Johnson Controls Incorporated will make statements in today's presentation that are forward looking and therefore are subject to risks and uncertainties. All statements in today's presentation, other than statements of historical 1995. Statements regarding future financial position, sales, costs, earnings, cash flows, other measures of results of operations, capital expenditures or debt levels and plans, objectives, outlook, targets, guidance or goals are forward looking statements. Johnson Controls cautions that these statements are subject to numerous important risks, uncertainties, assumptions and other factors, some of which are beyond the company's control that could cause Johnson Controls actual results to differ materially from those expressed or implied Automotive Experience business on business operations, assets or results, required regulatory approvals that are material conditions for proposed transactions to close, the strength of the economies, automotive vehicle production levels, mix and schedules, energy and commodity prices, availability of raw materials and component products, currency exchange rates and cancellation of or changes to commercial contracts as well as other factors discussed in Item 1A of Part 1 of Johnson Controls' most recent annual report on Form 10 ks for the year ended September 30, 2015, and Johnson Controls' subsequent quarterly reports on Form 10 Q.
Johnson Controls assumes no obligation and disclaims any obligation to update forward looking statements statements to reflect events or circumstances occurring after the date of this presentation.
When Warren S. Johnson invented the electric thermostat 130 years ago, he created something far bigger, a collaboration of this company, which every day imagines a world that runs more smoothly, smartly, simply and safely, one that has evolved relentlessly and consistently for longer than any human being has been alive. Opportunity for a company like ours is at the intersection of 3 forces: trends shaping the world around us, the position we hold in our markets and the will to excel, our enterprise plan. Today, cities house half the world's population and consume 3 quarters of its energy. In the next 15 years, 97% of the world's growth will come from emerging markets.
Spending will rise from $21,000,000,000,000 to $56,000,000,000,000 41 percent of it in China and India alone. This all means tremendous demand for smarter vehicles and buildings. Both sides of our business are well positioned for this future. In automotive, we lead in car seats globally and in the fastest growing market, China, as well as in auto interiors with our partner, Yang Feng. In power solutions and building efficiency, we're also a world leader, from everyday auto batteries to heating and cooling systems for the most complex buildings on Earth.
With 10 adjacent markets, we anticipate a more than $400,000,000,000 opportunity in this space. Our enterprise plan optimizes the strengths of our portfolio and world class operating system, strategically targeting new growth platforms and establishing leadership in China. The plan is already underway as we work to create 2 new companies primed for growth. We plan to move strategically from a value company to a growth company, to multi industrial strength and valuation, to a true worldview embracing China and to global brand leadership. By 2020, we project significant revenue, profitability and market cap growth.
As our founder showed us, the We are on the threshold of a new evolution.
Please welcome Alex Molinarolli, President and Chief Executive Officer.
Good morning, everyone. Thanks for being here. Beautiful day in New York City. I think the venue is fantastic. Before we get started, I'd like to and it's a little bit difficult to see, so I'm not going to be able to see everyone that I introduce.
I'd like to introduce some of the team members that we have here from Johnson Controls, some of them speakers and some of them not. And if these folks will stand up when I call out their name, it would be great. Brian Stief, our CFO Bill Jackson, who is President of our Building Efficiency Business Joe Wallachie, President of our Power Solutions Business Jeff Williams, Vice President of our Enterprise Operations and Engineering Kim Metcalfe Kuipers, Chief Marketing Officer. I think in the back, Brian Cadwalader, our Secretary General Counsel Bruce McDonald, who won't be speaking today. We all know Bruce, who is Vice Chair today and will be the CEO of our new automotive company next year Frank Voltalina, our Treasurer and Steve Milke, our Assistant Treasurer.
We also have Glenn, I hope everybody knows Glenn, Glenn Ponczak and Cathy Campbell here from Investor Relations who put this on. And then in the very, very back if you look up against the wall what you see is our distributed energy system packaging our small packaging product that we just introduced. John Shaw, who is Vice President and General Manager of that business will be here if he can answer some questions during the break. That's a product that we are selling in the marketplace today and we're pretty proud of. So with that, I'll get started.
Thank you. So I'd like to very quickly and not over pivot just talk about where we've been because this has been another year where we've been able to not only grow our top line in our businesses, but more importantly improve our margins. And this is a real point of pride for us as a company, but I think it also just speaks to the operational discipline that our businesses have and the operational programs that we put in place. And as you've witnessed over the last couple of years, we've been on this steady march of being able to improve our margins in each one of our businesses.
That's resulted
in an EPS of 14% last year along with our share buyback. So over the last 2 years, we have looked at our capital allocation. We've repurchased some of our stock. And then, of course, with our earnings growth, we've been very fortunate to be able to provide the kind of results that our shareholders expect. I think that I wouldn't be completely honest if I didn't say we're still frustrated.
We think our stock is undervalued. But if you look at our total shareholder return, you look at over a 3 year, 1 year period, you look at our EBITDA increases over the last year and over the last 3 years, based against our multi industrial peers, you can see that we've done quite well and we expect that to continue. Today, we're going to talk about how we think that's going to continue and why we think that John's control is a good investment. So let's talk about a few things. We're going to talk about each one of our businesses.
Our presidents will have the opportunity to talk about their specific businesses and what we're doing to create value inside those businesses, which ultimately is most important. The other thing that we've been in this journey over the last two years is we've been going through our portfolio and making sure that we shape this in a way that fits our enterprise plan, fits our strengths and has culminated in what will happen next year. On October 3, which I believe is a Monday, is the will be the 1st day of our automotive business. So on October 3, 2016, will be 2 great companies, an automotive company and the remaining Johnson Controls. I was asked earlier if we had a big announcement about the name of the automotive company and they've kept me out of that.
So I don't know what it is either. So at some point, we'll figure out what that is. Maybe you can corner Bruce. If you can get it out of him, let me know what it is. So there's been a lot that's changed.
We have we've done an awful lot of things and we're doing an awful lot of things differently than what we've done in the past. But most importantly, there's been a lot of things that haven't changed. 2 years ago, we brought together a framework and this framework talked about operational excellence at the core. And at the core of our operational excellence and Jeff Williams be very specific today and start talking about the Johnson Controls operating system. But we think of cost, quality, productivity and being able to speed the market, those are the kinds of activities that we've been focused on not only within the businesses as individuals, but program adequately.
We need to make sure that we find ourselves in growth markets and we'll talk about how we're positioning the remaining Johnson Controls and what we believe is markets that are growing faster than many of the other markets that we could participating in. And we'll talk about how we're going to participate in that. And then the most important thing is our leadership. Our leadership has demonstrated over the last decades the strength of leadership that we have as individuals, as individuals, but we've come together as a team over the last 2 years to focus on how we can not only deliver from a program perspective, but from a people perspective. And so this is the cornerstone of how we run and operate our business.
So I'd like to jump into a couple of things. When we talk about our business and we think about where we're going to go in the future, one of the things that was important to our organization is to provide clarity. And these are some slides that our people have seen and I think they're not going to be completely new to the folks here. Want to talk about how we want to make choices in our business about where we will invest and how we will invest and what we expect from those investments. And first, we want to play to our strengths.
Now that when we talk about playing to our strengths, you can go back to let's go back 2 years ago in the slide I showed just a couple of months ago about all the portfolio changes. A lot of the things that we did were to shed some of our low margin automotive assets, but we also divested ourselves of our GWS business. And when you think about our GWS business, it doesn't really play to what our strengths are. I will go through those strengths, but as you start to understand our business, that was not just a margin play. It was really to make that that business was in a position that it could perform the way that it needed to perform with the right owner.
And as you know, we were able to put an agreement in place with CB Richard Ellis in order to capture pull through in that business. So as we talk about playing to our strengths, what you can expect from us is that we will be manufacturing technical products. Now we will be in the service business. It's only confuse people because we want the recurring revenue, but we want to have technical products that require service, enable services and allow us to have a source of recurring revenue. You can look at our battery business and you think about the aftermarket.
You look at our buildings business and you think about the services that we can participate that the products that we have are leading edge and are able to serve the market most successfully. We're looking for relatively long and stable product cycles. We're not we want to make sure that we're in marketplaces that
to a
large extent are not completely resilient, but have a moat and have an ability to be able to be protected from a product perspective longer than some other products. So when you think about technologies, the type of technologies that we're in, air conditioning, building automation systems, batteries. They're relatively long and stable product cycles. And then we need to embed innovation capabilities because even though we want to have those stable product cycles as an example of the product that we have in the back of the room, we need to make sure that we're able to innovate to be able to adapt to the market as it changes. I think another good example of that is you think about our start stop systems with AGM, we were able to take advantage of a market trend that was happening in Europe, position ourselves as a leader and now we're able to capitalize on something that's becoming more and more ubiquitous around the world.
Manufacturing. So we want to be a manufacturing company. We are a manufacturing company. That's what we are at our core. There was another reason why as we sat around as a team over the last 2 years and I'll go back to the GWS example.
As we sat around as a team and we talked about our enterprise plan, the choices that we were going to make, what we were going to do and what we weren't going to do, it became very, very clear that GWS was not going to be able to benefit from the type of initiatives, programs and investments we're going to put in place. So whenever you have a plan, I think that you have to look at the corollary of not only what you are going to do, but what are you not going to do. And then when I think about our business and a hallmark is not something that's new, our manufacturing systems are built around a continuous improvement process. Jeff Williams will come up and talk about our Johnson Controls operating system and it truly is a foundation. A foundation of that entire program is business models.
This is something that we don't talk about a lot, but I think it's very, very important. We're a company that goes to market in many different ways. A lot of you would know us particularly in the buildings business as we go to the market primarily directly. We're trying to expand that in order to go to the market throughout more channels than we've had in the past. Applied engineering and technology, I mean, you think about our business model is not just to sell a product, but to apply technology and apply applications to those products.
That also helps us with our recurring a hallmark of Johnson Controls. One of the things that you know of us is that we have many, many partners and joint ventures around the world. And it's going to be an important part of our business going forward to make sure that we can leverage partnerships and understand that we can't make everything ourselves and we need to make sure that we have partners that can help us as we're on this journey. And then last, customer relationships. Our customer relationships are very unique in the businesses that we have.
The type of products that we have require us to be fairly intimate with our customers. It may be surprising, but when you look at our battery business, you think about our battery business, the aftermarket battery business, you could look at that as a commodity business and say, how could you have the kind of success that we have in our battery business. We have the success we have in our battery business first because we have the best product, 2nd because we have a lower cost, but 3rd and most importantly is the services we provide our customers. So when you think about our customers and as an
right batteries on the
shelf, make sure make sure that they have the right batteries on the shelf, make sure they have the testing equipment, make sure they have the programs in order to be successful. Clearly in our building automation and our HVAC equipment, customer relationships are important because we're solving problems. We're not just selling equipment, particularly when you have a channel that's a direct channel like ours. And then superior brands, we have some flagship brands within our market and then we've been adding brands. And you can expect over time that we'll continue to add brands and we'll continue to add channels, because one of the gaps that I would say as an organization that we've had is our strength.
Our strength of going direct has created a gap around brands and around channels. And you can see some of the actions that we've taken over the last couple of years. Hitachi is a good example. ADTI is a good example. Where we're expanding our access to the marketplace.
So let's talk about this, in the context of our operating system. We're going to spend Jeff Williams will spend a significant amount of time talking about our operating system. One of the things that I think is unique about our operating system, first is, it's all encompassing. It's all interconnected. It's something that we're doing together.
It's something that we're learning. And not only as we learn and improve our business systems, it's something that we're able to take and share improve our business systems, it's something that we're able to take and share business to business and make sure that it's a living, breathing operating system. It's also something that doesn't limit itself to our manufacturing systems. When we started on this journey, we talked about our Johnson Controls operating system. We were primarily focused at that time in the part of our value chain around manufacturing.
It's expanded way beyond that and it's something that you can see that we have multiple disciplines and we're creating value across the value chain including our marketing and sales efforts. You can be just as disciplined and have the same kind of processes in your operating systems and how you go to market just as you can around how you manufacture and deliver your products. So as we move and I'll talk about the remaining Johnson Controls and what I and this is a primarily a lot of this discussion will be around the remaining Johnson Controls. We'll touch on the automotive business a bit, but I'll and I'll come back to that. But as we went on this journey to become truly a multi industrial, I think where we were is we considered ourselves a multi industrial.
While we were in multiple businesses, but as you look at what metrics that we followed, who followed our stock, who were the people that invested in the company, who we considered our peers, it became very, very clear that we were going to have to divest or separate the automotive business to truly call ourselves a multi industrial and be perceived by a multi industrial not just by ourselves but by the marketplace. And so as we move forward, we're going to talk about the type of metrics and measure ourselves against the metrics that you would expect. In a little while, I'll show a slide and tells you about where I think we are in that process. I mean, I think we have in some ways, I think we're doing fairly well. In some ways, we have some great opportunity and we're improving.
And then in some places, I think we have some work to do. But that's how we plan to measure our business and that's how we plan to hold ourselves accountable just as we would with our other multi industrial peers. So let's talk about Asia Pacific and China specifically. In fact, I've already been asked today, are we still as bullish as we have been on China, Asia Pacific? I think what we have to recognize is that as every market goes through its challenges, you have to understand the underlying pendings of the market and understand where the market is and where the market is, is where the wealth is.
Where the market is for us is going to be where the middle class is. And you look at every statistic, and you look at every metric, the middle class that's going to be in China and Asia broadly is going to grow at a rate of 5 times what is in the mature market. And so we have to position ourselves in Asia and in China to be successful. And so we continue we plan to continue to be on that journey. So if you look at and part of our presentation today, we're going to talk about megatrends.
One of the things that's happening in China that is very specific to us, Just think about what's happening today, this week in Paris, that there is a real move toward more sustainable products to dealing with their carbon emissions problems and being able to move from an emerging market to a mature market and all the expectations that go with that. We're seeing building codes change. We're seeing investments being made in energy efficiency. And what we're seeing quite frankly in systems even like our start stop system, that's where our largest growth is going to be over the next 10 years. So as we look at our products and the products that we provide, we see great investment opportunities continue in China and in Asia broadly.
I think it's represented in our Hitachi joint venture. In order for us to be successful in China, we have to be local. As you know, we're building our headquarters in China and Shanghai. This time next year, we'll be just about complete. It will be calendar year 2017, we'll be moving in.
Remaining Johnson Controls for Asia Pacific. It's very, very important and we've learned this through our experiences that we can't be running Asia or China from Milwaukee or from Europe. We have to be there on the ground making decisions and making investments. If you look at this chart, you can see on this chart the kind of investments that
to
to have to make inorganic investments. I would not feel comfortable making inorganic investments in Asia if we weren't there participating in the marketplace. So as you look at as you think about our growth in the future and as we pivot to make sure that we participate in the market in China and in Asia, what you can expect is we'll have the resources there in order to do that in a way that allows us to be most successful. We already do have planned investments in Asia, a few of them. And our automotive business, we already have over $1,000,000,000 in programs that are in place that we have planned over the next few years.
These are committed investments for programs that we have that will propel the current growth within our joint ventures. I'll give just a little tidbit. One of the things that we're seeing is and a lot of it has to do I'm sure with some of the incentives is we're seeing the China market for automotive pick back up and we had a lull during the Q4, but we're starting to see things improve and we expect that to improve for quite some time. Our customers tell us these incentives are in place for at least the next 15 months. And over that 15 month period, I think we should continue to see strong sales in our automotive business in China.
We made our Hitachi investment. I don't know off the top of my head exactly how many resources we have in Hitachi. But if you think of our Hitachi joint venture, the other thing that comes with that is a relationship with a company called Hisense. Hisense is the white goods manufacturer, has a strong brand in China and that's what gives us the number 3 position in VRF in China overnight. And so as we move forward in Asia, I talked earlier about our strength of being a good partner.
We'll go alone when it makes sense and we'll go with partners when that makes sense. And whether that's around manufacturing, whether it's around channels, we will explore different ways to go to market that makes sense for in order for us to participate and be local. And then, we've talked an awful lot about this and we're getting a tremendous amount of traction in our battery business. We have over $1,000,000,000 in investments planned during this period and that is the current plan is all organic growth. It says here M and A is a possibility, but think about that as adding capacity.
If you think about M and A in that business, at least in this context that would be the kind of things that you would think about as we've done in other markets where we've consolidated the marketplace where instead of maybe building capacity, we may buy capacity. But we're on track. We're making the investments that we plan to make a few years ago. And in fact, I tell you where we are. And I think Joe Wallachie will talk about this.
We're actually bumping up against some of our capacity, which is something that we haven't done before. And the need for that product is growing at a rate and the need for that product is growing at a rate that it's very difficult for us to put the capacity in place quick enough. So what we're seeing in China, it's been a tough slug for us in order to get to this position in our battery business in China. But what I see is we now have a strong foothold. Our brand is strong.
Our relationships with the OEs are strong. And we have a technological advantage when it comes to AGM that it's going to help us not only our AGM products but with our SLI products. So we remain bullish on China and on Asia. We are completely aware of what the circumstances are. So we have to pace ourselves based off of the market is going to respond and where the market is over the next few years.
But whether this and these investments in these investments happen over the next 5 years or whether these investments happen over the next 10 years, I can tell you that we will continue to make the kinds of investments that are reasons. One, it's going to be the largest market in the world. It's already the largest market in the world in every market that we participate in. And number 2, technology is going to come from Asia to Europe to North America not vice And so we have to be in that market and we have to have those products in order to participate not only in Asia, but in order to remain in a leadership position in the markets like North America. So I'm only going to touch on this, just a little bit about automotive.
And I'll go back and recap for a lot of you I've told you this story and because I think there was a lot of questions around why did we do this was not to divest the Seating business. And that was not part of my agenda and that is true. I'll qualify that that if you were listening that was never a period behind that. It was always I don't intend to divest or sell the automotive business, but it's more important to me to become truly become a multi industrial company. What became clear was it was going to be very difficult if not impossible for us to be able to accomplish that goal, number 1.
And number 2, what we saw is and you've seen it, we've capital constrained that business. And what's happened over the last few years is you look at our top line, it's under pressure in that business and it's under pressure because of the fact that we've been selective on the programs and the kind of investments that we need to make. It's also a business that requires because of cyclicality tremendous amount of restructuring which we've done. And all these things are important, but in order for that business to continue to compete, it needs to be in a position to make the investments it needs to compete in. And so it was very clear after we went through our strategy session which is at May of every year.
As we sat down with the automotive team, we listened to their plan and we met with our Board of Directors that we needed to make the kinds of investments in all of our businesses that we weren't prepared to make. And in order to do that, it was time to think about divesting the automotive business. So that it could be continue to be the leader it is in the marketplace and that we didn't harm that business. You talk about leadership in that business. So I won't spend a lot on this.
Bruce will have an opportunity in a month or so or I guess in 2 months to be able to give you more information. We're in the process of putting together not only the financials, the audited financials working on the Form 10 and some of the inner workings around the separation. So we're going to share with you some of that today. We don't have all of it. But as it becomes more and more clear, we'll give you more and more transparency of what's going on.
But just suffice to say, if you look at our position across the world, it's not like we're starting in an automotive business that's not a leader. So it's a pretty good starting place. If you're going to start a company that's not a bad place to start from. Our current plan. Now this would be the plan that we have today.
This is the Johnson Controls' current plan for automotive and it hasn't changed. Leverage our position in Asia Pacific and China. We have unique relationships with the Japanese and Koreans and it's very clear what our position is in China and what our partnerships are in China and the leadership position that we have there. So we'll continue to invest in that. Those are long standing trusting relationships that continue to add value.
If I look back over the last couple of years and you look at some of the things that we were able to accomplish, one of the things that I think was probably one of our best accomplishments quite frankly was being able to establish our joint venture with our partner SAIC for interiors. We had a business that was not making money. We had a business that was not well positioned. It was mostly in Western high cost areas. And it wasn't clear how we were going to be able to afford a path forward in order for that business to be successful.
I mean we even talked about the fact maybe the best thing for us to do was wind that business down. We were able to set up a joint venture with one of our partners, and most profitable. And so now what you're seeing with that business, I just happened to just a couple of weeks ago happened to go to the Board one of the Board meetings is the type of programs that they're getting because they are truly a global company and are able to service customers that are centered in Europe, centered in the United States and North America and centered in China, it truly makes them unique. It also makes them unique because we're able to do a lot of our engineering in lower cost countries. A lot of our engineering is now done in China.
Our components business, primarily think about is our metals business. Strategically, I think it was a fantastic move what we did a few years ago. We stumbled a bit as it related to our integration of that business. But strategically, the business has moved from being a jet centered business, an assembly business jet centered business, an assembly
business to a components business.
And what we're seeing is our customers are starting to standardize around these components. And so you'd have multiple platforms in multiple regions standardized around certain components metals being one of them. So we're able to participate and grow with that and we're seeing the part of our backlog that's increasing is our components backlog and it has a higher margin. It's a much different business than a just in time assembly business. What we're seeing in our assembly business and it depends on where we are in the region, which region is that our customers are taking some of that engineering in house and they're sourcing things like the components.
And so over time and I'm sure Bruce will share some of this data with you when he has an opportunity in Detroit. You see here on the 13th December, Bruce and his team will be speaking about their strategy moving forward. One of the things that you'll see is our sourcing has shifted from being primarily to ourselves, meaning making components for our seats to primarily for everyone else. It's because the business model of our customers has changed. Our strategic move a few years ago has positioned us to take advantage of that.
And then margins and that's another thing that I think is as we think about our current plan, we've been focused on margin improvement. That's been margin improvement not That's been margin improvement not only around operations, but margin improvements as it relates to the selectivity of the product of the programs that we participate in. In January, you'll get an opportunity to hear from Bruce and his team and they'll talk about their plan moving forward, as a standalone company. And I think that probably end of March, I believe, is when we will have the Form 10. Will start to be socialized and you'll get an opportunity to get even more insight into the plan moving forward.
But I would like to make sure that we just brag about the automotive company. Separating this company into 2 companies had nothing to do with our automotive company not being a good business. We just aren't the right owners for that business. You look at that as a pure play, proposition, particularly as I talk about our position in China, our position in Asia and our component strength. It's very well positioned.
And I think that what you'll see moving forward is it has the opportunity to be able to make good investments and start growing the top line just as we've been growing the bottom line. And then I think that as it relates to free cash flow and we'll talk about that specifically for Remainco. A lot of restructuring we've done a lot of restructuring over the last few years. And I think it's positioned that company well for the future. So assuming that the market sticks with us, we have as much as any automotive company really been diligent to make sure that we restructure our footprint in order to be successful.
So more to come, on automotive. That will you have 2 ways to get that. 1 is you can corner Bruce in the back of the room and the other is you can wait till January 13. My guess is you'll probably get more on January 13. Let's talk about the remaining Johnson Controls.
So I'm going to start giving you some different looks. And my expectation is that over time, we're going to need to go deeper and deeper into the remaining Johnson Controls, our Power Solutions business and our Buildings business to be able to articulate our strategies, our positions visavis where we want to go, where the market is going to go and where our competitors are. And we understand where we have opportunity. We understand where we're in a leadership position that we can exploit and we understand where there are opportunities for growth. And so we'll articulate some of that.
So this business will be a little over $20,000,000,000 2 thirds of the revenue will be in building efficiency, 1 third of the revenue is in Power Solutions. This is as we come out of the business as it stands today.
But if
you look at profitability, it will be about half and half. Well, half and half of the profitability in each one of the businesses. So I also wanted to break this down a little bit more, a little more transparency as we start talking about this business. And so business and our starter business, which you can see, our lithium ion business and our starter business, which you can see is that business, the SLI aftermarket business is the primary driver of the profitability of that business. That primary driver of the profitability of that business allows us to make investments EFB is another product around start stop and in order for us to make investments in our lithium ion business and we'll talk a little bit more about that in a few minutes.
When we talk about our buildings business and you could break it down in a bunch of different ways, But we decided to show it to you this way so you can kind of understand where the revenues are coming from. Inside our HVAC business, we don't talk about our building automation and controls business much anymore. That is our roots. When you think about before the York acquisition, it did not go away. It's still a part of our business.
As you can see, it's not quite as big as our commercial HVAC business. But as when we talk about our HVAC business, very often we talk about it as a combination of our building controls and our HVAC business. You can expect that we'll talk about that more separately. And when you think about what where the future is, where the opportunity is, whether it's being able to save energy or greenhouse gases for our customers or whether it is because of the amount of instrumentation and the Internet of Things, where who is better positioned than John Controls and Commercial Buildings. And so we want to make sure as we talk about our strategies, we won't just talk about it as being an HVAC strategy.
We'll start talking more and more about our controls business. And I think we probably haven't done a lot of that particularly around technology, our market position over the last few years. But it's alive and well. It's growing and we're a market leader in that business. Our residential HVAC business as you know we have we're in a position that we need to grow.
We need to find more access to the marketplace. And it's something particularly in North America where we're challenged. Hitachi brings with it 2 products primarily. It brings many products, but primarily it brings 2 products. It brings VRF and RAC.
One of the things that you'll see in the slides that are coming up, you'll see and you saw in the press release is that the Hitachi joint venture is dilutive to our margins. So as we unpack our margins, we're continuing to grow the margins of our base business, but we did acquire a business that has a 4% margin and we need to fix that and we're going to fix that. We understand where the issues are and we'll have a program, we'll have a program and we'll manage a program in order to over time get those margins to something that makes sense. It made complete sense when you think about VRF, which is the fastest growing technology in the United States, surprisingly, maybe you didn't know that. It's coming from a very small base, but it's growing fast in North America and it is the leading commercial product in almost every other market in the world.
We move from a position, as an example, in China from really almost nonexistent to number 3. So we are now a legitimate player in this market. And so you'll see a lot of marketing efforts, you'll see a lot of technology reinvestments and that will be a theme as we talk about our business moving forward that we are a lot of the profits that we plan to generate, a lot of the margins that we plan to generate, we plan to put back into the business for certain products whether it be products to advance our battery business or products to advance our HVAC and controls businesses. So as you think about Johnson Controls, think of us as being much more focused and look at our Power Solutions business, this gives you a profile and our Building Efficiency business. So this is our starting point.
This is how I would look at this slide. This is where we're starting from. 74% of our sales comes from the aftermarket And that number, depending on how mature the market is, is higher. So it can be in the 80% to 60%. Where you'd find it to be in more like 60% or 50% are places like China where you first get OE business and then the aftermarket has to develop.
It only makes sense when you think about the car park in China is not old enough yet to have the kind of aftermarket opportunity that's needed in order to make this eightytwenty profile. So you can think about that over time as being a eightytwenty profile as it relates to units. Now AGM, lithium ion products, when you talk about units, there's more revenue for those units. And so as our business changes and grows, as our mix changes, AGM as an example, you can accept not only margin improvement to come from that, but you can see top line improvement because the batteries are more expensive. The other thing that we are embarking on is taking advantage of an energy management platform that we have in our buildings business and a battery capability in our battery business to be able to leverage the 2 in order to go to market with our new products such as the one in the back.
And building efficiency, we are the number one player as it relates to complex building systems. That is great and we need to continue there. And I think that bodes well and then we'll talk again about our building automation systems as we think about the future of buildings and how they're going to become more and more intelligent and more and more data is going to be required. So that's a position that's important. I actually would tell you that having our own channel, which sometimes we talk about in a way that we covet having multiple channels and being more balanced as it relates to how we go to market, having our own channel when it comes to building controls and being able to participate in a market moving forward that's going to require a lot more instrumentation and services, I think will be an important part of our future.
And then VRF technology through Hitachi. So this is where we're starting from and you see where our business is located and which parts of the world. So why are we in these markets? Well, these markets are growing faster than most markets. Kim Metcalf, our Chief Marketing Officer will talk about the megatrends that are happening around the world.
If you think about our battery business and you think about our buildings business, we're in the center of many of these trends, whether it's getting data for buildings, making them more intelligent, making them more efficient, making them more effective, or whether it's in the battery business where battery usage for vehicles and for non vehicle applications is growing at a much faster rate than the economy. And so what you can see here is we're in 2 markets that have a lot of headroom for growth. And so we think it's important for us to make sure that the business that we're in, not only do we have a future because we have a good business, but the markets are growing. So why would you want to invest in us? I think we have real top line opportunities.
I think they're both organic and inorganic and I'll talk about that in a few minutes around our inorganic opportunities. I think we have our leadership position in most of our markets. We have an operating system that is proven that it's going to make these businesses stronger and stronger. And one of the things one of our weaknesses becomes an opportunity. One of the opportunities we have you think about our buildings business is that we are not at the same margin level as our peers and there's no reason why we can't be.
And so we have a lot of headway as it relates to continued margin improvement in that business. And then we're committed as a multi industrial to make the right kinds of choices around our capital allocation. So let me go over this quickly. As we talk about our strategy, this framework you probably will see again.
We have at our core, we have our battery business and
our buildings business. Think of these circles as being the closest circle being near adjacencies. So if you saw this sold out, you'd see what are the likely adjacent opportunities that we move to or maybe gaps that we have in our portfolio. And then as we move out further in these concentric circles, it gets further and further away from our current core. So as we start to think about a framework about how we would make investments, and now I'm talking organic but mostly inorganic, these are the types this is the framework that we're using.
I'll as an example, and we will show this later is our product that we have in the back that we built ourselves and that we've marketed and that we have a strong pipeline. Where we're seeing an opportunity is not only on the outside of the meter, but on the inside of the meter where we have a strong presence with our current commercial customers. So we can leverage the sales force that we have in our building efficiency business to sell the product that you see there in the back. This is the framework I wanted to share with you. So take that concentric circle, now let's I just changed the view here.
A lot of questions and a lot of suggestions on what Johnson Controls should invest in inorganically and what we shouldn't invest in. These horizons, think of them as near adjacencies, gaps, opportunities that are in front of us, things that are priorities. And so you can look at it. These near adjacencies look like our strategy, expand our channels, some things we've already done, controls and smart devices, investing in our controls business, core HVAC products, so more products that allow us to go to market, China AGM capacity lithium ion. Horizon 2 driven by once again buildings become smarter and smarter, connectivity, integration.
In our battery business, motive adjacencies. So taking our knowledge and capability footprint outside of just the automotive business where it makes sense in order to leverage the capability and capacity that we already have, growth in other emerging markets and as you see in the back, our distributed energy storage system. Past that, there are technologies that make sense for us to invest in. And this probably is the number one question I get. I bet you every one of you have asked me this 1 on 1 or in a group.
What is our criteria if we want to make some investments moving forward inorganically. So we need to make sure that we're investing in markets that are growing and that have growth prospects. We think we're in those markets today broadly. And so that leads us to near adjacencies. So think about the kind of investments we make around the businesses that we have and how we're explaining our business and near adjacency are gaps.
Those will be kind of investments that we make. When we look at these deals, we want to make sure that we're able to drive the economics off cost synergies, not because we don't want the growth, but we want to make sure the cost synergies are there and they need to be accretive from an EPS perspective by year 3. Return our weighted average cost of capital by year 2,
It
has to be something that we can apply our Johnson Controls operating system to. We have an operating system in order to drive synergies, in order to make that business to make sense, it needs to work within the framework of our operating system. And it has to have come with it the opportunity to make more investments and for it to grow. It needs to be complementary and it needs to be consistent with the vision that I articulated. So as we start looking at our opportunities for investments inorganically.
The framework that I just described is the one that guides us. And hopefully, that brings some clarity to this question that's been lingering around how would we make investments, what would be the criteria we would use in order to make those choices. So a couple of things we're not going to run away from. So we are benchmarking ourselves against the multi industrials. I mean it's important to us because we know a year from now we are a legitimate multi industrial company and there are some things that we do well.
We have a good strong position in the markets that we participate in. We have a good growth profile. And if you look at our businesses, our margins are low compared to our peers and our free cash flow is low compared to our peers. So we understand what we need to do in order to become a benchmark company as a multi industrial and that's what you can expect from us as we move forward in our plans over the next few years. And these are the companies and the type of companies that we will compare ourselves to.
So what do I think about Johnson Controls? First, we're going to continue to execute on the strategy and meet the financial commitments that we've made. I think that it would be hard you'd be hard pressed to not say that we haven't had a plan that we articulated a little over 2 years ago and that we haven't marched against that plan. And I think we've been effective within our businesses. I think we've been effective with our portfolio.
I think it really comes down to you believe in our strategy or not. Because I think I hope that we're proven that we can execute. This transformation will be I don't know what complete means, but will be complete as it relates to our starting point as a multi industrial a year from now, on October 3, 2016, we're going to have a strong balance sheet in order to make acquisitions when they make sense, but we're going to continue to make the capital allocation choices that makes most sense for our shareholders. Operationally, our Johnson Controls operating system is world class And you're going to see some we're going to deep dive into that and see some of the metrics and some of the things that we're doing. This is not rhetoric.
This is not a cliche. We have a very strong operating system that's bringing real benefits to the bottom line. Growth, we need to grow. We're going to invest in markets and products and channels, brands that allow us to grow. So you will see us reinvesting some of the margin improvements that we'll be getting in our businesses in order to grow.
You could argue that in some of our businesses, we are not in a growth position because we have not made those investments in the past. I think we understand what is going to be required to be a true multi industrial and our plan is not to be in the middle of the pack. Our plan is for us to be a benchmark multi industrial company. So with that, I'm going to turn this over to Kim Metcalf Cupris. And what I would tell you as you listen to his strategy is that we have worked hard as we think about where the market is going to make sure that we position ourselves not only for today, but where we think the market is going to go.
Thank you very much.
Please welcome Kim Metcalfe Cupris, Vice President and Chief Marketing Officer.
Good morning, everyone. As Alex talked about, we've done a lot of work over the last few years to transform and position the company for long term profitable growth. And as we are getting more and more clear about our strengths and the portfolio decisions that we've made and the businesses that Johnson Controls should be in. We've also been complementing that perspective with a lot more focus on outside in thinking and some different perspective on the time horizons across which we manage. So today, when you talk to us about our enterprise strategy first, that's a different conversation than we would have had a few years ago, where we were primarily focused on our business unit strategies and then how those accumulated into the enterprise.
Today, it's about Johnson Controls first and how that translates into the portfolio of businesses we're going to be in and how those businesses are going to be positioned to win and perform in the short term, but also lead in the long term. One of the key things that we've done here is to balance long term vision and outside in thinking with our own current positions and operational strengths. So today what we're doing is very importantly taking a 10 year plus view to understand what's happening with megatrends and how those represent opportunities and potential challenges for our businesses so that we're dealing with them in advance of those developments, working backward from that perspective to develop 5 year strategic plans and working across strategy horizons and then translating those into 3 year business plans and 1 year budgets. So I'm sort of the bridge in the presentation as we talk as Alex talks about the vision for the company as a whole, how we're focused on our strengths. And then later in the morning, Joe and Bill will be talking about how they're bringing that strategy to life in each of their respective businesses.
All right. There we go, technical issues. So this is the way that we're looking at megatrends. And what we wanted to do really is here just provide a little bit of context from an external perspective. And this is the world, the way that we see it and these are the considerations that are industry engagement.
So these are things that are the most relevant to Johnson Controls. These aren't unique to us. The framework is probably unique to us, but we're certainly leveraging a lot of really smart people around the world who operate in these spaces every day. And what we really wanted to do was to provide a framework that gives us context that makes these things relevant and actionable. So we have a very simple model that combines 4 anchor trends around energy demographics, urbanization and technology with some secondary elements related to the government policies, natural resources, social implications and climate change because those are a little bit more dynamic and they're a little bit more fragmented in the way that they come to life.
So when we talk about megatrends, it's these four things on the right. And then when we get into individual businesses or individual regions or different phases in time, we see a lot more dynamic interaction between the anchor trends and the secondary enablers on the right. So it's also, I guess, a caveat that as we talk about generalizations in terms of trends, there will be variances based on some of the unique variables that are happening on the right side of that slide. But let's talk about each of the anchor trends in a little bit more depth. Alex talked a bit about demographics.
We clearly see there are major demographic shifts happening around the world. Population growth is continuing. It is continuing primarily in markets that are developing. It's not happening in North America and Europe. It's happening mostly in Asia, Middle East and Africa.
97% of the population growth that is going to happen over the next 15 years will happen in these emerging markets. And the most important thing for us at Johnson Controls is that as the population is growing, we're also seeing growth in the middle class. We're a middle class company. And in terms of the things we make around buildings and energy storage and transportation are tied to middle class demographic trends. Now it's also important to recognize that the dynamics of that middle class are not what we're used to when we talk about a North American middle class.
Here we're talking about people moving out of poverty and making $10 a day. But that's a fundamental shift in the economic and the living conditions and the expectations around quality of life and discretionary spending that these populations have. So what we see in China, what we see in India, what we see in parts of the Middle East and Africa is this growing quality of life as people have discretionary income and they start to spend those funds in different ways. No longer is it on subsistence living, but now suddenly they have discretionary income to put into different modes of transportation, different modes of shelter. You see moves to cities because that's where the jobs are and you see a different expectation on the part of those consumers.
So the net result is that tremendous amount of spending is going to happen over the next 15 to 20 years as these population centers grow. Expectations of those consumers are also going to be different. So we have to take that into account as we think about our product offerings and services and the business models that we have to be able to execute to serve these consumers. So for example, when we talk about transportation in Asia, that's not coming in the form of automobiles the way that we would expect it in North America. I mean, although the automotive population is growing, much more of that transportation is happening in public transportation that creates different kinds of opportunities for us, but also in 2 wheel transportation like e bikes and motorcycles that also need energy storage, that also need seats, but there are different kinds of products than what we might see in our mature portfolios.
The other thing as a business and all businesses that are operating in a global context that we have to contend with is that on the people side of things, we're going to see big shifts in labor dynamics with shortages of skilled workers in these developing economies and surpluses of workers in mature economies, which are going to represent a lot of challenges, a lot of transformation issues as we work through operating system implementations, as we talk about leveraging technology and we talk about leveraging a global workforce and global leadership across geographies. So companies that have that in mind and are able to work with human resources in a smart way are going to have strategic advantage as well. So the urbanization trend is tightly tied with this demographic trend because the move to cities is driven by the aspiration of people to move out of poverty and to follow the jobs. So as we see on this chart, the majority of population growth is going to happen in these emerging markets and it's going to happen in cities. Urbanization is occurring at a rate of over 100,000 people a day right now.
So this isn't something that's going to happen maybe someday. It's happening right now. And that's what's driving a lot of the growth that we see in infrastructure and urban planning around the world. It's a different kind of dynamic, than what we see in the United States. What you're seeing now is urban centers that are coming to bear with very robust are coming to bear with very robust urban planning requirements that are challenging the infrastructure capabilities to maintain pace with the population.
So with the Paris meeting that's going on this week, this is a huge part of the conversation that's occurring. Not only are these the population centers of the world, they're also the major resource consuming centers. That creates an opportunity and a challenge for companies like Johnson Controls, but also for government agencies, for the communities at large, because these are the places that are using most of the natural resources of the world. These are the places that are using most of the energy of the world. And this is the place where if we don't do this right, the quality of life for all these people that are moving isn't going to be what they expected.
And so now you start to see social unrest, you start to see challenges around social justice and equality and you also see the basic dynamic around sustainability related to clean air, clean water and reliable sources of energy. It's a huge issue and it's not going to be solved by traditional forms of individual efforts. And that's why we start to see more and more sense of urgency around the world as countries are working together, as cities are working together and as there's more and more public private partnership around these issues. With the technology that we have today, we can solve a lot of these issues. It's the business models that are the problem.
So what we start to see is a lot of different focus on different infrastructure approaches that are going to change the way that these the way that cities get built and the way that these projects happen. So you can see here, building investments through 2,030 are going to approach $57,000,000,000,000 around the world, but it's not going to happen the way that we've historically seen it. You're going to see a lot more emphasis on district seating district systems that are coordinated planned infrastructure investments, which drives a lot more need for technology, a lot more need for connectivity. And so as Bill talks about smart cities and the integration and the intelligence that's required as well as the scale of the equipment that's required, it creates new opportunities for us as we think about how we address those things. We also start to see much more connection across the infrastructure systems, which is why as Alex shows you that framework with the 2 circles and the bridge in between them, the connection to the grid and the exchange of energy and intelligence across different they're very they're very legitimate connections because they all have to work together in a coordinated ecosystem.
And energy, which is a hallmark for us, is right at the center of all of these dynamics. What we've done here is just list trivia points for you to give you a sense of the regulatory drivers and the anecdotal efforts that are happening around energy efficiency, around fuel economy, around CO2 reductions, you can pick this issue up in many different ways. But the point that we're trying to make is that energy is a highly regulated environment. Energy is at the core of enabling urbanization and the quality of life that the rising consumer class is expecting. And the growth in energy demand is outpacing anything that we've known in history Because of the needs of technology, because of the needs of urban centers, the demand for energy is enormous.
And the concern about how that energy resource on the supply side, develops is also enormous. So that's why we see a lot of regulatory involvement and we see different regulations coming into play as we cross different regulatory environments. But we're also seeing some consistent trends. Lots of focus on energy efficiency, lots of focus on coordinated infrastructure, lots of focus and increased collaboration around expectations for sustainable infrastructure and this increasing issue around the need for reassurance in grid stability and resilience. So when you think about it, we've got mature grid infrastructures in North America and Europe that are trying to adapt to a changing economy and changing, fuel resources.
And then we have these emerging markets that don't have that kind of grid infrastructure and they're trying to adapt and build quickly. And they're also trying to avoid the investments in grid transmission infrastructure that they've seen North America and Europe have to invest in. So what we're seeing is a lot more focus on renewables. What we're seeing is a lot more dynamics in terms of different business models related to brokering and exchanges of power across grids. And all of those are driving a need for intelligence, for communications, for energy storage and for backup power.
And I think I just talked about this slide. But the punch line here is that just and we've only picked up one example here because this energy storage obviously goes, the energy story goes in many different directions. But when we just follow the logic train and talk about the impact and implications of the shift to renewable technology, you can see that it translates into a market that will be over $1,000,000,000,000 by 2,030. That because of the intermittency and the distributed nature of these renewables translates into needs for energy storage in a
distributed fashion that we estimate and others
estimate is going to be a distributed fashion that we estimate and others estimate is going to be a substantial market over $19,000,000,000 by 2023. And that's why you see us experimenting in this space. That's why you see many others experimenting in this space because everybody recognizes that this is a problem that we've got to solve. And the faster we can solve it, the more opportunity there is, but also the better the outcome is going to be. So similarly, we have developments happening in other aspects of technology as well.
So across our businesses, we've got 2 different dimensions of technology and I'll talk about them in 2 different slides. First one here is talking about the Internet of Things. And so we're talking about advanced technologies related to connectivity, communication and intelligent devices. As you'll hear both Bill and Joe talk about this, I think, a little bit, especially as Bill is talking about smart buildings and smart campuses. Here we're talking about embedded intelligence that not only gives us better connection across within a building, but across buildings and between buildings and the infrastructure that will potentially support them in a district setting.
It will also enable more data visualization, more data optimization and more data analytics that will ultimately transition into different kinds of analytical services that become really robust and game changers as we talk we'll talk a little bit on the next slide. In addition to that, as Jeff is talking about end to end business processes and the Johnson Controls operating system, a lot of that is increasingly enabled by embedded intelligence in our operations. So whether it's connectivity across the supply chain and through our IT systems whether it's through automation and increased intelligence in the manufacturing operations and the supply chain, across our business partners and logistics partners, all of that technology translates into key enablers for us to be able to move forward. And it's that's not unique to us, but it is, it is relevant to us. And so just smart building applications alone $90,000,000,000 by 2020.
And as we talk about advanced manufacturing and then advanced materials that ultimately transition into the way we actually make our products. Those are all areas that we're working on in a development fashion today. And then as I mentioned a minute ago, when we talk about digitalization, the business models that we talk about today related to smart buildings and embedded intelligence, getting more information from our equipment and our devices and also being able to translate that into energy efficient solutions and performance contracting and building optimization solutions, that's just continuing to increase. So we see more and more technology convergence across the building information systems, across the technology systems that allows us to harvest data and not only predict and optimize the operation of that, but also then to translate that data into the way our customers are using their facilities. And so whether it's through traffic flow or asset management or predictive planning, all of those things are continuing to evolve and develop.
And so as Alex talks about our focus on building automation and controls, there's enormous opportunity as the Internet of Things continues to proliferate for us to become more and more relevant outside of the walls and inside the operation of our customers' environments. It's also translating into new business models, new ways of interacting with our customers. We're investing in customer portals that allow us to support our channels more quickly, our independent channels more quickly. They can do transactions on their own. They can get support resources very quickly.
Translating into direct channel to channel connection, but also business to consumer connections as we have consumers looking for how to buy a battery, where does it fit, how do we help them in their selection process and then drive traffic into our customers and into our channels, as well as looking for diagnostic help as they're looking for solutions. So that's all going to continue to evolve. And when you think about how you buy something in China, where we don't have big some of the historical channel development that has taken place some of the historical channel development that has taken place in mature markets and for business to business companies to take a very direct presence and change the business model, change the consumer consideration process. And so it's going to be important for us to continue to be very present in those places as we're participating in those marketplaces. In addition, the potential risk, but also an opportunity for us as we are a controls company is that all of this technology creates new points of vulnerability.
So cybersecurity is a huge issue. I think everybody hears about Cyber Monday yesterday, Target site crashed. Fortunately, I don't think there were any intrusion events that the retailers experienced. But the more dependent we are on these systems, the more vulnerable they are to attack, the more attractive they are as points of vulnerability for those who have malice or wish to do harm. And so the more important it is that we have robust security measures in our control systems and that we have value propositions to our customers that help them stay secure and the business model and infrastructure that's there to be able to support them.
So just a quick summary slide because I've hit on most of these points as we've gone through the trends. But the implications for Johnson Controls really are what's most important in all of this information. And across the board, what we see a consistent theme is that the megatrends are generally favorable to us. They're increasing demand across all of our businesses. Now I've emphasized power solutions and building efficiency in this conversation, but it's true for automotive as well.
We see a shifting auto industry and we see changing modes of modes of transportation in emerging markets and different kinds of technology. But all that means is that we have new opportunities and that we have technology and operational capabilities that needs to evolve and adapt. All of our businesses see the emerging markets as their primary area of focus. Hence, our investments, particularly in China, but across Asia Pacific and a realization and an appreciation that those will be the markets that drive profitable growth in the future and that for us to continue to be a global leader in our businesses, we have to participate there and we have to participate in a way that's going to allow us to win. We're going to see evolving infrastructure, evolving technology and we're going to see increasing connectivity across all of these spectrums as the world continues to evolve.
And we're going to see evolving business models that are enabled by technology, but that are also impacted and influenced by different regional parameters, regional differences in a much more global economy. So tie this back to what Alex was talking about. As we focus on the future of Johnson Controls, we have, centered around a buildings platform and an energy platform that collectively when combined with the adjacent spaces that they afford offer over $400,000,000,000 of opportunity for strategic growth just across these two platforms. We feel like that's enough for us to go after over these next few years. We think that there is a tremendous amount of resilience and optimism and ambition for us in these spaces.
Nobody is as strongly positioned in both of these platforms as Johnson Controls. And when we bring the capabilities of the company together, it gives us permission to now start to consider adjacencies in ways that we may not have thought about in the past. And then when we translate that into strategy to action horizons, whether it's through organic investments or inorganic opportunities and disruptions through innovation, we're working across these multiple horizons in a parallel fashion and as well as in a sequential fashion. So within the businesses, we're focused and executing on horizon 1 as we continue to invest and develop offerings and partner with others and explore horizons 23. All of those focused on creating value for our customers and optimizing shareholder returns.
And so as we think about the presentations that will follow, just want to set a little bit of context here. What we'll talk as we translate our megatrends from discussions about technology that are focused on smart connectivity and Internet of Things, advanced materials, manufacturing and digitalization. Those are going to translate into the initiatives and investments and business growth that Bill and Joe and Jeff are going to talk about here in the continuing presentations around increased speeds in our product development cycles, the investments that we're making in smart buildings and the capabilities around extending those into campus and city infrastructure, how that translates into advanced battery technologies and experimentation with things like distributed energy storage that offer opportunities for disruption and incremental growth. And they also translate into the strategic capabilities because we aren't going to magically wake up one day and suddenly reap the benefits of these efforts. We've got to invest now both for short term return, but also to win in the long term.
And that's the importance of the Johnson Controls operating system as a key enabler to support our operating excellence today, but also be a strategic advantage that will drive speed for us in the future as well as agility and nimbleness in order to be able to adapt, to integrate with partners very quickly and to be able to provide a position of strength as we win in the markets we choose to participate in. Global presence in brands, so having that presence in the places where the markets will be with brands that are appreciated and relevant to those emerging consumers, incredibly important as we earn their hearts and minds today for their future buying power tomorrow. And then these last areas around innovation and corporate development are key enablers that we're making selective but smart investments with some central resources. So Alex mentioned John Schaff. He's a member of our innovation team and leads our incubator.
We have a small central effort around innovation as well as some small central efforts around corporate development that are closely aligned and partnering with our business unit colleagues to accelerate the things they want to go after and need to achieve today, while we also experiment and apply lean startup principles or quick partnering opportunities to explore some of the adjacencies or disruption opportunities so that we don't have blind spots as we go forward. So just in closing, few summary themes here. We're working across multiple time horizons. Of course, the most important horizon you, I know and appreciate is that we've got to do what we said we'll do. Operating the businesses and executing on our commitments is informed by our ability to do that in the context where we know where we're going and we know where the puck is going to be and how we're going to win in the future as well as how we will finish and win next quarter.
Global macro trends are generally very favorable to Johnson Controls.
We have a bright future.
The world needs the things that we're Controls. We have a bright future. The world needs the things that we can provide and nobody can provide those things as well as we can. Our business plans are addressing our most attractive near term opportunities and we're exploring the adjacencies and the long term opportunities that will drive profitable growth beyond them. Both organic and or inorganically, we have a profitable future and a growth vision for the company as we go ahead.
And we're smartly investing in technology and capabilities that will enable us to pursue growth in a very aggressive way. Thank you.
Please welcome Jeff Williams, Vice President, Enterprise Operations and Engineering.
So good morning. To start today, Alex gave an introduction of the Johnson Controls operating system. And I have the opportunity to go much deeper and really share with you tangible results that we are enjoying today and obviously the bright opportunity that lies ahead for us. I'm going to dimension a couple of things. I'm going to dimension the vision, define what the operating system is and then really talk about the priorities, the accomplishments we've had, the value to the company, right?
And then what lies ahead and what is in process or in pursuit for our business. Our vision is very clear, to be the most operationally capable company in the world. It is a standard enterprise approach. It does encompass all areas of the business. So everything is in play and it's about best practices, it's about repeatable processes that certainly increase our speed and our agility as we pursue the markets.
What is the Johnson Controls operating system? As we talked about in the early slides is that it is an integrated framework. This is everything across the business that is in play. It is very much performance based and there are performance metrics that are clearly defined in each of the pillars. There's a commitment from the leadership team starting with Alex and cascading through the entire organization.
Well, I'll frame the slide just so when you look at the operating system, we dimension
Every one of these pillars and every one of the dimensions
of the operating system, Every one of these pillars and every one of the dimensions the operating system is in flight, is in progress today. I would tell you that there are a couple of these that you can see by the length of the bar relative to the maturity that started 2 years ago and others started, if you will, 6 to 8 months ago. So I think what you're going to see in the slides that I will show you subsequently is that the strength of all of these, where they are and what the opportunity is for the business. I dimension this 1 through 5 or 0 through 5, which is a function of maturity. We believe just to maybe ground you on the scale is if when we're at a level 3, we are already outpacing our competition.
When we get to a level 5, we are clearly, all right, world class and leading, all right, in those dimensions. This is about creating enterprise value. And as Kim and Alex in their presentations talked about it, it's beyond economic value. It's certainly how do we get to markets faster than our competition? How do we improve quality productivity?
How do we have a one Johnson Controls way? And when we think about the 130,000 employees in our business, when we have a one way, a common way, an enterprise way, we certainly have the ability for the leadership to really transfer from business to business because we have common practices, common approaches and best practices that are widely shared and understood. It does result and will result in increased margins and certainly increased share in the markets we serve. We believe and we've dimensioned this to be $2,000,000,000 enterprise opportunity by 2020, maybe some grounding. This is based upon a fiscal 2015 or 2015 cost base and this is then the cumulative gross benefit over this 5 year horizon.
And I think the comment that Brian Stief will talk about later in his in the presentation is that this is growth. There are a set of, if you will, capital investments and launch expenses that certainly are required to achieve this gross enterprise savings. The other comment on this slide would be, you can see where we believe when we've modeled this, where these opportunities will come from. And what I will do in the next section and handful of slides is really dimension and give you tangible, if you will, evidence of what's happening in the business, how we're achieving these savings and what to then expect. I start with engineering.
And engineering is far more than really the efficiency and the economic value of the product development activity from a human capital standpoint. This is about attacking our product cost, around standardizing your designs, about enabling greater quality and first time yield. When we look at it and we dimension it, we're looking at 3 dimensions: efficiency, speed to market and certainly a value proposition. When you think about our 3 businesses, automotive, power solutions, building efficiency, they all had a product development process. And now today, we have 1 enterprise product development process for the whole of Johnson Controls.
It's about knowledge management. How do we go design next generation products? How do we have a repository of information that aids and enables, all right, and leverages best practices very readily for that engineer, that designer, right, to do their work and do it in the most efficient manner? We are investing in 3 d printing. And so we're seeing that right now it's very low volume, but we're seeing that enable our prototyping phase and cutting that development cycle and time to market in a pretty significant way.
We're doing more virtual modeling, less physical testing, which has a tremendous economic value in that development cost as well. We then further that I'll talk about is that we have a number of development centers around the world. There are clearly some economic benefits, right, by leveraging technical centers in, if you will, Southeast Asia, India notably. When we look at the accomplishments that we've enjoyed to date and what lies ahead is that we have a strengthened product portfolio. The business presidents later in this presentation will talk about what they're doing in that space and bringing new products to market, filling those gaps and certainly outpacing our competition.
I talked about expanding our presence in India, increasing the whole of our capability, whether it be the design, the engineering, the physical testing, right, the prototyping in that region, right, at significant economic value to the organization. As I mentioned, 3 d printing and how that can be disruptive to even our manufacturing activities long term. And then we're making strategic investments, example in product lifecycle management. And so how do we truly manage that end to end in the whole of our business and do that in the most efficient way. Next pillar I'll talk about is procurement.
We break this down into really 3 primary areas: our direct material or bill of materials, your indirect spend and obviously infrastructure. We have the I'd say the beauty of having 3, if you will, disparate business, but globally and global and leading businesses that we can leverage and capture best business practices from, which we have. We're looking at enabling the procurement team from design standardization. So again, the interconnectivity of engineering and procurement as we go to market with certainly standard and world class designs. We know that we're partnering with where we're not vertically integrated and where it doesn't make sense, we have those strategic relationships and we're continuing to build those around the world.
From an indirect standpoint, you think about the 1,000,000,000 of dollars we spend in that indirect space. The first time in the history of the company, we have aggregated, right, that spend and gone to market, right, for significant economic value and you're seeing that in our financial figures today. We're then further streamlining and defining and rationalizing what we'll call catalog management that says how do we have a narrower portfolio and achieve that scale, right, in our businesses led from our procurement activities. When you look at our accomplishments, they're significant. Best business practices have been shared across all three businesses.
And I think if I step back and say, we did a tremendous amount of benchmarking when we set up this Johnson Controls operating system. And I will say that every business from power solutions to building efficiency to automotive had their own, if you will, best business practices that we have now aggregated into the whole of the company and thus calling it JCOS or Johnson Controls Operating System. It was further informed by some external benchmarking, right, that has certainly helped us advance our activity. The second bullet point on the page in terms of accomplishments. We spend nearly $1,000,000,000 in capital on an annual basis.
We put a center of excellence in place in China to leverage those economics and the increased development and the capability in that market where we're seeing between 20% 40%, if you will, improvement and quality that is significant and matching if not outpacing the other mature markets. As I mentioned, transforming our indirect spend, augmenting capabilities with external hires. We could say that for virtually all of our dimensions is that we have certainly acquired a number of capable resources that come from other industries that bring talent and bring capability to this business to help us advance and accelerate what we're doing. What you can expect is further leverage of our low cost country procurement activities, reducing supply chains and certainly increasing our free cash flow through standardizing our supplier terms, which has been an ongoing opportunity for the business. Manufacturing, you can see in terms of its maturity, this is something that started 2 years ago.
And what we have been able to do in 2015 when we look at the Johnson Controls manufacturing system, it's when we look at the Johnson Controls manufacturing system, it is very detailed in terms of the criteria that you must achieve, the metrics that must be met that gets you to a particular maturity level. Our goal is to achieve maturity level 3 by the end of 2017. It's a 2 year journey. We're already seeing tremendous benefits as we look to that glide path and we look to that activity that our plants are delivering today. We are strengthening the capabilities of our leadership, strengthening the capabilities within the four walls of our manufacturing and certainly accelerating and unlocking value at a much faster pace than our traditional continuous improvement activities have afforded.
When we look at our accomplishments, we do have now a one Johnson Controls way of manufacturing. And I would say there's an underpinning of many of these Johnson Controls operating system pillars, which we call an academy. From a learning and development, we have academies that have been stood up with tremendous, if you will, curriculum and professionals that understand how to train and deliver, if you will, training to an organization of 130,000 men and women. We have that in manufacturing, have that in engineering, building that in supply chain and a number of other Johnson Controls pillars. We are standardizing our metrics.
And so when you look to our business, right, it is common and there is not a unique way for a particular business. It's the one Johnson Controls way. We're looking at the new acquisition, the new of Hitachi and you could say the air side business that Bill will talk about later in the day is that this gives us a playbook to now take to these newly acquired businesses and rapidly accelerate and improve, all right, these businesses. And then furthermore, standardizing our performance management tools, aligning the expectations of the company, all right, and cascade that through the management ranks of the business. Supply chain.
When you look at the collage that we put here in terms of recognized value of supply chain excellence, it's clear. Lower inventory, better time to market, all right, lower cash to cash cycle times, these are all planned benefits and tangible benefits of companies that certainly invest in supply chain excellence. We break it down into 3 pillars around efficiency, our working capital and that of sustainability. We're already seeing shorter lead times as we look to compress, right, that whole supply chain activity. There is a level of technology that is required to be invested to enable IT solutions and reduce that supply chain pipeline.
Again, improvements of free cash flow from a standpoint of standardizing our payment terms and really looking at vendor managed inventory. So a number of activities planned in this space. When I step back and look at the $1,800,000,000 of freight that we manage as a company, we're already seeing significant benefits by aggregating that spend across all three businesses, combining that, going to market and seeing how the market responds to a significant opportunity for the whole of the company. When we look at asset management, we have a number of we'll call returnable containers and packaging that we transfer in and out of the supply base every day. And we have some unique RFID tagging that ensures that investment is maintained by the company and not lost in that larger supply chain network.
We recently put together 6 months ago a central team led by an individual who we acquired from a strong logistics transportation company that we're building those capabilities that and certainly strengthening the capability of the whole of the company. We recognize that we may not have all of the solutions. We are not inside the four walls of our company. Thus, we are looking at strategic partnerships with those renowned and notable logistics, supply chain and IT leading companies and more to follow. I think the last comment here on this page would be the opportunity to consolidate our spend in freight, specifically in North America, unlocking significant value that we're seeing here in the near future.
Another pillar we call sales and marketing. We dimension this by some of Kim's comments that would say product management, innovation and commercial excellence. And I think you can see that interconnectivity between those three activities. This is around being very product focused. All three of our businesses today are in a product based organizational structure.
Innovation, there's a central led innovation team evidenced by the product that we certainly encourage you to visit here at the break and later in the day as to what we're able to bring to market that is innovative, that is developing and creating new growth platforms for the company. And lastly, commercial excellence. There are tremendous opportunities to standardize those commercial excellence account management skills and we're doing that in this particular pillar of the operating system. When I look as to what we've accomplished to date and what we're doing and what you could expect in terms of improvements going forward. As I mentioned, all businesses are product centric and the organizational models are very much aligned with those product activities that are certainly customer focused as well.
We have aligned with technology. We've aligned with the megatrends that Kim talks about. We certainly have protected an innovation budget for the whole of the company to ensure that that engine and that activity continues unencumbered during our business activity. And lastly, commercial excellence. There is certainly an opportunity to standardize how we approach our customers, how we maintain the relationship, how do we certainly address change management and certainly grow our business here looking forward.
Lastly, the pillar is functional excellence. You can see vertically on the page what functions that we capture in this particular pillar of the operating system. This is really about not making some choices and some trade offs between a central organization and that that may be distributed inside a business unit. And so we talk about this as operating model choices. What do we want to centralize and what do we want to decentralize?
And I think that this is about transformational change. It's about creating centers of excellence. It's about standardizing tools and processes such that we can gain those efficiencies and those economies that are identified in the space. What we have done and examples of centers of excellence would be our finance activity that we have located in low cost countries that are really the back office to a lot of our transactions and processing for the company. Our talent acquisition, when the businesses have human capital needs, how is that centralized as a set of best practices and if you will, universities and or other industries that we can certainly go recruit, right, faster than you could potentially as an individual business.
It does represent a reduction in overhead cost for the organization. What is in process for us is certainly refining our end to end business processes. And we also realize that post the automotive separation, which is next October of 2016, we need to take a look at our cost structure and is it competitive relative to the remaining Johnson Controls. So our success, I think evidenced by the prior slides, we're certainly pleased and proud of that. We're certainly seeing, all right, the attributes that are listed in terms of reduced time to market, improved quality, safety, productivity, increasing margins.
And I think the other comment would be faster integration. When we think about Hitachi that recently closed here in the fall, it would be how do we take this playbook and how do we go integrate, all right, Hitachi into our business in a much expedient manner and unlock those value drivers and those propositions that have been identified. I think lastly is that certainly very pleased with where we are, but certainly we are accelerating rapidly to unlock even further an incremental value that is identified in the $2,000,000,000 We believe and certainly our goal is to have it embedded in our culture, our business, our systems, our dialogue each and every day always talking about the Johnson Controls way, the Johnson Controls operating system and certainly sharing that with our customers and our shareholders in terms of what that means and how that unlocks the value that we're describing. So I thank you for your attention. What we're going to do is now take a short break.
So enjoy some time and then what we'll do is certainly call you back here in the next 15 minutes or so. Thank you.
Ladies and gentlemen, at this time, we are going to take a 20 minute break. And during that time, please remember to visit the distributed energy system demonstration located at the back of the ballroom. Thank you. A few minutes. Thank you.
Ladies and gentlemen, please take your seats. We're going to be starting in just about a minute. Thank you.
Please welcome Bill Jackson, President, Building Efficiency.
Hello, everyone. Hope I got a coffee refill. So what I'm going to do today is give you an overview of Building Efficiency and what transformation we're going through and how ties to the operating system, the megatrends and the investments we're making in the future to grow. So let me just start with giving you a basis of what building efficiency is. It's a $13,500,000,000 business.
That's with the Hitachi consolidated last year. We ended the year at 10.5. We have a global footprint in manufacturing. This is a very distributed business. We have lots of customers, completely different than the auto space where you have 14 or so customers.
We have millions of customers in this business. It's a very local driven business. That's why we have over 6 50 branches and over 1,000 partners that we go to market with. Very distributed, very local product driven business. So Kim talked about the megatrends.
They really are affecting the building efficiency business. Urbanization was referred to. Let be best advantaged to win that game because it's going to take reinvestment. You can see be best advantage to win that game because it's going to take reinvestment. You can see it right in the chillers with going to low GDP refrigerants, you can see it in the requirements on SEER, right?
That whole play is going to require more and more investments. And the larger and more global you are, the more likely you'll win. Constantly, right, there's lots of pressure on the facility managers to reduce operating costs. With smart equipment, right, with smart concepts and integrated sensors, we'll be able to lower operating costs substantially. We've already connected over 3,000 chillers.
We're already seeing the opportunity to lower maintenance costs across the chiller spectrum alone. As we connect more and more of our equipment, we'll be able to optimize the systems as well. Kim talked about the Internet of Things, we're doing it. And what we're specifically doing and an example of it is Stanford University. Not only will it be buildings, but it'll also be campuses that will be connected.
So in the Stanford example, what we did was the central plant optimization. It's not just having an energy dashboard like a lot of our competitors, it's actually optimizing the energy from both the energy side and the cost side. So at Stanford, we basically took the central plant, we took weather patterns and we took the price of energy and optimized it and we do a predictive model over the week period and optimize the whole chilling plant. That's because we have the controls and the equipment and the knowledge base in order to do that. That's just one example.
Today, we are the global leader in the non residential section or the applied business. So anything that's non residential, we probably make, we probably make it and apply it globally across the world and have channels. And you can see, we make the distinction because in many regards there is a big distinction between the residential market as different from the commercial market. In some markets like China, the residential market and the commercial market are very separate. You can play in residential, right, and you can play in commercial and you may never run into each other.
In the U. S, it's a little more muddled because of the distribution. But broadly, right, we deliver the HVAC automation. We're the market leader in non residential. We have a very broad product line and a leading position in industrial refrigeration.
I'll get more into what we do broadly across the non residential markets.
There's 2 big shifts that
we did this year. The first one, Alex mentioned that we grew up as a controls business. When you're a controls business, a lot of your cost structure is in the field, around 75%. So we actually had a P and L structure that was field oriented. So all our P and Ls were field based.
But now with the acquisition of York, Hitachi, ADTI, as you saw on Alex's chart, we actually have a broad product offering as well. It's beyond just the controls business. So the transformation we've made is actually going to both. And that's having a P and L at the field still, but also translating the P and L into the product. And the reason we did that, right, is to put more pressure, right, on the product teams to recognize the market, its competitors and its market share requirements and also it's a natural way the business wants to get run.
The second big shift we made in this last year, right, we were predominantly a single way to market, right? We were predominantly a branch based structure, which has served us incredibly well and will serve us incredibly well going forward. It is a very special and competitive advantage that we have. But because it's a local market business, right, relationships matter and they are local, we can't own all the relationships. So going multi channel, multi brand makes a lot of sense.
And so we've made that shift as well and that was accelerated by the ADTI acquisition. So the organizational management system in place in order to drive that duality of product and market. So the strategic bets we're looking at, global products, there's a number of products that you actually have to win globally on, chillers being 1, VRF being a second. You can't play regionally in those businesses and make the economics work. And there's a number of key markets that we need to win into.
As talked about in both the megatrends and in Alex's presentation, 64% over 50% of the market will be in Asia, specifically in China first and India second.
So this was a year where we
got a lot done, a big year of transformation and we played to our strengths. You saw this slide in Alex's presentation, business models. It is really one of a foundational strength of Johnson Controls to figure out how to play and play to scale. So we built a new business model and implemented it within the building efficiency built around product and channel. So now we have P and Ls on both the product side, P and Ls on both the channel side, as well as we put a governance process in place, meaning a management cadence in place that drives the product and channel focus.
Simultaneous to laying that in, we leaned out the organization, specifically by increasing the number of spans and lowering the number of layers in order to lean out the organization and make it more agile around decision making. And at the same time, we took about 15% of the G and A, which was HR, IT and finance costs out of our business. We're reinvesting heavily in product. We're launching a set of new products already. We're launching a lower cost YK chiller.
We're launching a new YMC2 chiller actually this month, which is a high end, launching new products in the light commercial residential space. We're making a bunch of investments in products. We see there's a lot of space that we don't play in that we need to play in that are real opportunities because we have the channel and we can leverage that channel and push more product through it. In order to make the economics even better in that and be even more everything to
shrink
our development time is really critical, right, everything to shrink our development time is really critical in order to win on the product side. As I talked about on the customer side, multi channel, multi brand is really important. This is a very local DRIP market. It's driven by relationships. We don't have them all.
Many people do, the reps, the distributors, we need to be able to reach the critical all the end customers through a multi channel, multi branded strategy. We're driving to a lot more local transparency. What I mean by that, managing the business at the local market level. So looking at market shares as much as possible within a local market and asking ourselves and putting a structure in place to better understand how we are playing and whether we're winning in a market or not. So for instance, in some markets, we have north of 60% share across our business.
And in other markets, we have 15% or 20% share. So what are we going to do in those markets in order to build it out? The only way we get that is if we get full transparency, not only of how we're doing, but also about how the 3rd party channels are doing. China, we need to win in China. There's some serious competitors in China.
DX channels
in
North America, this DX channels in North America, this has been kind of a weak point for us, if you will, not because of we actually just launched a whole bunch of product, we actually believe we're competitively advantaged in the product. What we really need to do in that business is build out the channel. We're running a bunch of pilots right now to figure out how to make that happen and we'll roll that out fairly quickly. Operationally excellent. One of the things that's truly important here and you can actually see it, right, if we don't deliver on time as promised, we lose, right.
So everybody's done something in their apartment or their home or right, some sort of construction, right. And you had a contractor, a general contractor promise a due date, right. And sooner or later, they change that due date. Well, that puts them in a bad light. And the reason they've changed that due date is probably because one of the manufacturers didn't deliver on time.
We don't want to be that manufacturer ever. So we need to make sure that we're operationally excellent all the time because we then build a relationship with that contractor, with that architect that of trust and reliability. We have a great portfolio. We cut across every aspect of HVAC and Industrial Refrigeration. We have the control side.
We have a spectacular position in that business, particularly on the complex. We have the opportunity to build out the less complex network and we're doing that. We have a great position in chillers, specifically in centrifugals, but we have a great opportunity to build out our SCRUB business and our SCRUB business as well. Airside, great across a number of dimensions, but opportunities also in our custom, fan and EVR businesses. Direct expansion, right, we break them into the ducted and ductless.
So there's really 2 ways to cool a building. 1 is chilled water and another is direct expansion. Ducted is predominantly a North American business, right. That's the light commercial and residential business. And ductless is what we got with Hitachi, right, as Alex talked about the rack and VRF business.
And ultimately, we have a great position in Industrial Refrigeration, specifically in North America and Europe. So again, products and channels, we have the opportunity also as we look across this to build out our channel network. In some places, we have a fantastic network and other places, we don't, right. So there's lots of investment opportunities to build out that network because we got a fantastic product offering. So when you think about the channels, you can really by the way, every channel, since it's a very local business, channels build out differently.
So the channel in India is wildly different than the channel in China, which is wildly different than the channel in North America and the channels in Germany or France. And so you actually have to look at the business local market by local market and ask yourself how do you want to play it. But broadly, right, to think about the channel structure is you have players who do solutions. That's what our branches do. They help do solutions for buildings, whether it's the cooling loads, the controls of HVAC, we work with the architects, the engineers in order to design the building loads, particularly on high complex buildings.
You have another channel that also does engineering, but it's really a component side. So once you've got the overall envelope scoped out, there's a bunch of engineering that happens at the component side, air handling units. We do that as well, so do others. And then there's what I'll call a parts and boxes business where people just buy off the shelf. Broadly, you can think of the business in those 3 buckets, how they get to market, how they get solved, change market by market, the overlaps change market by market, but broadly if use that construct, it's helpful.
We play across all three of those. So the strategy we're moving towards and have moved to both organizationally and operationally is a strategy of both product and channel. How do we win across the product lineup, tearing down our competitors' products, understanding our competitors, understanding where they play, why they play, where we have unique market shares, where we don't, why we don't, what we think their next moves are and how we're going to beat them. On the channel, how do we get access to the local market, right, that we need in order to fund our product development? Because you can imagine, if I get more scale, I can actually spend more on development.
So it's a self reinforcing position. Building efficiency has an industry's best and most product portfolio, fact, leading channels and delivering products to market by having both and figuring out how to win local market by local market, product by product, we get a self reinforcing game, right, that is unique in the industry. ADTI, why did we make that acquisition? Right, it gave us a broader product lineup. It gave us things that we wouldn't have been able to develop internally.
And it gave us leading positions in those products. Specifically, right, dampers, louvers, ducts, fans, filters, diffusers, terminal units. Some of those we made but didn't have leading positions and now we have leading positions. As importantly, and maybe even more importantly, it gave us another channel. It strengthened a third party rep channel that we didn't have.
That's incredibly important in this business in order to win. So we had the complex side, we had the branch network, but we didn't have the 3rd party rep network. So now we can actually do multi brand, multi channel, right, take some of ADTI products through our branch network and take some of our branch products through our rep market, right. The trick here is figuring out how to manage channel conflict and we're working to figure that line of demarcation. It's really important on the channel side, buildings are by nature local, serving customers require local relationships and are locally delivered.
It's a relationship driven business. ADTI brought us those local reps, resulting in additional access. Hitachi just closed that in October, kicked off the integration actually a while ago. This gives us a technology called VRF that is unique. It's an 8 predominantly today an Asian product line, but will be important in the North American market and European market as well.
So today, China is the largest piece of the VRF market and we have a great relationship as Alex talked about with a company called Hisense, who we go to market with through a joint venture agreement. They actually are the number 2 player in China. Daikin is the number 1 player. Daikin has been losing share in China for the last 5 years. I think they're coming in at 13% 31% share and the Hitachi Hisense joint venture right now our joint venture is coming in at 18% share in China and still growing.
So incredibly important market, we need to win with our joint venture partner. We also launched the VRF in North America as well, another important market and you can see the growth rates there. We're already that market today is roughly $500,000,000 We've bid on broadly about $55,000,000 of work already and we just launched. So it shows you the power of our channel and we've only gone through a piece of our branch network already to bid on. Lots Lots of opportunity there.
As I talk about product and channel, we're strengthening our product line. So let me just go through some examples of how we're strengthening it. So first, let me go on the building automation and controls and go to the 3rd dot point, updating Medisys. So Medisys is a world class BAS, building automation system. It is the best in the industry by a long shot.
It needs some things in order to continue to have a dominant position in that space, specifically graphics, specifically security. We continue to update MedAssist in order to secure our position and maintain our position in that space. But MedAssist is really great when you have complex buildings. And what I mean by a complex building, I mean a high loop count, meaning lots of data flowing back and forth between devices and controls, a loop and levels of sophistication that you need to bring to a building, automation, monitoring, things that actually require a knowledge base to control. Medisys wins in that game, but not all buildings are sophisticated to that level.
So we have a gap in our product line offering. So we're developing new control platforms and we really have 3 opportunities there. We have an opportunity for so Medisys is a programmable, meaning that you actually program it on-site. We have an opportunity for a configurable platform, which means that you it's a menu. It's a much more simpler and easier to install building automation system.
We have that opportunity both in North America as well as an opportunity to build a platform in China as well. On the filling in the product lines, we have a lot of devices we supply today, actuators, but we don't have all devices. And we already have the channel we have 2 multiple channels to flow those devices are and they're reasonable margin businesses. So we're actually building out the device side as well. On the chiller, historically, we've thought of ourselves as really a centrifugal business, but we need to actually think broader than that.
We need to think of ourselves as a chiller business. And so we have opportunity spaces in that business as well. So we just launched a high end magnetic chiller, multi ton in North America, well across the globe, but it's predominantly for the North American market and we like what we're seeing. We're reducing our chiller. One of the opportunities to improve margins is continue to look at product cost reductions.
So we've actually put a teardown facility in China where we're actually testing and looking at other people's chillers on what smart things they do as well. Direct expansion, we just launched a new residential LA commercial. I mentioned that earlier. It's best in class. We're really excited by that.
The VRF line, right, we just need to build that out globally. We'll be launching a new compressor platform within the next 6 months. And then air side, we've got some gaps in that I talked about earlier, again, opportunities to fill in and leverage our channel. When you get to the
right, just
in North America branches, we're adding sales people. We actually had more sales opportunities than we could actually handle through our branch network today. So we're adding 200 more salespeople. We're adding branches in Asia where it makes sense, wisely, recognizing that there are some headwinds economically there. 3rd party, right, we've actually built out this year a system to actually go after the 3rd party reps, figure out how to joint venture with them, talk about their line card, decide what line card they have, put a salesforce.comCRM system in place, working with the reps and understanding our opportunity there.
We have a big opportunity in distribution. It's probably a weak point of ours today, but an opportunity we understand in order to build out. So the distribution side, which really is more of a parts and boxes business, right, which is really where the light commercial business goes. We have an opportunity to build that out. And we see when we do build it out, we can get much as 15% to 20% market share in a local market.
Let me change a little bit and just specifically talk about China. It's a big priority for JCI and it's a must priority for building efficiency. We have a very good position in China today, one that a lot of people would die for, but it's not enough. So specifically on the chiller side, we've done when you kind of look at a chiller, you could actually say there's a life cycle chiller, there's a value chiller, and there's a budget chiller. We do very well in market share on the value and life cycle side.
So the high end, higher operating performance. But if we don't play on the budget side, which is basically a good portion of the China market today, we'll let competitors in. So we just launched a budget screw, water screw, which is basic that market in and of itself is $500,000,000
in and
of itself. It's a market that we didn't play in historically. New building automation devices and controls. China is really a devices business, a lot of Tier 4 devices. We have an okay portfolio, but we have an opportunity to build out that portfolio as well.
We also have we do in some of the large buildings, the BAS and have a great market share there, but the issue that we have is some of the lower end buildings, we don't have a good position. We see a platform that we could build in order to meet the requirements of those buildings. We want to continue the success and help our partners succeed in China. They've already been hugely successful. We'll do anything and everything to continue that success.
And air side, specifically, we have a great position in air handling units and fan coils. We had a dated product line, we're updating it. So today, we have roughly over $1,000,000,000 business in China. We have broadly 40 branches. Some branches are as big as $100,000,000 in and of themselves like Shanghai and Beijing, right.
And then we have 70 regional offices. We're now adding we're going to add branches and regional offices. The way that works is really these regional offices grow into branches. And so a regional office is really kind of think of it as a hub spoke, right? So you got a hub of a branch and then a regional office, then the regional offices grow into branches.
And this last year, we added 20. This coming year, we're hoping to add 40 And that will continue to expand going forward. And a lot of it is to cover the Tier 3, 4, and 5 cities that we don't cover today. 2 central priorities for building efficiency, growth, right, high quality growth. So the ADTI acquisition, we still have growth opportunities, we need to get those.
We need to get those by the cross selling opportunities through both our branches and both through the 3rd party rep. Hitachi joint venture will also bring us growth opportunities both in China and the rest of the world, North America particularly. We're making investments across the board on product. You've heard about a number of new chiller platforms. We're bringing our controls and automation.
We have
opportunities to increase our line card
on field devices, air side offering as well. We have a good fan offering, but it could be better. We have opportunities that we're looking at selectively on channel investments, both in North America and China to start, but there are other rest of the world. Malaysia, we just launched a whole new channel there as well. So lots of opportunities across the channel as well.
As importantly, if not more importantly, is continuing to drive margins. So we talked about Alex talked about the Hitachi, it's a 4%, 4 0.5% ROS. It's dilutive to us today. There's really three reasons that we need to do in Hitachi that will drive margins. Japan is basically a breakeven business today.
We need a turnaround program. It's in place. We program office. We need to drive that. Brazil actually loses money today for Hitachi, roughly $10,000,000 opportunity.
And specifically, it's an opportunity because we have a good position in Brazil, they have a good position in Brazil. It's a very protected market. If you can actually figure out how to make
those two positions work, you can
business that is at breakeven today. Maintain our cost focus, right. We talked a lot about there's lots of opportunity to improve our manufacturing and supply chain. We're working that through the number of initiatives that Jeff talked about, CI initiatives and something called tailored business streams, which is recognizing the complexity of the bill of materials that we deliver to our customers and actually segregating it. We've leaned out our organization.
We basically took out $70,000,000 for this fiscal year and we'll be at $100,000,000 coming by the end of this year going into FY '17. That also includes reducing the number of layers and increasing the number of spans. We constantly think about our investment cycle. Do we have the best investment cycle in the industry? Because if we don't, we'll lose this game.
And the investment cycle is driven by lots of different methods, but one of them is time to market, right. One of them is size of the market that you have access to, right. We actually think we can build the best investment cycles around. There's always pricing opportunities here. And I don't mean the this business is a very dispersed bid based business, right?
We bid on projects just like when you got bids for whatever renovations you did. That's what we do, we bid. It's bid based predominantly, right. So we have opportunities to figure out when we're going to win, what's our opportunity to win and make sure that we price appropriately to win. And then ultimately, the work that's being done on the Johnson Controls operating system is a massive opportunity.
We're already seeing it in the manufacturing side, right. The amount of increased continuous improvement opportunities has almost doubled since we've launched this. We've restructured the way we do purchasing because of this. We have lots of opportunity here on the Johnson Controls operating system and we're just starting to see it. We have a I believe and I believe I hope you believe that we have an unmatched opportunity.
Broad product line, winning commercially and institutionally, leading positions across the globe, we're investing. When I look at the investment opportunities we have, right, they're massive. We're just starting to realize them. We have an outstanding branch network complemented by a fantastic third party rep network that we're building out, and we've just implemented a new management system in order to deliver that and execute upon it. Thank you.
Good morning. It's a pleasure to be here with all of you today. I'm going to share a little bit about Power Solutions today and the investments we're making in technology, our customers, emerging markets, capacity and even adjacent markets to continue to grow successfully into the future. So if you look at Power Solutions, we had a pretty successful year in fiscal year 2015. We grew our unit sales by 4%.
It was about north of 6,000,000 new units that we sold globally. If you bounce that up against the total market growth, we actually had a fair share of about 70% of the global growth in battery units and vehicles in fiscal year 2015. We had about 2x revenue growth compared to our unit growth, largely because of the mix we saw on AGM batteries. Alex talked about that a little bit earlier. And we saw significant margin expansion, north of 100 basis points.
And that also was due to that mix advantage of AGM, but also it was a relatively quiet year when you look at our investment related expenses. And we've had a consistent track record of growth. If you look at Power Solutions performance going back a decade, we've had 9% CAGRs on revenue and 14% CAGR on segment income, EBIT growth. And this is something that we expect to continue as we move forward. And one of the reasons and key ingredients for this steady non cyclical growth is the fact that we're largely an aftermarket business.
We enjoy outstanding relationships and strong market share with OE automotive producers around the world. And it gives us a lot of insight into the technology that's going to be under the hood of that vehicle years before those vehicles come to market. And we're able to inform and advantage our aftermarket customers with this information and create sticky relationships with them. 74% of the batteries we sell go into the aftermarket. There's 1,000,000,000 cars in the park around the world and that car park is growing largely because of the emerging market growth that you see in Asia.
Each of those vehicles and those 1,000,000,000 plus vehicles will need 3 to 4 battery changes over the life cycle of that vehicle. And the battery doesn't know if the economy is on an uptick or a downtick. When its time is up, it dies, right? And the consumer, this is something they can't go without. They need to get back and forth to work.
So this is really what's driving that consistent growth that we see. The way that we've achieved this market leading position is something we're going to continue to leverage as we move forward is that we play to our strength. We are a business with scale, 146,000,000 batteries, 52 manufacturing and distribution sites around the world. It's important that we build those sites globally and close to where our customers is because it's very expensive to move these batteries around. Our advantages in product and technology go both in our factories, in the full world of our factories, where our technology and our processes enables us to build batteries better, quicker, faster and very importantly, safer than most of our competitors, but you also see it in our superior designs.
One of the things we reference up on our technology is PowerFrame. This is our grid technology. So all batteries have anodes and cathodes, plates. Our grid technology, we can build it 20% less power on average than our competitors. So it's got a better carbon footprint that's important to us and to our customers.
But also it's got 70 percent better electrical performance on average than our competitors. So this means we can use less active material in our batteries to get the same outcome. So better quality battery at a better price, better performance. We also leverage that PowerFrame technology in our start stop batteries. We have a 1st mover position, 1st to market on start stop batteries.
I'm going to talk quite a bit about them in this presentation. But that PowerFrame technology enables us to get better cost and better performance out of start stop. I mentioned scale, but with scale, one of the things that advantages us is our vertical integration. So in the biggest market in the world here in North America, we produce 50% of our own lead. We smelt 50% of our own lead.
That gives us a clear advantage. We're the world's largest recycler of lead, about 8,000 batteries per hour. But we're also vertically integrated around poly, plastic casings that our batteries go into. We have that relentless focus that you heard Alex and Jeff talk about earlier on continuous improvement that we leverage across all of our plants, so we can get more batteries out of our existing assets. One of the metrics that we're focused on today is 24 batteries per person hour in each and every one of our plants around the world.
From a commercial standpoint, we enjoy very strong brands. Our Varta brand is one of the best known brands in all of Europe and we've since introduced it to China. We've had the VARTA brand we've been making the VARTA brand a battery since 18/88. LTH is one of the most recognized brands, bounced against all consumer brands. In Mexico, we have Optima, we have MAC in the Andean region, Helior as you move down into Brazil and DelCor as you look into Korea.
And we also have a set of strategic relationships that are very important to us. We're in fact that trusted partner that Alex talked about earlier with many of the big OEs around the world. We enjoy a relationship and supply just about every major OE, globally. And we have some outstanding relationships with some of the biggest mass retailers and automotive retailers in the world. And if you move over to Europe, you'll see some of the bigger distributors that you would find in all of Europe.
So those relationships, those trusted relationships are very important to us, but also a pretty impressive set of JV partnerships. Interstate Battery is one of the most recognized brands, not only in North America, but they're also now in the throes of expanding into China. Amraj is a number 2 player today. We have a JV with them. In India, number 2 player.
Within 12 months, they'll be the number 1 player in automotive batteries in India. And Medco is one of the top battery producers in the Middle East. And then also relationships with universities and some of the top labs around the world. These are the things that have helped us get to the industry leading position and we're going to continue to leverage that. It's not only important though that we build a quality battery at a great cost.
Our values compel us to be good stewards of the environment. And this isn't something that's just feel good. There's real value in this, especially when you think about our OE customers, you think about those big retail customers. They'll pay, a little bit of value knowing that the supplier of their product is doing it in the most environmentally responsible way possible. If you look at that second bullet, we've achieved 98% improvement in per unit environmental emissions since 1989.
If you look at our plant network in North America, we have 4 to 5 times the capacity of our next closest competitor. Our emissions in our entire network are less than 20% of one plant from one of our competitors. This is important not only to Johnson Controls and a differentiator, but it's important to our entire industry as we continue to move forward. Lead is one of the most recyclable products in the world, 99 of lead acid batteries, 99% of the battery is recyclable. And if you look today, I already mentioned our recycling position and how that advantages our supply chain and our cost position, but our batteries today contain 80% on recycled content.
So that really puts us when you think about our scale, when you think about our vertical integration into an advantaged cost position. So we're an integral part, when you think about where we're at today of a multi industrial portfolio. We have projected revenue over the next 3 years, well above our multi industrial peers and our EBIT performance is well in line with what you would expect out of multi industrial player. So let's talk a little bit about where are we going. Well, consistent with what Alex said, we're a growth platform here in Power Solutions.
We expect to see solid growth in revenues in the midterm as we look forward 7% to 8% and we're expecting good solid margin expansion over the time horizon. The way we're going to do this, very much in line with what Jeff Williams shared with us, is continuing to leverage the Johnson Controls operating system across Power Solutions. We're making significant investments in commercial capabilities, especially in Asia, right, where we're developing an aftermarket channel, so we can win in China. I'm
going to talk about that in a minute. From a technology
standpoint, if you go back 10 years ago, we were largely talking about a flooded battery. Today, we have a continuum of technologies that we're developing. So we have technologies, leadership that we're that not only do we have today, but we're investing in it, especially around powertrains. And then from an operation standpoint, we're continuing to make significant investments in our operational capabilities. And we're taking those capabilities and we're focused on very deliberately on our growth opportunities.
So you're going to as we move forward, I'm going to talk a little bit about our technology. We're focused on developing a continuum of energy storage solution technologies for vehicles. And now you're going to hear us talk even more and more, you already heard us talking about it for buildings. And it's a synergy point between power solutions and building efficiency. We're investing in our customers in mature markets, right?
Those sticky relationships with the big retailers in North America and in Europe, those customers that really enable us to invest in places like China and in the future into adjacent markets. And the value added services we're providing there are things like vendor managed inventory, category management, test more, sell more. We're helping them with testing programs so they can proactively test batteries and increase their turns. In emerging markets, it's all about China first. I'll talk about why as we move forward in this presentation.
In order for us organically to meet our growth objectives, we need about 50,000,000 more units of capacity between now 2020. And we're going to do that both through investments in capital, but we're also going to do that again through the operating system where we can get more productivity out of the existing assets that we already have in place and then adjacent markets. So let's talk a little bit about product and technology. What's driving technology regulations are driving technology in vehicles and therefore they're driving technology advancements and requirements in batteries. And here what you see, if you just focus on the U.
S, between 2015 2025, there's going to be a 50% increase in the miles per gallon that an OE producer needs to get
out of the car park that they produce.
And at the same time, 50% reduction emissions over that same time period. And if you look around the world, governments around the world, they're all doing the same thing. They're putting more and more strict requirements on our industry. So the automotive manufacturers, they're balanced in meeting these regulations with economics and also consumer preference. Consumers still have anxiety about electric vehicles.
Some of it is just simply range anxiety. They don't like the idea that it could just run out of juice somewhere in the middle of one of their trips. They're also a little concerned with sticker shock. If you look at it from an OE's perspective, they're going to do everything they can to keep the consumer happy, everything they can to meet regulations, while at the same time they sweat their existing assets and they have 1,000,000,000 and 1,000,000,000 of dollars of assets tied up in the internal combustion engine around the world. Now the good news for us is, at least in the midterm, is they have a lot of levers on their roadmap to meet these more stringent requirements as they move forward.
A lot of them are mechanical, lightweight the vehicles, turbocharging, low friction tires, low friction oils. And our favorite here in Power Solutions is the start stop battery. I think it's actually the best that's part of this equation. So what you see here is actually a model, right? We call it the VITAM model, it's our vehicle efficiency trade off model.
It's something that Johnson Controls has developed and we've done this in partnership with a lot of the OEs. This model is actually looking at a Toyota Camry, which is a representative midpoint of the American car park. And what this model does, if you think about what Jeff Williams was sharing with us about virtual engineering capabilities, this is part of that virtual engineering capabilities. This is where we partner with OEs and we make it's the beginning process where we start making decisions together around how do we achieve these regulations. If you look at the Toyota Camry, what the blue line represents is the mechanical levers that Toyota has on its roadmap to meet regulations.
And as you can see, they can meet the regulations all the way through 2025 and they're already approaching 2,000 and 30, right? If we apply start stop technology, you'll see the red line, they get even more benefit and even closer to that 2,030 timeline. There's an article in words a couple of weeks ago where a director from the EPA was talking about 10% of the vehicles in North America already meet the 2025 regulations. One of the surprising things about that 150 and how the 2 wheel drive most efficient version of F-one hundred and fifty already meets the 2025 regulations. So what this means to us is lead acid is going to be the predominant energy storage solution for vehicles for a long time to come.
We see all the way through 2030. So if you look at this model all the way out through 2025, our model shows that electric vehicles, hybrid electric vehicles make up about 15% of the OE production come 2025, maybe it's a little bit more than 2,030. The other thing I want to point out is when it comes to lead acid batteries, you'll notice that even at the top where we're showing electric vehicles, there's a coexistence of a lead acid battery still driving the 12 volt power even in those electric vehicles. So over this time horizon, you're going to see SLI, the flooded battery that our grandparents and a lot of us grew up with. That's in fact going to shrink in new OE production.
But what's going to more than make up for it over this time horizon is start, stop and advanced start, stop battery technology, which is predominantly lead acid. And what's going to drive that start stop adoption is Europe today about 60% of the vehicles, if you go back a year ago, 6 out of 10 vehicles were start stop. That's going to grow to 8 10 between now 2020. But what you're really starting to see is an explosion in start stop adoption happen in China, where it's going to grow from low single digits to close to 40%. That might be a conservative number as we even speak right now.
I was over there as recently as a week ago. And then in North America, you're going to see aggressive adoption also growing from single digits up to mid-thirty percent adoption rate. So this is going to be great for Johns Controls because we have an industry leading position. We're the 1st to market with start stop. We've established a reputation with the OEs.
They trust us. Our technology performs well. And I'm going to talk about how we're making significant investments in this. So if you look at our investments in technology, we're continuing to invest in enhancing our position in SLI. That is going to continue to grow even though it's going to slow down in the OE production because of those 3 to 4 battery turns, the SLI battery will continue to grow well into close to 2025.
So there it's a lot around standardization, so we can leverage our supply chain. We're making considerable investment in AGM capacity. I'm going to talk about that. But we're also building and have been building market leader in energy storage solutions for vehicles regardless of what the technology is well into the future. And the capabilities that we're investing in not only are going to help us in the markets that we're focused on today, largely automotive, those capabilities are really leverageable in some of the adjacent growth opportunities, which I'll also get into.
So why
do we talk so much about China, all right? Even my North America region always gets a little bit bummed out because they feel like I talk a little bit too much about the China market. Well, 90% of battery growth, market is going to grow from in automotive batteries from 365,000,000 to about 530,000,000 units. You can see here between now 2025, 90% of that growth in emerging markets, 70% plus of that emerging market growth is in Asia and 60% of the Asia growth is happening in China. So it's important for us if we want to maintain that industry leading position and by the way if we want to thwart off probably some competitors from coming out of China and into some of our other markets that we win in Asia.
So it's all about China first. We have 2 plants that are already up and operating, about 16,000,000 units of capacity and we've just begun to build our 3rd plant up in Shenyang. It's our North plant. What's unique about this 3rd plant is it's going to be a full AGM plant. It's the 1st plant we built from the ground up that's 100% AGM.
I want to pause here again for a second and recognize the Johnson Controls operating system and how this brings real value. Jeff talked earlier about procurement. Well, we're leveraging our procurement capabilities both on direct and indirect, and we're helping develop a set of suppliers so that we can build this smart plant different than we built any other plant before. We're actually localizing a lot of the proprietary industrial technology equipment we use to build our batteries. We're localizing that capability in Asia, something that we haven't done near enough of in the past.
This plant is going to cost us quite a bit less to build relative to our other plants and we're not going to sacrifice anything on productivity or environmental performance in the process. We will never build another plant in the world the same way we're done building this plant, whether it's in China or anywhere else, we're exporting this knowledge through our operating system so that we continue to advance ourselves in the future. We're also investing 9,000,000 units of capacity, AGM capacity into the China market. That's far beyond where any of our competitors are today. We have our biggest competitor has pilot plant, about 300,000 units of capability.
And what's interesting to note about that is if you really want to get into that business, it takes about 2 years to stand up a plant. But if you haven't done business with those big global OEs, it's a year plus to certify your product with them. So if they decided they wanted to get into this tomorrow, take about 3 years, in the meantime, we expect to be far out in front. And that's going to be important because it's an important inflection point for our growth in China. We have a little bit north of 20% market share on the OE side.
We're going to see significant growth leveraging that AGM capacity as the China market adopts over to start stop. We're not only investing in AGM capacity in China, we're investing in AGM capacity around the world. So this is going to help us grow in the emerging markets like I just shared, but it's also going to help ensure that we maintain the relationships and the share position we have in Europe and that we enjoy in the U. S. Today.
The other benefit of this is from a revenue and margin standpoint, there are multiples higher than what we see on an SLI product and you can see that in our results. The capabilities that we've developed over time in the lead acid batteries provides a significant runway of opportunity for us to grow moving forward. And that's what we're focused on. Beyond what I've already shared with you around capacity and supply chain, if you look at our core market and you just talk about automotive and light trucks, historically, what our franchise has been built on, that's about a $16,000,000,000 market opportunity. But if you expand it and look at 2 wheelers and heavy duty trucks, it grows by $10,000,000,000 of opportunity.
And our assets today and our supply chain are all fungible to participate in that marketplace. It's the same equipment, same process, same supply chain and there's actually even a lot of overlap in the channels. So in select regions around the world, we've already started to expand our motorcycle and our heavy duty capability. We can do that inside the four walls of the plants that we already have. And that's $10,000,000,000 of more growth opportunity for us, a bigger market.
But then you look at our capabilities around lead acid and this is where you start to see the industrial market, stationary. This is where there's standby power for cell phone towers and for motive applications. Our know how in lead acid batteries, because those are lead acid batteries, if you look at that stationary market, they're AGM batteries. The only difference is the terminals are on the side instead of on top of the batteries. We would have real credibility in a space like this.
It's another $10,000,000,000 worth of market growth on top of where we're at. And then from an emerging market standpoint, you see XEVs and grids. This is where we start largely talking about lithium ion. We're well positioned in advanced battery technology today. We have experience here already.
We were the first the mass produced lithium ion batteries over in Europe in 2006 for one of our large customers. We believe that the transition really is going to be around low voltage solutions, less than 60 volt solutions, 12 volt, 48 volt, or we have a lot of know how capability and credibility with the OEs. We're already investing $100,000,000 annually in this marketplace. We have strong relationships with labs, universities. We have 4 global research and development centers already around the world.
They've been in place for more than 5 years now, 2 in the United States, 1 in Hanover, Germany and 1 in Shanghai. And we have a world class manufacturing facility in Michigan. And when it's fully filled out, it has a capability of upwards of 8 30 megawatt hours of capability. And we're leveraging that already and you heard quite a bit about it and we've got John Shaw standing in the back and you've got one of the prettiest products by the way that we've ever produced in Johnson Controls, our energy grid, stationary energy storage solution. But this is an area where and Alex and others talked about it, Bill talked about it, where there's real synergy, Kim talked about it, between building efficiency and power solutions.
If you look at this market, it breaks down into 2 pieces. There's a front of the meter market, Largely, these are the grid operators. They generate, transmit and distribute energy. And you can see that's a $1,000,000,000 market growing to $5,000,000,000 They're really interested in us, because of, not only our battery technology, but our branch network that Bill talked about provides local service capabilities. They also, enjoy our made in America, capabilities, right?
That's a real advantage for us. And then if you look at behind the meter, the behind the meter, that's the building owner side of the equation and we have incumbency and relationships through our building efficiency division where we provide energy solutions today that really provide us a right to win. And you can see that market is going to grow considerably from 1,000,000,000 dollars to greater than $11,000,000,000 by itself between now and 2025. We had the know how and the engineers from Building Efficiency have been working together for over 2 years under John Schaaf's leadership. 80% of the content we manufacture.
We don't make the containers, right, that it goes in and the inverter is one key ingredient that we don't make, but we have great relationships with the companies like Eaton who make those inverters. But we obviously have the cell technology that we manufacture over in Michigan, battery management systems that Power Solutions has been manufacturing and development for many years. And we really think we have an advantage with this offering, right, from a life cycle standpoint, in particular, which is a way a lot of building customers, especially in the institutional space buy. We've already had success. We've got 3 megawatts installed and that's with multiple customers, both from a military site perspective and industrial in our pipeline.
That's actually already exceeded 50 megawatts. In our pipeline. That's actually already exceeded 50 megawatts as of last evening as John Schaaf would remind me. And we're getting tremendous pull for this offering. And so in summary, I think we're well positioned.
We're a multi industrial business with an aftermarket model. And because of those emerging market grows, there's significant runway in the growth opportunity that's in front of us today. Lead acid battery is going to be remain the incumbent energy storage solution for ways to come. But in the meantime, we are making investments and we're going to continue to accelerate those investments as we go forward in advanced battery technology. We're investing in customers' capacity, technology, leadership around the world.
And we see significant growth opportunities, as shared with you in advanced technology in emerging markets and in adjacent markets. So I thank you for the time and I'm going to hand it over to Brian Steve.
Officer. So good morning, everyone. So my fellow presenters this morning, I think, laid out a great framework for growth for Johnson Controls, and I have the opportunity to kind of pull it all together for you from a financial standpoint. We're coming off, as you know, $3.42 which is a 14% increase over fiscal 2014. And as I stood here a year ago, we talked about the remaining portfolio changes that we needed to accomplish in fiscal 2015.
Those would have been the GWS divestiture, the Hitachi joint venture and the Interiors joint venture. And all of those were successfully completed during fiscal 2015. So good progress. As we look ahead to fiscal 2016, we see another year of record financial performance. And of course, we have now announced the separation of our auto business, which is targeted to occur on October 3, 2016.
I would also tell the group that as we work toward the separation of our automotive business, we have a separate work stream within the company right now looking at growth platforms. Those could take the form of anything from product line, expansion opportunities and building efficiency and power solutions all the way to larger transformational transactions. And so we're really looking across the spectrum from a growth platform perspective. So this morning, I'm going to hit on really 4 key areas. We talked about a financial model a year ago.
That is going to be something we talk about every year with the group as we really frame how we view Johnson Controls from a financial standpoint. I'm now going to talk a little bit about free cash flow. It's a hot topic I know for this group, it's a hot topic within Johnson Controls as well and we've got a lot of focus in that area and I'd like to go through with you our thoughts in that regard. And then I'd like to talk a little bit about fiscal 2016 guidance as well as a midterm outlook for our businesses with a focus on solutions and building efficiency. And then lastly, I'm going to give a brief update on where we stand relative to some of the financial metrics and our views on time line relative to the auto spin off.
So some themes you're going to hear from me this morning. First of all, 2016 is really a transition year as we move towards the spin off of the auto business. That auto spin off will certainly set a foundation not just for the automotive business to thrive in the future, but set a growth platform as well for the remaining Johnson Controls business. The one thing I'd point out is we do expect significant separation costs in fiscal 'sixteen relative to the auto business. As you'll see in the books, we're estimating today that those separation costs will be in the range of $400,000,000 to $600,000,000 And there will likely be on top of that some level of restructuring that we do throughout fiscal 2016 really to address some of the stranded costs that will remain in connection with the separation.
And those restructuring costs could incur during the course of fiscal 'sixteen. So you may see in a quarter other than just Q4 a restructuring charge. The 3rd item we've talked a lot about this morning is the John's Controls operating system. That is embedded enterprise wide now and will continue to be a theme not just for this meeting, but for all meetings as we move forward. We will continue to see margin expansion.
And you'll also see that this year from a capital allocation standpoint is a bit of a transition year. And I'll talk about our thoughts relative to our share repurchase program in a few minutes here. And then lastly, the free cash flow section, which I mentioned earlier. So the Johnson Controls financial model, we had 5 areas that we talked about last year. First of all, clear portfolio choices, investing where we can win.
This is really, Alex's vision for starting 2 years ago to move to a multi industrial diversified company. We've talked a lot about business and operating model changes. The business changes are pretty straightforward. The operating model changes, we're going to have quite a few of those, I would say, as we move through fiscal 'sixteen, as we think about how remaining Johnson Controls will operate on a go forward basis. So I could see a fair amount of functional operating model changes as we move throughout the year.
Significant attention to margin enhancement, that will continue to be a theme that you hear from us on a go forward basis. We've got a 70 basis point improvement in margin plan for 2016. Balanced allocation of capital, again biased toward building efficiency and power solutions. And if we deliver on the first four bullets there, we'll clearly deliver on consistent shareholder returns. So we started the portfolio journey in fiscal 2013 when Alex took over as Chairman and CEO.
And if you take a picture of the company at that point in time, we're really an auto centric company. About half the revenues were auto related and we had operating margins of roughly 6%. In the middle column there, you see the strategic actions that we've taken over the last 2 years. The ADT acquisition was roughly 1,600,000,000 dollars The Tachi investment was about $600,000,000 So you've got $2,200,000,000 of cash outflows related to those two transactions. We then got the GWS divestiture, which occurred in the Q4 of fiscal 2015.
That brought in proceeds of about $1,700,000,000 In fiscal 2014, we divested of our electronics business, which brought in proceeds of about $1,000,000,000 And then we did the interiors JV in July of 2015, which as you know was a cashless transaction forming that global $9,000,000,000 interiors JV with Yangfeng Automotive. So $2,700,000,000 of cash inflows the GWS and Electronics transaction and the auto spin off will occur on October 3, 2016. As we've got in our deck, that will generate some type of net proceeds back to John's controls and remain in the range of $2,500,000,000 to $3,500,000,000 What that leaves us with at the end of fiscal 2016 and looking at 2017 revenues is a business that's got about 2 thirds building efficiency and a third power solutions and any business that really has a lot more financial flexibility as we move forward for strategic investments. Margin expansion, again a great story here. If you go back to fiscal 2012 2013, we were in the low 6% operating margin.
And as we look at fiscal 2016, we're expecting a 70 basis point improvement, 8.6 percent last year to 9.3 percent this year. And if you actually pro form a Hitachi out of the building efficiency results for this year, we will deliver another 120 basis point improvement in
core underlying business.
So if you look at the reasons behind that, we've done a good job, I think, in the restructuring area, really rightsizing our cost structure relative to the top line. The Johnson Controls operating system is delivering clear benefits and we continue to invest in products that have higher growth and segment margin opportunities we have in our historic business. The last item I'd point out there, we've talked a lot about the major transactions that we've completed, but there's probably a half dozen or so other dispositions that have occurred over the last 2 years in our smaller, what I would call, non core businesses that we've generated sales proceeds between $50,000,000 $100,000,000 and they were just non core. So we're cleaning up some of the cats and dogs within our portfolio as well. I'm not going to spend a lot of time on the Johnson Controls operating system.
I think Alex and, of course, Jeff in his detailed presentation have gone through this. We do expect a net benefit in 2016 of about $200,000,000 gross of $400,000,000 And if you look at that $200,000,000 of investment, I mean, as I look at that, there's certainly investments in people, there's investments in tools. Jeff mentioned there's some launch costs associated with getting these plants up and running with the Johnson Controls Management Manufacturing System. And the other thing that we've had to do in our plants is invest some capital. And as that capital is put in place, we've obviously got some depreciation expense that comes against the net benefits.
But all in all, a solid contribution expected in fiscal 2016 from JCOS of about $200,000,000 So if we think about CapEx, if you recall back in 2012, there were significant investments that we made, to the tune of about $1,800,000,000 And for those of you that are familiar with, John's Controls over the years, that was the year that followed our acquisition of Kuiper and Hammerstein, which are 2 metals businesses. And there were a fair amount of capital that was required to put into those businesses in the year following the transaction. But you can see since then, we've ranged in the $1,100,000,000 to $1,400,000,000 level. If you look at the color scheme there, building efficiency, you can see is increasing CapEx year over year. That's really reflective of the Hitachi investment and the growth CapEx we're putting in that business.
If you look at the Power Solutions investment, again, you can see that going up a couple of $100,000,000 year over year. Joe referred to that within the context of our China investments, both in our CX plant and the New North plant. And then the automotive decline in CapEx is really a function of the JV of the interiors business. But all in all, we're expecting about $1,300,000,000 in CapEx in fiscal 2016. So this is a familiar slide as far as the left hand slide that we presented a year or so ago.
It really kind of lays out how we view some of our key financial metrics as well as the areas that we look around balancing the appropriate capital allocation process around CapEx, dividends, strategic M and A and share repurchase. As I mentioned earlier, 2016 is really going to be a transition year for us. We're going to have significant automotive separation costs of $400,000,000 to $600,000,000 I would say given the fact that we're going to be operationally effective with the spin off, our target date is July 1 with a legal spin on October 3. Most of those separation costs will actually come in the first half of the year. So we have decided to pause our share repurchase program for the first half of the year.
We'll reevaluate at that time and then move forward, either with some share repurchase in the back half of the year or we may defer the share repurchase program until 2017. But that's that will really be dependent on how things play out over the next 6 months. Dividends, we will increase dividends again this year in line with our earnings growth. And strategic M and A will be continued to be evaluated by the management team. As far as the post auto spin off remaining Johnson Controls, we look to maintain or improve on our credit rating of BBB plus I mentioned we should receive auto spin proceeds of between $2,500,000,000 currently the expectation.
And then I would say we're going to move more toward really a multi industrial view from a financial metric standpoint. And what we'd really like to do is get to a point where our share repurchase program is put in place on a sustainable level. I think over the last 2 years as we've executed on the $3,600,000,000 program, it's really been a function of some of the divestiture forward basis, what we'd like to do is determine what is the real true sustainable share repurchase level for the remaining Johnson Controls. I think our balance sheet will clearly have increased flexibility without the auto cyclicality as a bit of an overhang. And I think we can look to probably take our debt net debt to cap target from 30% to 35%, up a little bit given the better balance sheet flexibility we're going to and strategic M and A will continue to be on the list.
So strong track record of dividends over the last 37 years. We've had 35 years of continued increases. Our Board approved at the last Board meeting an increase in this year's dividend from $1.04 to 1 $0.16 which is a 12% increase, which is really in line with our earnings growth. The share repurchase program, I've already touched on. 3 years ago, our Board approved a 3 year $3,600,000,000 program.
We completed $1,200,000,000 of that in 20 14, dollars 1,400,000,000 of that in 20 'fifteen, and we've got about $1,000,000,000 left. And as I mentioned, we're going to pause until mid year this year to see how we move forward with finalizing that program. So free cash flow, I'd like to kind of spend a few minutes on this. I know there's been a lot of discussion with many of you about our free cash flow on an annual basis and our free cash flow conversion as we compare ourselves to other multi industrials. And I'd kind of like to walk you through how we view this and what our opportunities are in this area.
So I would point out that as we look at fiscal 2016, there are some challenges that we face relative to the level of free cash flow that we're going to be generating. I mentioned the auto separation costs of between $400,000,000 $600,000,000 The divestiture of GWS, that was very much a cash flow business, right? It was a service business with very little CapEx associated with its operations. And so that cash flow through the divestiture will lose about $125,000,000 to 150,000,000 of cash flow per year there. We will have some incremental restructuring in the current year.
As I mentioned, we've got really the funding of the restructuring that was announced in Q4 of fiscal 2015. And then we'll probably have some more restructuring that we announced during the course of fiscal 2016 as we move toward the AE separation and really take care of some of the stranded costs we expect that we need to take out of the business before we get into fiscal 'seventeen. We've got some transaction tax payments. So as you know, in the GWS deal, we did have a gain on that transaction. The tax leakage on that was pretty minimal, to be honest.
I think our tax payments in total will be about $200,000,000 on that transaction and those will actually fall into fiscal 2016. And there's been some tax law changes in Mexico that we're going to make tax payments of around $300,000,000 in fiscal 2016, which also provides a little headwind, but I'll kind of walk you through that in the next slide. Another item would be the interiors joint venture. Because it was just formed in fiscal 2015, we will not be getting a dividend from the interiors JV in 2016. But after fiscal 2016, we would expect on kind of a 1 year lag to get dividends out of that JV.
And those dividends will range anywhere from probably $60,000,000 to $85,000,000 based upon current forecasts. We've talked about through Joe and Bill, they've talked about a lot of the growth CapEx investments we're making in our business. And we do have some areas, I think, in trade working capital where we need to do a better job. I think BE has got some issues and receivables that we can go to work on. And I think Power Solutions has some inventory areas in certain pockets where we can do a better job.
We obviously have to balance that against customer expectations as well. So I wanted to kind of take you through a reconciliation of reported cash flow to, what we call adjusted free cash flow. So if you look at the top line there and you go to our 10 ks for 2014 and 2015, that's what you would see as our reported cash flow, dollars 1,200,000,000 in 2014 and $500,000,000 in 2015. I've tried to reconcile back for you what we kind of view as a more normalized free cash flow number. And I guess I draw your attention to the middle column there.
In fiscal 2015, we made 2 specific decisions on discretionary items that we felt were contributions to our pension plans. So we were able to maintain those plans at about an 85%, 86% funded level. And the second item is we had tax audit settlements in the U. S, Mexico and Germany. There were in total about 36 open years of audits that got completed in the Q4 of fiscal 2015, we made tax payments of about $400,000,000 and we had reserves established for that of about 500 $1,000,000 So net net from a P and L standpoint, we reversed $100,000,000 worth of reserves, but it was a cash outflow of $400,000,000 So the way we kind of view our adjusted free cash flow, we're going from $1,300,000,000 in $14,000,000 to $1,400,000,000 in 'fourteen I'm sorry, dollars 1,400,000,000 $1,500,000,000 in fiscal 'sixteen.
And again, that doesn't have the Interiors dividend in it. That's really, kicked out a year. So free cash flow conversion. We have a lot of discussions around this with many of you. What the top line represents is if you take our free cash flow adjusted for one time items and then also adjust our net income number for one time items, that's the top line.
You can see it's roughly in the 60% range for Johnson Controls and for the auto spin company, it's near 50%. Mid-70s level, when we look at BE and when we look at Power mid-70s level. When we look at BE and when we look at Power Solutions over the next couple of years, in particular in 2016, there are conscious decisions we're making in growth CapEx that drive our adjusted free cash flow conversion number down. If you adjust for that, you get to a more normalized free cash flow conversion rate in the mid-70s, I would say, for remaining Johnson Controls. If you go back in pro form a in a similar exercise that for 'fourteen and 'fifteen, you end up in the 73% to 75% range.
So not where we want to be. We've got a target of 85% to 90%. But again, investments growth investments, we would much rather spend our money there than generate free cash flow and not use it for growth opportunities. So let me take you into fiscal 2016. So we've got some good momentum going into the year.
We've talked about the portfolio activities that are complete. I would tell you the auto separation is well on track. We've got an operational date for July 1, targeted and a full spend date of October 3. And I would say all of that as we sit here today is well underway and on track. We've got a number of investment opportunities we're looking at.
And I mentioned some of the restructuring and JCLS benefits that we continue to see come through our results. As far as specific actions in fiscal 2016, complete the spin transaction, execute on the restructuring and probably take another bite at the apple relative to restructuring charge in 2016 to get out the stranded costs. Bill talked about Hitachi integration. You'll see that kind of flow through the discussion here I have on BE. But that $3,000,000,000 in Hitachi sales at 4% margins does have a dilutive impact on B margins this year.
So we've got to get the residential air conditioning margins improved over the next few years Focused on free cash flow, continue to look at M and A transactions. And I think China from an automotive standpoint, we've seen some positive things in the last couple of months. But I would say as far as BE, we continue to see some stress in Asia, certainly, in particular in China. So our outlook for 2016 has some key assumptions built into it. You can see we see a slight uptick in North America.
I would say as we sit here today, we're probably seeing better than planned volumes in North America. Europe relatively flat and China is a bit TBD. Again, I think in the months of July August, we were a bit more concerned about China. But I think with some of the tax incentives that Alex mentioned, we feel a bit more comfortable with our China growth that's in our plan than we did a couple of months ago. The euro we've got at $1.10 I know I've had some questions at the break about the euro and the dollar moving to parity.
And just to kind of box that for you, about every nickel in movement is about 25 $1,000,000 So, dollars 50,000,000 would be the delta in sync if we were at parity 1 versus 110. Tax rate will continue to be at 19% and the M and A activity. One thing I'd point out here, we are consolidating the Hitachi joint venture, but remember that we've got a 60% interest in that joint venture. So there is a minority interest add back or charge in the income statement for the minority interest partner share of earnings on an annual basis. The Interiors JV closed in July and the auto spend as we've talked about.
Construction spending, you can see the numbers there relative to growth rates. I would tell you the Asia growth rate is probably under pressure as we sit here today. We've got built into our models, diluted shares, weighted average diluted shares of about 652,000,000, which reflects the deferral of the share repurchase program until we reevaluate midyear. It also assumes some level of new share issuance in connection with option exercises. So what does that translate to relative to consolidated results?
You can see top line is up 4%. You kind of unpack that, you see there's $3,000,000,000 added for Hitachi, but there's also $3,000,000,000 coming out in the interiors business as we JV'd that last year. And so what you're really seeing top line is the organic growth in Power Solutions and Building Efficiency, offset with a slight decline in the automotive business, and I'll touch on that in a second. Segment income growth year over year of 12%, 70 basis points improvement, 120 basis points improvement pro form a with Hitachi. EPS of $3.70 to $3.90 And as you know, that compares to $3.42 in fiscal 2015.
So that would be a growth rate of anywhere from 8% to 14 percent. Net financing charges are up a little bit year over year. That reflects minority interest because I think it's important for the group to understand. If you look at our fiscal 'fifteen income statement, minority interest is $112,000,000 add back. So it's really the minority our minority partners share in the income that's consolidated in our primary income statement.
But with Hitachi this year, the you kind of do the math and you'd say, okay, well, at $3,000,000,000 in revenue with 4% margins is $120,000,000 and 40% of that goes to the minority partner, you'd expect an add back of about $48,000,000 That number is actually closer to $70,000,000 because there are a number of lower tier entities within the Hitachi business that are accounted for. They have majority ownership in those entities. So they've got a minority charge at the lower level within the TACI organization. So the all in number for the TACI minority interest this year is going to be ballpark about $70,000,000 CapEx at $1,300,000,000 I've already talked about, net debt to cap is 34% to 37 percent. That's an end of the year number.
I would tell you that in the early part of the year, you're going to probably see our net debt to cap a bit higher than that with the AE separation costs and adjusted free cash flow as I've talked about of $1,500,000,000 for the year. So let's go through each of the businesses. So building efficiency, growth rate up almost 40% inclusive of Hitachi. But if you pro form a Hitachi out, we've got what I would call a very aggressive growth rate of 11% 9% to 11%. That really reflects organic growth in North America and what at the time of our plan and what we're seeing today is still a pretty solid pipeline of quoting activity in the market.
Asia volumes, I talked about being a bit of a red flag for us as we sit here today. Margins at 8.1% to 8.3%. We finished last year at 9.1%, so they're down 80 to 100 basis points. That was all planned, from the standpoint of the strategic investment that we made in Hitachi to get the VRF technologies. If you pro form a out that strategic investment, our margins are up 30 basis points and they were up 70 basis points last year.
So we've historically guided about 50 bps a year in average annual improvement. And so we're really right on track with our previous guidance. One of the things you'll see this year is we are going to be changing our reportable segments for BE. On the left hand side of the chart here, you can see our current segments. Now keep in mind, GWS would historically have been on that left hand side as well.
But we've obviously divested of that business as of this point. So we had 3 segments that were reported in our year end 10 ks. The adjustments we're making, I think, are going to make this business a lot more understandable for this group and much more transparent. The way to look at this is we're taking the North American products and distribution business that used to be embedded in North American Systems and Services and we're pulling that out and setting up its own reportable segment on a go forward basis. We're taking the ADT acquisition and we're taking the UPG business, which historically have been included in our other segment and we're putting those in the products and distribution segment.
And then we're going to take the Hitachi joint venture and we're putting that in Asia. So the only other change and it's footnoted there is historically we've had embedded in other a fair amount about 100 and $50,000,000 worth of engineering and R and D investment. And we're taking that out and we're applying that R and D investment to the segments that we think it best relates to. So about $150,000,000 got spread between the 4 segments on the right hand side. So I think what you're going to find as we move forward here is this is going to be a lot more transparent relative to kind of our branch and project business, which is North American Systems and Services, our products and distribution business and then geographically, Asia and Rest of World and Rest of World will be Europe, Latin America and the Middle East.
Midterm outlook for building efficiency is 4% to 6% top line growth, which I think reflects primarily the Hitachi growth as well as some incremental sales in emerging markets. And we expect a 30 to 50 basis point improvement in margins on a midterm outlook basis. And of course, a big piece of that will be the residential air conditioning business that Bill and his team will be working on. Power Solutions, strong growth expected in fiscal 2016, 9% to 11%. If you kind of unpack that between aftermarket and OE, We're growing 7% aftermarket and the underlying market is growing at 3%.
So we're picking up nice market share in the aftermarket side. And if you look at OE, growth rates at 5% for Johnson Controls. If you look at the underlying market growth rates, it's around 4.5%. So we're getting a little bit of market share gain there, but pretty much in line with market growth on the OE side. AGM volumes up 22%, Joe touched on that.
I've got a slide that I'll show you next on that. And although a small base to work off of, our China volumes are up significantly 30% to 40%. Our margin is at 17%. Again, that is a planned margin target that we had for this year because we knew we were going to have launch costs associated with the CapEx investments we're making in China. And there's also some advanced battery investments that we knew were going to be incremental in fiscal 2016 as well.
And I'll show you a chart here in a couple of slides on, our historic performance and margins at Power Solutions. So if you look at AGM growth, again, great story here. If you look at fiscal 2015 to fiscal 2016, we're basically doubling AGM volumes in Asia and North America. And then if you take it all the way out to 2020, you see nice growth in Europe, but you see fivefold increases in AGM in Asia as well as North America. So that is huge unit volume increases, also comes with it nice top line and nice margin improvement.
Midterm growth 7% to 8%, that continues to reflect market share gains and our growth in China and margin expansion of roughly 40 to 50 basis points a year up to 18.5% to 19%. And again, those numbers in the midterm are offset by continued investments we're making in China and in Advanced Battery Technologies. So here's the chart that shows so we had fiscal 2015 margins at 17 point percent as most of you know. That was a huge improvement from fiscal 'fourteen at 160 basis points. I would tell you on a normalized basis, we pretty much view the trajectory of our margin improvement to be in line with what we talked about a year ago and we consistently look at this to be a 40 to 50 basis points a year, margin improvement business.
Automotive, we've got 2% to 3% decline top line exclusive of automotive. And I think as most everyone in this group knows, a couple of years ago, and we've been talking about this for the last 2 years, we made a decision to really pull back on the capital that was being allocated to the auto business. And we also put in place some new business profitability hurdles for the auto management team as well. And we're now seeing the impact of that coming through in the top line. And we're seeing small reductions in revenues for auto in 2016 despite really some strong global volume improvements across the board.
Margin expansion is up significantly to 6.8% to 7%. Those are record levels for the automotive business. But you keep in mind that of that, there's about 70 basis points of that improvement that's kind of accounting because we're now looking for our interiors business on an equity basis. So we get the income benefit in sync, but we don't have the sales of the denominator. But still solid margin improvement in the auto business of about 70 basis points in the current year.
And a lot of that has to do with the JCLS benefits, G and A, reductions and continued improvement in the margins we see in our metals business. Quick snapshot here of China sales on a 100% basis. You can see the significant increase between 2015 2016. That's reflective of a couple of items. That is the interiors JV at Automotive in the light blue.
Then you see in the green, that's reflective of the Hitachi investment that we made and their dominance in China. And as Bill mentioned, we end up number 2 in the market with roughly a 20% market share compared to Daikin, which is, I think, is about around 30% or so. But again, strong growth in sales in China at 100%. If you look at the sync margins during this period, you can see us going from $1,000,000,000 in fiscal 2014 to $1,800,000,000 in fiscal 2016. The margins on that are roughly going 12% in 2014 down to about 11.2% in 2016.
And that reduction in margin is really reflective of the interiors JV being at a bit lower margins than our seating business. So what do we pick up from an equity standpoint based upon that again, that previous slide was China at 100%. This shows what our equity income is going to be $15,000,000 versus $16,000,000 You can see it's going to go from $375,000,000 up to $547,000,000 And most of that increase is due to the, interiors JV, which is about $110,000,000 of that. And then there's also the Hitachi JV that contributes most of the remaining piece of that. And you look at China in both years is roughly 70% to 75% of our equity income on a global basis.
So to summarize, that brings us to our commitment of 3 point $7.0 to $3.90 for fiscal 2016. I think that is the management team is committed to deliver on that. We've got a lot going on with the Hitachi integration, the AE separation and a lot of the growth platform activities that we're working on. But this would reflect a growth rate of anywhere between 8% 14% that this management team is committed to deliver. So I'd like to take just a few minutes to finish up here and give you a little bit of color regarding the auto spin off.
So if you look at the financial profile of our auto business today, it's roughly a $16,000,000,000 business. That's a little bit misleading and that it's a $16,000,000,000 consolidated sales business, but it will have $17,000,000,000 in revenues and it's unconsolidated JVs. If you look at the growth opportunities in automotive, there's great organic growth opportunity in China. Our margins continue to improve at automotive. And automotive continues to have very much cost focus as they really have had for many years and they've got solid free cash flow generation.
If you look at the capital structure that we're looking at post spin for the auto business, our target is to have them at a high non investment grade rating. We're looking at leverage in that business to be somewhere in the 2 to 2.5 times EBITDA range. So EBITDA at auto is about $1,600,000,000 And we're looking at capital allocation flexibility, I would say, in the new business. I know Bruce and his team haven't finalized all their thoughts in this regard yet. But they certainly will have the cash flow to delever, but they'll have to look at that option versus dividend, share repurchase, M and A activity, etcetera.
So Bruce and his team will be talking to this group a lot more about that as we move through fiscal 2016. So that leaves John's controls with a profile of investment grade rating at least maintain or improve our current credit rating. The spin off proceeds assuming about a $500,000,000 of cash is retained in the auto business. We should get a dividend back at, John's Controls of between 2 point 5 will provide us a lot of flexibility from a capital allocation standpoint as we move forward. And we would certainly continue to expand our dividend consistent with earnings growth.
So quick financial metrics here. I mentioned that leverage will be in the 2 to 2.5 times EBITDA. Cash on the balance sheet will be between $400,000,000 $600,000,000 prior to the dividend. I think a pretty comfortable level for the auto business going forward will be a net debt to cap ratio of 30% to 35%. And the tax rate, we've got at 18% to 20%.
I would just mention in this particular area, there's a lot of work to be done yet in the tax area as we kind of prepare for the auto spin off. And there's a fair amount of tax certainly that 18% to 20% rating. So I guess from my perspective looking at it today, I would say that 18% to 20% is probably the top effective rate that you would see in the automotive business. I think there's some opportunity to reduce that. CapEx, I think you're certainly going to see a level that's higher than we've had the last few years at automotive by design.
And dividends, I think, is part of Bruce and his team's review of the overall capital allocation. There'll be more to come on that as they present in January. I think it was mentioned earlier, the Form 10 will be filed by March 31, 2016. And of course, as most of you know that Form 10 is essentially a 10 ks and an S-one document almost combined that really will be the documents that profiles what the auto spin company will look like with some pro form a adjustments and a description of business and growth opportunities. Time line, you can see where we are today.
I mentioned the Form 10 will be filed on March 31 or so. Bruce has announced, I would say, the majority of his management team. There's probably a couple open positions that I think the hope is that those would be completed by the end of this calendar year plus or minus. You can see the operational day 1 is July 1. And what we mean by that is Jeff Williams and his team are targeted to make sure that we can really run parallel in that automotive business for our 4th calendar quarter.
So there'll be separate financial reports. There'll be corporate functional leaders that are responsible for the automotive business. And we will really truly be running in a parallel mode for the Q4 anticipation of the spin on 10.3. So bright future ahead. This is the slide that Alex ended his presentation with.
I think when we look at our opportunities that lie ahead for Johnson Controls' execution is very, very important, particularly during the time of all the change and potential distractions with the separation and other transformational growth platforms that we're working on. But JCOS continues to be a very embedded process within the company right now. I think our balance sheet for growth and long term shareholder value will be as strong as it has ever been at John's Controls as we finish fiscal 'sixteen. And with that, I would just leave you that a year from now, I think we've positioned we'll have positioned both these companies to be very profitable, long term successful companies, one being Johnson Controls with fiscal 2016 revenues of roughly $22,000,000,000 $2,400,000,000 in sync, in an automotive business, that will roughly be $17,000,000,000 with $1,200,000,000 in sync. So with that, I think we're going to take a short pause here, a short break, 5 or 10 minutes.
No? Just all right. We'll get the stage set up for Q and A.
So I think on our schedule we have about 20 minutes. So hopefully and then of course we have lunch and you have opportunity to ask questions at lunch. Question over here.
Hi, good morning. Emmanuel Rosner from CLSA. Question on the lithium ion battery side, I guess, of your business. In one of your early slides, Alex, you had essentially a view that the overall energy storage markets will grow 7% a year, but within that, it's essentially lithium ion at 15% and lead acid at 5%. Can you maybe give us a little more detail on your investment strategy on the lithium ion side?
I mean from the outside it looks like, yes, you have good capacity in Holland, Michigan, but that's maybe a little bit small compared to some of the massive investments being made elsewhere on lithium ion. And then on the stationary storage, do you view do you see a great opportunity outside of lithium ion for buildings to in that market?
Yes, good question. So here's the way I would think about our lithium ion strategy. Our lithium ion strategy is twofold. 1 is to support what we see as a continuum in the combustion engine of low voltage battery. So I think that as we think about trade offs and where the opportunity for us, where we'll fit, we'll likely be as we migrate to 12 volt and 48 volt systems and that will be a real focus around our development.
So if you went inside Johnson Controls and looked at where we're making most of our development because that's closer to our core. The other thing that's clear to us is that the not only the synergy opportunity, but the distributed energy opportunity is no longer a nascent opportunity. It's becoming something that we believe and if we were here a year ago or 2 years ago, although we were working on it quietly, I think we were concerned it was much more nascent than we are concerned now and we think that's our best entry. So as we think about where we're going to focus that would be the places that we would be focusing our efforts. Does that cover it?
Hi, guys. This is Johnny Wright at Nomura. So two questions. The first, you talked about the separation costs associated with the autos business. Do you have a view on kind of dissynergy from the spin and sort of sizing that?
Yes. I think the separation costs, as I mentioned, were $400,000,000 to $600,000,000 And I think the stranded cost number that we kind of box right now is probably in the $150,000,000 to $200,000,000 And I
think if you ask about dis synergies, I assume you mean beyond just stranded costs because you have to deal with that.
On the procurement side as well.
Yes. So one of the things that we're trying to do and we've found we need to make sure that we have arm's length transactions, but there's but as we go to our vendors and our suppliers, we're going to them together. As we renegotiate, because we're going through a process now of renegotiating with our vendors, so everything from IT to consultants to any other products that we would buy because we're not going to be competitors. We're not in different space. And so we're doing the best that we can to make sure that we don't have those dis synergies, which would mostly show up in purchasing by going to our vendors together.
Okay. On the free cash flow, that 77% number you gave kind of ex growth CapEx, what are the things that get you to the 85% to 90% range? And then beyond that, what stops you getting to 100% cash conversion? Kind of what are the easy wins? What are the hard long term goals?
Yes. So I think the 85% to 90% is achievable. If you take a look at some of the trade working capital areas of improvement that I had in that slide, I think there's some opportunities in BE and the receivable area and I think there's some opportunities at Power Solutions and inventory. I think those two opportunities would probably get you to a number with an 8 in front of it. And then I think we just as you and I talked at one of the breaks, I think what we really need to do then is balance how important is it for us to get up to that 100% level versus continuing to make investments in growth areas that we have in building efficiency and power solutions.
So I think a target an interim target of 85% to 90% is achievable. I think 100% is probably a longer term target for us simply because we've got so many investment opportunities.
Yes, I would so as I look at the we've studied this quite a bit. Look at the metrics as we compare the remaining Johnson Controls with our multi industrial peers, very clear that free cash flow would be at the bottom of the list. It's also very clear that we'd be on the top of the list as it relates to growth. And so as long as we're able to maintain that, then I'm okay. Let's say margins are improving and I think we have lots of opportunity for margin improvement.
And if we can stay near the top as it relates to growth profile, then I'm not as concerned about the free cash flow. But I think that those two things need to be in balance because a lot of that ends up being investments in capital, particularly in our Power Solutions business. But we are investing more today than we ever have in our buildings business. So I see those as being a trade off and we need to make sure we manage that.
Hi, good morning. It's Josh Pokrzywinski at Buckingham. Just a couple of questions on B, I guess to start off. When you talk about some of the biggest margin opportunities in the portfolio, clearly, B has the brightest light shining on it. But it seems like there's a bit of a disconnect with the 50 basis points a year that you have in the forecast.
Even that 10% maybe isn't quite where some of your peers are at. And a 20% incremental margin over that forecast horizon, again, seems a little bit shy of world class. So could you just maybe talk about what you're doing inside of BEA from a cost perspective? I think Bill's presentation spent a lot of time on product and channel maybe versus cost. And then how does that $2,000,000,000 from JCLS filter down into to be over the next several years?
Yes, there's on the cost side, the first thing I talked about in the presentation was
we were taking
out about $100,000,000 in G and A and de layering. So that's $100,000,000 of cost coming right out right there. Part of that money is being reinvested in product. The second big opportunity in cost that we've already embarked on is the supply chain and that has really two aspects to it. The first is on the purchasing.
So we've restructured our purchasing department to really be 3 layers of where we actually do it's driven by our JCOS process but and things that we learned in our auto business where we do what we call MBBP, MBBP Lite and eAuction. That actually is showing a great deal of opportunity on the cost side. The 3rd opportunity on the cost side is just our manufacturing operations. When you look into our manufacturing operations to become world class, we have opportunities there. And actually, we picked up our CI, and I mentioned this in the presentation by almost double this year, driven by JCS as well as tailored business streams.
The next opportunity, which is something we've started, but we probably haven't fully engaged in is actually the teardown process. So for example, on the rack business and the VRF business, we've torn down all our competitors' products, tested them and we actually see opportunities by using some of their best practices, using some of our best practices to take out product costs. I actually think that's a big opportunity yet to be fully mapped.
$1,000,000,000 comes back into B Or is that is it too early to think about how that dimensions out?
Yes. I think I haven't dimensioned that to tell you the truth. I don't know if you have a view.
Yes. I would say when you think of the $2,000,000,000 and you think of automotive being 2 thirds of our manufacturing plants and 50% of the controllable spend, you could then say that the $2,000,000,000 you're spending the $1,000,000,000 with that of Power Solutions and BE and it's roughly half. I think
a margin expansion opportunity is more than just on the cost side. New product launches, right, will give us margin as well. You can actually see margin differentials around products that we've new products that we've launched versus older products. And so the ability to actually change the investment cycle actually has a lot of margin expansion. We haven't mentioned that yet, but we I believe that's upside as well.
Let me add a couple of things.
So I think that we have some structural impediments that won't get us to at least some of our peers. If you look at where we're strong at the more complex contracting level, it's a different margin profile. And where we are weak is in the residential light commercial. Now we're trying to add to that because you have a lower cost of sales and it's just a different margin profile. And so we also need to make sure that structurally we can get our portfolio more balanced so that we can get to the margins that our peers have.
Because if you it's not going to happen on the back of a very large contracting business is what we have. So it's a great question. I think over time it's something that we'll have to continue to answer. I've even seen some of our peers say, you know what, our margin focus has really caused us not to grow. And so we want to make sure that we're able to grow our business, but we have plenty of room for margin improvement in all of our business, but we do have to reshape our portfolio.
I mean things like ADTI, the products that we're going to get from Hitachi even though right now being dilutive. And I think that you look at our position in the residential North America it really hurts our margin profile. So we know what we need to do, but some of it's more transformational and some of it's just some hard work. I have a question here. Right here.
Yes. Hey, guys. Good morning. It's Robert Barry from Susquehanna. So, another question on BE, just this 9% to 11% organic growth.
Brian, I think you even described it as aggressive. I would agree. And I was wondering if you could just unpack it a little bit and help us get comfortable. It sounds like it's weighted to North America, which implies that it's even greater than 9% to 11% in North America. Your growth assumption is only 6.
So that's substantial market outgrowth. Just give us some color on how we get comfortable with 9 to 11, especially given the Asia pressure.
Sure. So the first thing is we're 1,300,000,000 now or 1,350,000,000 dollars right. Just momentum, just the market growth as you saw some numbers in the assumptions that Brian showed, right. We'll get you about $450,000,000 to 500,000,000 dollars of that $1,000,000,000 growth, just the increase in the market in and of itself. Because of the ADTI acquisition, right, we see another between $75,000,000 $100,000,000 growth in the cross selling opportunities that we haven't fully taken advantage of.
We also are investing in the chiller business as well. The Hitachi acquisition has a number of growth opportunities in it. We've already I mentioned the North American launch. We're also growing in China where others are not. So those have a when you kind of combine though, that's another $100,000,000 roughly.
And then on the controls business, we're actually making investments on the device side as well as the platform side and that has a real growth opportunity. And then finally, we're building out some channels, specifically you've heard 3 of them today. One is a 200 new salespeople in North America that has an opportunity for growth, building out sales channels in China as well as building out our DX channel in North America.
But all that new product and channel investment, I mean, is that ROI actually expected to impact
business, But we launched a bunch of this product early on. So for instance, I mentioned we've launched actually 2 chiller platforms already and we cost reduced the chiller platform, which allows us to actually grow market as well. So those launches of they started in, let's November, December timeframe of last year and we're launching product already. So the product will be now launching over a period of time, but you're right, it's a long cycle program.
And the main competitors there, is that Ingersoll and UTX? Is that where you see the opportunity
coming from or?
No, not only because they don't play in the ADTI space as well. They do play in the air handling space. We have an opportunity in the custom air handling units as well, which we're a small player in, but we see potentially $15,000,000 $20,000,000 of growth right there as well.
Okay. Thank you. Sure.
How about right here, because his arm is getting sore.
I thought she was ignoring me.
You were so close. I can't see everybody else. Everybody else's arm is also sore, but I can see that his is.
Thanks, Alex. It's Jeff Sprague from Vertical Research. A couple of things on capital deployment and M and A perhaps. First on the deals, the road map was helpful. I thought the couple of targets were a little peculiar though, accretion in year 3 and WACC positive in year 2.
The accretion sounds super easy and the WACC sounds difficult. If you would have said accretion in year 2 and WACC in year 4 or 5, I'd like that to be okay, I get that. So is there something in the way you're thinking about capital or your returns or something that you could share with us to maybe elaborate
on how
you came to those numbers?
So hopefully it makes sense if you remember the list and we talk about one of the profiles that we need, which kind of drives us to a near adjacency is that we want to make sure that we can get to our synergy targets that you're talking about here from a cost perspective. And so if we're able to get a cost perspective, because a lot of the things from when you look at revenue, obviously, we want to have growth platforms, but we need to make sure that the synergies are going to drive costs. And I think that's probably what drives the near term benefits in the models that we have.
And clearly, we could all presume where you might head on M and A from those overlapping circles you put up there. But how do you weigh M and A against share repurchase? If we think about your conviction on organic outgrowth and your conviction on the company being undervalued, would that naturally bias you toward share repurchase at least in the kind of near the intermediate term?
I think we're going to be faced with that decision. We're going to get a dividend here in a year and we're going to have to make some choices. I think there's some very obvious things that we can do there, be accretive and that will also help. The way I characterize it is, I think in Power Solutions we have an opportunity to grow. We can find the right adjacency and we can create value very quickly, I believe that.
I think in building efficiency, I look at it a little differently. I wouldn't go so far as say we have to fix building efficiency, but we have gaps in building efficiency. And there's some gaps that if we could fill at the right price that we would want to fill. Other than that, when you get further out, you really look at it, share repurchase probably looks like probably a better answer.
Just a real quick one for Brian. Could you elaborate a little bit more on kind of the debt capacity on the RemainCo visavis that credit rating that you're targeting? And maybe you could express it in terms of leverage on EBITDA so we have another reference point?
Yes. I mean, I guess if you take the dividend that we said was $2,500,000,000 to $3,000,000,000 right? So $2,500,000,000 $3,500,000 So let's say $3,000,000,000 is the dividend. Our current debt net debt is about $6,500,000,000 or something like that. So I mean if you make it easy and just say you're going to take all that cash and pay down debt then lever back up, I would say that we could lever back up pretty significantly to a level of 2.5 to 3x EBITDA.
And 2.5 to 3x EBITDA will be for the remaining business, it would be a number of about $4,000,000,000 of EBITDA with Power Solutions and BE together, so 2.5x to 3x.
Yes. So I think that and I actually think that and I'm sure we haven't done a good job, but I think one of the things that we haven't been able to articulate is we will be we expect to be rerated as a multi industrial give feedback. We expect the dividend to be significant. So I think our flexibility will be there. You asked a question about share repurchase.
I think right now that's probably maybe because we're in the middle of all this. I don't think this is really built into our stock price today.
Colin Langan, UBS.
You highlighted today one of
the big highlights is distributed energy systems. Can you remind us of who the key players are in that today? And can you give us any color on where your cost of the systems are in terms of kilowatt hours? And you mentioned lifetime was better than or competitive where it is relative to your peers?
I don't have that information. Do you have the cost information you want to view?
Well, I think the cost information that you want is not really the way that we look at it. We're not talking in a KWH capacity, the same way that people are talking about cells today. So the module that you're seeing and the commercial model that we're testing is more about packaged application systems. Today, we are competitive with a host of folks that are out in the marketplace. Obviously, there are some very high profile folks like Tesla and LG Chem and Panasonic, A123 in Asia.
I mean, all of the players that you see in the lithium ion space are dabbling in this space as well. We think that we've got a legitimate place to play. What we've done is in a lean startup model here is move forward with minimum viable products using 80% of our own manufactured content, but we're also exploring other opportunities to maximize that as the market matures. And now we're testing, the commercial models to understand where are the profit pools, where will we really need to play to win as the market develops.
Yes. And if I could and I'm going to get these numbers. John, you may have to correct me. If you look at the sell just for a minute take the cell out and if you're selling the cell at $100 a kilowatt hour or $200 or $300 you're talking about 10% to 15 percent of the total cost of the system. And so as you I understand the question and I understand because that's the focus that people have.
But when you talk about an engineered solution that's going to be engineered, not only packaged but engineered and integrated into a building, you're really talking about a very small part of the overall systems cost. And I don't know how to tell you what the delivered cost is, John Schaaf could, but I think this will be application dependent. Can I
just I had one other question? At the beginning of the presentation, you talked about building efficiency, not having a reason to be those margins not being no reason they couldn't be in line with peers, I believe is what you said. But when I look at some of your peers, they're at more like 13%, 14% margin.
So
is that a comment meant really from an apples to apples since you are a little servicing heavy? Or is that really where you're thinking in 10 years you could go to that sort of competitor level?
So I when you look at the margins of our competitors, there's no reason why we the numbers that you just said is no because of of the mix of their business that it would be very difficult for us to duplicate. So the 13%, 14% margins is something that we should aspire to. Bill? Agreed. So it's clear.
Just to give you a sense too on the product lines, right, on the product side of the world, we're there or we can even be better than those numbers, right. When you get to the service side, when you're actually in the field, those have different margin structures as Alex pointed out. And so the mix matters a lot in this.
Yes. And the reporting structures that we're putting in place is to help us and help you give more transparency. So as we talk about this mix of our business, I'm hopeful that our new reporting will bring some real transparency on that, so that it's we're not looking at this black box that we can't understand where the margins are. So it will be really interesting when we have our first set of reporting, the feedback that we get from you if we're getting the transparency that you need in order to see our progress to that down that path.
Hi, everyone. It's Rich Quas, Wells Fargo Securities. So a question for Bill here, a couple of items. In terms of the budget product that you're introducing in China, how does the margin compare to your base supply business?
So this is the so what we've launched in China is a water cooled screw, which is basically when you talk about platform, right, the budget side is really 100 tons, 130. We actually launched 5 products, 100 ton, 130, 160, 175 and I'm sorry, 175, 200 and 230. The margins vary across each one of those depending on the our competitiveness, right. So for instance, on the $200,000,000 $230,000,000 the larger size, we get comparable margins. On the $110,000,000 $130,000,000 side, they're less.
And so that was a platform we launched very quickly. It's actually going to be a couple of year program for us to launch a full platform. We'll launch another piece of that platform this year and then a final piece of that platform with heat recovery the following year. So these platforms actually take a long time to launch. We've already had a number of sales in that space already, but the margin profile isn't as good as it could be and it will be quite a bit better as we launch the next product cycle.
Okay. That's helpful. And then
in terms of post Hitachi with the vertical integration on the component side, How should we think about the cadence of that when you look at some of the key components whether it's compressors or other items? How does that flow through over the next few years in relation to your mid term target?
Yes. 2 transaction was getting the VRF business and the VRF business came with a vertical integration on both a scroll and rotary compressor business. So the and that's actually an important point because the compressor actually drives the cost structure, not the only driver, but a major driver of the cost structure of any VRF design. So actually this coming year, we're going to launch another compressor platform, which will help us lower improve the cost structure of the overall VRF platform. The good thing is that we have both a scroll and a rotary.
I don't know how much you want to know about this, but the rotary is predominantly in the rack side, but it will creep up into the VRF side too. And we are actually a merchant supplier to GRI and other players in that space as well. Yes.
Yes, thanks. Zener Mas from Stifel. A question on the Power Solutions margin expectations. You're guiding down around 50 basis points. How much of that is driven by investments in AGM and lithium ion versus kind of organic performance?
And do you assume additional lead cost reduction kind of pass throughs?
So I'll just tell you that there's no performance issues in that business today. The biggest performance issue we have in the business today is that we're running short on batteries and we're actually having to move batteries cross region
because we
can't wait for the capacity to get built. And so that's a short term problem. But other than that none of the margin changes has anything other to do with the investments that we're making.
The decision to lever the auto seating business to 2.5x or 2.25x, Does that speak at all to the lack of M and A opportunities that are out there for the seating business at that size? So you just run the business for cash flow? And then just one more
relative valuation of the automotive business and the relative valuation of the Johnson Controls business, if you have to understand that the fiduciary is responsible for the whole, it makes sense for us to lever up the automotive business. It's all an assumption. I mean, we'll see where the what's happening a year from now is all assumption on what the free cash flow predictions are going to be for the automotive business. But when you look at it and step back, it makes most sense to lever it up.
Okay. And just the comment about potential inventory reduction on within Power Solutions, how do you reconcile that with more AGM batteries that are going to need to be sold through that aftermarket at Advance also increasing their own distribution footprint to compete with the O'Reilly's and the NAPPAs of the world. Yes.
I think the inventory comment is very specific to certain geographies. I think there's probably out of the $150,000,000 of trade working capital improvements that we can get, there's probably about $35,000,000 to $50,000,000 that we look at, at Power Solutions and there's probably about $75,000,000 would be receivables and the remainder is just split across a variety of geographies. So it's not a huge number of power solutions, but it's something we have to go after.
Yes. And just adding that a little bit, in the short term, we don't hold on to those AGM batteries, Alex's capacity reference. They move out of our inventory pretty quick into our customers. And then beyond finished goods, obviously a big part of the inventory that we look at outside of North America is our lead inventories and that's a little bit about what Brian is even referring to.
Okay. So I want to thank everyone for coming. Appreciate your attention and we'll be around for next half an hour or so for any other questions you might have. Thank you.