Welcome. Thank you for standing by. At this time, all participants are in listen-only mode. During the question-and-answer session, to ask a question, please press star followed by the number one. Today's call is being recorded. If you have any objections, you may disconnect at this point. I'll now turn the meeting over to Ms. Katie Campbell. Ma'am, you may begin.
Thank you, Jen. Welcome to the review of Johnson Controls second quarter 2016 earnings call. If you didn't already receive it, the slide presentation can be accessed at our investor page at johnsoncontrols.com. This morning, President, Chairman, and CEO Alex Molinaroli will provide some perspective on the quarter as well as some progress updates on our transformation. He will be followed by Executive Vice President and Chief Financial Officer Brian Stief, who will 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. We are scheduled to end at the top of the hour.
Before we begin, we 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.
Great. Thank you, Katie. Good morning, everyone. I'm extremely pleased to talk to you today about our results and our outlook and our future. Before I get started, I'd just like to make a couple comments. I was reflecting about our discussion at the Analyst Day in December. I thought I might just spend a couple minutes, reviewing a few things with everyone. In December, we talked about opportunity. Opportunity that was in front of Johnson Controls and what a bright future that we had. At that meeting, we committed to a few things. One is execution. That's both our strategic and financial execution and meeting our commitments. Transformation. Of course, at the time, we were really talking about the Adient spin-off and the Hitachi integration. Of course, things have changed since then, we continue to be committed to transforming our business.
Making strategic acquisitions in those that made sense and where it makes sense in order to support our growth platforms. Continuing on our drive for operational excellence. We've seen that in the maturation of our Johnson Controls Operating System, and we continue to see and realize tangible results. Building our growth platform, a platform that includes both building technologies and energy storage, and a focused, separate automotive company with a shifted orientation toward growth. Increasing shareholder value. Focused on our multi-industrial company vision to create value through improved cash flow, improved margins, and a sustained top line. I hope you're seeing this through our actions and that we're laser-focused in order to make this vision a reality. Let's start on slide seven. For the second quarter, I'm really pleased to talk about what our team was able to accomplish.
We were able to execute and make significant progress as we transform ourselves into two leading global companies. We saw organic growth across all of our businesses this quarter. In Systems and Services, North America, we continue to see positive momentum with revenues up 9% in the quarter and strong orders secured of 7%. Our backlog is up 2%. If you recall, it was flat last quarter, we continue to add to our backlog. Our North American pipeline is up 8%, driven by activity in healthcare, higher ed, and public transportation. In North America, we're seeing strong year-over-year growth in most of our HVAC businesses, and we continue to gain share with a focused account management and solutions-based approach. We continue to make investments in our future. We're launching new products in direct expansion. We've made increased investments in our chillers through our screw products.
We have new investments in our Metasys control systems. In fact, we're launching a new launch here in June for our Metasys controls. For Power Solutions, our investments in additional capacity in China is paying off in a really big way. Record shipments for the quarter, up 60% versus prior year. We've more than doubled our aftermarket shipments, and we've grown our original equipment shipments over 20%, and sales of AGM units in China are nearly twice what they were last year this quarter. Our operational execution demonstrates our ability to continue to deliver as we affect our transformation. Our segment margins are up 160 basis points, including the contributions from Johnson Controls-Hitachi and along with some offsets as we continue to invest in new products and salespeople to fuel our future growth. Our adjusted EPS is over 18% up over prior year.
Feedback from our customers as we move toward our Adient spin and our Tyco merger is extremely positive. In May, we at the EPG conference will have an opportunity to talk about some of the feedback that we're getting, I'll leave those comments to then. Just suffice to say that our customers, both from an automotive perspective and our customers in our buildings business, are pretty excited about the opportunity in front of us. Speaking of our Building Efficiency business, we've had some great wins in the quarter. We secured a 20-year contract, $68 million with Norfolk Navy Base in our energy solutions business. We've also got a partnership with Target to replace 3,600 rooftop units at 225 Target stores. This is a three-year project in order to improve the efficiency of the units that they currently have with more efficient HVAC equipment.
Our automotive seating order wins continue to accelerate during the first half of 2016, where we have nearly the same amount of orders in the first half of this year that we had all of last year. Our Interiors joint venture, which is de-consolidated, has secured business of over $7 billion since we made the announcement last summer. Our Johnson Controls-Hitachi joint venture integration is going extremely well. It was a strong quarter in Q2 and exceeded our plan expectations. Great performance in Taiwan, Japan, and in China, where we continue to take share in VRF. We're making great progress in our market plans across Europe and Asia, we're beginning to see increased backlog and basis design work in North America.
We're making product investments within our base business in order to support the joint venture, you'll see this impact of the increased spending when you see our product North America segment this quarter. We're reducing our tax rate for the year from 19% to 17%, we benefit from the continuous long-term tax planning initiatives that we have underway. I'd like to address our top-line growth. If you noted in our first quarter earnings call, as we continue to gain momentum in our future top line, we're not converting the pipeline as quickly as we originally expected. We now estimate our sales growth for BE to be 2% to 4% for the year, we're very encouraged what we see in North America. Unfortunately, we have some headwinds in the Middle East and our industrial refrigeration business, mostly driven by the lower oil prices in the region.
A little bit of softness in China, more than what we expected in new construction starts. Overall, when we look at our pipeline and our backlog, we're pretty pleased. For Power Solutions, we're updating our estimates to 4% to 6% growth for the year. It's positive share growth in North America and in China, it's being impacted by lower lead prices. We're also seeing some warmer weather in Europe and North America than we expected, we really feel very good about what's happening within Power Solutions. In Auto, we're increasing our estimates, where in the past we talked about a decline of 2% to 3%. We think we'll be able to have that as we see benefits in the U.S. from higher SUV mix, more content, luxury segment is doing well, that helps drive our volume.
We have Bruce here, later on, he'll be able to answer some specific questions that you might have. Our pipeline and backlog continues to build. We continue to effectively manage our cost and improve our productivity. As a result, we're able to increase our full-year guidance. This is a result of a strong operating performance, as well as the reduction of our go-forward tax rate. Brian will cover more about that in a future slide. Move to slide eight. Let's talk about the financial highlights. I'll hit this quickly so Brian will get into more detail. We really have a lot of moving pieces on our top line with the de-consolidation of the Interiors joint venture. It's about $1 billion. The addition of our Johnson Controls-Hitachi revenues is about $740 million.
As I noted earlier, we're seeing overall organic growth in all of our businesses that results in a 3% organic growth for the quarter, 3% in BE, 5% in Power Solutions, 2% in Automotive. Segment income is up 22%, excluding FX, with margins up 160 basis points. EPS up 18%. I'd like to talk a little bit about Auto. Record profitability in the quarter with reduction levels ahead of our plan levels, and we're benefiting both from the restructuring actions and our operational efficiencies. Great margin expansion, 250 basis points. Power Solutions has higher volumes that are being offset by China launch costs. We're seeing 10 basis points improvements in margins. BE segment income is benefiting from the Johnson Controls-Hitachi joint venture. Higher volumes, and that is being offset by our continued product and sales force investments that will drive our future growth.
Let's go to slide nine and talk about the Johnson Controls Tyco merger. There's a lot of discussion about the recent announcement and what the impact is on our plans. We're moving full steam ahead. We're executing against our day one, and we're making tremendous progress. Our teams are working well together, and I'm really personally energized by the strategic nature of the deal and the opportunities it presents. Every day, as we get involved in this, I see more and more opportunity. We have an executive steering committee that George Oliver and myself lead, along with integration teams from both companies. We're on a clear path to capture the value of this unique combination. As you all know, Tyco filed the S-4 on April 4th. We've received HSR regulatory approval during the quarter, and we do expect all the remainder approvals will be received within our timeline.
We anticipate that the Johnson Controls and Tyco shareholder meetings will happen in the July-August timeframe, and we're targeting October 1st as the merger date. I know many of you are aware, and many of you have been asking about the new Treasury regulations that were recently released. Early this morning, we filed an 8-K jointly with Tyco, confirming that following the review of the U.S. Treasury's temporary and proposed tax regulations issued on April 4th, that we will proceed with the merger and continue to expect $650 million of previously announced synergies over the next three years after closing. Those synergies will include operational and tax synergies. We'll provide additional updates on the progress at EPG conference in May when George and I will be presenting together. Let's move on to slide nine and talk about Adient.
The Adient separation is on track to be a successful independent public company. Great momentum. Just talked about great new business wins, record profitability, and tremendous progress, both on the organization and on the business. Bruce has the executive team already in place, and his board of director appointments is substantially complete. The project management office, which is being led by our Vice President of Enterprise Operations, Jeff Williams, is on track toward our targeted internal day one of July 1st. We've got plenty of time in order to make sure that we are successful on the public date. The Form 10, we expect to file by the end of April, and you should expect the separation cost to be within the disclosed range that we talked about earlier, $400 million-$600 million. Half of these costs come from IT.
We're targeting a spin date of October 31, 2016, Adient will be a foreign domiciled entity when we spin. Adient's employees, plants, and income is primarily outside the U.S., as a result, we expect the effective tax rate for Adient to be in the range of 10%-12%. This adds significant value and improved cash flow for our shareholders. Turn it over to Brian.
Thanks, Alex. Good morning, everyone. We had a very strong underlying Q2 quarter here. As you saw in our press release, our reported results do include transaction integration and separation costs associated with our portfolio activities of $131 million, a restructuring charge of $229 million, a couple non-recurring tax items that net to $765 million, which resulted in a net charge of $1.68 in the current quarter. We've included a summary of these items in the appendix, given their size, let me just provide a brief overview on those three items. As far as the transaction integration separation costs, as you can imagine, those relate primarily to the Adient separation, as Alex mentioned, those are in line with the previously provided amounts of $400 million-$600 million.
As far as the restructuring charge of $229 million, that relates to the automotive business, as well as the ongoing stranded cost reductions that we're going after as we move toward the Adient separation date of October 31. I would just note that substantially all of the automotive restructuring will be funded in fiscal 2017 and beyond. There were two items in the tax charge. One item is really consistent with some of our previous divestiture transactions, GWS, Interiors, and Electronics, where we had a $780 million non-cash charge, this relates to the required accounting for earnings which are offshore, which were previously deemed to be permanently invested, which no longer will be, we need to provide a book charge on that. Again, it's a non-cash charge. The second piece of that is a benefit of $15 million that came through in the second quarter.
That really reflects the first quarter impact of our tax rate reduction from 19%-17%. As I talk through the business unit results and the financials, I'll exclude the impact of these three items from my comments, as these items were excluded from previously issued guidance. Also consistent with Q1, the formation of the Automotive Interiors joint venture, which occurred in July 2015, the closing of the Johnson Controls Hitachi joint venture in October 2015. Those do impact the comparability of quarter-to-quarter results, I'll comment on that as we move through the slides. Moving to slide 11. Building Efficiency second quarter sales of $3.2 billion were up 33% from the prior year. If you adjust that for the impact of the Hitachi joint venture as well as FX, our sales grew 3%.
We did see strong Systems and Services North American growth, which is up 9% year-over-year, as we continue to see strength in our North American branch business. Ex FX, Asia was up 3%, Europe was down 4%, and Latin America, although small, was down 15% from the prior year. Orders in the quarter, excluding the Hitachi venture and FX, were up 5% for the second consecutive quarter. We did experience share gains in Systems and Services North America, where our orders increased 7% year-on-year. In addition, our Asian orders were also strong at 9%, and we did experience some softness in Latin American orders, which were down 19%. As Alex mentioned, backlog is up to $4.7 billion, a 2% improvement.
Year-on-year segment income of $245 million was up 43%, excluding the impact of FX, due to the contribution from the Hitachi joint venture, as well as higher volumes in North America and Asia. I would point out that the integration of our Hitachi business is now well underway, and VRF product and sales force investments are being made on a global basis. Given these aggressive global integration efforts, the Johnson Controls-Hitachi's actual results are really becoming difficult to measure on a standalone basis. However, we estimate that BE had mid-single digit segment income growth exclusive of the joint venture. Just as an example, as you'll see in our Form 10-Q, you'll see VRF product investments impacting the products North America segment margins throughout fiscal 2016. Overall, BE segment margins of 7.8% were up 50 basis points from the prior year. Strong quarter from BE.
Turning to slide 12 in Power Solutions, sales were level compared to last year. However, if you adjust for FX and the lower lead prices, sales were actually up 5%. In terms of units, overall second quarter shipments were up 3%, with the Americas up 2%, Asia up 28%, and Europe down 4%. We continue to see strong AGM growth with year-over-year volumes up 18% to 3.1 million units, and Q2 global OE and aftermarket volumes each increased 3% year-over-year. Segment income in the quarter of $264 million was up 3%, excluding FX, primarily the result of higher unit volumes, partially offset by the planned launch costs associated with the capacity investments we're making in China. Segment margins were up 10 basis points in the quarter and remain above our expectations on a year-to-date basis. Moving to Automotive, who had another very strong quarter.
Sales were down 18% compared to last year, as Alex mentioned, adjusting for the Interiors consolidation and FX, sales were actually up 2% on strong global production. We saw production up North America 5%, China 4%, and Europe 3%. Seating volumes in North America and Asia continue to be very strong, although we did see some weakness in Europe and South America within the second quarter. In China, where we go to market primarily through unconsolidated joint ventures, as you know, our 100% sales improved by 51% in the quarter to $2.9 billion. Adjusting for the Interiors joint venture and FX, China sales were up 9%, which compares very favorably to industry production of 4% in China. For the quarter, segment income of $324 million was up 26% year-over-year.
Total Automotive margins of 7.5% were at a record level, up 250 basis points, that's 140 basis points if you adjust for the Interiors deconsolidation. These significant positive results reflect the benefits of the higher volumes as well as ongoing restructuring benefits at Automotive, as well as continued operational efficiencies around JCOS. Turning to slide 14. On a consolidated basis, overall second quarter revenues were down 2% to $9 billion, that was driven by the deconsolidation of the auto Interiors business and the unfavorable impact of FX, offset by the consolidation of the Hitachi joint venture. Excluding the impact of these items, sales were up 3%, with all three businesses showing year-over-year increases.
Gross margin for the quarter of 19.1% was up 200 basis points versus the prior year, as we continue to see the favorable impact of the Johnson Controls Operating System efforts as well as improved product mix. You'll note that SG&A was up 6% from last year. This really reflects the consolidation of the Hitachi joint venture as well as the products and salesforce investments that are being made in BE. That's partially offset by the deconsolidation of Interiors and ongoing cost reduction activities within the company. Equity income of $117 million was 43% higher than year-ago levels, that relates primarily to the Interiors joint venture as well as some of the joint ventures within the Hitachi consolidated venture that we have. Overall, second quarter margins were 9.2%, 160 basis points better than 2015.
Turning to slide 15, net financing charges of $74 million were slightly higher than last year. I guess the highlight on the page is that we have reduced our effective tax rate from 19% to 17%, related primarily to tax planning associated with the Adient spin-off. Of course, that gave us a $0.02 benefit in the quarter. This is a sustainable rate at the 17% level in the near term, we continue to see the tax rate benefits of our global tax planning initiatives that are being put in place in connection with our portfolio transformation over the last couple of years. Income attributable to non-controlling interests is up $41 million compared to last year. That primarily relates to the contribution of the Johnson Controls Hitachi joint venture.
As we've talked before, that venture has several majority-owned ventures within it as well, so that year-over-year increase is significant. Overall, some very strong second quarter results with diluted earnings per share at $0.86, up 18% versus $0.73 a year-ago. Turning to the balance sheet and cash flow at quarter end. Our net debt to cap ratio of 40% compares to the prior year second quarter of 41.2% and 39.1% at 12-31-2015. Our net debt of $6.7 billion is down $700 million versus a year-ago and level with 12-31-2015. Our capital spending remains in line with our target for fiscal 2016 of $1.3 billion. Turning to cash flow, I'm pleased to report that our Q2 cash flow of $400 million is an improvement of $300 million versus the prior year, that includes $100 million of transaction, integration, and separation costs.
I should also point out in the second quarter of last year, we did have $200 million of one-time tax payments, but still, on a net basis, we're plus $200 million for the quarter. We're making progress in this area. We still have some work to do, but we had a good second quarter. Finally, we plan to resume our share repurchase program shortly and expect to buy back $500 million of shares by the end of fiscal 2016. Moving to slide 17 and our guidance. We expect third quarter earnings per share of $1.01-$1.04, which will be up 11%-14% from the prior year. Consistent with prior guidance, this would exclude any transaction integration and separation costs or any other one-time items that we would have in Q3.
Lastly, we are raising our full year guidance from $3.70-$3.90, up to $3.85-$4, which is up 13%-17% from fiscal 2015. This really reflects the momentum we have from our strong year-to-date operational performance, as well as the reduction in our effective tax rate from 19%-17%. With that, Katie, we can open it up for questions.
Operator, we'll now start the Q&A. We have a long queue today, so if you could please limit it to one question and one follow-up, then get back in the queue, it would be much appreciated. Operator?
Thank you. We will now begin the question and answer session. If you would like to ask a question, you may press star followed by the number one. Please unmute your phone and record your name clearly when prompted. Your name is required to introduce your question. To cancel your request, you may press star followed by the number two. Our first question comes from the line of Colin Langan from UBS. Your line is now open.
Oh, great. Thanks for taking my question. I guess my question's pretty straightforward. Any update on the stranded cost post Adient? I think at the Investor Day, you said it was $150 million-$200 million. Is that still the range, or is that actually maybe looking worse or better?
The $150 million-$200 million is still a good number. We're on track to take those costs out prior to entering fiscal 2017.
One maybe quick follow-up here. Any color on free cash flow conversion? That seems to be a popular topic among investors. Do you think the 77% is still on track? You're on track to get us your midterm of, I think, it was 80%-85%?
Yeah, I think, Colin, when we put the free cash flow conversion slide together at Analyst Day, we did have a couple pro forma adjustments in there for tax payments that would be one-time related to transactions. We're a couple hundred million dollars ahead in the second quarter. We were $100 million ahead in the first quarter. Some of that might be a bit of timing. I think the 77% that we gave you, I'd like to think there's a bit of upside to that. We're certainly comfortable with the 77% still.
Okay. All right. Thank you very much. I'll get back to you. Thank you.
Thanks, Colin.
Thank you. Our next question comes from the line of Josh Pokrzywinski from Buckingham Research. Your line is now open.
Hi, good morning, guys.
Morning.
Morning, Josh.
A follow-up on the BE guidance. Alex, I think the 2%-4%, probably more in line with where you guys are tracking on sales and orders, but could you maybe hash out how that looks on an EBIT basis? Clearly margins are performing better here in the interim.
I think that what you probably heard, and maybe this is a good opportunity to even talk about a little bit, is what you're seeing is we're seeing an improvement in Hitachi better than what we expected. One of the things that's causing us a little bit of tentativeness here is we're spending an awful lot of money in the core business outside of the Hitachi joint venture in order to build a pipeline. Our sales efforts in North America, Europe, and parts of Asia and South America are outside of the joint venture. That will impact our core margins a bit. When we talk about our margins, it's going to be very difficult for us to talk about core margins versus consolidated margins because we're doing stuff in and outside of the joint venture.
I think we're seeing leverage on the BE business more than what we expected, even though we're making the investments we're making. I don't know that we have a guidance at this point, but we probably just need to follow up on that.
Okay, that's fair. Just as a follow-up, I noticed when you guys reiterated the $650 of synergies, it didn't quite get bucketed out. Should we still think of it as a $500 and of operational $150 at tax? As a corollary to that, you mentioned some of these integration teams coming together and the excitement building. Do you think that means that those numbers look conservative, or we're realizing them earlier, or how should we think about some of that early excitement?
Well, I think that the early excitement should translate into more synergies. Obviously, when you get teams together, they're probably more excited about the revenue opportunities than anything else, and that's one of the things that we still haven't talked about, and hopefully we'll be able to, at a minimum, start giving examples. What I would say, if you want to break out the $650, obviously the new regulations would have an impact on our tax planning, and so it wasn't without us having to go back and revisit what the tax planning would be to see what we could recover from the new regulations. I don't know that we're comfortable talking about what the split is, but the new regulations did have an impact on us.
We are going to be able to achieve tax synergies, but they're global tax synergies, and it's not always in the U.S. when you look at where our opportunity is. I don't know if you have any more comment on that.
Yeah, I would just add to that, when we came up with the synergy numbers of $500 and $150, that was early on in the process. We obviously had ranges around each of those areas, synergies from costs and synergies from taxes. I would just say that as we've gone back and looked at the opportunities for global tax planning, as well as understanding Tyco's tax footprint and their understanding of ours, the range that we had for tax, we're still very comfortable that we're going to be able to be within the range of tax synergies that we quoted previously. I think from our standpoint, it's full speed ahead.
Perfect. Thanks for the color, guys.
Thanks, Josh.
Thank you. Our next question comes from the line of Robert Barry from Susquehanna. Your line is now open.
Hey, guys. Good morning.
Morning, Rob.
I had a question on tax as well. I just wanted to clarify. As we think about JCI ex Adient, the piece that's merging with Tyco, is it going to be joining with Tyco having this 17% tax rate? Is that the idea?
I think what we're saying, Rob, is our tax rate in the near term, we think is sustainable at 17%. When I say near term, that takes us through fiscal 2017. The Tyco tax rate, I think, has historically been in that 17%-18% range. If you put the two companies together and then layer on the over a three-year period that we think there's $150 million of tax synergies, I think that's kind of the way to think about it. As we put the two companies together, we're just going to have to kind of work through what the ultimate rate is. I think we've been talking in terms of 17%-18%, and I would say.
Right
The guide down to JCI is 17%, it means that we think we may do a little better than that.
Got you. Yeah, okay. I just wanted to clarify that.
Rob?
Yep.
Just wanted to make sure that you also, kind of the news on this was the Adient tax rate was something that we hadn't talked about previously also.
Yes, indeed. It was pretty striking to see it at that level. I was curious if somehow the split between the two impacted the way the business would look as it entered the merger.
No. In fact, a big part of the integration process is to make sure that as we do our planning, that we do tax planning during the, I'm sorry, the separation for the last year.
Got you. Maybe just on BE, looks like there's definitely some good momentum building there, especially in North America. I think, Alex, you called out healthcare and education was where you were seeing the strength. Perhaps is government a lagging? Any color on the verticals? If you could also just comment on pricing as this order momentum builds, is the pricing of the backlog, would you say, accretive or dilutive to the segment margins? Thank you.
I think that, I don't know that these are mostly contracts, so I think that it's really a variable margin play. I don't know that we're really looking at a fixed cost play. I do think that it's accretive. Now, it's going to come down to the mix of the size of projects. Typically, the larger the project, the lower the margin. Also it has lower SG&A to go along with that. I think that we're going to see accretive, the business is going to be accretive as volume runs through it. Particularly as we have pull-through. Again, a lot of this business is not performance contracting business, so a lot of this business is core construction business, which means it's going to drag along equipment and controls, which will have an accretive component to our business. Those are real positives.
The other thing that I'd say is around the verticals, if you talk about transportation, I would call that really more of a state and local government vertical, which is infrastructure related. That seems to be holding up. Education, healthcare. We're also, and we did talk about in our comments, we're also seeing in our commercial business is doing pretty well, and that's really on the back of our CBRE business, where seeing significant orders through our relationship with CB Richard Ellis. We're hitting on a lot of key initiatives, and the market seems to be holding up with an 8% pipeline in front of us.
Great. Thank you.
Thank you. Our next question comes from the line of Michael Wood from Macquarie Capital. Your line is now open.
Hi. Thanks for that color on the commercial verticals. Could you also provide some trends on commercial in terms of split between renovation activity and new construction, what you're seeing in the pipeline, and also maybe the various size tonnage equipment and where you're seeing most of that pipeline come from? Thank you.
This is kind of a global picture. If you look at it from a global perspective, actually, our large tonnage business is not doing well as more of our mid-market or mid-tonnage spends. That is primarily driven by markets like the Middle East, markets that are driven by infrastructure spending. When you look at North America, I think what we're seeing is basically the same thing. It's kind of a mid-market on a revenue, but on the secured, there's some very large infrastructure projects. I think today our mix would probably more toward mid-size equipment. I think that the secured pipeline is looking toward larger projects and larger tonnage.
You'd mentioned Hitachi exceeding expectations initially. Is that sales or margins? Do you have a clear plan at this point now with how to fix their resi business, or has that began?
No. I would tell you on the Hitachi, we're seeing both. The top line has been something that's been a pleasant surprise. Tremendous growth, particularly in the Asian markets and market share. We're also seeing margins better than what we expected. I think on both counts, we're seeing with Hitachi. As it relates to residential, right now, the plan that we have residentially, we have a lot of new products that are out in the marketplace. We're making some initiatives, but nothing transformative at this point.
Thank you.
Thank you. Our next question comes from the line of Julian Mitchell from Credit Suisse. Your line is now open.
Hi. Thank you. Just the first question maybe on Power Solutions. You had obviously enjoyed exceptional margin expansion. Obviously that seems to be sort of leveling out a little bit. I just wondered if you could call out
How severe and how long do you expect the headwind from those China launch costs to be? Was that sort of a blip that you saw in Q2 and the second half margin expansion should be more considerable? Any color there?
Yeah. When we talked at the December meeting, we actually guided margins down 50 basis points from 17.5% to 17%. I think we called out at that meeting that there was going to be some China launch costs, certainly, throughout fiscal 2016. We're starting to see those now. Even with those, we had a 10 basis point improvement in Power Solutions margins. Year to date, they're still up pretty strong. There will be more of that in the second half of the year. Then, as you know, we're also in the middle of constructing a plant in the north in China. I think the investment and some of the launch costs in China, we're going to continue to see for a period of time.
I would tell you, sitting here today, when we look at the margins for Power Solutions, the 17% that we guided to in December, we're well ahead of that pace right now for fiscal 2016.
Got it. Thank you. Back to Building Efficiency. I think there's been sort of very mixed and mostly negative sort of comments on China construction for quite some time. Your own Asia orders, though, have been very good, actually, up 9% to 10% the last six months. Maybe give us some background as to how you're able to drive that. Any particular verticals or countries that you think are key behind that sort of very high single digit above market average growth?
This is Alex. What I would tell you is that China has been a headwind for us, with the exception of what we're seeing through Hitachi in our VRF business. That business is growing pretty quickly. When you look outside of China, I don't know that you can point to one particular country, but across the board, the ASEAN countries, we're seeing growth. What I would tell you as it relates to China, it's kind of a mixed bag. It's choppy. We're seeing some orders. We saw some, I wouldn't call it momentum, we saw some sprouts here in the last few months. We're also seeing some new infrastructure projects that are on the board when you look out west. We're hopeful that it'll come back with some stimulus money here.
Great. Thank you very much.
Thank you. Our next question comes from the line of Jeffrey Sprague from Vertical Research Partners. Your line is now open.
Thank you. Good morning.
Morning, Jeff.
Hey, a couple of follow-ups. First, just on the Target Corporation deal. I'm intrigued by that. Your name doesn't usually come to top of mind when I'm thinking kind of big retail retrofit jobs. Congrats on that. Could you elaborate on what drove that? It sounds like there was some performance contracting tied to it. Do you have a pipeline of some additional opportunities there?
No, actually, it wasn't a performance contract. It was based off of energy savings, but it really wasn't a performance contract. I think that what you should see is that over time, I think we'll continue having more activity there, but it's probably something that we are underutilized. I agree, it's something that you don't see a lot. I do think that we have a set of new products that makes us more competitive in that market, we probably haven't been approaching it aggressively. Hopefully you'll see more in the future.
On the government side, Alex, things have been hung up there for a while. This Navy project broke free. Do you have a decent size front log on the U.S. government side in particular? How do you think that plays out over the balance of the year?
I think we talked about $150 million, if I recall, that got hung up. I think we're going to see about half of that, and the Navy project would be in that half as it relates to projects that were hung up. Moving forward, we still have a headwind around the U.S. federal government related to our historical plans. We're not really counting on that this year to save our day, until we get kind of through this fiscal situation that we have with the U.S. government. We are glad to see that we were able to get that project freed up. There are probably a few more, but we'll get about half of what we expected.
Thank you. Just a quick one on Adient. Should we still be kind of thinking dividend roughly two turns on EBITDA?
I'll let Bruce talk to you about that.
Well, actually, I think on the slide in the deck here, when we talk about the Adient separation, we're just finalizing that with our advisors. The first turn here of the Form 10, it won't have the dividend in there, but that's something that is top of mind for us, and we'll work with Brian and his team on that.
All right. Thank you.
Thanks, Jeff. Thank you. Our next question comes from the line of Rich Kwas from Wells Fargo. Your line is now open.
Hi, good morning, everyone.
Good morning.
Just a follow-up on power. Start, stop coming in at 18% for the quarter. That's good growth, but down pretty considerably from the 30% and 40% run rate that you've been realizing over the last several quarters. Just curious in terms of, was there timing of launches around in North America or China that affected the growth rate? How should we think about the progression of the growth rate?
Two things. One is, the numbers are getting bigger, and the second thing is that we're capacity constrained. If you remember, as we talked about last year, things were happening much quicker than what we expected. As we're putting in capacity, we're chasing it a little bit here.
Alex, are the economics still the same with regards to the price and the margin dollars two times, three times, on sales and operating profit, respectively?
Pretty much. Even though you see the basis model, you kind of have to look through the numbers, but if you look at our unit growth rate and you look at our margin growth rate, you can sort of see it. There's so many moving parts with lead costs and FX, but we are seeing that, and as we're able to continue to add capacity, more and more of that'll get realized on the bottom line. Yep, we're still seeing it.
Okay. Just a quick one on auto for Bruce. In the deck it says European softness on production here in Q1 or fiscal Q2, I should say. You've had production get raised here recently. Just curious, is that a customer specific issue or what's going on there?
It really just relates to some business that we have that's rolling off. As you know, the last couple of years, we had some business losses or that we didn't renew in Europe, we're just sort of seeing the tail end of that.
That would be pure seating, not including interiors?
Correct.
Okay. All right. Thank you.
Thank you. Our next question comes from the line of Patrick Archambault from Goldman Sachs. Your line is now open.
Great. Thanks again. Yeah, just two from me. Number one is, what's the pricing like on those seating contracts? It just strikes me as obviously a fairly remarkable acceleration, right? To do sort of all of what you did in bookings in half a year, in terms of compared to what you did a year ago in a whole year. Are you finding that the environment is just willing to take in some new orders at reasonable pricing, or is this kind of an aggressive push to kind of reassert yourself, at your proper share? How should we think about that?
Yeah. Well, first of all, it's great progress when you think about the rationale for spinning off the automotive business, it's really been because we wanted to free up automotive to reinvest their cash flows to grow the business. If you were to look at our reinvestment ratio in the auto business compared to our closest North American competitor, what you would see is that our reinvestment ratio is about 30% or 40% lower than theirs. Our growth has been stunted because of our lack of commitment on future CapEx and engineering spend. It's not that we are chasing things at lower prices here.
Our business, probably the best way to think about it, Pat, you've been around for a while, is we have a long 20, 30 year track record of aggressive growth in automotive, we're giving them back the access to resources and letting them flourish again, that's what we're seeing in the first half.
Got it. All right. Thanks, Bruce. Just one other side, more generally, it just feels like in the last four or five months, the discussions on 48 volt have gone up a lot. Can you just remind us your positioning there and how much of an opportunity that could be for you?
Yeah. I think that, for us, the 48 volt discussion is one that's a positive discussion, because as we've talked about our technology portfolio and the fact that vehicles will move up from one powertrain to another powertrain, we'd rather see an incremental move, and one that's not 100% disruptive, but more of an evolving portfolio. For us, this is something that we actually predicted. The timing of it is something that's unique around the discussion, but I do think it makes an awful lot of sense, and we're encouraged by it. If you look at our investments in R&D, it's directly related to low voltage lithium-ion products.
Just to follow up really quickly, are these products that you could see in the market within kind of a two-year timeframe? Is it that soon?
No. If you think about the cycles of the automotive business, you'll probably have some pilot projects, but you're really talking about five years plus out just because of the product cycle times.
Okay. Got it. Thanks, guys. That's all I had.
Thank you. Our next question comes from the line of Noah Kaye from Oppenheimer. Your line is now open.
Good morning, and thank you. Let's start with Building Efficiency. You had mentioned the new Metasys launch in June. As you work towards the Tyco merger and the integration there, I was wondering to what extent are you already starting to design building automation products for integrating some of their fire and security products and controls? It seems like a good opportunity, and just wondering how much of that might be baked into how you think about synergies versus potential upside, and maybe what you think the integration of those product suites will do for your competitive positioning.
As you probably know, the Metasys platform has been around for a long time. It's an evolved platform.
Sure. Mm-hmm.
It already has an integrating capability with lots of fire alarm products, including products like the Simplex products. Through open protocols, I think what you're going to see is a much tighter integration. We haven't really gotten into the details about product planning. You have to remember, we're still two public companies, and there's certain planning that we can't do until we're further along in this process. Clearly, when we talk about, I think Tyco talks about their Tyco On product, we talk about Metasys, that's really a convergence of technology that will need an integrating platform. What that really looks like, the opportunity to look under the cover, we really can't do that yet. I'm excited about that. It's part of the synergy opportunity. It wouldn't be the near-term synergy opportunity. It'd be like the second wave of opportunity.
The first wave of opportunity is going to really be cross-selling and commercial opportunity.
Mm-hmm. We'll look for that. Then just a question on Power Solutions. You mentioned in your guidance for the year, the change in the guidance earlier. Just wondering how you think about regional volumes in kind of the remainder of the year, North America, China versus Europe and kind of the puts and takes of that, where you think that might end up impacting pricing.
I think that the mix will be very similar to what it's been up to this point.
We've actually gained share. There's been a little bit of market growth in North America. Europe has had a pretty mild weather. Haven't lost share, but it's pretty competitive in Europe. What I would expect is that our share will continue to grow, pivoting toward Asia, specifically China. We'll see moderate growth in the other regions.
Okay, great. Thank you very much.
Thanks, Noah.
Thank you. Our last question comes from the line of Joseph Spak from RBC. Your line is now open.
Thanks for squeezing me in here. Just one quick one on, I guess, the Yanfeng JV, where we just get a little transparency. It seems like things have really accelerated there by some of the clues you dropped here. China up 51%, but only 9% ex that JV. Then, if you could sort of back out the margin improvement as well. I guess, is that just the fruits of some increased business? Because it seems to be way more than China production would have otherwise suggested.
Yeah. I just want to clarify. You're talking about the Interiors joint venture, correct?
Yes.
Well, yeah. Keep in mind, Joe, it's a global joint venture, so roughly speaking, it's a little bit more than 50% is China, and the balance of it is North American, Europe. Just to remind those on the call that maybe aren't familiar with it, but this joint venture, we basically took Johnson Controls business, which was a global Interiors joint venture operation, and combined it with Yanfeng business, which was almost all in China. I think they had one North American plant. Really the rationale here was combining the Chinese cost base that they brought, and access to low-cost tooling and capital, marrying up with our global footprint and our global customer relationships. What you've sort of seen there is putting that all together is we've got a business that's got a return on sales of more than 6%.
That's somewhat stunted because of the cost that we're incurring to set it up as a separate entity. See good, strong growth. We got a global business that's growing nicely. You see the $7 billion that's lifetime awards of revenue. It's not the same as our backlog. If I looked at that backlog, that's the customer validation of the investment thesis. I think, if you look underneath that, about two-thirds of the new business is Daimler, BMW, and Porsche on business, and that's a global mix. It's not just winning it in one region. Great customer acceptance. The marrying of the customer relationships and the cost base, it just has played out perfectly for us, and we're real excited about how that venture's starting off here.
Just to confirm, it's the after-tax portion of that JV that you're reporting in that segment income number, right? I guess the difference suggested something about like almost a $50 million contribution, which just seems to be a little bit higher than, I guess, some of the initial color you had.
Yeah. I don't think. Maybe after the call, Katie can straighten me out there, but I think it's not quite. I don't think it's $50 million from the Interiors joint venture. Your point is actually bigger than you said. All of our Chinese equity income, which is more than $50 million in the quarter, is all after-tax income. I think one of the things that, from a value perspective is, generally speaking, I think people give us an EBITDA type multiple on our equity income rather than a P/E type multiple. I think there's unlost value there.
Thanks a lot.
We can walk through the math afterwards, but remember, we've got a 30% interest in that joint venture, and you're correct. It is after tax. We can walk you through those numbers.
All right. We can take it offline. Thanks.
Yeah.
Thanks, Joe.
Okay.
Alex, clossing comment .
All right. I appreciate it. I thank everyone for joining the call today. I just wanted to mention, just as I always do, but it can't go unmentioned, is that how could you not be more proud of our employees and what they're accomplishing? We've got a significant amount of things going on. If you look at the summer we have ahead of us, it's not slowing down, but I think we can see the path to be clear of all this. Things are becoming much more clear for our employees, for our customers, and I think that the execution that they're delivering on is something to really be proud of. I just want to thank our employees, and I want to appreciate everyone's great questions, and sticking with us through this transformation.
We're a great company today, and we're going to even be a greater company, a great two companies when we come out of this. Thanks a lot. Have a great day.
Thank you.
Thank you, speakers, and that concludes today's conference call. Thank you all for joining, and you may now disconnect.