Welcome to Johnson Controls 4th Quarter 2016 Earnings Call. Your lines have been placed on listen only until the question and answer This conference is being recorded. If you have any objections, please disconnect at this time. I will turn the call over to Antonella Franzen, Vice President of Investor Relations.
Good morning and thank you for joining our conference call to discuss Johnson Controls' 4th quarter fiscal 2016 results. The press release and all related tables issued earlier this morning as well as the conference call slide presentation can be found on the Investor Relations portion of our website atjohnsoncontrols.com. With me today are Johnson Controls' Chairman and Chief Executive Officer, Alex Molinarolli President and Chief Operating Officer, George Oliver and our Executive Vice President and Chief Financial Officer, Brian Stief. Before we begin, I would like to remind you that during the course of today's call, we will be providing certain forward looking information. We ask that you view today's press release and read through the forward looking cautionary informational statements that we've included there.
In addition, we will use certain non GAAP measures in our discussions, and we ask that you read through the sections of our press release that address the use of these items. In discussing our segment operations during the call, references to adjusted EBIT margins exclude transactions, integration and separation costs as well as other special items. This metric is a non GAAP measure and is reconciled in the schedules attached to our press release. In addition to our earnings release issued this morning, we filed an 8 ks, which contains quarterly pro form a fiscal 2016 financials for Johnson Controls PLC. The pro form a financials represents a combination of Johnson Controls, excluding Adient and Tyco, including conforming accounting adjustments and recurring purchase accounting to provide you a comparable basis for our reporting in fiscal 2017.
The purpose of this call is to discuss the quarterly results for the Q4. If you have any questions regarding the pro formas, please contact me after the call. Now let me quickly recap this quarter's reported results. On a GAAP basis, which includes 1 month of Tyco, sales of $10,200,000,000 in the quarter increased 17% year over year on a reported basis, driven primarily by the contribution from Hitachi joint venture as well as Tyco. Earnings per share from continuing operations attributable to Johnson Controls ordinary shareholders was a loss of $1.61 and included net charges of $2.82 related to special items.
These special items were primarily composed of non cash mark to market pension, post retirement and settlement losses, transaction, integration and separation costs, restructuring charges and tax expense related to the Adient spin off. Adjusting for special items and excluding the Tyco results, non GAAP adjusted diluted earnings per share from continuing operations was $1.21 per share compared to $1.04 in the prior year quarter. In order to remove the complexity associated with the closure of the merger with Syco, the results discussed on today's call reflect the underlying non GAAP operating results of legacy Johnson Controls. Now let me turn the call over to Alex.
Thanks, Antonella. Good morning, everyone. Thanks for joining us today on this call. Before I get into the details for the Q4, I'd like to spend a moment as I've done over the last few quarters to reflect on the commitments we made last December. Of course, we're making some new commitments in the upcoming December, but to reflect on how we did against those commitments throughout 2016.
As you all know, there was an awful lot that happened at Johnson Controls. Let me just start on Slide 5 of the presentation. As we started the year, we had a couple of strategic objectives we needed to achieve during the year. 1st was our integration of Hitachi. If you recall, 1st of last fiscal year, we formed the joint venture with Hitachi.
And I'd just like to say that the performance of the Hitachi joint venture, the integration activities has far exceeded our expectations. And I think it's a great platform for us moving forward. The second thing that was important to us to get accomplished and we just accomplished this on October 31 was a spin off of Adient. I just want to make a couple of comments about that. I was fortunate to be invited by the Adient team to be a participant at the New York Stock Exchange last Monday when they rang the bell and their first trade happened.
And I couldn't be more proud to be associated with the team. And I feel great about what they have in front of them as it relates to the opportunity. Great team and I'm happy for Bruce and for all the Adient employees and wish them well in the future. And then obviously, one of the most important events clearly that's a watershed event for us is the historic merger with Tyco, which happened a month ahead of our schedule. We've scheduled it for October 1 and we were able to get that done a month early and we have our legacy Tyco team members here today.
In line with our vision 3 years ago that we started to transform ourselves to a multi industrial leader, I could say now we truly are a multi industrial. We have a great position, leading positions in building technologies, integrated solutions for buildings and energy storage. And George will give you some updates on the progress that we've made so far related to the integration and sort of frame out the organization. 2nd, our financial commitments. Throughout this entire process, we've had every opportunity for our folks to be distracted and I couldn't be more proud of what they've been able to accomplish.
150 basis points of adjusted EBIT margin expansion over the last year most of that achieved in at least in large part due to our Johnson Controls operating system initiatives and our cost reductions. Earnings per share growth, 16% and without sacrificing the continued investments we have in our business and just to highlight a couple here on the page, we have strategic capital investments, as you know, expanding our AGM capacity, dollars 245,000,000 in North America and then forming the joint venture in order to add our 4th plant with Bohai Piston, which is an affiliate of BAIC in China in order to increase our capacity there in China. We accomplished a tremendous amount this year, in this quarter, and I just want to thank all our employees for their hard work. It's truly remarkable. Across the globe, across all of our segments and all of our businesses, everyone really pulled together as a team.
Our transformation, coupled with our strong financial performance, allows us to enter this 2017 with great momentum. We're really positioned well to deliver continue delivering strong results. So if you turn to Slide 6, just want to reiterate, we exceeded our guidance for the fiscal Q4 and then we were at the high end of our guidance for the fiscal year. Let's go to Slide 7. So we finished the year strong, both from a top line and a bottom line perspective.
Organic growth, our sales increased 4% if you exclude automotive or Adient, with 2% growth in building efficiency and 8% growth in power solutions. Building efficiency, I'll give you a little bit of color on that, underlying strength in Asia, real progress in China. If we started the year, we weren't sure. But as the year has gone on, China has gotten stronger and stronger. We've introduced some exciting new products in our HVAC product range around small tonnage chillers for the Asian market and really seeing good traction there.
Another thing that we're really happy about is our products in North America. Our UPG business, we're actually gaining share in both in residential and light commercial and seeing strong growth both in residential and light commercial mostly because of new product introductions and the investments we've made over the past couple of years. Power solutions have benefited from strong growth across all of our regions. Start stop technology has grown 30% globally, and that's held up over the year. And as you know, we're adding more capacity.
And this year, we shipped over 152,000,000 batteries, which is an increase of 4% from a unit perspective. Lastly, an added confidence as we move into 2017, orders grew 6% in the Q4 and it's the 4th consecutive quarter of mid single digit growth in order secured. And we continue to see strength in our orders in the institutional vertical markets and that is on a tough comparison. We've seen growth on a year over year perspective here for the last couple of years. Turn to Slide 8, I just want to remind you this excludes any results from Tyco.
Revenues in the quarter increased by 7% to 9,400,000,000 dollars If you take out FX and M and A, the overall revenue was level, and Brian will give you more detail business by business. Profitability continue to show improvement year over year with all of our across each and every one of our businesses with segment income adjusted up 16%. Our adjusted margins expanded 90 basis points overall for the quarter. EPS up 16% to $1.21 And I couldn't I think as Brian goes through the numbers, I think you'll see that we had strength in almost all of our regions and in each of our businesses. So great performance.
With this, I'm going to turn it over to George and give you an update on how we're doing with integration.
Thanks, Alex, and good morning, everyone. I'd like to start by thanking and congratulating both the legacy JCI and legacy Tyco teams for all of their hard work and dedication over the last 9 plus months. Our integration teams working with our employees across the globe have put in countless hours and an enormous effort to put us in a position to complete the merger a month ahead of schedule so that we could hit the ground running in September. We have moved firmly into the execution phase of our day 1 plan. And although we're only 2 months into the process, I'm encouraged by what I'm seeing, including some very early traction on our $1,000,000,000 cost synergy commitment as laid out on Slide 9.
We'll update you in more detail and provide some timing around synergy achievement at our upcoming Analyst Day on December 5. As we have come together as one team, it has become more and more apparent to me that the 2 organizational cultures have more similarities than differences. As I've seen that in nearly every region of business I visited within my 1st 60 days. In the marketplace, we continue to receive positive feedback from our customers and channel partners and I can tell you they are just as excited about this combination as we and all of our employees are. Turning to Slide 10, we will be organized around 2 strategic platforms, Buildings and Power.
The Building platform represents the combination of the legacy building efficiency businesses within Johnson Controls and the legacy Tyco businesses. Together, these businesses will generate roughly $23,000,000,000 in annual sales and consists of several well known and trusted brands across complex HVAC, building controls and fire and security systems. We are well positioned in the building with 1 of the broadest portfolios of products, integrated solutions and service offerings in the market. We are also uniquely positioned with our customers and channel partners with a large installed base and significant scale in the direct channel. Going forward as one company, we will be able to leverage that global scale to expand our installed base as well as our market reach.
And as the technology convergence in the building evolves, we will be prepared to lead the way. The Power platform includes a portfolio of leading battery technologies across the product technology continuum, with number 1 positions in conventional lead acid and AGM start stop batteries globally. Our Power Solutions business has a large and resilient aftermarket business with consistent performance and growth throughout the cycle. I look forward to providing you more details on our strategic growth plans across the portfolio on December 5 at the Analyst Day. Let me now turn it over to Brian to walk through the financial details of the quarter.
Thanks, George, and good morning, everyone. As you saw in our release this morning, our Q4 reported results, as expected, were a bit noisy and included a number of special items which resulted in a net charge of $2.82 in the quarter. We've summarized those adjustments for you in an appendix, but just given their overall size, let me briefly comment on each of them. First of all, transaction integration and separation costs of $293,000,000 those costs relate primarily to the Adient separation and the Tyco merger and were in line with our expectations. We also had a restructuring charge in the quarter related to asset impairments as well as some workforce reductions.
And the way you should view that as outlined in the appendix is about half of that charge is cash and the other half is non cash. And it's really spread ratably across the businesses in corporate. We also had as we always do in the Q4, a mark to market pension adjustment quarter related primarily to a decline in interest rates year over year. There were also some non recurring purchase accounting items of $74,000,000 A good example of that would be the requirement to step up inventory to fair value in the opening balance sheet and then that turns out as that inventory turns that we've called out separately at $74,000,000 And then there was $1,100,000,000 charge related to the Adient separation. As I talk through the business results, I'll exclude the impact of the special items as well as the Tyco results since they were not included in our previous guidance of $1.17 to $1.20 Similarly, we've got the Hitachi joint venture, which closed in October of 2015.
And so the Hitachi JV does impact the quarter over quarter comparability. And I'll comment on that as I go the results. And then for the first time, the automotive interiors joint venture, which closed in July of last year, we do have comparability in Q4 this year versus Q4 last year as it relates to the interiors JV. So with that, let me turn to Slide 11, building efficiency. Their 4th quarter sales were $3,600,000,000 which were up 25% from the prior year.
If you adjust for the impacts of M and A and FX, the sales grew 2% and had a strong comparable 2015 quarter which saw a 5% growth rate. Revenues in our Systems and Services North America business were level year over year and we saw good growth in our residential business and products North America of 3% and as Alex mentioned, Asia was up 8% ex Hitachi. We had good order growth in the quarter, up 6%. And as Alex mentioned, it's the 4th consecutive quarter where we saw order growth above the 5% level. Systems and Services North America was up 6%, Products North America was up 7% due primarily to growth in our residential business and Asia was up 7%.
Our backlog ended the year at $4,800,000,000 a 5% year over year improvement. Turning to segment income at Building Efficiency, it was up 17% year over year due primarily to the contribution of the Hitachi JV entities and the North America residential business in Asia. And as expected in the Q4, we did see a 80 basis point reduction from the prior year quarter to 11.3%. That was due primarily to mix related to the lower margin Hitachi joint venture and some ongoing product and sales force investments we made. If you kind of step back and look at the full year as far as building efficiency margins, we ended the year up with 9.2% from 9.1% last year and that was far in excess of the guidance that we provided in December of last year at our Analyst Day.
Moving to Slide 12, real quickly touching on the Tyco results, which as you know that merger was completed on September 2. Sales for the month of September were $828,000,000 and segment EBIT was 86 $1,000,000 That $86,000,000 does include $21,000,000 of recurring purchase accounting amortization. So if you adjust for that, the EBIT of $107,000,000 reflects about a 13% loss in the quarter. I'd say overall, as we look at the Tyco businesses moving into 'seventeen, they've got solid momentum. Turning to Slide 13 on Power Solutions.
They just had another great quarter. Their sales were up 7% compared to last year, 8% if you adjust for foreign percent. Asia was up 22%, Europe was up 11 percent. Asia was up 22%, Europe was up 11% and the Americas were up 3%. As far as start stop shipments, they continue to be strong, up 30% year over year, growing from 3,100,000 units to 4,000,000 units and all regions delivered higher year on year growth with China up 136%, albeit on a very low base.
America is up 87% in a growing market and EMEA is up 3% in a very mature market. We also saw Q4 OE up 2% and aftermarket up 9%, again strong showing. If you look at Power Solutions segment EBIT for the quarter of $394,000,000 it was up 16%, primarily driven by the higher unit volumes, product mix and cost reduction efforts. The segment margins in Q4 were up 160 basis points and were well above our expectations for the year. For the year, we had 19% margins and we had guided in December to 17%.
So another great year for Power Solutions. Touching quickly on Slide 14 on the auto business, their sales were down 5%. The higher volumes in Asia were offset by lower volumes in North America and Europe. As far as China, we did see the 100% sales numbers for our non consolidated JVs, up 26% in the quarter to $2,900,000,000 And if you adjust for foreign exchange, that was actually 31% compared to industry production of 21%. So the JVs continue to perform exceptionally well.
For the quarter, automotive had segment EBIT of $281,000,000 up 13% year over year and overall auto margins were 7.1%, up 110 basis points for the quarter. So let's move to the financial highlights on Slide 15. Overall, 4th quarter revenues were up 7 $9,400,000,000 that was primarily driven by the Hitachi JV, offset by some headwinds for FX. If you look at gross margin for the quarter, it was up 90 basis points to 20.5%. And as Alex mentioned, we continue to see the benefits of the Johnson Controls operating system efforts on a global basis.
SG and A was up 13% from last year. If you remove the impact of the Hitachi joint ventures, the SG and A is actually down 4% year over year. And I think this is really reflective of the Equity income was up $150,000,000 that Equity income was up $150,000,000 that's due primarily to equity income of $150,000,000 was up 43%, That was due primarily to the interiors joint venture, which added about $8,000,000 year over year and the Hitachi JV was 30,000,000 dollars So overall, a great 4th quarter with double digit EBIT growth of 16% and segment margins improving to 11 0.6%, which is a 90 basis point improvement. Turning to Slide 16, 4th quarter net financing charges of $77,000,000 were slightly higher than last year due primarily to the portion of the Adient debt proceeds that we drew on in the quarter. Tax rate remained at 17% and the non controlling interest was up up 16% and up 16% and I too give a lot of credit to our management teams globally to continue to focus on our external financial commitments that we've made in a period when it'd be pretty easy to point to the transformational activities and other initiatives that we've got in our businesses being a distraction.
So well done to our global teams. On Slide 17, balance sheet and cash flow at quarter end, Our net debt to cap ratio was 39.4%, which is right in line with expectations. We do have kind of a grossed up balance sheet at the end of this fiscal year, primarily related to the $2,200,000,000 of debt we assumed in connection with the Tyco merger. In addition, there was the $4,000,000,000 of newly issued debt in connection with the merger, the cash of which went to the JCI shareholders. And this balance sheet that you have at ninethirty includes $3,500,000,000 of debt related to Adient and there's $2,000,000,000 of cash in escrow, $1,500,000,000 which will be retained by JCI and $500,000,000 will go to Adient has gone to Adient as of October 31.
Our cash flow in the quarter was $900,000,000 which exceeded our expectations and for the year adjusted free cash flow was $1,700,000,000 dollars versus a plan of $1,500,000,000 So I was pleased with the progress we made there in fiscal 'sixteen and CapEx was pretty much in line with expectations. Just a waterfall chart on Slide 18 to kind of show you the pro form a net debt. You can see we started at the $16,400,000,000 and the $3,500,000,000 of debt that went with the Adient spin on October 31. We have net cash of $700,000,000 at the end of the year and then we'll have $1,500,000,000 of the $2,000,000,000 in escrow come to us. So our true pro form a net debt position as we move forward is $10,700,000,000 dollars which is right in line with where we expected after the transformational activities.
Before we open it up for questions, I'd just like to take a couple of minutes here on Slide 19 and talk about items of interest as we move into fiscal 2017. First of all, as we've talked about throughout the quarters this year, even though the Adient spin off has already occurred, from an accounting standpoint, we can't report that as a discontinued operation until the date of the spin. So the first time we'll report Adient as a discontinued operation will be in Q1 of fiscal '17 and all prior periods will be restated. Consistent with George's comments regarding our 2 strategic platforms, we do plan on changing our reportable segments probably in the later half of twenty seventeen. So within the buildings platform, there will be more granularity that we provide as we move forward into 2017 and we'll talk about that a bit more at our Analyst Day on December 5.
We're also going to report corporate as a standalone segment and we think that's going to provide better Tyco purchase accounting. As of ninethirtysixteen, we've done a preliminary allocation based upon some preliminary work done by our outside valuation firm. There will be some true ups to that as we move through the first half of fiscal twenty seventeen. We'll continue to have some restructuring and impairment and integration costs as well as our Q4 pension mark to market in 2017. But I think those will be communicated as far as range of unexpected costs again on December 5.
As Antonella mentioned, we did file a Form 8 ks this morning, which shows the fiscal 2016 quarterly and full year EPS numbers on a pro form a basis. The full year is $2.31 and that includes about $0.31 of annual consolidated amortization expense. So on Slide 20, to wrap up here, please join us on December 5 at the Mandarin Oriental Hotel in New York for our Analyst Day. And at that meeting, we will present our Q1 and full fiscal 2017 guidance. And with that, Antonella, we can turn it over for questions.
Thanks, Brian. Operator, could you please provide the instructions for asking questions?
Thank you. We will now begin the question and answer Our first question is from the line of Deane Dray
Congratulations on getting to the finish line and then starting your next marathon as well.
Thanks. Thank you.
And just the slides were real helpful as were the 8 ks just to kind of sort us through the changes. And maybe just for the legacy Tyco analysts like myself, George can give us a perspective on the quarter consistent with the metrics that we're used to seeing on organic revenue growth orders and so forth?
Sure. Dean, let me just give you a high level summary. Certainly, as the year played out, we saw our continued softness in the high hazard heavy industrial end markets, and that had a fairly significant impact on our product businesses as they played out for the year. That does impact about 35% of our revenues in that segment and certainly these are high margin businesses. Overall though, the orders for Tyco were up low single digits, so we continue to expand orders.
The back log year on year is up 4%, which does position us well here to get out to a good start in 2017.
And then, Alex, just this might be
a good
question for the Analyst Day, but your comment that the transformation is complete, Certainly, JCI has arrived as a multi industry company, but the idea is portfolio optimization never ends. And where do you think at the margin do you expect portfolio moves over the next year or so?
Yes. So that's a good question. So I'm not sure if I had an adjective in there or not. At the margin, we're going to be looking at our portfolio. That's not going to change.
But I think that the comment that I made was the major transformation to get us to a platform that we could truly call ourselves a multi industrial is complete. I mean, and I think that probably means more to the legacy Johnson Controls people that have followed us because we've gone through this transformation over the last 3 years. And if you've been a spectator, it's been quite a transformation. I think where we are is we're in a position we can truly call ourselves a multi industrial now. Now we have to that just means I think you just said it a minute ago that the new marathon begins and portfolio optimization is not going to be something that's going to be lost on us.
We're looking at or actively looking at our portfolio both in the legacy accounts controls and legacy Tyco businesses and that will continue. And we'll talk a lot about that or at least we'll talk some about it in December as it relates to not only capital allocation, but strategically how we want to position ourselves. So more to come on that. But if I left you to believe that we are done, that's not correct. I think I want to make sure that you understand, everyone understands particularly our employees that we've got ourselves now positioned where we need us to be as a true multi industrial.
The automotive business is set up to be successful. And I think now we have a platform for us to optimize.
Great to hear. Yes, that's I appreciate that. Thank you.
Thank you. And our next question is from the line of Jeffrey Sprague from Vertical Research Partners. Your line is now open.
Thank you. Good morning, everyone.
Good morning, Steve.
Just some questions really kind of on the numbers. So we're just kind of level set here because I think we're not getting a lot on forward guidance. But first just on the amortization, maybe it's for Brian. It looks like the deal related amortization came in on the low side of what was expected. Can you provide a little bit more color on what drove that and if that number is likely to move around some more?
Yes. I don't think that number is going to move around now So I So I think the number that's out there in the pro formas is a pretty solid number as we look at it going forward. You're right, it did come down from the preliminary filings that were made. I think it came down roughly $100,000,000 or so. I'm probably rounding there.
But that had to do really with the original information that was provided to the outside firm. As you go through that process of finalizing evaluation, there's tweaks you make to it based upon variations in earnings levels by geography. And what ended up happening is, as a result of some of those changes we made, some of the amortizable asset base came down as far as intangibles and it really got reallocated to either indefinite lived intangibles or to goodwill. So I think that number where it stands right now, Jeff, is a pretty good number to use and that number will be with us for a while because the life associated with those
$1,000,000 Then also just on the baseline number of 231, I believe stranded costs would be conceptually in that number. Can you give us a sense of what that is and how rapidly that could come down or what we should think about that?
Yes, I mean the stranded cost number that we've kind of been talking about related to the Adient spin off was about $150,000,000 and I think a little over half of that was taken out fiscal 2016. So it's already reflected in the results. The other half will come out during fiscal 2017 and that's really part of the $300,000,000 of productivity that we've talked about that will be recognized over the next 3 years as part of the JCOS benefits that we're going to realize. So I think that's the way to think about that, Jeff.
Thanks. And if I could just sneak one more bigger picture in. George, you'd mentioned kind of just early traction on cost synergies. I'm just also wondering early reaction from customers on the sales side. I doubt you have some big marquee order to share with us today, but how is the sales funnel looking and do you guys see some early traction
on that effort? Sure, Jeff. As you know,
integration team put together over the last 10 months and they've done some great planning work and now we're into the implementation phase. Revenue growth is a key component of the merger and we've had commercial teams across the globe laying out the existing customer bases, how we serve them today, the opportunity that we have to be able to cross sell and serve them with more of our portfolio, build services and how we create additional value for those customers that we serve. And we feel really good about the planning process. And now we're putting in the right incentives, so that no matter where our commercial people sit across the globe, they're going to be properly incentivized to be able to bring the new capabilities to their customer base to be able to drive growth. We're going to lay this out in a lot more detail at the Analyst Day in December, but we're certainly feeling very good about this because this certainly was a key component of the merger to be able to accelerate the ability to be able to serve customers, being able to capitalize on the full portfolio, being able to convert some of the technology to be able to longer term change the game and how we serve buildings.
And I feel really good about the progress we've made.
Hey, Jeff, I'd just add, it's Alex, that we had an opportunity to work on this almost in a lab environment for 9 months. So it wasn't real, except for the fact we had a chance to visit with customers. What I've seen happen with the integration teams over the last couple of months, it's gone from an idea to reality. And I've seen a lot of confidence building in our team. As I as we get an opportunity to meet with the integration team and now moving into the business, George put together an organization that's going to activate it.
He talked about incentives. I know he'll talk about that. But I'm actually really pleased with what I see. And one of the things I didn't mention earlier, I'm just going to sneak in and it doesn't have anything to do with this question, but it relates to being able to get synergies. We've actually seen almost $100,000,000 in secured in the CBRE relationship.
And we've learned a lot. It's not the same, but we've learned a lot in being able to pull through activities like that. So I think our team is seeing those things too and that gives them confidence. So I think we're going to be pleasantly surprised. And obviously, we've got to secure it before we revenue it, but I think in December, we'll have we'll maybe have a couple of those stories we can share with you.
Yes. And your questions about customers, they have I met with a number of customers in the my first 60 days here with the integration and they're very excited about the combined capabilities and our ability to be able to better serve them on combining the work that we do across our channels. Thank you very much.
Thank you. And our next question is from the line of Gautam Khanna from Cowen and Company. Your line is now open.
Good morning, guys. Congratulations.
Good morning, Gautam.
Hey, Gautam.
Hey, I had three quick questions. First, I was wondering, at the Investor Day, do you plan to lay out multi year targets, revenue and EPS like you used to at Tyco?
Right. I can't speak to Tyco, but we'll give you some ongoing metrics that you can look at that you can hold us accountable to, hold ourselves accountable to, which I think, look, based on what I've seen in the past, very similar to what we've done at Jobs Controls Investor Day. So you'll get something that gives you guidance on all each aspect, whether it be cost reductions, productivity, top line, bottom line, and we'll give you some guidance on how we think about capital allocation also.
Yes. I think we'll probably give pretty solid focus on fiscal 2017 and then we'll give medium term guidance relative to key financial metrics, sales growth, segment EBIT growth, etcetera. And that's reasonably consistent with what JCI has done historically as well. So you'll be able to kind of take it through 2020 based upon the way we're doing things.
And one of the second question was on Power Solutions and the strong growth you experienced in
the quarter. Was there any one time effect in the quarter or is this kind of
what we should be anticipating going forward in terms of organic growth based on the mix shifting to AGM and what have you?
Well, I think the unit growth, I don't really think about it quarter to quarter because there are depending on a lot of times it depends on pricing and stocking. A quarter can move around a little bit. But I think what you've seen, if you look at our average growth across the year, I think that's fairly consistent. I think when you look at it quarter to quarter, it's a little bit dangerous as each one of our customers is either filling their channel, getting ready for the season or finishing the season and sometimes that doesn't happen the same quarter after quarter. But if you look on an annual basis, I think it's fairly consistent, which is around 5%.
And I think that that's probably a pretty good number. And the mix is obviously going to help us because it's more and more AGM. And of course, a lot of our capacity is moving into China. So it's going to be heavily focused on Asia growth.
All right. And thank you. And lastly, I was just wondering, maybe you gave us this before, but what is the dividend for the go forward company?
We haven't given dividends. The that will be approved by our Board at the November meeting and it's still under review. So we don't have the go forward dividend for 2017 established yet. We'll be announcing that at Analyst Day as well.
All right. Thanks a lot. I'll turn it over. Okay.
Thank you. And our next question is from the line of Steven Whittaker from Bernstein. Your line is now open.
Thanks. Good morning and congrats on the milestone everybody.
Thanks Steve. Hi Steve. Hey.
So I just wanted to maybe start with getting
a little more granularity if I could on the HVAC side and specifically York Equipment as opposed to in that business in that business that you saw resi, non resi in Americas maybe?
Well, yes. We had a great quarter. And so I'll put it in units. So our residential unit growth was 23%, which is outstanding. Now we have a lot of new products come out.
We also announced a price some pricing that's going to be effective first on November. So I'd have to say that I'm sure some of that impacted it, but what we're seeing an awful lot of growth in both residential and our light commercial growth was in the upper teens also, so and from a unit perspective. And that's really a benefit from a lot of the product investments we've been making over the last couple of years and then we're also making some investments in some of our channel structures. So great quarter, gain share, glad you asked the question.
And the second part of that question was non resi?
Non resi like and the unitary was close to 17%. And Applied? Around 4%.
Okay.
And are you and specifically on the Applied side for maybe large absorption chillers, when you are you seeing large project activity picking up on the bid front?
We're seeing project activity because that would be aligned with our SS and A channel in North America. Where we're seeing weakness is in the Middle East and Europe, particularly as it relates to when it starts moving toward the energy related markets is where we're seeing some weakness. So we're seeing strength in China. We're seeing steady issue goes in North America and having just like the rest of the market, almost a near collapse when you think about the Middle East East because of the energy related part of the market. And then, of course, that bleeds into our industrial refrigeration.
So a lot of the gains that we're getting are being offset by industrial refrigeration and some of the toughness in the Middle East market.
That's really helpful and sounds good. Just secondly on CapEx and cash, maybe just a little bit of picture or you may defer this to December, but to how should we think about in Georgia also as you're starting to look across the organization, how that CapEx may pace down over years or how working capital may improve on maybe the combined business? Maybe just a little color there would be helpful. Yes.
I mean, we ended the year with CapEx right at $1,250,000 which is kind of planned for the current year included in that number, round numbers was about $3,000,000 or $350,000,000 related to the automotive business. And if you look at Tyco's historic CapEx, it's in that $300,000,000 to $350,000,000 range as well. So I think in the near term here, we don't see a significant reduction in CapEx. I think a number between $1,200,000,000 $1,300,000,000 will probably be steady state for us for the next 2 or 3 years as we ramp up some of the investments that Alex talked about in the Power Solutions business. That does give us a reinvestment ratio that's probably around 1 point 5 or thereabouts.
And so we recognize it's probably a bit higher, but I also would tell you that the growth investments we're making have good business case financial metrics associated with
them. All
right. Great. We'll leave the rest for December. Thank you.
Thank you. And our next question is from the line of Julian Mitchell from Credit Suisse. Your line is now open.
Hi, thank you. I just wanted to start with the building efficiency organic sales growth. You'd called out that the EMEA region was very soft in line with other companies. But if we look at the North America Systems and Service specifically, sort of flattish sales there and I think that did drag down the sort of global organic sales average a little bit. Did you see any delays in customer sort of conversion of orders into revenues?
Or it's just sort of classic kind of lumpiness and we should expect that revenue number in North America Systems and Service to accelerate soon?
Yes. I think we had a pretty strong comparable last year in North America, but I do think it's just project flow. There's nothing that you would look inside there and see an aberration. The orders are strong, backlog is up. So I don't expect that that's something to be concerned about.
I think it's probably, as you just said, just the timing of projects themselves. Nothing sticks out as being unusual.
Thanks. And then sort of related to that, you called out the strength in some of the institutional buildings verticals. Remind us I guess how much of your building efficiency segment is institutional?
Well over half, probably twothree of our buildings business is institutional related. And just to remind you, when we say that, that would be the government verticals, healthcare and education.
Thanks. And then secondly would just be on the Power business, very good incremental margins, 40%, 45% or so. Could you remind us where we are on the cost build out within China? On and off in the past 18 months, that has been a headwind on your EBIT margin within Power. Was there any kind of one time factor driving that down in Q4?
Or you think that the margin headwind from China is kind of behind you largely in Power?
Well, we're going to continue to launch plants. So I think that what you instead of what I if you look at China and you separated it, what you'd see because we're adding capacity, obviously, it's because of launch cost, it's going to be a lower margin than other regions. But I think the right way to think about it is the plant economics are no different in China than anywhere else. And so we're getting good economics, but we also have the launch costs that are in and they're going to be there for a while. But as we continue to add, as our capacity increases, it becomes a much smaller percentage of the overall cost structure.
But launch costs in that business are fairly significant and it takes a while to launch those products. Some of it's quirkiness of the China market as it relates to the testing required to go to market. And then of course having a capacity that's a plant that's got open capacity also has some costs. But I would say that the plant economics, which is probably the most important thing, are really no different in China there anywhere else. Yes.
I think our EBIT margins of 19 percent for fiscal 2016 were pretty strong relative to what we expected. But I think if you look at the investments that we're making in Power Solutions in China over the next 2 to 3 years, there will be a bit of drag on margins simply because of the launch costs that Alex referred to. But we'll actually be providing both 2017 and guidance through 2020 on Power Solutions margins on December 5.
Very helpful. Thank you.
Thank you. And our next question is from the line of Joshua Pokrzywinski from Buckingham Research Group. Your line is now open.
Hi, good morning guys.
Good morning.
Good morning. Good morning.
Just a follow-up on couple of the questions on your non resi businesses, particularly in legacy JCI. Alex, I think there's been a lot of debate around where we're at in the non resi cycle. Clearly, institutional verticals are a little later positioned than some of the other ones. But can you just talk about the lead time and the visibility and maybe the percentage of revenue that you have booked for 'seventeen, just to give people some comfort about the level of visibility, kind of the long cycle nature of that business as we stand here
today? Yes. So the good news about our business is that it's late cycle and the bad news is late cycle. In this particular case, it's good news because as we build our backlog, typically our projects are more complex, larger and late cycle. So our position is we're probably in a better it was tougher for us to get to this point, but probably in a better position than we have been because if you look 6, 9 months out, our business is fairly predictable just because of the nature of the type of projects that we have.
So if you look at the flow rates of our projects, on average, you're talking 9 to 12 months and it's pretty easy for us to see 6 to 9 months out. And then we look at our 4 log, which is our pipeline, we can pretty much look at the next quarter and see what we can expect. So I think that we feel if you look at it from a FY 'seventeen perspective, I think we have pretty good visibility in North America.
Great. And then just following up on some of the stranded cost questions. I understand that JTOS productivity has been aimed to bring those down. I think it was $100,000,000 a year that we should expect. Brian talked about $75,000,000 of kind of leftover stranded into next year that comes out.
Does that come out on a run rate basis or is it actually come out in the $75,000,000 lower? I'm not trying to put too fine a point on it, but it seems like this has been a source of confusion.
Yes. I mean, I think the $300,000,000 that I referred to is $100,000,000 over each of the next 3 years. And I think the we took out a little bit more than half of the $150,000,000 in 'sixteen and the remaining piece is really part of the productivity $100,000,000 that's kind of embedded in the 'seventeen plan that we'll present December 5. So it's just it's part of the productivity piece that's been out there given the fact we knew that we were going to be spinning Adient.
Well, probably the way to think about it is it's because you take out $75,000,000 last year, take out $75,000,000 on stranded costs, even whether it's an exit rate or an ongoing rate, you probably have 0 sum game here because you've got last year's cost benefiting this year and this year's cost benefiting the next year. So we I think you could I know that you're probably a little more detail and we'll give it to you, but I would think it's going to be fairly consistent what we've seen over the last year.
That's helpful. Thank you.
Thank you. And our next question is from the line of Joe Ritchie from Goldman Sachs. Your line is now open.
Hi, good morning guys. This is actually Evelyn Chow on behalf of Joe. Maybe just starting with Power for a minute, your EBIT was very strong and represents a much higher level of EBIT dollars than you've historically achieved in 4Q. Can you just help give us a sense of what were the headwinds and tailwinds you saw in the margin line, maybe the lower lead prices, potentially some mix shift from the better aftermarket and start stop growth? A little color there would be helpful.
Yes. So we let last time, when we gave you the numbers, I would I think when we gave you numbers, we're trying to make sure we take out the effect of lead. Lead is right now, it's about where it was last year, but it's kind of been a round trip, it's gone down and it's back up to about where it was a year ago at this time. So I think that that's probably not much of a change year on year, if I think of it intuitively. One of the things that's obviously a tailwind is the more AGM start stop batteries we sell, the better.
The second thing that's happened is that we're seeing some really strong growth in the market in North America, particularly, almost I think what the people inside the business call is an echo of the 5 years ago when the OE bill started, we're starting to see the aftermarket from that grow and registrations pick up. So we're seeing some strength in North America, which is good for us. We do well when we're able to run at capacity and then start, stop. And China aftermarket growth has been happen.
Understood. And then
maybe a
lot of headwinds, a lot of tailwinds.
Makes sense. And then maybe a similar question on the building efficiency side. I think you've called out some investments both this quarter and in prior quarters too. I guess I just want to get a sense of what the puts and takes are on the margins and maybe a little bit more context around the year over year decline that you saw in the business on the margin line?
Yes. So I'll let Brian talk about the specific margins for the quarter. But just to kind of give you overall what's happening. First off, we knew that Hitachi was going to be a drag on our overall margins in general because of the lower margin business. However, Hitachi is doing better than we expected, but still diluted.
So that's one of the things that's kind of fighting us on a year on year basis. Brian can give you some more specific color. But the investments that we've been making, 2 specific investments, some in our product ranges, there's been refrigerant changes. Plus, as many of you may know, over the last few years, we've had to catch up on some investments in our UPG business like commercial and residential. We're seeing the benefit from those investments now.
And then we've made significant investments in just sales headcount over the last year. So those are the 3 buckets of investments. Brian, you might want to give us a little bit of color on the margins.
Yes, I mean the margins for the year at Building Efficiency were 9.2% and that's a 10 basis point improvement. But I think what you're referring to is it was pretty choppy quarter to quarter. I think in the Q1 for building efficiency, we had a 50 basis point improvement. 2nd quarter, we were down 50 basis points. 3rd quarter, we were up 90 basis points and 4th quarter here that you're referring to is 80 basis point decline.
So it's been choppy and a lot of that has to do with the timing of when we're making some of these products and sales force investments and also the timing of some new product launches. And in particular in the Q4, there were some new product launches that impacted the basis points reduction in the quarter. So I think to step back and look at it, I think you really should look at it on a full year basis and say we improved 10 basis points versus what we thought going into the year, we thought our margins were going to be in the 8.1% to 8.3% range. So I think the folks at the year are actually pretty happy with where they ended up margin wise. Yes.
And what
I would say is we did that and we didn't jeopardize any of our investments. We made the investments when we needed to, so to not only help us with the growth that we're seeing now, but allow us to position ourselves well for the future. And so I think being able to get those margins and maintain our investments and our product investments, I feel good about.
Thanks guys. I'll get back in queue.
Thank you. And our next question
Good morning.
In terms of cash flow, I mean, you're going to have the elevated CapEx continuing in power. It seems like a lot of the opportunity cash conversion wise has to come out of building efficiency. Can you talk about where that stands? And as you've looked at the initial integration plans, etcetera, just frame a little bit the opportunity you see for that piece of the business cash wise?
So the I think if you look at free cash flow adjusted for next year and the reason I say adjusted is we've got some really choppy tax impacts that will hit us from a free cash flow standpoint in fiscal 2017. But as I step back and look at building efficiency, I think the opportunities for improvement are probably in the geographically and certain pockets in the accounts receivable area. I do think there might be some opportunities in Power Solutions in the inventory area. And I think on a combined basis, if we as we look at cycle and JCI together and kind of put together the JACOS operating system embedded across the organization, I think there's going to be some working capital opportunities there as well for legacy JCO and Tyco combined. So I mean, I guess when we look at fiscal 2017, it's going to be choppy, but on an adjusted basis, I think we're going to probably be in 75% to 85%.
Okay, thanks. And then in terms of the treatment of restructuring and special charges, I mean there's obviously some things to be called out, but is there also sort of a pay as you go restructuring or repositioning element that you are going to include? Could you just maybe clarify what's going to be in and what's going to be out of the numbers?
So I think the adjustments that we've historically made have been the tax payments and we've had separation costs included in the adjustments and then any other significant one time charges. I mean, we're going to put only items that are kind of viewed by us to be material on a quarterly basis in that adjusted free cash flow number.
And just to clarify on the historical Tycho side, Shannon, I think you're referring to how we typically group restructuring and repositioning all into one line item. So what's reflected in the pro formas is the restructuring dollars or charges are out, but those repositioning charges that Tyco took in 2016 are part of the $2.31 pro form a.
Okay, great. Thanks.
Operator, I think we have time for maybe one more quick question.
Thank you. And our last question is from the line of Robert Barry from Susquehanna. Your line is now open.
Hey, guys. Good morning. Thanks for fitting me in.
Good morning, Rob.
Just wanted to actually follow-up on a couple of things. One is on the government vertical within North American on res. I know that last year in the quarter, that was a pretty significant pressure. Did that snap back or what are you seeing in government?
Still under pressure. So if you looked across the institutional, that would be the one place. Healthcare is reasonably flattish and government business is down, still down under pressure. Everything else is really strong, but we're still seeing pressure there. I don't think that is anything that's unusual to us.
I think what we're seeing right now is maybe it's maybe it has to do with the environment we're in. Hopefully, things will free up here after today.
Got you. And then you talked about strength in Hitachi. I think half of that is residential air conditioning in Japan. I mean, is that what's doing well or what's growing there so well?
Yes. So I wouldn't say it's across the board, but it's in a lot of places. The residential is doing much better than we expected. But what we're seeing is I mean, it was really quite impressive. Maybe George can even comment, he had a chance to see some of the integration activities.
But on the cost side across the board, we're seeing an awful lot of benefit
that we've been able to
bring through our integration and synergy activities.
There have
been some pricing actions and some channel restructuring as it relates to the residential business. There has been some new product introductions. China business with our partner Hisense is doing really well and Taiwan is doing fantastic. So I would say it's not everywhere, but it's more places than not we're seeing improvement both on the cost and on the sales side. There's still opportunity, but it's been pretty impressive.
Yes, and just a quick comment on that. I had the chance to join the team at the 1 year anniversary and was very impressed with the work that's been done from an integration standpoint, deploying the JTOS across all of their business processes. And as you talked about, how do we now leverage that platform in many other markets that are very attractive markets that we don't ultimately serve today and the team has got plans, detailed plans in how we take that product and truly capitalize on the growth opportunity that we see in any other markets beyond Japan. So I would tell you my first view there, I'm very impressed with the team, very impressed with the performance in the 1st year and truly is going to be a strategic platform for the future for the company.
I think originally that was targeted as like a 4% to 5% op margin. It sounds like it's tracking well ahead of that.
Well ahead of that. It was a great investment for us. It was even better investment for Hitachi.
Great. Thank you.
Thanks. Operator, that concludes our call.
Thank you. And that concludes today's conference call. Thank you all for joining and you may now all disconnect.