation program. And we don't know what that number is yet. We would like to have a competitive dividend and share cash return to our shareholders in the form of share repurchases at some consistent level on a go forward basis. So quickly to touch on the balance sheet position. So this is a pro form a balance sheet ex the Adient debt that you saw in our books as of September 30.
That debt obviously at $3,500,000,000 has now been transferred to the Adient business. But we had $12,800,000,000 of gross debt, $10,800,000,000 of net debt. The way to think about that $12,800,000,000 from an interest rate sensitivity standpoint is half of that is fixed and about half of that is floating. The underlying debt instruments may not be secured in that fashion, but we swap into about a fifty-fifty fixed floating mix. So if you think about it in terms of sensitivity, you've got $12,800,000,000 of gross debt and half of that's in a floating rates, that's $6,400,000,000 so 1% move up in interest rates is in that $60,000,000 range relative to interest
rate sensitivity of our
debt portfolio. We've got great And I think as we look at upcoming debt maturities, they're very manageable. We've got about $3,000,000,000 of unused revolving credit facilities. And I think as we look at upcoming debt maturities, they're very manageable. We've got about $600,000,000 of debt maturities in fiscal 'seventeen and about $370,000,000 of debt maturities in fiscal 'eighteen.
So let me turn to our fiscal 2017 outlook as well as our midterm outlook through 2020. And before I get into the specific numbers, just a comment around the reportable segments that you'll see beginning in the latter half of fiscal 'seventeen. As most of you know, legacy John's Controls reported on a North American systems and services. It reported on North American products and distribution. It reported Asia as a separate segment and reported Asia as a separate I mean rest of world as a separate segment.
If you look at Tyco, they had a North American installation and service business, they had a rest of world installation and service business and that a global products. So beginning in the latter half of fiscal 'seventeen and the reason we can't report this way right out of the box in the Q1 is we have to be able to get the plumbing done in our underlying systems and reporting to management to be able to Q3. But I would look at the new segment reporting and say we're going to have 1 global products business within our building segment. We're going to have a building solutions North America that Ron Rushing runs. We've got building solutions EMEA and Latin America that Yohan Pfeiffer runs.
And then we've got the building solution Asian Pacific, which Trent Neville runs and I missed saying that Bill Jackson runs our global products business. So that should all be in place reporting consistently beginning in our Q3. So just to tee up some of the underlying assumptions that we're using because some of these depending upon the movements of commodities and currencies and GDP in North America is up a little bit. If you look, Eurozone, U. K.
And GDP in North America is up a little bit. If you look Eurozone, U. K. And China trending down a bit. If you look at M and A activity, the only M and A activity of significance that's built into the plan that we're going to go through this morning is the Adient spin off, which has been completed and that will be reported as a discontinued operation in the Q1 of fiscal 'seventeen.
So there will be comparables that you'll have with the pro form a information we provided in the 8 ks for the combined JCI Tyco business as we move throughout fiscal 'seventeen. Any one time costs related to restructuring or any one time costs related to integration and separation of the businesses, those are not reflected in the guidance consistent with the way we have reported historically. Construction spending, resi is about flat. These are industry statistics. Non residential is down from about 5% to 2%.
That's not necessarily indicative of Johnson Controls. It depends upon the verticals you participate in. And of course, we're heavy in institutional and commercial, which tends to favor something north of that 2% that's out there as general industry statistics. If you look at the euro, we've got it at $110,000,000 If you look at the pound, we've got it at $128,000,000 And I think noteworthy for this group is that we are projecting now an effective tax rate for fiscal 2017 of 15% versus 17%. And that's due in part to some global tax planning that's been able to be put in place immediately in 2017 related to the Tyco merger.
If you look at diluted shares, again, just for your models, we're assuming throughout this that 940,000,000 shares will be the weighted average shares outstanding. And then of course, as I mentioned, the share repurchases will just offset dilution during 2017. So let me touch on commodities just very quickly here. We are in the process now of pulling together on a global basis our strategy relative to hedging commodities. But what I mean by that is pulling Tyco kind of into the John Controls hedging program, because historically Tyco did not do a great deal of commodity hedging.
But the way to think about this is that from our perspective, we don't have significant net exposure to commodities. And it's a result of the fact that we've kind of operate under a practice that within a rolling 12 month period, forecasted 12 month period, we expect to be about 60% hedged on our commodities and we're 80% hedged as it relates to the upcoming quarter. And so that allows us to do is make sure that the P and L effect of commodities is not significant. And this is incremental to those customers for which we've got normal contractual arrangements where if prices go up or down, there's price adjustments on those. Now I will point out that lead is a bit of a unique commodity in our Power Solutions business and we do not hedge lead using the same policy that I mentioned for currencies like aluminum and tin and steel and others, okay, and copper.
The way to think about lead is our plan is at 1800, okay? And as most of you know, lead shot up from the 1700, 1800 level up to, I think it's more recently, 2,400, 2,500 something like that. And so that provides some challenges for us relative to headwinds in Q1. We think for the year, we'll be able to normalize most of that. But because of how quickly it moved up in the Q1, it does create a bit of headwind for us.
And the way to think about this is about every $100 per metric ton is worth about $3,000,000 to $4,000,000 to us in immediate sync if we can't cover it through price increases. So with commodities bumping up around $2,400 right now, you can see that's about an $18,000,000 to $24,000,000 headwind that we've got in the Q1 that we ultimately will recover during the remainder of the year, but it's a bit of a headwind for us in Q1. So fiscal 'seventeen guidance for Building Technologies and Solutions, we expect earnings growth or I'm sorry, sales growth of 2% to 4%. Our order pipeline, as most of you know, as we've talked in the quarters, we've seen order growth anywhere between 3% 6% in both companies over the last year or so. That order pipeline continues to be very strong.
And we continue to see the benefits of some of the product rollouts that we've done, particularly in the historical BE business related to some new products that were launched in the 3rd Q4, which provides some benefit to us as well. If you look at margins, and here we're referring to EBITDA margins, okay? EBITA margins are going to be up 60 basis points to 80 basis points for the year. That's due to the synergies that we expect from the JCI Tycho merger. It relates to some of the benefits we're going to see from restructuring in JCOS, as well as some volume and products mix benefits as well.
If you turn to Power Solutions for fiscal 2017, we've got order growth at 4% to 6 percent. We continue to see market share gains in all regions. And we see start stop volumes increasing about 25% year over year and China up about 35%, albeit on relatively low volumes, but we continue to see the growth in unit volume in the China location. Margins will be flat. The reason it's going to be flat is I think some of the pressure that we're going to see from the run up in lead will put some pressure on the calculation of our margins because our denominator is going to get bigger through passing that increase in lead costs on to our customers.
Having said that, the JCO JCO benefits, restructuring benefits, AGM mix benefits us as well. Those items should be able to at least offset the lead price impact as well as our ongoing investments in China as far as launch costs. So let me just kind of walk you through a full year bridge. So our guidance for fiscal 2017 is that we will move from $2.31 pro form a in 2016 to a range of $2.60 to 2.75 dollars And again, as I go through this, a lot of this is under our control as we move throughout the year. If you look at the synergies and productivity piece of that, it's about $0.25 a share.
Volume and mix, that gets back to the growth rates we talked about for each of the businesses that should add about $0.18 a share. Our tax rate going from 17% to 15% adds about $0.06 a share And FX is about a $0.07 negative and continued investments that we're making in both the Buildings and Power Solutions businesses result in about a $0.06 reduction. So that's really the walk. I guess I'd tell you the FX headwind on the right hand side of the page $430,000,000 If you think about the currencies we're most exposed to, it's really the pound and the peso, the euro, the Canadian dollar and the yen. And if you look at those currencies, the pound and the peso are roughly $100,000,000 to $125,000,000 negative for us year on year.
And about $50,000,000 or so would be the Canadian dollar, the yen and the euro, again, on a year over year basis as it relates to the bridge. So that $260,000,000 to $275,000,000 does include $430,000,000 of intangible asset amortization, which is $0.31 a share at a tax rate, which is a blended tax rate depending upon where those intangible assets at 32.5%. So again, the $2.60 to $2.75 includes the $0.31 in incremental consolidated amortization. So Q1 guidance, again, pro form a Q1 last year that we filed in the 8 ks as part of our Q4 earnings, that's at $0.48 And you can see synergies and productivity, volume and investments kind of walks you to a $0.50 to $0.52 As I mentioned earlier, lead is a bit of a headwind for us in the quarter, given its quick spike up. And so that's probably going to be a penny, maybe 2 for us in the quarter.
And the other thing I'd point out in here is, if you looked at the prior slide, we had $0.25 in there for cost and synergy benefits in the year. And you only see $0.03 here in the Q1. And I think as most of you know and as we expected, a lot of the synergies that we are going to realize will be in the back half of the year. And the reason that those are going to accelerate in the back half of the year is we do have some processes and controls that we need to put in place around our federal business to ring fence that business between Tyco and John's controls. And we also have to ring fence the Tyco operations that support the $4,000,000,000 debt issuance that was done in connection with the transaction.
So as we work through a process here over the next 2 to 4 months to get all of those businesses ring fenced, that will do nothing more than allow us to speed up the process in the back half of the year. So that would be a 4% to 8% year over year improvement. If you look at mid term for each of the businesses, you can see that Power Solutions is going to go from 6,700,000,000 to north of 8,000,000,000 in sales and their margins will be up around 100 basis points or so during that period. And again, that reflects some of the continued investments and launch costs that we've talked about in China. When you look at the buildings business, it's going to move from about a $23,000,000,000 business in 2016 to about a $26,000,000,000 business in 2020.
And that you can see will come with margin improvement from 12.7% to something between 15% 16%, obviously reflecting a lot of the synergies we expect to realize as part of the transaction. So just to kind of summarize on a quick chart here for you, as we look at fiscal 2020 targets as compared to fiscal 2016 pro form a, sales will move at about a 3% to 4% CAGR through 2020. EBIT margin should move somewhere from 11% on a pro form a basis, up 300 basis points to 3 0.8 percent to 14.8 percent. Free cash flow conversion will move from an 80%. These are adjusted free cash flow numbers as it relates to fiscal 2016, but we expect free cash flow conversion at the 90% plus rate as we move into 2020.
Corporate costs during this period, we expect to go down from about $540,000,000 on a pro form a basis in 2016 as you saw in the pro formas in the 8 ks. And that should go down to a number around $400,000,000 in 20.20 and that $2.31 will grow at a 12% to 15% CAGR through 2020. So a couple of things for your models as you think about the growth leverage that we've built into this. Buildings, we've built in about a little over 20% growth leverage. I'm sorry, high teens for Buildings and Power Solutions is in the low 20s.
And then we've got the $1,000,000,000 of savings over the 4 year period that the presenters this morning talked about. We do think there's probably some upward pressure on the rate as we move through 2020. I think right now based upon what we see, our tax rate is going to be 15% for 'seventeen and we have a pretty good feeling
sitting here today about that for 'eighteen as well. But there's probably
some upward pressure on that as we continue to generate more North American income, which obviously is as we sit here more North American income, which obviously is as we sit here today, taxed at a higher rate. And then we talked about 940,000,000 shares outstanding. So the EPS bridge, we kind of walk this through for you as well. Dollars 2.31 pro form a 16, the $1.10 was on, I believe, Alex and George's slide in an earlier presentation today. The $0.45 to $0.80 is really that $500,000,000 $900,000,000 of EBIT growth that we expect over the next 4 years.
We can see investments, that's the $200,000,000 investments that we've talked about, That's a negative $0.15 to $0.20 And then the underlying tax rate pressure that I talked about has got about a nickel impact over the period. So with that, that kind of walks to a 3.61 to 4.01 range. And I guess the thing I'd point out here is this assumes that as we generate this type of EBIT performance, a lot of the cash is really be kind of put aside as dry powder. So if you think about where we're going to be cash position at the end of 2020, we haven't made decisions yet on whether we use it for M and A, whether we're going to use it for share repurchase, whatever it is, we have not made that decision today. But just to kind of frame this for you, if we accumulated the cash over the next 4 years and then in 2020 did a share repurchase, there is earnings power of about $0.25 that isn't reflected in anything we're talking about here.
So just in summary, I think as we sit here today, both John's Controls and Tyco have a history and a track record of being able to deliver. We certainly have a large revenue base that's balanced globally that we can grow from. And I think as a company, Johnson Controls the If you think about what we can build on, the first one is both organic and inorganic revenue growth, which we are talking about a 3% to 4% organic over this period and there will certainly be inorganic growth as well. The next three items really are under our control. Delivering the cost synergies, improving free cash flow conversion and what do we do with our capital to optimize returns to our shareholders.
And then lastly, I would just tell you, the management incentives that are now put in place have changed a little bit for the new John's controls moving forward. We really took, I would say, the best practices of John's controls and Tyco as it relates to those metrics that are most important to being a true multinational multi industrial company. And we've now got management metrics aligned with those, I think, as best we could in connection with our Board. So lastly, I would just tell you that we've got a management team that's been put together. It's a mix of legacy JCI and Tyco.
I can tell you it's a very focused, excited management team about the opportunities that lay in front of us here. And when we look at the 12% to 15% CAGR growth that we're talking about here this morning, not only are we committed to deliver on that, but we're very confident in the message that we delivered here this morning. So with that, I'll invite Antonella and Alex in George up, and we can begin Q and A.
Just while we get the stage set up, we will have a few mic runners in the room. So when you do get selected for a question, please wait till the microphone arrives before asking your question so we can ensure that everyone in the room as well as those that are listening via webcast have the opportunity to hear the question. So let's go right here on the first row. Go ahead, Jeff.
Great. Thank you. It's Jeff Sprague from Vertical Research. Couple of questions. They might actually be for Brian, but welcome anyone to answer them.
First, just on tax, Brian. Big election in the last couple of weeks you probably saw. If we looked at kind of what the GOP plan was going into this, 20% tax rate kind of border adjustable tax and all those sorts of things, Do you foresee that actually putting significant upward pressure on your tax rate? You'd lose your U. S.
Deductions. Obviously, we're talking a proposal, but I wonder if you've worked through that and have any initial thoughts on that? I can't say we've worked through it, Jeff, but I think when we look at our tax position today, you kind of if you remember, John's Controls legacy had a 17%, 17.5%
rate in our own, which is very similar to Tyco. So the merger didn't create that big a one time tax benefit for us. What it really did is, as we look forward with M and A activity, I think it provides us an opportunity to do things on a much more tax efficient basis. Whatever happens in the U. S.
Relative to tax rate, I mean, if the U. S. Tax rate is taken down from 35 to 25 or whatever, that will certainly be of benefit to us actually, because there will be from a growth and synergy standpoint, a lot of the synergies that will be generated will be generated in North America. And of course, that'd be taxed at a 35% rate. So I don't see it as a negative.
I think we're still working through it, but I actually see some positives in it.
Great. I just had one follow-up on the kind of the $3,000,000,000 plus at the tail of your walk there.
Yes.
I guess there is a plus there, but it does seem like that could probably pretty easily be $4,000,000 But is there something else in debt reduction or something else we should be thinking about as we think about that excess cash number in 2020?
So that was ex dividends, it did not and it assumed term debt pay downs of the $600,000,000 and the $370,000,000 that I talked about '17 and 'eighteen, but it assumes some type of refinancing if necessary the TESARL debt of $4,000,000,000 Other than that, debt was not part
of that.
So I would agree with you, the $3,000,000,000 is probably a conservative number. That's why we put $3,000,000,000 plus. And hopefully we'll have some upside
to that. I'm not sure everybody is familiar with TSARL is.
TSARL is the entity that was formed that issued the $4,000,000,000 in debt that came the cash of which came to the John's control shareholders as part of the transaction. And that TESARO entity on a go forward basis, I mentioned it needs to be ring fenced. We need to make sure that the entire $4,000,000,000 of debt that TESARL issued in connection with the merger is repaid by cash flows from the Tyco business. So it does provide us some limitations in sharing cash flows between John's Controls and Tyco on a go forward basis. But I think our roadmap to get that TCRO debt paid down to a reasonable level pretty quickly is pretty achievable.
Yes. So just a nuance, because I think this is really important point, a nuance on that is that it's not going to impact our overall operations, but as we go through the synergy activities over the next year, we've got to make sure that our internal processes have the integrity to make sure that we can identify those cash flows. Because the cash flows for the TESARO debt in order to protect our inversion needs to be paid off of Tyco cash flows or Tyco assets. And so that's just an important aspect when we talk about the synergies and being able to get those.
Go ahead, Steve.
Steve Winoker from Bernstein. Just a question on the pacing of the both cost and revenue synergies over the full multiyear basis, it looks like you've got the 25% to 30% in year in 2017. But should we think about that as evenly paced throughout the full set of years other than the cost side? And then on the revenue side, just how back end loaded before we start adding 40 basis points a year of growth?
Yes. I think there's a pretty good mix there where there's a lot of short term savings with G and A and with the procurement leverage that we have with the combined buy that we're beginning to see some real traction. Some of the structural changes that will take place in the field take a little bit longer. So when you look at the total, it looks like it's evenly split, but the mix of that is different, the 1st year to the 2nd year to the 3rd year. But very confident that we've got the plans in place to be able to execute as we've committed.
So a bit of a bigger one upfront and then sort of pace it down and then
I think you're going to start to see momentum from an operation standpoint. Certainly, the G and A upfront with the overlap that we had between both companies was a significant short term opportunity. We're seeing some nice, like I said, pickup in procurement with the combined buy. But when you net all of it, it's a pretty steady rate of improvement as we go through the 3 year period.
That's probably the way to think about it. It's just a flip of procurement, which is easy to go get, corporate cost, which is fairly easy to go get. And then it moves into the business, we just got to be very thoughtful about how we did that.
And is that incremental margin that you put in the slide of 70% to 20%, 17% to 20% in the buildings for just the base volume growth. It's a little lower I think than I might have thought otherwise. What and that's separate from the additional investments later on. Anything is that mix or what's going on there?
See a lot of the overlap that we have is in projects. So when you think about enterprise accounts and big projects, so we have targets for secured orders in the 1st year and the revenue begins to come through kind of the latter part of the 1st year and it begins to pick up in the 2nd 3rd year. But we've got account plans, as I said, account by account, going after the large projects. And then from a service standpoint, there's going to be incremental benefits being able to leverage our service teams that are out there with our customers every day. So when we think about it, it's more back end loaded because of the way that we secure and then ultimately execute on the revenue.
So you're talking about the margin rate or you're talking about the volume? I think Yes. So the margin rate also probably relates to it's more project oriented than it's product oriented, that's part of it. And then as it relates to the pacing of it, it's exactly right. This year, we're not going to see much benefit, but we're going to build so we'll be talking in when we talk quarterly, we'll be talking about sales secured versus revenue because that's probably the most important metric for us to be able to say what is the prediction of the ongoing revenues.
Somebody had asked in the hallway $500,000,000 of run rate revenues by the end of the period. Remember, if we're doing that, we're probably securing about $700,000,000 or 800,000,000 dollars to get
that. Yes, the buildings piece was 17% right and the power piece was probably a bit in the 20, you'd blend the 2 together to get to the 85 to 100 incremental margin that you are thinking of.
We'll get the
mic over here on the front.
Yes, thanks. Gautam Khanna of Cowen and Company. Two questions just on the last one. So we're to assume it's 17% to 20% incremental margins before the additional investments? Or is that just on the
volume?
Yes. Yes. Yes.
Before? Okay. And Brian, could you talk a little bit about what the onetime costs are going to be in cash costs in 2018 and 'nineteen? You mentioned the $1,600,000,000 in 'seventeen?
Yes. So in fiscal 'eighteen, there will still be some level of restructuring and integration costs as we're moving through the integration of Tyco. Other than that, depending upon what happens with I'm just thinking out loud a little bit here, what happens with interest rates, there could be a requirement to potentially do some funding from a pension plan standpoint. Tax should actually come back and be a benefit to us in 'eighteen, because as I mentioned, these large tax payments that we're making that are transactional related in 2017, we're going to be able to get about $300,000,000 of that back in 'eighteen and we should get about $600,000,000 of that back in '19. And if that happens, that's going to obviously improve our free cash flow conversion, but we would adjust for that like we would the $1,200,000,000 going in, right.
So we'll be transparent when that cash comes back.
Do you have any ballpark sense for what the size of the cash restructuring and incremental pension cash contribution might be?
I'd say $200,000,000 would be 150,000,000 to 200,000,000 would probably be the restructuring and integration piece of it. And I think it's totally dependent upon what happens to interest rates as far as funding requirements in the various pension plans.
We've been saying for the last few years, interest rates have to go up, so we'll see. Which may be good.
Andy Kalogowitz for Citigroup. So Brian, if you do come back with higher growth CapEx in FY 'eighteen and FY 2019, we'd still be committed to the 90% free cash conversion? And then you mentioned the change in management incentives. Can you talk about what it is for free cash conversion? And then what needs to change from a working capital standpoint to hit the 90% target versus 80% that we're at now?
Okay. So first of all, the question regarding growth CapEx, I mentioned that 'seventeen and 'eighteen was Power Solutions and the 90% plus does assume a more normalized rate of growth CapEx. So as you may have saw in the slide, we're going from a reinvestment ratio of 1.6% where we were in 2016 and 2017 down to 1.3%. So yes, that would have some pressure on the free cash flow conversion rate that we're projecting for 2020 if we were to make those investments. Having said that, if we're going to make those investments, we should be able to stand here and tell you that those returns and those investments are going to be there as well.
I'm sorry, go ahead.
I was just going to comment on the next question around incentives, if you would. Okay. So as far as the incentives, we've got 2 pieces to our incentive program. There's a short term piece that we call AIPP, and there's a long term piece that's really performance units. And our short term piece is weighted 60% year over year EBIT growth.
It's rated weighted 20% year over year return on sales improvement. And we don't have a specific free cash flow conversion metric for the other 20%, but we put in place this year, which was something that Tyco had done historically, we put in a trade working capital improvement for 20%, which feeds the free cash flow conversion. So that's on the short term side. On the long term side, 70% is year over year pretax earnings improvement. So any interest costs that we are incurring in order to support debt that we're incurring to make investments is incorporated into the numerator.
And lastly is the 30%, which would be return on invested capital, and that's a year over year improvement metric.
Yes. And then since we're on the incentives, not cash related, but we have a TRS multiplier that we didn't have in the past, which is more in line with where Tyco was. And then the last thing that I think is really important is that we've got a piece of this incentive that essentially motivates management to get after the synergies. So we're going to have it both on a cost side and on the revenue synergies that actually sales secured, because that's really what we're going to see in the 1st year. Those two metrics are going to be laid in as near term metrics that we know if we get those things, it's going to it's something that's going to prove out over the following years.
So that's kind of the whole incentive plan.
And just if you go back to EPG, you changed field related synergies the most it looks like now. You didn't change G and A. Is that more manufacturing efficiency that you see as you sit here 6 months ahead of where you were? And why no more G and A, because I would think G and A somewhat low hanging fruit when it comes down to that?
Well, I mean, at EPG, we had a sizable G and A target to begin with. That was easily understood with the two structures where that G and A was. As we now have gotten together and put our businesses together, we've made a tremendous amount of progress understanding now where the opportunity is working with Jeff and the team from a JCOS standpoint. And so each of the business units that are here today have a much better view on how their cost structures are built and where the opportunity is to make sure that we have the right structure to get the revenue synergies at the same time while we're getting the cost synergies. And it's across to every level of cost.
So there's G and A or kind of overhead within the business structure and then there's certainly overlap in the type of work that we do that we can begin to get more productivity and more efficiency out of.
The mic is over here. Go ahead, Dean.
Thank you. It's Dean Dray with RBC with a strategy question. And George in your presentation on slide 33 under the building systems lifecycle, one of the major building platforms lighting is there
that one of the major platforms?
Well, I'll start. So elevators is we don't have no intention to be in the elevator business. I think that that's probably we probably don't need to prove that to ourselves that we don't think there's elevator synergies. Now, I think integrating to an elevator is going to be important. And that's not something that we need to have to own
elevator synergies. Now I think integrating to an elevator is going to
be important. And that's not something that
we need to own an elevator company to do. The lighting is and you saw it on the slides, it's something I think it's an open strategic issue. How important is that? I think we can do what we need to do without it. But as technology shifts, that's one of the core systems in the building.
You have fire systems, all life safety systems, HVAC and control systems and lighting systems, power management, those are the 2 things that you can say are in all buildings. I think at this point, we don't know that we need that, but it was on the chart. So your observation was correct. I would say right now, I wouldn't count on us getting the elevator business, but I would tell you that from a lighting perspective, I don't think we don't know what we don't know.
And Deane, my perspective on that is that, when you think about cost savings, efficiency that you deliver to the customer, 2 big buckets are energy from the HVAC as well as lighting. So you can go and get or replace lighting and get a lot of savings. What's critical as far as the operations is a control system. And our Medisys control system can take all of these other subsystems and optimize that we can ultimately deliver not only the efficiency, but the optimization of the building. So it's something that we look at.
We have a tremendous presence in the building today with our sensors and devices and being able to extract the data that's most important to be able to build the next generation of solutions that we bring to the building's vertical.
Yes, we connect to light. You can't come up with a lighting system that we don't connect to today. It's really a question, do we need to be in the lighting business?
How about we get the microphone down on that side over to Shannon?
Yes, actually sort of follow-up to that. George, you talked about the Medisys system and within Tyco, you've been sort of committed to building the product portfolio and having a view that product technology really differentiates. So, Medisys is vendor agnostic, can handle anybody's equipment. So, what parts of the product business you really feel you need to be in that Medisys can't just integrate on its own separately?
I mean just within our own portfolio taking the Medisys architecture and enabling better integration of our intrusion access video, our electronic fire, we have a tremendous opportunity to create a competitive advantage with how we ultimately create solutions to be able to plug and play without going through that layer of customization that occurs today. So a lot of the integrations that I did show you today, there's a level of customization. So as we look at these type of projects going forward, we can enable ourselves to have a huge cost advantage with how we configure. So beyond what we invest in ourselves, we'll make sure as part of that architecture that we build. And then making sure that as there's other products that we're not in, that we can easily integrate those into creating the solutions that are going to be critical to leading the space.
Okay. And then, George, you spoke to retail. And I guess in terms of this bigger opportunity of digital buildings, etcetera, retail has seemed to sort of adopt the data analytics. You seem to have more success in the vertical than maybe some others. So what's the barrier in these other verticals to doing the kind of things because retail is not a huge part of this, you got to get the bigger and commercial part.
So what's the barrier?
I think the learning curve that we're on in Tyco and very similar to what has been happening within JCI is we historically have been an inside out company, leading each of the domains that we lead, bringing products to the market and doing traditional installation and service. As we all have evolved to become more of an outside in, to take the intimacy, the contact and the intimacy that we have with the customer, to truly then bring that back to say what is it that they're trying to solve with our system, not only in the traditional space we're in, but beyond across their operations. And so you'll find that 9 times out of 10, we have the data. We have the capability to be able to solve the problem. It's just been able to have a customer that's willing to understand what that benefit could be.
So there's a number both companies have had a number of pilots working with big customers that are have And as And as these get developed, they can then be replicated across other verticals that we serve.
So I don't think it's by accident you saw some of the types of systems that are being integrated beyond retail. It's hospital systems that have multiple systems that are being integrated, it's airports being integrated. I mean you're starting to see that on large systems. The problem is today is the technology integration is really an integration of a black box to a black box to a black box. What we have to get to is we collapse technology into sort of integrating platform.
That's where we have to get to. Today, you're doing this integration, but you're really doing it at a premium and that's and the only people who can really afford it are these large institutional customers and that's what you see the examples that we're showing, It's people that are buying these very complex systems and very large scale systems. We have to get it to where it's much simpler to actualize that.
Good. Julian?
Thanks a lot. One, I guess, longer term question is that if I look at the Buildings business, whether legacy at Tyco or JCI Building Efficiency, about 40% of it, I guess, is non North America, non China. And that's something where JCI and Tyco have had, I think, very little profit margin development in recent years. So aside from the cost synergies around the merger, what's changing in the approach to Europe, Latin America, rest of Asia? And then a shorter term one would just be the organic sales growth.
It's starting off sluggish in Q1, accelerates the balance of the year. Is that fairly evenly split across Power and Buildings, that acceleration? Or is it weighted in one of them?
Yes. I'll touch upon in Europe. I mean, we have made if you go to Legacy Tycho, we have made tremendous progress there over the last 5 to 7 years where we have addressed the fundamentals. We have businesses in the U. K.
And Continental Europe that now are growing and growing very profitably within kind of low to mid teens. The opportunity that we have with the combination is with our footprint there, we do have the opportunity to utilize that same infrastructure to be able to get much more leverage from the JCI portfolio within Europe. Now that enables us quickly to be able to free up the resources that can be put into the reinvestment, not only in the product mix, but in the channel. The second part of the question was the organic growth. Starting off somewhat light, we are still pressured within buildings and more in the heavy industrial high hazard industrial high hazard that has continued a bit here and that's hopefully going to normalize at a point in time.
That's been a little bit of pressure for us. But as you project the orders that we've been able to build or orders we've been able to achieve in the backlog that's been built, that projects in both legacy JCI as well as Tyco, that backlog will continue to play out during the course of the year. So we feel really good about that in the plan. So that will pick up during the year. And then from a service standpoint, we are service within the Tyco portfolio has been extremely critical.
We had had some pressures there because of getting out of some of the projects that we get out of, But now we're back on a growth path, building that base, continue the service element, we'll continue to grow. And as you all know, that's a very important very important segment of the business because of the profitability. And so and then in the power system, I think over it's fairly consistent on a year on year basis, the growth that we're going to achieve year on year.
That's really a buildings phenomenon in the second half of the year. Power is pretty consistent throughout.
Yes. And then I would say that if you look at our backlog, it's between depending on legacy TECO, legacy Johnson Controls, it's 4% to 5% up when we came into the year. So you can look at that and just say what is the pacing of us being able to recognize that on the install part of our business and you saw the pie chart of what that was. And then I just kind of come back to the European question. I think that we're going to be able to get some G and A savings from the infrastructure, but I still think that there's some significant product gaps that we have in order when it compares to our peers, because you got to get into the cost of goods sold and get beyond just an SG and A.
So we it's still from a strategic standpoint is a real opportunity for us.
Great. We're going to have time for one more question over on this side.
Thanks. Joe Ritchie, Goldman Sachs. And so just a few questions on the 20 17 bridge, I just want to make sure that I understand it. If lead prices were to stay, call it $2,400 to $2,500 per metric tonne, then the incremental headwind to the current guidance would be somewhere between $0.04 to $8 is that correct?
For the year?
For the year?
Yes. So I think what we said
Beyond Q1.
Because we're going to price adjust. So I think if they would stay at 2,400 for the rest of the year, there's about a 90 day lag and it's that $18,000,000 to $24,000,000 in Q1 that we aren't going to be able to pick up through pass on to the customers. So it's going to be a couple of pennies.
Yes. And the way that I would think about that is where it's a problem for us, if it just continues, we will always be behind it if it continues to increase. If it increases and stabilizes, then we are able to recover and life goes on.
Got it. That makes sense. And then on the floating rate debt, I didn't see it explicitly in your bridge, but is there any type of headwind that you're baking into the bridge for 2017? No. Okay.
And then I guess lastly, you guys mentioned earlier non core asset sales. Maybe if you could provide a little bit more color. It seems like the company is digesting a lot today. And so talk a little bit about the process and maybe what we can expect moving forward?
Well, I wouldn't think it's anything over the top, but I do think that we just because we have a lot going on doesn't mean that we need to stop looking at our portfolio and making sure that we have the right businesses from a platform standpoint
going forward. I think
that it's a process that but there are businesses but there are businesses within both the legacy portfolios that we're going to continue to look at. Nothing of the scale that you've seen over the last 3 years, I guess, that's the best way to say it. But just because we have all this going on, doesn't mean that we can't strategically keep looking at our portfolio. We'll be very careful to make sure that we don't try to distract the business units and the core of what we're trying to accomplish. It's very clear, think about this synergy opportunity.
Get past corporate and what you really have is within the buildings business and where we supply to our commercial building customers. That's where the leverage and that's where the merger opportunity is. Anything outside of that is something that we're they're not really distracted. They're curious, but not distracted.
Great. Alex, do you have any closing comments?
I guess what I would just say, I would appreciate the attentiveness. I appreciate all the welcoming and great questions that you guys have had over the past few months. I think that we're going to have a great run. I mean this is a fantastic opportunity. I hope you see it from us.
As you get a chance to meet with us 1 on 1, what you're going to find is the team is as energized as we are. We've got a great team. We're still learning, but what I see is people are asking why instead of why not. And if you keep asking why instead of why not, you can't help but be successful. So I look forward to talking to you guys on an ongoing basis and look forward to a great year.
Thanks a lot.
Thank you. Lunch is being served in the foyer area. We do ask that you please take all your belongings as we need to close down this room. So again, please take all your belongings to the foyer area. Thanks again.