Welcome and thank you for standing by. At this time, all participants are in a listen only mode until the question and answer session This call is being recorded. If you have any objections, you may now disconnect. I would now like to turn the call over to your host, Kathy Campbell. Ma'am, you may begin.
Thank you, Dale, and welcome to the review of Johnson Controls' Q3 2016 earnings call. If you didn't already receive it, the slide presentation can be accessed at our Investor page on johnsoncontrols.com. This morning, President, Chairman and CEO, Alex Molinarolli, will provide some perspective on the quarter as well as some progress updates on our merger with Tyco. He will be followed by Bruce McDonald, incoming Adient Chairman and CEO to provide some updates on the Adient spin off. Executive Vice President and Chief Financial Officer, Brian Steef, will then review the results of the individual businesses as well as the company's overall financial performance.
Following those prepared remarks, we will open the call for questions and we are scheduled to end this top of the hour. Before we begin, just want to remind you that today's comments will include forward looking statements that are subject to risks, uncertainties and assumptions that could cause the actual results to be materially different from those expressed or implied by such forward looking statements. The factors that could cause results to differ are discussed in the cautionary statement included in today's news release and the presentation document. We also remind you to review the extended disclosures related to the proposed transaction with Tyco, which can also be found in the earnings documents today. With that, I will turn it over to Alex.
Thanks, Kathy. Good morning, everyone. So I'd like to get started before we jump into the slides, just as a reminder, and I've done this the last couple of quarters to remind everyone what we talked about back in December as we made commitments to ourselves and to our shareholders and to the folks that were at our December Analyst Meeting and talk about the few things that are guiding light here as it relates to being able to achieve our objectives. First is around execution, delivering both on our strategic and our financial commitments. 2nd was our transformation activities to make sure that we're able to complete successfully our portfolio actions.
Recall the time when we had made those statements then we were talking mostly about the spin. We weren't really including the Tyco transaction. Maintaining a strong balance sheet for the future in order to be have flexibility for our growth investments and then continue our drive toward becoming a real benchmark for operational excellence. And I'd just like to make a comment. I believe that our Johnson Controls operating system continues to deliver tangible results.
And I think we just have more to come. So I'm very pleased about that. And then position ourselves with business platforms and you can think about the sectors that we participate in and operating models to be able to drive sustainable organic growth. All these with an eye what's important to us to increase shareholder value. I'm really proud to say that we've stayed focused.
We've been able to execute in line with the strategy and objectives that we talked about in December. With that, I'd like to jump into the slide. Just move to slide 7, please.
On Slide 7, we have some highlights here I'd just like
to report on. First, our Q3 was a great quarter and excellent with continued execution. You adjust for the Hitachi joint venture and currency and our lead cost pass through, our organic sales were 4% building efficiency and 5% in Power Solutions. Building efficiency growth was driven by both North America where we saw 3% growth and Asia at 9%, and we're seeing some strength in China, which is really encouraging. Power Solutions, our unit growth across all of our regions, we've had growth in all regions, but particularly we're seeing strong growth in Asia across Asia at 12% and our stock stock growth, which is the future of our business over the next 5 years, it grew 22%, driven by the Americas and China at 78% and 79%, respectively.
We had continued trend of our segment year over year profitability improvement with segment margins in all business units up 170 basis points across the board. Our adjusted EPS up 18% at $1.07 which is above our guidance for the quarter. And with a strong operating performance, we've tightened our guidance to the higher end of our previous range. Brian will get into that later as it relates to our full year guidance. We continue to invest in our future.
During the quarter, we announced our joint venture with Bohai Piston Group, which is an affiliate of BAIC in China to build our 4th plant. This strategic partnership is pretty important to us because it gives us access from the OE perspective to 5,000,000 vehicles by 2020. It also gives access to a distribution channel that 2,400 outlets of OES shops in order to sell batteries to the aftermarket. With this local partner, it's going to help us continue with our objectives to gain share in the region. We also announced that we're doubling our AGM expansion in North America by 2020 and we'll increase our capacity up to 11,000,000 units.
We're taking advantage of the growing demand for start stop. I mentioned this earlier. What we see is this technology is becoming more and more ubiquitous in vehicles as they come out and work for our customers to meet the increasing regulatory targets. Our Hitachi joint venture continues to exceed our expectations. And I'll just give you a little bit of color.
If you look across the regions, we're seeing strong performance in China, Japan and Taiwan. And we're starting to see some opportunities in North America as we've made significant investments in both product and sales. We're able to drive profitability within Hitachi joint venture and across the board. Our pricing we brought pricing discipline along with cost reductions and across our operating system functions of manufacturing, procurement and design. We also completed in the quarter our $500,000,000 stock repurchase that we announced last quarter.
So we completed that and we are at the share count that we talked about in the previous call. We continue to make great progress on our portfolio transformation activities. In fact, we're in a position now that we can talk about our merger date with Tyco moving to September 2nd. And we continue to be on track for Adient spend date on October 31st, as we previously communicated. Both Bruce and I myself will talk about both of these transformation activities in further slides.
If you go to slide 8, financial highlights. And we have a lot of moving pieces as we all know. But if you look at the top line, you kind of break that down. You take the interiors joint venture where we deconsolidated the revenues for that and then you add back the Johnson Controls Hitachi revenues. You adjust for these two events and currency, our overall organic growth was 1% for the quarter.
I noted previously that we saw strong growth in building and power solutions at 4% and 5%, respectively. Overall, automotive experience is down 1%, seating grew 1%, and there's some remaining plants. If you recall, in our discussions around our interior joint venture, we maintain some of the plants in interiors and as we wind those plants down is where we're seeing the decline in sales, not in our Seating businesses. Segment income was up 19%, excluding FX with margins at 170 basis points. Our adjusted diluted EPS up 18% in the 2nd quarter in a row.
Building efficiencies segment income continues to benefit from the contribution of Johnson Controls Hitachi, both higher volumes and cost improvements. That has been offset by some of the product and sales force investments we're making outside the joint venture. Auto had another exceptional profitability quarter driven by the performance of the Seating business that was partially offset by lower than expected results from interiors. Power Solutions continues to drive segment margin expansion with higher volumes, both through manufacturing and pricing disciplines. Let's move to Slide 9, I'll give you an update on where we are with our merger with Tyco.
We've made a lot of progress in the quarter as the combined Tyco and JCI integration teams continue to work extremely well together. The quarter, we've announced our combined leadership team. Tyco has received an effective S-four and the IRS perspective is cleared and we've set both shareholder meetings for August 17. The shareholders of record of June 27 should have received all the proxy materials in order to vote for the merger. We've received all of our antitrust clearances, so the shareholder vote is one of the last hurdles necessary to close.
And based on that, we're expecting to accelerate the closing date to September 2nd. We feel good about the progress we're making around synergies. And I'd just like to reiterate the commitment that George Oliver and myself made during the quarter at the EPG conference where we talked about $1,000,000,000 in run rate savings coming from the combination of the ongoing productivity improvements at both Tyco and Johnson Controls, along with the synergy cost reductions, we remain committed and optimistic that we'll achieve those. And finally, I'd like you to save the date. We're going to have our first as a new company, Analyst Day will be at the Mandarin Oriental in New York City on December 5.
And if you could save that day, it would be great because it's going to be an opportunity for us to talk about both strategically and financially what the merged company will look like and what the expectations you should have. And it's going to be an important event for us as we start our new journey as a combined company. With that, I'd like to turn it over to Bruce and he'll update both around the Adient progress and the separation activities.
Okay. Thank you, Alex, and good morning to everyone on the call today. So I'm real pleased to talk about where we stand in terms of the Adient separation, like the activities underway with the merger with Tyco. We and the automotive side have had an extremely busy quarter as well. For us, July 1 was a huge milestone.
It's the internal date that we said we were going to have effectively our separation largely completed. So we call that operational day 1. So with that, we've changed over the bulk of our IT systems, cloned what we had to clone. We've got new treasury systems in place, good progress on the corporate organization structure. So for all intents and purposes, we're operating independently within John's Controls.
We've got a 4 month kind of running in parallel until we get to our true separation, which will be at the end of October. In terms of the tracking of the cost of the separation, Brian had given an estimate of cost being in the $400,000,000 to $100,000,000 range, we're tracking well within those estimates. Those costs will quickly drop off here in the Q4 and I think there's a little bit that hangs into the month of October, but the separation costs are on a pretty steep downward trajectory here as we've done most of the the activities. In terms of our Form 10, which we filed during the quarter, the second version, it had our pro form a financial results in there and also our 2b balance sheet in there we disclosed that we will have $3,500,000,000 of gross debt, we'll retain $500,000,000 and pay a 3,000,000,000 dollars dividend back to John's Controls just before the spin off. In terms of our financing, great progress here.
We're nearly probably next early next week, we'll wrap up the first part of our financing plan, which involves us putting in place $1,500,000,000 revolver, which will be for working capital purposes and give us some cushion and $1,500,000,000 of term loan A. Those that we're just wrapping up the commitments from our lenders and we expect to close that out early next week and make an announcement. Then we'll shift into our bond program. So during the 1st 2 weeks of August, we will be marketing our bonds. We expect to issue $2,000,000,000 of 8 to 10 year bonds here and close that transaction into escrow here in mid August.
In terms of our credit rating, I think we've published that we've received the BB plus rating from S and P was consistent with our expectation that's sort of one notch below investment grade and I really think it speaks to the underlying strength of our business and the bright future that we have. Moody's will publish a rating on us probably here within the next 2 weeks. In terms of the next version of the Form 10, that will be filed late next week. In there, I guess the most noteworthy thing is we've decided in there to change our domicile from the UK to Ireland. That reflects really as we started working through the complexities of separation with the new John's controls entity being domiciled in Ireland, it was just more tax efficient and less complex transaction structure for Adient to be Irish domiciled and so we made that change and you'll see that reflect in the next version of the Form 10.
I think the main issue from a financial perspective with that is it really doesn't have any impact on our numbers and with the Irish domicile, we're still confident that our tax rate will be in the 10% to 12% range as we've previously communicated. Lastly here, I'll just comment a similar save the date. We expect to have our first Adient Analyst Meeting here on September 15. So prior to the spin off, we'll be doing a number of shareholder outreach 1 on 1 things from mid September through our spin off date, but sort of kicking that off will be an analyst meeting that we scheduled here for the morning of September 15 in New York. Teams are excited, working hard and really looking forward to legal day 1.
Maybe just transitioning into Slide 11 here, maybe just comment on our investment thesis and why the team is so excited before I turn things over to Brian. So first of all, I just point out our market position. I mean, clearly we are the market leader in many, many sense of the word. If you just look at our market share, we're globally number 1, nearly 50% bigger than our next close competitor. Our product lineup, we've got a very diverse product lineup from a vertical integration point of view with the most vertically integrated.
So we're extremely well positioned in the industry. Then I think really uniquely to us for Adient is our customer diversity that we have and I think it's clear that we are the entity of the industry. If you look at our share, our market share and we're leaders in all three major regions. And we've got great customer diversity with Japanese, with Chinese customers. Our business really reflects the diversity of the auto OE base globally.
So we're not overly exposed to any one customer, any one region. We are the envy of the industry. In terms of looking forward, obviously automotive here is on an upward trajectory in terms of our margins and profitability this year And we expect to see that to continue as we get into as we become our own separate company. We've got a lot of self help initiatives, some operational efficiencies that we're going to implement. And you can see here on the slide and we've talked about this before that we expect to deliver a 200 basis points of margin expansion over the mid term here.
Then lastly, coming out with $3,000,000,000 of net debt, we're not too worried about. We expect to have extremely strong free cash flow. I mean, the automotive business is strong free cash flow business. We will be ticking up our capital expenditure here to invest in some growth initiatives as we go forward and pay a competitive dividend, but all in all, very strong stable source of cash flow that will enable us to both quickly delever, pay an attractive returns to our shareholders and also invest in growth initiatives to get the top line moving again for automotive. And so with that, I thank you and I will turn it back over to Brian to go through the business results.
Okay.
Thanks, Bruce and good morning everyone. As you saw in the press release, our Q3 reported results included transaction integration and separation costs of about $167,000,000 a restructuring charge of $102,000,000 and a non recurring non cash tax charge of $85,000,000 which resulted in a net charge of $0.48 per share in the current quarter. We've summarized those items in an appendix, but just given their size, I'd like to just briefly comment on each of those. As far as the integration, separation and transaction costs, the majority of those costs in the quarter relate to the Adient separation. And as Bruce indicated, we should be on the downside of those costs as we move through Q4 now, and there will be some trailing costs into Q1 toward the separation date of October 31.
As far as the restructuring charge, there's some non cash impairments included in that, stranded cost reductions in connection with us moving toward the Adient spin date as well as some footprint changes at the automotive business. And then lastly, the tax charge again is non cash and it relates really to some Adient spin off tax planning that's been done in the quarter. So as I talk through the business unit results and financials, I'll exclude these items from my comments. And also consistent with Q1 and Q2, as you know, we formed the Automotive Interiors JV in July 2015, and we closed on the JOT Controls Hitachi or JCH joint venture in October 2015. And those impact the comparability of the quarter to quarter results and I'll count on those as I go through the slides.
So with that, turning to Slide 12 on building efficiency. 3rd quarter sales of $3,600,000,000 were up 36% from the prior year. If you adjust for FX and JCH, sales grew by a solid 4%. Revenues in Systems and Services North America were up 3 percent as we saw good growth in the North American branches. And in Products North America, our residential business drove year over year growth to 3% and Asia was up 9% ex Hitachi.
In our Rest of World segment, it was level with Q3 of 'fifteen, but if you unpack that, Europe was up 5%, Latin America was up 3%, and there was softness in the Middle East, it was down 10%, and that's tied into oil prices. As far as orders secured in the quarter, excluding M and A and FX, we were up 5% for the 3rd consecutive quarter, and we saw share gains in Systems and Services North America and Products North America related to our residential business. Asia orders were also strong in the quarter, up 6% and we ended the quarter with a backlog of $4,800,000,000 which was up 2% year on year. As far as segment income of $397,000,000 it was up 48% ex FX, due primarily to the volumes in North America and Asia and the contribution of the Hitachi joint venture.
As I
mentioned last quarter, it's now difficult to isolate the Hitachi joint venture standalone results given all of the integration work that's going on and the investments that we're making in product and sales force that Alex referred to. But based upon some pro form a calculations we've done, we would estimate that we'd be in mid single digit segment income growth without Hitachi. And overall, B segment margins in the quarter were very strong at 10.9 percent, up 90 basis points. So turning to Power Solutions on Slide 13, sales were up 3% compared to last year and 5% if you adjust for FX and the lead price. So lead prices today are around 1700 dollars versus last year at about $19.50 And of course, that impacts our top line sales numbers.
In terms of units, we saw higher volumes across all regions with global 3rd quarter shipments up 2%. Again, if you unpack that, Asia was up 12%, Europe was up 2% and the Americas were up 1%. We continue to see strong start stop growth with year on year volumes up 22% from 3,300,000 units last year to 4,300,000 units this year. All regions delivered higher year on year start stop volumes with China up 79% and the Americas 78% in growing markets and then in the mature market of EMEA were up 4%. We also saw Q3 global OE and aftermarket volumes increase 5% and 1%, respectively.
So from a segment income standpoint, Power Solutions delivered $262,000,000 which is up 13% ex FX, and that continues to reflect the higher volumes, some strong price discipline and the ongoing favorable products mix that we're seeing at Power. Their margins were up 130 basis points year over year and remain well above our expectations year to date. Moving to Automotive Experience. Sales were down 19% compared to last year, but if you adjust for the deconsolidation of interiors and FX, they were down 1% We really saw strong global production in Asia and Europe that were offset by some expiring programs in North America.
If you
look at our China non consolidated joint ventures on 100% sales basis, they were up 49 percent in the quarter to $2,900,000,000 But again, if you adjust for the interiors joint venture and FX, they're only up 11%, but still very favorable relative to industry production of 5% in the quarter. Our automotive team has been quoting significant new business and have secured wins of $4,300,000,000 year to date, which already exceeds the fiscal 2015 full year total of $3,600,000,000 and they're well on their way to a record year of new business secured at automotive. For the quarter, segment income of $3.44 was up 1% year over year as we continue to see the benefits of cost reduction and restructuring initiatives. And overall Seating results were very strong. However, as Alex mentioned, we did see some softness in the interiors business related to the retained plants that we have at Johnson Controls that were not contributed to the joint venture, China translation and some launch costs that we're beginning to incur on new business.
So total auto margins of 7.9% were very strong in the quarter, up 160 basis points year on year and up 20 basis points if you adjust for the interiors deconsolidation. Moving to Slide 15 and the consolidated results for the quarter. Overall, 3rd quarter revenues were down 1% to $9,500,000,000 but if you adjust for interiors, FX and the Hitachi joint venture, sales were up 1% as Alex mentioned. Gross margin for the quarter of 19.8 percent was up 200 basis points and this just continues to reflect the benefits we're seeing from the favorable impact of the Johnson Controls operating system initiatives and our improved product mix. SG and A was up 7%.
This increase is really a function of the consolidation of the Hitachi joint venture as well as product and sales force investments in BE, and this is offset by the deconsolidation of interiors and our ongoing cost initiatives. And I would just comment here that I think the overall focus that we have on G and A costs remains strong as we really right size our cost structure as we move toward the Adient spin off in October. As expected, equity income of $134,000,000 was 40% higher than year ago levels. Again, that was due to about $19,000,000 in the joint venture related to interiors and certain joint ventures of JCH contributed another $30,000,000 So overall, 3rd quarter segment margins of 10.5% were 170 basis points better than 15%, and this is well ahead of the 70 basis point expectations that we had for the year. Turning to Slide 16, net financing charges of $69,000,000 were slightly lower than last year and that's due primarily to the favorable interest rate environment we have today.
And consistent with last quarter, our tax rate remains at 17%, which is favorable compared to our Q3 of fiscal 'fifteen, which was at 18.5%. Income attributable non controlling interest is up $49,000,000 compared to last year, and that's primarily due to JCH. And overall, we had a strong 3rd quarter, up 18% from $0.91 a year ago to $1.07 this year. And I just comment, I give tremendous credit to our business unit management teams as they continue to deliver these outstanding results during a period when a lot of these portfolio transformation activities could be a potential transaction for our global teams. So they're doing a great job.
Turning to the balance sheet on Page 17 at quarter end. We have a net debt to cap ratio of 44% compared to the Q3 of last year, which was at 40.7% 40% at the end of last quarter. That increase really is a function of the share repurchase and some of the separation costs that were funded in the 3rd quarter. If I turn to cash flow, our 3rd quarter adjusted cash flow of $400,000,000 was in line with our expectations. We have included an appendix in the deck, which provides a reconciliation of our reported to adjusted free cash flow and it's similar to the format we presented at our Analyst Day in December.
And as you can see in the 3rd quarter, we had transaction costs, separation costs and tax payments that totaled about $600,000,000 We do expect to be in line with the $1,500,000,000 free cash flow guidance that we provided at the December Analyst Meeting. If I turn to Slide 18, there are a lot of moving pieces as we enter Q4, and I'd just like to comment on a couple of things before we get into Q and A here. As Alex noted, the expected merger date is now September 2, which will mean that we will pick up 1 month of Tyco results in our fiscal 2016 consolidated financial statements, including the purchase accounting adjustments. Additionally, the consolidated balance sheet at the end of our fiscal year will include Tyco's historical debt of about $2,000,000,000 plus the new debt raise of around $4,000,000,000 that will be completed in connection with the transaction. And on our year end earnings call, we will provide you with some pro form a financial information to demonstrate John's Controls performance, exclusive of Hitachi as we provide our upcoming guidance here.
Yesterday, you may have seen we announced the pull forward of our 4th quarter dividend of $0.29 to shareholders of record on August 5 and the payment date will be August 19. And we will continue to see the one time or non recurring items, I guess, or special items related to transaction and separation costs in Q4. We will have likely another restructuring charge as we move closer toward the spin off of Adient and the integration efforts associated with Tyco, and we'll have our normal Q4 mark to market adjustment related to our pension and OPEB plans. One technical thing from an accounting standpoint, we are not able to show Adient as a discontinued operation until the date of the spin. So our year end financial statements will continue to show Adient as a consolidated entity and it won't be until Q1 that we show that as a discount.
Turning to Slide 19 and our guidance, I'd emphasize that the guidance that we're providing you excludes any impacts of the Tyco merger. Our Q4 earnings per share is expected to be in the range of $1.17 to $1.20 which was up 13% to 15% from Q4 last year, and it does reflect the tightening now of our full year guidance to 3.95 'fifteen. And I would just say that our 4th quarter guidance reflects the positive momentum we have going into Q4, but it is somewhat tempered by uncertainty around potential currency and volume headwinds that could exist in our automotive business as we move through the Q4. So with that, Kathy, we can turn it over for questions.
Gail, we will now begin our Q and A. If you could please limit yourself to one question and one follow-up and then get back in the queue, it would be much appreciated. Dale?
Thank you. We will now begin the We have one from Joshua of Buckingham Research. Your line is now open.
Hi, good morning folks.
Hi. Good morning. Good morning.
Just a quick question on BE margins. I guess, can you break down maybe some of the headwinds, tailwinds or moving And then maybe Brian just go through where we're at versus that one And then maybe Brian just go through where we're at versus that $100,000,000 of cost savings you expected to get this year whether running ahead of that at this point or if that's all part of the performance
in the quarter?
Yes. So let me give you I won't put
the numbers to it, Brian can do that, but kind of give you an overview. As we've quickly integrated the Hitachi business, it's becoming more and more difficult for us to be able to tease out the margins inside Hitachi and outside Hitachi, not because we don't have the results, but because we're making investments outside of Hitachi around our products in North America. So what you see is when you get into the products in North America, in particular, you're going to see some margin pressure. You also see a little bit of margin pressure, although because of the volumes have been overcome in SS and A where we're hiring salespeople. And then we also have some product that we're building for our UPG business, which had an excellent quarter this quarter.
We're making investments in new product development there. So those are the 3 guess those are the 3 major headwinds we have as it relates to cost. All of them are investments in future products. And a lot of that is real self help from the standpoint of we've been able to lower G and A and reinvest it in the business and both products and salespeople. I'll get Brian to give you maybe some of that.
Yes, Joshua. I think on the $100,000,000 number, of course, that was the number that we showed at Analyst Day and that was the gross save from our JCOS initiatives. And then the net save was the 100 you referred to. That, of course, was across all three of our businesses. But BE certainly is benefiting by that.
And I think some of that is reflected in certainly in the margin improvement we're seeing at BE East. But that $100,000,000 would be across all three of our businesses, and I would say we're pretty much on target with what we expected there.
Perfect. And then I guess
just a follow-up on the Tyco close moving forward, certainly good news there. Any expectation that we would update the synergy target or get maybe some more crystallization or timing around that at close? Are you guys going to wait until you report the Q4?
So we'll wait till December, because I think that we want to make sure that as we get into post close activities that we validate a lot of the things that we're working on now. We've done an awful lot of planning. But I think as we put together our plans, as you remember, we not only have synergy costs that we talk about as it relates to the deal itself, but also cost reduction initiatives with both companies. And as because we're still 2 separate companies, we don't have the level of detail that we need to talk about it now. But when we come out in December, I think we'll be able to have the level of detail that we can hold ourselves accountable and that you folks will be able to have some transparency to.
Perfect. Appreciate it, guys.
Thank you. Our next question comes from
So I think there were some concerns into the quarter perhaps about non res slowing a little bit, perhaps some due to the Dodge Momentum Index slowing, though it rebounded a lot in June. It looks like your orders in BE showed good growth, but steady versus last quarter, even though the comp got a little easier. So just curious how you'd characterize the momentum there and anything since the last update, any verticals in particular got better or worse?
So across the board, we're seeing stronger. So if you kind of tease out underneath the overall North America, what you'd find is both in our HVAC business and our controls business, we're not only seeing growth in the market, but we're also gaining share. Where we're having a tough comp is in our performance contracting business and our federal government business. Those businesses are under some pressure. And so what if you get underneath it, you'll find the institutional markets in our core business, HVAC controls, HVAC controls and ironically, fire and security are growing extremely fast.
And then if you look at our performance contracting business, particularly the federal government business, we're seeing some slowdown there. And I think that's that is probably something that we're going to have to live with while we're seeing a diversion of funds away from the type of activities we have. So there's just less opportunity there in the performance contracting business, particularly federal government. But I see strong momentum in the core of our business.
Got you. And then maybe I did actually want to follow-up on the comments about the residential business. Just because I think it struggled a little for a while. It sounds like the momentum there is actually really good. So can you give us a little more color on how it performed and sounds like it inflected and why that might be the case?
Well, yes, so question, because we've been on suppression, I mean, I think that the comps are better. We've also had a lot of new products out in the marketplace. So we're seeing mid teens growth in the quarter. So we had some strong growth. We've had some specific wins.
We've also added some distribution throughout the region. So we're pretty pleased with some of the growth that we're seeing because we haven't, as you noted, over a period of time, but mid teens.
Is that revenue or orders?
Revenue. Revenue.
And the distribution you added, was that I know you had some shortfalls or coverage weakness in Florida and Texas. Is that where
Yes. We lost as you recall, we lost some distribution in Florida and we put some back and we've also got some distribution across multiple regions. But in Florida specifically, we have added back some distribution.
And revenue and orders are both up mid teens.
Wow, great. Even though maybe the weather wasn't super helpful. So
that's good.
Yes, that's great. Thank you.
Thank you. Our next question comes from Noah Kaye of Oppenheimer and Company. Your line is now
open. Yes. Thank you. Good morning. Maybe just to follow-up since day with BE.
So we do obviously have a little bit of ongoing non res tailwinds. You mentioned, a lot of new products in the marketplace. I was just sort of wondering, particularly on VRF, what kind of traction you've been seeing there in North America? You spent some resources to kind of integrate this. The strength we are seeing seems to be kind of in the mid market, which is really kind of the sweet spot there.
So how is that tracking and kind of how much room do you think it has to run?
We have a long way to go. I think we have we're starting to get products out. We had some product gaps as part of the investment we're having to make, because the products that were built by Hitachi were really not to serve the North American market. So we're getting to where we have a full set of products. Our quoting activity is up quite a bit, but I'd tell you, we still got a long ways to go.
And I think we're going to have the right product positioning and we're starting to see distribution sign up. But I would say that we're seeing most of that growth is right now outside of North America.
Okay. Thank you. And then just a quick clarifying question on Adient. The tax rate, it looks unchanged from previous expectations, but you did mention that you thought there might be some tax benefit moving from moving to Ireland. Certainly, it's got a lower statutory corporate tax rate than the U.
K. So can you just kind of help clarify that for us a little bit? Is there a benefit? How should we think about that? Thanks.
Yeah, maybe this is Bruce here. Maybe I'll take a few comments and Brian you may to add in, but we disclosed that we would have a rate of around 10% to 12% previously when we thought we're going to be domiciled in the UK and with the change to Ireland, there is no difference. And the reason why we don't have a reduction is because we really don't have any Irish income. We don't have any plants or anything like that in Ireland. So it wasn't a positive from a rate perspective for us.
Okay, that's very helpful. Thank you.
Thanks, Noah.
Thank you. Our next question comes from Rich Kwas of Wells Fargo. Your line is now open.
Hi. Good morning, everyone.
Hi, Rich. Hi, Rich.
Just want to ask Alex on Brexit here. I know it's kind of early days still, but are you seeing any impact on quoting activity, particularly as it relates to BE?
Well, first off, let me put it in context. Our revenues in the U. K. Are pretty small. I think it's 3%.
So we're starting from a small place. We do have reports that not necessarily quoting activities, but things are just a little slow right now because people are there are some projects that are in the queue or have slowed down, probably people are just trying to figure out where things are. So I think that people are on kind of a wait and see mode. So we do see some indications of slowdown, but I don't know that we'd be the bellwether for the UK.
And then how about broader Europe? Anything where there's any early signs of any contagion or?
No, we don't see it across Europe, but we do see a little bit in the U. K. In fact, if you look at our European business, it's not doing badly. It's actually seeing some growth where because we haven't been in the rest of the world where we see some deterioration. It's actually in the Middle East where we're more petroleum energy dependent.
Okay. And then on North America on the product number, which I think is new, I hadn't seen that disclosed previously in terms of your orders. So that was up 8%. So that suggests there's pretty good activity on the institutional side. Is that a fair assessment of what you're seeing right now based on that number?
Well, the way I think about it, when our products business is probably more skewed towards the light commercial. And our branches are more skewed to institutional because of the channel we serve.
Okay. All right. And then so just and then lastly on the clarification on the mid teens number for residential,
is that residential
and light commercial combined or just residential in terms of the orders of the revenues?
That's both, that's combined. Okay, combined. That's the LVPG. Right.
Okay. Thanks.
Thanks, Rich.
Operator? Dale, are you still there?
Yes. Can you hear me now?
Yes. We have another question.
I do apologize then. Our next question comes from Emmanuel Rosner of CLSA. Your line is now open.
Hi, good morning everybody.
Good morning. Good morning, Emmanuel.
Just a couple of
questions on the auto side. First on the margin performance in the quarter, you mentioned a few factors that sort of like may have sort of been keeping a lid on margin expansion there. Can you please just go back over some of these factors, what's happening in seating and in tiers? And then how should we think about that margin expansion for the near future and in particular in the context of the ability to expand that by a couple of 100 basis points.
Appreciate that.
Well, maybe I'll talk to what I think is going to drive the improvement in the future and then maybe Brian can just he went through a number of things, maybe he can touch on those. But from a go forward perspective, what we're saying, we're looking for a couple 100 basis points of margin expansion, really falls into a few big buckets.
First of all
is us having a leaner corporate SG and A structure than we have as part of Johnson Obviously, we will be a single industry company and would that will offer us and smaller and I think that will offer us some efficiency. So I think as we look at the cost associated with standing up the company to be a public entity, that's a big driver. Secondly is, we're on an upward trajectory in terms of our business performance right now. Really in things there you would sort of see is some improvement in our metals business on a go forward basis, that's probably the single biggest bucket there. And then I guess the other thing I would point to from a margin expansion would be the growth of our equity income, which flows through as our Chinese businesses grow.
Those are the 3 main areas, Emmanuel, where the 200 basis points comes from.
And I think if you look at the segment income in the quarter, I mean, seeing results were very strong and I think it continues to reflect some of the cost initiatives as well as some of the JCO S benefits that they're seeing is, it was really offset in the quarter by softness in interiors and those would really come in 3 areas. As you may know in connection with the formation of the interiors joint venture a year ago, certain plants, the unprofitable plants were retained by Johnson Controls and we are essentially winding those down as we move through about mid fiscal 'seventeen. And so those losses have been a bit heavier than we expected. That would be 1. The second item, which is kind of a good news thing, the new business that's being won by the Chinese joint venture is significant and they are incurring some way down in the quarter on their results.
And then lastly, just the currency in China has given us some headwinds as well. So those would be the 3 big buckets, I guess, that would explain the interior softness.
Acceleration there. Can you provide any color either by product like seeing versus interiors or geographically, where you sort of like seeing the most traction with the new ADN proposition?
Yes. Well, first of all, the number that we quote is just seating. So we are talking about new business wins on a year to date basis, just the seating side, okay? And then if I was to sort of, we've historically, if you if you sort of go over the last couple of years, most of our new business has been in China and that continues to be the case, although I would say our backlog is building on the consolidated side of our business in North America and Europe. So I think the last couple of years when we've talked through our backlog, it's almost all the growth has been in non consolidated operations.
What you'll sort of see when we when we'll probably touch on this a bit more at our Analyst Day here in September, you'll see we do have some consolidated new business opportunities that are coming through. So that's good because it will help us turn our top line performance around here.
Great. Thank you so much.
Thanks, Emmanuel.
Thank you. Thank you.
Thank you. Our next question comes from Julian Mitchell of Credit Suisse. Your line is now open.
Hi, thank you.
Good morning. Good morning, Julian.
Good morning. Just on Power Solutions, the aftermarket shipment growth was lower in the quarter than we've seen for a while. Just wondered if there was any background you could give on that and how you see if you see that picking up now in the 4th fiscal quarter?
Yes. So I'll try to take that.
I
think that it's just really a function of the market itself. I mean, as you know, it's a very mature market and with our size and Western Europe is one where it's very hard for the growth they're having in China at this point to move the needle. So that's one of the reasons why the growth would not be at some of the same rates, particularly see us around the technology changes. We haven't lost any share. We've maintained our customers in the mature markets and we're gaining share in China.
I think if you look at the Q4, we've got we're going to see some growth in the Q4. What we don't know is how it will compare to last year because what we need to make sure is that our customers are starting to stock up for the winter to make sure that we're able to that they're able to serve their customers. So the market itself is one that's we're kind of reporting because we're such a big part of the market. We're really reporting the market growth.
Thanks. And then just my second question, if the free cash flow guidance is still around sort of $1,500,000,000 for the year. And then a quick follow-up would be any color at all you can give on expected sort of Tyco financial impact in the 4th quarter?
I'm sorry, the Tyco financial impact in the month of September?
Correct. And maybe you can't talk until the actual earnings, but if there was any context you could give? And then on the free cash flow guide, is that still $1,500,000,000? Yes.
I mean, the $1,500,000,000 is still our plan. I guess if you take where we are free cash flow wise through 3 quarters that we provided in the appendix. We may be short a bit of free cash flow Q4 this year versus Q4 last year and that would really be related to 3 items. There's a couple of $100,000,000 additional CapEx in Q4 this year versus Q3 Q4 last year. In addition, there was a dividend that we received in the Q3 of this year from a Chinese joint venture partner in the auto business that last year was received in the 4th quarter.
And then there is probably about $50,000,000 to $100,000,000 more in cash restructuring costs that we're going to have in our 4th fiscal quarter this year. So that probably is $300,000,000 to $400,000,000 less than last year's Q4 number. But with that, we still end up being on or about that $1,500,000,000 number that we guided to in December. So we still feel pretty comfortable with that. As far as Tycho's impact, I really don't have visibility to that right now and we'll certainly lay it out for you on the year end call.
Thank you.
Thanks, Julien.
Thank you. Our next question comes from Nigel Coe of Morgan Stanley.
So just to come back
on the aftermarket, the plus 1%, I'm wondering, did the cooler weather in both North America and Europe, do you think that has an influence or maybe dampen down the market a little bit?
Well, it always does, Nigel. I mean, there's 2 things that influence the market. 1 is, where what position our customers are in as it relates to their own inventory and then whatever is weather related. So I could say that's probably the case, but if you look at the overall growth of the aftermarket in both the U. S.
And Western Europe, you're really talking about 1% to 2% growth over a long period of time. That's kind of what you can expect. And so it can be a little choppy, but you're really going to be sticking around that 1% to 2%. Okay.
Got it. That's very fair. And then you called out China as an era strength in building efficiency, probably not a huge surprise, but there's obviously a big debate about durability of that strength. So I am just wondering if you can maybe add some context about what you have seen in terms of the cord and activity and the general health of that
cord and activity is strong. We're seeing I don't a year ago, I didn't want to say that we felt that we were pessimistic about the market. We felt like it was a place to stay that over a period of time it would sort itself out. And I wouldn't declare victory today, but I would tell you that we're seeing quality activity to be strong. We're certainly getting an awful lot, both on our GRS sales, not only in the joint venture, but outside the joint venture.
And then we're seeing some fairly significant size orders in the core of our large tonnage business. We're also making investments in Tier 3 and Tier 4 cities where we're getting we're gaining share and moving into markets that we haven't previously served as well. So I think the market seem I don't want to say how durable it is, but it seems less choppy than it was. And I think our folks feel more optimistic each and every quarter. I mean, we've had a couple of quarters here where we feel like things are getting stronger.
Great. And then a quick one for Brian. On Slide 18, you call out pension op ed mark to market.
Yes.
I don't know if I missed the comments in the prepared remarks, but what
does that relate to?
What is it so what is it referring to or what do you think are you asking
No, no, no, yes, it's a bullet point. I'm just wondering if there's
anything to
say about that. Well, we have adopted mark to mark accounting. So in the Q4 of each year, we'll have either a charge or a benefit to record based upon investment experience, actual investment experience versus expected in our assumptions. And then also there is a movement in interest rates that gets taken into consideration in the valuation of the obligation at each year end. So, as it relates to that adjustment, we are working through the magnitude of that right now, but with rates being down, I think we are assuming there is going to be a mark to market charge.
We don't have that frame get us to size.
Okay. And the lower discount rate doesn't cause any cash contributions next year?
It does not.
Yes. Great. Thanks very much. Yes.
Thanks, Nigel. I'd like to turn it back over to Alex for some closing comments.
Yes. So I just want to once again thank our employees for everything they have accomplished. Brian touched on it. It's absolutely amazing to see what's been accomplished. Probably the biggest accomplishment of this particular quarter for me is to be able to see the Adient spend.
We really are running as 2 separate companies inside Jones Controls today, and we're going to be well positioned and feel really comfortable that we're going to be in a place where on October 31st that we're going to be confident that we'll be able to turn this thing over officially. And then as it relates to the quarter coming up, the one that we're in, obviously, we've got the anticipated merger with Tyco and the activities going on with Tyco and George Oliver and his team. I can't say anything, but good things about what I've seen, the people at Tyco and the opportunity in front of us. So I think that I feel great about what we've been able to accomplish and I feel even better about the future. So I appreciate the questions and I'm sure there might be some follow-up.
Thank you, operator.
Thank you. That concludes today's conference. Thank you all for your participation. You may now disconnect at this time.