Welcome and thank you all for standing by. At this time, all participants are in a listen early mode until the question and answer session of today's conference call. Today's call is also being recorded. If you have any objections, you may disconnect at this point. Now, I will turn the meeting over to your host, Mr.
Glenn Ponsack. Sir, you may begin.
Thanks, Katharina, and welcome everybody to the review of Johnson Controls' Q1 2016 earnings. If you didn't already receive it, the slide presentation can be accessed at the Investors section of johnsoncontrols.com. This morning, Chairman and CEO, Alex Molina Rolli will provide some perspective on the quarter as well as some updates. And he'll be followed by Executive Vice President and Chief Financial Officer, Brian Steef, who will review the results of the individual businesses as well as the company's overall financial performance. Following those prepared remarks, we'll open up the call for questions and we're scheduled to end at the 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. And with that, I'll
turn it over to Alex. Great. Thank you, Glenn. I first wanted to acknowledge that this is probably the first time in years that Bruce McDonald hasn't been on the agenda. But just for everyone's sake, he's here.
So when we get to the Q A, we'll make sure that Bruce gets an opportunity to keep the string alive. What I'd like to do before we get started is just remind everyone, it's been a while since we had an opportunity to talk. And I wanted to remind everyone that in December, when we had our Analyst Day, there's some themes that I want to hit on. I mean, we talked about execution and over the last couple of years, I continue to be completely satisfied with our team's ability to stay focused, particularly as we transform our portfolio. Our teams within the business units have been focused on reinvesting in growth, but most importantly, being able to improve margins and continue to meet our commitments.
As we
talked in December, we made a lot of progress around our operational excellence, our Johnson Controls operating system, and it continues to bring and yield results for us as a company and within our business units. And I think after the auto spend, we talked a lot about that and Bruce had an opportunity to meet with a bunch of you in January in Detroit about the automotive business, about Adient. And we'll be well positioned along with the automotive business to be 2 great companies after the end of this fiscal year, and I'm pretty excited about that. And then as it relates to the path of the remaining Johnson Controls, I think that particularly as we talk about our announcement earlier this week and the portfolio changes that we made up to this point and how we've invested within our businesses, I think we're really on a path to achieve our multi industrial status and make sure that we are in a position to reinvest in the business and continue to increase shareholder value. So with that, I'll start on Slide 7.
I won't spend a lot of time on this, but I just want to break a few things down for you to make sure that you understand that from an organic standpoint, although we're not exactly where we want to be, I am seeing some momentum in the business. If you sort out some of the numbers, you see that our FX has impacted us negatively along with a drop in lead prices within our Power Solutions business. And Brian will talk about that when he gets into one of the businesses. Also, you have to take Hitachi and you have to make sure that you know that we now have that consolidated within our quarter. It's over $500,000,000 of increased revenue, but then you have to take the deconsolidation of the interiors joint venture out and it's over $1,000,000,000 So if you look inside our businesses, what you see is automotive business really exceeded our expectation around production levels across the board and that would include China, by the way.
And then BE is up organically 1%, and that excludes Hitachi and FX. And then we have higher revenues particularly in North America and the Middle East and we'll talk later about North America, but we're seeing some real momentum in that business that we saw earlier. And I think last quarter, we had a little bit of a hiccup because some of the federal government work. But the secured sales continues to come and our top line, I think is in a position to continue to grow. And then Power Solutions, if you take out the unit volume and you just take out lead and FX, we had a 3% growth and I'm particularly happy with some of the sales increase we have in China.
Once again, we continue to see margin expansion in the business at 130 basis points across the board. In auto, we had record performance. We've never seen this kind of performance before in our Q1, and we continue to see improvements within that business. So we're setting that up for success and then Power Solutions again with margins that have almost 20%. A little bit benefit from the low the press led position, but still we're seeing margin improvements within the business.
And now we're seeing BE with the reinvestments into that business with a real position to grow. Go to Slide 8. Let's talk about a couple of things here that I think are pretty important. I'm pretty proud of how our team is accomplishing. And as I said earlier, and with the segmented income margins up 130 basis points and EPS 11% versus last year,
Even with a little softness
in the top line versus where we wanted it to be, we've got a lot of headwinds in the business that are outside of our control. We continue to deliver on the bottom line despite that. And of course, as I said earlier, operational excellence across all of our functions continues to improve. And I would say that includes everything from our procurement, our manufacturing operations, our supply chain and the productivity we're getting out of our sales force. And we have a challenging macroeconomic environment, but we are gaining some momentum.
If you look at our SS and A, our North American branch business, we saw the orders growth in Q1 and we see the pipeline are up. If you look within North America and you just go to North America, you can see that orders are up 13%. Our chiller market share is up 170 basis points. Our hit rate is up and it says historical highs. And then within Q2, we see the pipeline continue to grow.
And so the institutional market focus that we have, I think, is starting to pay off. It's been a long time coming, but hopefully, we'll continue to see that happen. And so we expect to see revenue growth and the pipeline continue to increase. Actually, in Asia, orders were up significantly in the quarter. Now in the context of things that we saw 3 quarters of orders being down prior to that.
So we were happy to see Asia orders being up. And if you look at Hitachi, we're pretty happy with where we were. Now it exceeded our plan. We've got a long way to go with Hitachi and the integration, but the integration is going well. And as it relates to what our plans were for Hitachi, we had more profitability and better operational performance than what we planned.
So off to a good start there. Power Solutions, great quarter. Some real milestones. I was reflecting on Power Solutions and some of the growth. We're going to be adding some more capacity as we speak.
Within 2017, we'll have another 6,500,000 units in a new plant in Power Solutions in China. And we hit a record of 1,000,000 units of battery shipped in China during December and a little bit less than 3,000,000 units for the quarter. And I was reflecting on that because you know over the past few years, when I was at Power Solutions and we had our problem with the Shanghai plant, that plant was a 3,000,000 unit plant. And so our as we've moved through the past few years, we're now selling in 1 quarter our total capacity, what we had when we first entered China with our Shanghai plant. And then AGM growth continues to be something that's accelerating.
Our biggest challenge here is keeping up with capacity. We had a 41% growth in AGM. So the mix is working in our favor. If you go to Slide 9, we'll talk about the auto separation. Adi has spin off here in a few minutes.
And then as you all know, we introduced the fact that we will merge with HEICO earlier this week. I'm incredibly excited about what I've seen so far, the reaction by our customers, by our employees and by the folks that follow us, our investors. I do think it's going to be a win win for both companies, certainly for our customers and our shareholders. And so I look forward to working with our partners at Tyco over the next few months as we work toward close. And I think that it's just going to be more exciting times to come for both companies.
Back in December, I think there was a little bit of a disappointment. We talked about the fact that we were just a little unsure of ourselves as it relates to our share repurchase program, and we wanted to pause that while we really understood what the cost and the cash flows were going to be associated with the automotive spend. And I got a lot of feedback there at the meeting that there was a little bit of a surprise. I think it was the right thing to do, but we now understand
how this is all going
to come together. And so we're going to reinstate our repurchase program in the second half of this year. I think the stock price is a place where it's a really good buy. And so we're going to we plan to repurchase a a 1000000 shares by the end of the fiscal year and the second half of the year. So I'm happy to report that.
Go to Slide 10. You know that Bruce announced earlier this month, and I found out just right before you did, the name of the new company Adient. And it's a really exciting step forward. A lot of things that are on this slide are consistent with
what you saw if you were
if you either had the presentation or you were at the presentation that Bruce gave in Detroit. But there's only one real significant difference is that since that time, we've actually received another piece of business, a Hyundai Kia replacement business and a VW Metals program. And so that moves from the $650,000,000 of replacement business to $750,000,000 And of course, we already had talked about $850,000,000 of new business that we've seen in the business, essentially since we've made the announcement. So the team is working hard around separation. We're not seeing any hiccups in the business itself.
In fact, we're seeing momentum. The team is really excited about their future. You'll get some more information, the 10 form, thinking about capital structure for Adient. On Slide 11, I'm not going to spend a lot of time on this. This should look familiar.
The Tyco Just Control's merger, if you look at the key points on this particular slide, I just want to talk about a couple of things and make sure that it's absolutely clear. And we've gotten a lot of feedback over the last week. We see $650,000,000 of synergies and including operational and the tax synergies that we're going to get from the deal. That's something that we've taken to the bank and we feel very comfortable that we'll be able to achieve. What we don't have in that is any revenue synergies.
One of the things that you can expect from us over the next few months as we fully understand how that is going to come together and how we're going to integrate specifically, you can expect for us to update these numbers to include revenue synergies and the timing for that. So that's we position that as all upside to make sure that we didn't set some expectations that we couldn't meet. But I can tell you internally, our teams are incredibly excited about this opportunity. And I spoke with George Oliver and his team is too. Post merger, prior to any of the synergies, we're talking about a company with $4,500,000,000 of EBITDA.
So I think the financial flexibility we'll have as a combined company certainly will be much enhanced from what we have today and what RemainCo would have had without the merger. If you go to Slide 12, we've gotten a lot of feedback over the last week. And so we tried to put a slide together that I think is going to be very helpful. There's been a lot of feedback that we've gotten to make sure that people could understand because we are merging and then spending, what is the value to the JCI shareholder and how what are the mechanics, what's included and what's not included. And so I think this slide certainly goes through some of the questions that we've gotten.
In particular, I'm not going to go through the entire slide because I think most of this stuff is something that you've that we've talked about and that you've been able understand. I think that the share repurchase helps you understand how we get from the current 650,000,000 shares outstanding to the future combined company of 940,000,000 shares outstanding after the repurchase program. So if you go back into the appendix, there is a slide that I think can help you get from the $650,000,000 to the $940,000,000 of shares And that might close some gaps for some of the folks that we're trying to understand some of the metrics around this deal. The $10,500,000,000 net debt is an important number. And if you look
at what
our net debt to EBITDA is, we'll be in a strong position, I said earlier, to be able to have some flexibility moving forward. So with that, I think that as we move forward, we look forward to your feedback to make sure that we're as transparent as we can and make sure that you can it helps you put together your models. I do know that it's a little bit of a challenge with a couple of the moving parts that we have here. Now with that, I'm going to turn it over to Brian and let him go through the business.
Okay. Thanks, Alex, and good morning, everyone. Before we move into Page 13, just a couple housekeeping things. As you saw in the press release, our Q1 results from continuing operations are adjusted for the $87,000,000 in separation costs, primarily related to the Adient spin off that we incurred in the quarter. And as I turn the financials, I am going to exclude the $87,000,000 in costs from my comments as consistent with what we guided to previously to exclude those type of costs.
And I'll also comment on just continuing operations as we go through the slides here. As you know, the formation of the Automotive Interiors joint venture in July 2015 and the closing of our Hitachi joint venture in October 2015 does impact the comparability of the quarter to quarter results. And so I will also refer to that as I go through the commentary here. And then lastly, we did file a Form 8 ks today and that Form 8 ks will break out for you the fiscal 'fifteen results with our new reportable segments for BE. We'll give you annual fiscal 'fourteen results as well.
And then as we move through 'sixteen, you'll have the comparable quarter amounts for the 4 new business segments in BE. And those 4 new business segments are Systems and Services North America, Products North America, Asia and Rest of World. And we have outlined kind of the mapping as to our old segments to the new segments in an appendix to the slide deck. So with that, let's go through Slide 13 on building efficiency. Their sales in the quarter were $3,000,000,000 which were up 18% from the prior year.
If you adjust for Hitachi and FX, sales grew by 1%. Revenues in our systems and services North American business were up 4% year over year. As Alex mentioned, we continue to see good momentum in the North American branch business and the Middle East was up 31% quarter over quarter. And that was due primarily to several large jobs that closed here in the Q1. However, Asia, excluding Hitachi, was down 3 Orders secured in the quarter, excluding Hitachi and FX, were up Orders secured in the quarter, excluding Hitachi and FX, were up 5%.
We're very pleased with the share gains we saw in the North American region where orders increased 8%. And as Alex mentioned, Asian orders were also strong in the quarter, up 10% and we did see a bit of softness in the rest of
the world.
Backlog is consistent at $4,500,000,000 and we continue to see strength in the systems and services North American business as far as the new business opportunities pipeline for the next 6 months, which was up 7%. If you look at segment income, year over year up 10%, ex Hitachi and FX, it's up 2%, primarily due to the higher North American volumes. And as expected with the Hitachi consolidation, our margins were down to 6.1% versus 6.6% in the prior year. But if you adjust out for the negative impact of Hitachi, we're flat year over year. I will comment that for the remainder of the year, we still are confident that the margins will be in line with the guidance that we provided in December, which is a 30 basis point improvement.
So overall, a very solid Q1 for building efficiency. If we turn to Slide 14, Power Solutions, their sales were down 6% compared to last year. But again, if you adjust for FX and the impact of lower lead prices, their sales were actually up 3%. And just to kind of put a little bit of color around the lead prices, the average price in Q1 of this year was $16.81 as compared to 19.99 dollars in the Q1 last year and that reduced price of lead finds its way through our top line. In terms of units, overall, Q1 shipments were up 3% with growth in all regions.
Americas up 1%, Europe up 8% and Asia was up 7%. And as Alex mentioned, we had a record 1,000,000 units shipped in China in the month of December. We continue to see very strong AGM growth with quite honestly demand outpacing our current capacity and year over year volumes are up 41 percent to 3,200,000 units and we saw strong global volumes with the OEs up 4% and aftermarket at 3%. Segment income in the quarter was $342,000,000 versus $315,000,000 last year, an increase of 7%, primarily the result of the higher volumes, improved product mix and productivity improvements. The segment margin improvement was 2 60 basis points, but you really have to look at that exclusive of the impact of lead.
And ex lead, it was still up a solid 70 basis points in the quarter. So again, Power Solutions just continued to deliver strong quarters for us. So turning to the automotive business, their sales were down 20%
compared to last year. But as Alex
mentioned, you have got to factor in with the joint venture that
was formed in July of
last year. And to with the joint venture that was formed in July of last year and FX. And if you consider those two items, sales were actually up 4% on across the board strong global production. China sales, which are primarily unconsolidated, as you know, improved 58 percent in the quarter to $3,300,000,000 but that's inclusive of the interiors joint venture. If you strip that out, China sales were up 11%.
So again, very strong performance. For the quarter, segment income of $266,000,000 was up 15% year over year and auto margins of 6.3 percent were up 180 basis points. Again, we get the benefit of the interior's equity income being picked up with the sales not in the denominator. So if you adjust for that, the automotive business still showed a 70 basis point improvement in the quarter versus last year. So automotive simply continues to deliver excellent results for us.
So if I take you to Page Slide 16, overall, 1st quarter revenues were down 7 percent to $8,900,000,000 As Alex mentioned, you really kind of need to unpack that in 3 pieces. There's just short of $1,000,000,000 in interiors revenue that we lost and then we had headwinds with about $500,000,000 of foreign exchange. And then to that would be the Hitachi revenues of north of $500,000,000 So if you look at it that way and exclude those items, you end up that sales were actually up 2% on a consolidated basis and up across all three of our businesses. Gross margin for the quarter was 18.3%, up 160 basis points and I think that's really reflective of the benefits we are continuing to see from the Johnson Controls operating system. SG and A was level with last year.
Really the way to look at that is the increases came from Hitachi JV were substantially offset by the deconsolidation of interiors and ongoing cost savings and restructuring initiatives that we have across our business. Equity income was up strong 37 percent to $140,000,000 and that's really attributable to 2 pieces. The interiors JV, which contributed about $20,000,000 in the quarter. And then there were several JVs that came with the Hitachi business and they contributed between $15,000,000 $18,000,000 as well. So that really is the entire gap there.
So overall, 1st quarter segment margins of 8.8% were up 130 bps versus 20.15.80 basis points excluding the impacts of attaching interiors. So very strong performance as it relates to our segment margins. On Slide 17, net financing charges were pretty level over the last year. We did have a slight increase in our effective tax rate from 18.4% to 19% And there were a few joint ventures that came with the Hitachi transaction that added about $10,000,000 to the minority interest line in the current quarter. So overall, we are very pleased with strong first quarter results and diluted EPS of $0.82 which is up 11% from last year.
And I would just echo what Alex said. We're pretty proud of the management teams that are able to deliver these type of results quarter to quarter with all of the portfolio transformation that's really going across the company and could be potential distractions for us. But it simply hasn't been and we continue to deliver strong results. So quickly, I would like to hit the highlights on the balance sheet. At quarter end, we have got a net debt to cap of 39.1% versus the prior quarter of 40.5 percent and year end at $36,700,000,000 and our net debt of 6.7 $1,000,000,000 is up from $6,000,000,000 at ninethirtyfifteen.
And if you look at those ratios and the net debt position, it's really a function of the Hitachi investment we made in Q1. Capital spending at $300,000,000 is in line with expectations and relates primarily, as we've talked in the past, about Power Solutions, growth investments. And then cash flow, we made some good progress in the quarter. It's normally a cash outflow quarter for us. As you know, it was $300,000,000 in the quarter, which was $100,000,000 better than last year, and we had $100,000,000 of separation costs, roughly $100,000,000 in the quarter as well.
So stronger free cash flow performance this quarter than planned. So let's turn to guidance on Slide 19. For the Q2, we expect earnings per share of $0.80 to $0.83 which would be up 10% to 14% from the prior year level of $0.73 And then consistent with our prior guidance, this will exclude the transaction and separation costs in the Q2.
And I
note that again simply because we expect those costs to ramp up in the Q2 as we move toward a July 1 operational separation date with full legal separation in early October. The other thing we have done on page 19 is kind of layout for you a chart that shows what our December analyst guidance was for sales growth by business and then our sync margin targets by business for fiscal 2016. I would highlight a couple of things. As it relates to BE, we are seeing revenue softness in that business primarily in 3 areas. China, where it seems to be taking a bit longer to number 1, secure orders and then number 2, to get the orders executed from a revenue recognition standpoint.
So that's causing a bit of softness for us as we look through the rest of the year. The Middle East, although strong in the Q1, it looks like with oil prices where they are that there could be some softness in the back half of the year. And then the third area that I just point to is there were 3 or 4 federal jobs, 1 in particular that we thought at the end of the year fiscal 2015 that we were going to secure in early 2016 And for a variety of reasons, those jobs have not been secured yet. And if they aren't secured, that will provide a bit of downward pressure on our previously provided guidance as well. So some softness we see in VE as it relates to the 9% to 11%.
In Power Solutions, although unit volumes remain strong, the decrease in lead prices that Alex and I have talked about, as well as the FX impact in the year could put a little pressure on the 9% to 11% at Power Solutions. Auto, on the other hand, continues to be very strong and we would expect them to exceed the revenue guidance that we provided. As far as margins, despite the top line pressures that we see at BE and Power Solutions, we continue to be committed to that margin improvement as well as delivering on the $3.70 to $3.90 per share annual target that we provided in December and that would be 8% to 14% improvement from the 3.42 dollars that we delivered in fiscal 'fifteen. So with that, Glenn, we can open it up for questions.
Thanks, Brian. Thanks, Alex. Operator, we're ready to take questions.
Thank you. We'll now begin the question and answer session. Our first question comes from the line of Mr. Robert Barry with Susquehanna. Sir, your line is now open.
Hey, guys. Susquehanna. Sir, your line is now open.
Hey, guys. Good morning. Good morning, Rob.
I wanted to follow-up on
the comments on commercial
HVAC in Asia, both China and on commercial HVAC in Asia, both China and elsewhere. It looks like orders were actually pretty good in the quarter, but you also cautioned that China weakness is kind of weighing on the outlook. So could you maybe unpack a little more of kind of what you're seeing in commercial HVAC in Asia, China and elsewhere?
Yes. So I think that and you're right, it's caution because you look across our businesses and just because you asked the question, I'll go ahead and answer it. But I'll also point out that we're really surprised with the strength in auto and power solutions continues to gain share and grow dramatically there in China. But when we look at the buildings business, there does seem to be some stickiness. And it's been pretty lumpy.
If you remember, we had a couple of quarters where we're down. We had a real strong quarter. I think it was 4th quarter sales secured. And so it's pretty lumpy. And I think from our standpoint, it's probably just best for us to be cautious.
And that's why when we talked about our guidance, we report on the top line. It's just become pretty hard to predict as it relates to the commercial business. I would tell you though that one of the real surprises we had, I was looking at the Hitachi sales and our VRS sales through Hisense are it's an unconsolidated joint venture in China. We're up dramatically versus our plan. So I think it's more of a mix issue.
And I think at the high end infrastructure level, some of the commercial projects we're doing moving a little slower than we thought. But our VRF sales are higher than what we expected. So I think we're just going to have to continue to watch it. Thank goodness that North American market just seems to be kind of chugging along and gaining a little momentum. You didn't ask the question, but I looked inside our secured for North America and it's truly institutional.
If you look at within the institutional and also commercial, which we're seeing some benefit from the CB Richard Ellis relationship. Within commercial and institutional, we're seeing that outpace some of the losses that we're seeing within the essentially the manufacturing and retail segment.
Got you. Got you. Just sticking with BE on the margin side, you talked about seeing improvements in the remaining quarters after some pressure in 1Q. Is that just about investment spending moderating? Or what's driving that?
Well, so as you look and I'll let Brian get into some of the details. But if you look at the margins and get into the new segments, you'll see that our product margins are under pressure, and that's where the investments are showing up. I think what our expectation is that we had some costs that won't repeat, but we certainly have reinvested in that business purposely and you're going to see that pressure. It will get offset, but you'll see that pressure is going to continue to be a little bit on the product side because that's where the investments show up.
Yes. Rob, I would just add to that. I mean, if you recall, in Q4, we took a pretty good sized restructuring charge at BE and if we look at the timing of those actions, some of those are occurring during the Q1 and we'll just get full run rate benefit for the year in the back half. So there's some improvement in margin just as a result of the timing of some of the restructuring actions we had.
Got you. And then just one last one for me, the resumption of the share repurchase, does that add to the EPS target for this year versus what was factored in at the Analyst Day? Thank you.
Yes. At Analyst Day, we had an average share outstanding of $652,000,000 And at that time, we indicated we were going to pause it for 6 months and then reevaluate. We had built into the guidance that we had given that repurchase program coming in for the entire $1,000,000,000 in the back 6 months of the year. And now we're doing $500,000,000 But instead of doing $1,000,000,000 at $50 a share, which was what we had built into our plan, we are doing $500,000,000 at $35 a share, let's say, just to pick a stock price. And the net effect of that is about $0.01 or so in the guidance that we gave, Rob.
Got you. It benefits it by a penny.
Actually, it's the other way, right, because we had $1,000,000,000 in shares at $50 in what we guided and it's going to be $535 So I think the net effect of that's a penny going the other way.
Got you.
Great. Thank you. Yes.
Thanks, Ben.
Thank you. Our next question comes from the line of Mr. Johnny Wright with Nomura. Sir, your line is now open.
Hi, guys. Good morning. Hi.
Good morning. Good morning.
So just going to the auto side maybe, you guys actually putting up some strong results despite certainly some of the investors who talked to seeing more and more concern about the auto cycle. I know China is benefiting a little bit from the incentives that have been put in place there. But maybe you could talk about in developed markets, what you're seeing, what you're hearing from companies and kind of your outlook for the remainder of 2016?
Yes. It's Bruce McDonald here. Yes, I think if I just sort of run through it regionally, you're right. The incentives that we've put that got put in place in China that lasts till the end of the fiscal year have been pretty effective. If you just look at the production throughout our quarter, it accelerated and continues to be pretty strong.
I think there's some questions whether or not after the Chinese New Year is here in early February, whether that strength is going to continue. But for now, the production schedules that we have for China pretty good. And I think people are feeling fairly optimistic and probably much more optimistic than people looking outside into China are feeling. The auto sector is doing well and the stock market impact in terms of how widespread that is, is much lower than people think. So I feel pretty good about the outlook for China for the balance of the year, probably more so than most people.
In Europe, I would say, after a long period of soft volumes, we're seeing sort of double digit increases in some of the more mature markets like Spain, France, Italy, the U. K. And Germany. Those are holding up pretty well. Our customers are doing better there.
A lot of us have taken big restructurings in Europe. And so I think we're positioned well and you'll see that in our margins. We're positioned well to benefit from the better volumes. I'd also point out that in Europe, it's primarily where all the luxury vehicles are made for Audi, BMW, Mercedes globally for the luxury end is strong and that's helping us, particularly in our interiors business and seats because there's a lot more content there.
And then in North America,
things are looking pretty good. We're, I would say, doing better than the industry because of the enhanced content in larger SUVs and pickup trucks, which as you know are sort of hard to keep in stock here right now. So I don't think there's a lot of extra growth in the tank for North America this year, but the we are seeing a richer mix on larger vehicles and that will be a good thing for John's Controls.
Great. Thanks for that, Bruce. And then on Power Solutions, 3% growth excluding FX and the lead impact. I think you guys are looking for close to double digits. But some of the key drivers in that business, the China record shipments in a month, the AGM up 41%, look pretty robust.
Maybe what's different there versus your prior expectation? And kind of how do you see that playing for the rest of the year? Year?
Yes. Well, the numbers are so big when you get to Europe and North America. When you start talking about AGM growth at 41% and China being record sales, it doesn't we can't get to the 9% to 10% without both mix and growth within primarily North America. I mean, that's really where we need to see it. And so I think that I mean, I think that we feel good about where things are, but it's a little bit out of our control, particularly when you start talking about the aftermarket and what the weather is going to be and what the timing of that is going to be.
But that's what moves the needle when you look at North America. So I think we feel like we're in good position. A lot of it has to do with what our customers are seeing. We're not going to we're not in a position we're going to gain any more share in North America. And so what we really need to see is some we need to see the weather help us out here a little bit.
Okay, good. And just Brian, reported free cash flow this year is $1,000,000,000 still the target?
Yes. The guidance hasn't changed.
Okay. Great. Thanks, guys.
Thank you. Thanks, John.
Thank you. Our next question comes from the line of Julian Mitchell with Credit Suisse. Sir, your line is now open.
Hi, good morning. Thank you. Good morning. Good morning.
Good morning.
Just firstly a question on pricing within building efficiency. I guess, firstly, around you talked about some of the private sector commercial activity maybe being a bit uneven. Have you seen any change in the ability of HVAC manufacturers to price? And then also on your margins, what sort of effect you see from price net of cost this year in BE?
You're talking about based off of commodities?
Yes. And your pricing net of commodity costs, yes.
Yes. So I actually don't have that in front of me. So I will have to get back with you and just make sure I understand our net hedge position, primarily around copper. We certainly are seeing some help as it relates to our transportation costs. But I don't have an update on that.
So we'll follow-up on that specifically just so I don't misrepresent it. As it relates to pricing, I was talking to Bill Jackson, our President at Building Efficiency, and he seems to feel pretty good that pricing has not been that pricing has been rational and probably because we're starting to see orders increase a little bit that we're not under as much pressure particularly in North America. I think the opposite is the truth when you get to places like China though. I think there's pricing pressure in China.
Understood. And then just on Hitachi, you highlighted that it's off to a good start on growth as well as perhaps margins. I just wondered you look at that business right now, how you think about the priorities there in terms of maximizing, say, VRF growth in the U. S. Versus making sure that you can pull up the margins through cost synergies?
And maybe how much higher do you think you can push those margins at Hitachi over the next couple of years?
Yes. So I think if you want to if you were going after the become the most important things, I mean, strategically, we need to be able to get our position strengthened in North America, in VRF because we're going to market now and Hitachi wasn't in the market. So I think that strategically is going to be important. As it relates to margins, our biggest lever on margins is going to be the business that's in Brazil and the business that's in Japan and our rack business, which is the residential business. And that's going to be more around cost than it is going to be around growth.
And so there's really 2 answers. 1, in the long term, it's going to be very important for us to continue investing. So if you look inside, which you see, we're investing in our distribution and investing in places like North America to set up our channels and our training and our support system. And then if you look at our cost plan, it really is around our residential business and focused in Japan and Brazil.
Very helpful. Thank you.
Just on the commodity question, just to address that quickly, I do have some data here. So as it relates to BE in the quarter, we did get a commodity benefit of about $3,000,000 $3,500,000 in the quarter and we are forecasting for the year that that number could be around 14%. But based upon current FX levels across the 2 or 3 main countries that they do business in that are impacted negatively, it's pretty much offset as it relates to our plan. So there's really no commodity benefit net net coming through if you consider FX as well.
Perfect. Thank you.
Thank you. Our next question comes from the line of Mr. Mark Wood with Macquarie. Your line is now open.
Hi. Thanks for taking my question. First, are Hitachi sales still expected to be about 3,000,000,000
dollars for the full year? And is
the lower run rate in fiscal Q1 just seasonality or is there something else there?
Yes. So a couple of things there. The Q1 was $525,000,000 and it is seasonal to some extent. I would tell you that we had guided at about $3,000,000,000 of sales and $120,000,000 of sync. And in that $3,000,000,000 of sales, there was an entity that's got about $250,000,000 of sales that we were planning on consolidating.
And as we got in and looked at the underlying agreements related to the joint venture itself, we determined from an accounting standpoint that we weren't going to be able to consolidate that entity. So instead of $3,000,000,000 for the year, our revenues related to Hitachi are going to be $2,750,000,000 or so. And that correspondingly, there was about $70,000,000 in the quarter that was impacted as well. So that $5,000,000,000 was originally targeted to be about $600,000,000 So we are now looking Hitachi for the year about $750,000,000 And yes, the 5.25 percent in the Q1 reflects some seasonality in that business.
Yes. And I would like to point out that the strong disclosed we saw in China is an unconsolidated. So if you look at the top line growth, where we had the strongest sales, it happens to be and where we saw the strength in China that I was representing earlier is happens to be with Hisense, which is unconsolidated.
Great. And then approximately when should we expect to begin to see benefits of the restructuring in that resi business that you were planning?
Yes, that's a great question. I think by the next time we get together, I'll be able to update. In fact, I'll be at a steering committee meeting tonight. So I'll be able to report on that. So I will I'm anxious to be able to tell you what the plan is, but I want to make sure that I get it hot off the press.
Great. Thank you.
Thank you. Our next question comes from the line of Mr. Josh Pokrzywinski with Buckingham Research. Your line is now open.
Hi, good morning guys.
Hi, Jeff. Good morning.
Just a follow-up on some of
the BE order momentum and maybe unpacking that growth algorithm to 10%.
I'm sorry, we can't hear you.
You guys hear me?
Yes, go ahead.
Okay, perfect. Just to come back to that 10% outlook for obviously, some puts and takes internationally and it sounds like the bottom line is North America is still pretty solid. I guess, Alex, how do you think about North America underneath that 10%? And where does the bridge from here really need to get better to start to move closer to that? Maybe the 10% number is more aspirational just given where we started, but what needs to get better or where or still from here to start looking more achievable?
If we continue to see the kind of momentum we have in the quarter, particularly the end of the quarter, I mean, I think that at some point in North America, I think that we can get there. I get a little bit nervous about things that are outside our control. I mean, it seems like the actual market is doing better than the financial markets. But at some point, the financial markets will make their way to the investors and that investments and that's what worries me. I'm pretty bullish on what I see in North America with the one caveat is that there is just this cloud hanging around as it relates to the financial markets that just what you hope is, it doesn't get our customers spooked as it relates to investments.
But the institutional markets are gaining steam, which is our strength. So knock on wood, I'm hopeful to be able to report that we'll continue to see that growth. Unfortunately, the one thing that we were counting on that did not come back, at least didn't come back at the pace we wanted was, if you remember, we got sidetracked at the end of Q4 with the federal government work with huge projects and a lot of them. And we had significant impact to our backlog and to our top line because of that. And we haven't seen that come back.
Hopefully, we'll see it at the end of this year when it comes that time again. But it's always been something we can count on, and I'm just not sure if we can count on it now or not.
Would that branch business look even stronger ex government this quarter?
Absolutely. The federal government in fact, earlier when I said that, I apologize, I said something about industrial. Industrial and federal government together are the two ones that are off, not only where our backlog is, but we've seen that continue through the Q2.
Yes. I mean, just to put it in perspective, the government jobs that I referred to that are really out there that we aren't sure if they are going to now be able to execute or even if they will be awarded to JCI given some of the deferrals that are going on are in the $125,000,000 to $150,000,000 range in aggregate. So that certainly is a piece of ACV we need to work through for the rest of the year here.
Got you. I think about how that 10% broke down initially in December, it seemed like there were, if I'm recalling it right, about maybe 3 or 4 points of product new product growth and channel penetration. How would you mark yourself against that bogey today? On track or is there maybe a bit of a gap there too?
There's a gap there. And when you talk to the teams, I mean, there's 2 things that when you look at the new segments, you'll be able to see that. The product growth wasn't what we expected and the margins because the investments were a little lower. One of the things that was a challenge for us in the Q1 was that and when we were going through the integration of ADTI, one of our brands are significant brands. We relocated 1 of the production facilities, and I think we had a hard time catching up with delivery.
So hopefully, that will fix itself a little bit, but that was one of the problems we had in the quarter.
I think with some of the product investments that we made in the Q1, hopefully we will start to see some of that benefit in the back half of this year. But I mean just to kind of frame that for you, between product investments and investments in sales resources, that number was almost $20,000,000 in the quarter for BE. And you'll see that when you see the Products North America segment data that's in the 8 ks.
Got you. That's helpful. Yes. The other thing that just kind of the to kind of pile on that a little bit, the Hitachi channel work
will show
up in that number, too, which was which is an investment that we have to put in place in order to get ready for sales for that particular product. So there was a significant amount of investment in the product North America business.
Okay. And just flipping over to Adient real quickly, it might be a little premature for this, but I'll take a flyer. I guess with the new structure with Tyco, one would imagine that Adient now comes out maybe a bit more tax advantage than it would have otherwise pre merger. Any way to maybe handicap what kind of tax synergies maybe versus the former imaginary case?
It's a
great question. It's a really good question.
And then I think as we work through that, we've talked about where we are and we just don't have it finally worked out. We will have it worked out by the time we get the Form 10 and the question you have is a great question and I think that we're sorting through that now. And we certainly will have that prepared between now and the Form 10 that's at the latest, we'll be able to have that then, which is late March, early April. Great. Good question.
Thanks, guys.
Thank you. Our next question comes from the line of Mr. Colin Langan with UBS. Sir, your line is now open.
Great. Thanks for taking my question. Can I just clarify, I just want to understand the Power Solutions outlook? I mean, if we take out the impact of lead prices, does the outlook on your for that segment actually really change? I mean is the sales that's creating a sales headwind, but dollar margins like they're going to look better on a percentage basis?
Or is there some other underlying headwind there that we should also be considering?
That's the way you should think about this business. So one of the things we wanted to make sure that we pointed out was that don't give us all the credit for the 260 basis points of margin improvement because that's not all operational because as things move around, we may not be able to continue at that level. So that's why we point that out that we are because lead is such a big part of that pass through that it does impact our margins. But you got it right. As lead prices go down, the margins go up.
It doesn't impact us. There is a timing issue that flows through our books. But other than timing, it's kind of a net zero fact dollars wise.
And in terms of the outlook for building efficiency sales being not at risk, you named 3 items. You quantify it sounds like the federal jobs are maybe like 1% of your growth. I mean, if all of those items are issues, I mean, what is sort of the bear case that you're looking at for that from that 9% to 11 So how bad do you think it could get if all of them kind of come together at the same time?
Probably half that number. I mean, I think that's probably what we see now. I mean, I guess it could get worse. But if we see the if you kind of if you look at where we are, when we talked about it, our backlog was actually down going into the year because of the federal government work. And so what you have to what gets a little bit difficult to predict is if the product business doesn't grow, then we're really suspect to the revenue recognition of meeting a backlog and the flow through of the work.
So even if we are secured, it starts moving at the rate it's been growing at, we'll still have a revenue issue. And so we need to get those orders in now.
Okay. Very helpful.
But I would tell you, we've got a contingency plan as it relates to it. If that were to happen, we've got actions that we can take to ensure that we still deliver the segment income and the margins and what we've kind of put out there for our full year guidance. So we're working the issue relative to top line and adjusting our cost structure accordingly.
Yes, absolutely. So our investments will certainly mirror our top line prospects. We have not changed our commitment regardless of where we fill and fit in that revenue as it relates to our bottom line. Because the other part of this is, it's not like you can't see it coming as it relates to revenue. If our backlog doesn't improve, then we're certainly not going to be able to make the investment as quickly as we plan.
Our next question comes from the line of Mr. Rod Lache with Deutsche Bank. Sir, your line is now open.
Hi, Rod. Good morning, everyone. It's actually Pat.
Good morning, Pat.
Just a similar question on Power Solutions, the organic growth of 9% to 11%. I know it's not the biggest quarter this quarter, but how are you if things are tracking pretty much in line with what you're seeing at the end of the quarter, where do you think that 9% to 11% ends up for the year? And just a housekeeping, what was the actual revenue impact from lead in the quarter? I'm sorry.
Revenue impact on
lead. Revenue impact on lead was about $50,000,000 in the quarter. And as far as where the 9th level could go, I guess based upon what we have seen, could it go down to 7% to 8%, yes. But again, I would tell you that if it goes down to that level, we've got plans in place to cover. So at this point in time, whatever shortfall we might see at BE and Power, we think auto is over performing.
And so we're very comfortable with where we are for full year guidance.
And remember, as it relates to any of the lead impact of top line, it's not something that we should feel from a bottom line perspective. All right.
Thanks, guys.
Operator, we've got time for one more.
Thank you. Our last question comes from the line of Mr. Nola Kaye with Oppenheimer. Your line is now open.
Yes. Thanks for taking the question. So with the Tycho merger now another major integration to manage, just wondering how, if at all, does that change your thinking about the capital allocation strategy once all of these ducks are put in a row? Thank you.
Do you mean as it relates to after?
Yes, I mean after the spin off and the dividend received, the influx of cash, how at all does this change any of the thinking about capital allocation, say, between M and A, share repurchase?
Well, so I don't know that it changes anything except that we're going to have an awful lot going on. And so depending on where we are and if you look at the cash flows that we look at, I mean, it's going to ramp up because we'll still have some trailing costs as it relates to integration moving into next year even the separation. So I think as our cash flows improve depending on where we are with the integration, I would expect that we're going to make the right decision as it relates to whether we return that to the shareholders or make investments. I don't know that we've gotten that far. The one thing I can tell you for sure is around our dividend policy.
We're both at this point, we're very committed to making sure that at a minimum we continue the current dividend policies of both companies. But we have to just to make sure that you understand where we are in the process. This is an awful lot of the stuff that we really have to continue to work through. We haven't really had a lot of those conversations yet as a team.
But we're going to have to allocate cash flow,
that's for sure.
Yes. If I have time for one quick follow-up, just to come back to Power Solutions and specifically to AGM, 41% growth in shipments. Maybe at a high level, could you talk about your level of, let's call it medium term visibility over the next few years? You're significantly expanding capacity. How much of that visibility related design ins and customer commitments and what sort of the right mix of aftermarket versus OE to think about?
Thank you.
Well, that's a great question. It's still going to be a lot more OE than aftermarket because the OE business is going so fast. And our visibility to that is pretty high because usually it's program driven. A lot of the AGM capacity that we're talking about adding has been in China, But what we're seeing is across the board, I mean, we'll be adding capacity in Europe. A lot of that is because the aftermarket is starting to happen there because we've been at it much longer.
In North America, there's actually more than aftermarket that's already there. Surprisingly, it's not necessarily for start stop, it's just for enhanced performance. And then in China, it's really it's an OE story. So I think it's still going to be a heavy mix for OE and I think that what we see is that most of the capacity, if not almost all of it, is already subscribed that we're putting in.
Excellent. Thank you.
Thank you. May I ask some final comments? So let
me close out. I just want to comment again, and I'm not sure if you were sitting in my shoes how you couldn't feel good about the ongoing performance of the business. We continue to meet the expectations that we set, not only as an overall business, but within the segments, continue to improve our margins. And I think our investments, particularly in BE, we're starting to see the shoots of growth. And I'm pretty proud of all that, that everyone's accomplishing.
Hopefully, that you feel the same way that I do, that our strategic position is improving. I think Adient's going to be an incredible competitor within the automotive space, and we're setting it up to be successful. That's our plan. And then if you look at the remaining Johnson Controls, not only the investments we're making now, but you look at the transformational merger that we talked about, we have an opportunity to do something really special. And I think that we'll actualize that.
So hopefully, you have the same confidence I have and that we look forward to continue reporting, achieving our near term and our long term plan. So thanks a lot. Have a great day.
Thanks, everybody.
Thank you. And that concludes today's conference. Thank you all for participating. You may now disconnect.