Earnings Call: Q4 2015

Oct 29, 2015

Welcome, thank you for standing by. At this time, all participants are in a listen-only mode. Questions can be taken at the end of the presentation. To ask a question, please press star and then one. This call is being recorded. If you have any objections, you may disconnect at this point. Now I will hand the meeting over to your host, Mr. Glen Pundzak, Vice President of Global Investor Relations at Johnson Controls. Sir, please go ahead. Well, thanks, Abby, welcome everybody to the review of Johnson Controls' fourth quarter 2015 earnings. If you've not already received it, you can get the slide presentation at johnsoncontrols.com. Click the investors link at the top of the page, just scroll down to the events calendar section. You'll find the PDF there. This morning, Chairman and CEO Alex Molinaroli will provide some perspective on the quarter, followed by Executive VP and Vice Chairman Bruce McDonald for a review of the business unit results, then Executive VP and Chief Financial Officer Brian Stief will review the company's overall financial performance. Following those prepared remarks, we'll open up the call for questions, scheduled to end at the top of the hour. Before we begin, I'd like to remind you, refer you to our full forward-looking statements disclosure that's in the news release, also in the slide deck, remind you that today's comments will include forward-looking statements that are subject to risks, uncertainties, and assumptions that could cause actual results to be materially different from those expressed or implied by such forward-looking statements. These factors include potential impacts of the planned separation of the Automotive Experience business operations assets or results, required regulatory approvals that are material conditions for the proposed transaction to close, the strength of the U.S. or other economies, automotive vehicle production levels, mix and schedules, energy and commodity prices, currency exchange rates, cancellation of or changes to commercial contracts, as well as other factors discussed in Johnson Controls' most recent annual report on Form 10-K for the year ended September 30th, 2014, Johnson Controls subsequent quarterly reports on Form 10-Q. The company assumes no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this presentation. With that, turn it over to Alex. Great. Good morning, everyone. I'm going to jump right into slide 4. If you go to slide 4, I think it's a busy slide. We've been busy, and I think it's indicative of all the things that we have going on and the pride that I have in all of our people. In our fourth quarter, we continued most importantly with our ongoing improvement in each one of our businesses. Our EPS guidance, we've made significant progress across our portfolio transformation. As we remake this company and ultimately as we create two great companies once we spin our automotive business. In the face of some real headwinds in each one of our businesses and the company as a whole, we've achieved margins for the quarter and really margins for the year that we've never achieved. I'm incredibly proud of our entire team. If you look at our slide 4, you'll see that our improvements in our margins for the year is 120 basis points, and our EPS improved 14% to $3.42. The slide also does a really good job of putting into context the ongoing transformational actions that we've taken up to this point. It goes back a couple of years since we began this journey. Then specifically in the fourth quarter, you can see we completed the sale of GWS and consummated our Hitachi joint venture. Of course, the largest and most significant action that we currently have and that we've had underway is the spin of our automotive business, which is planned to be spun off on October first, 2016. If we move on to slide 5. A couple more data points. I already discussed our segment margins improvements and our EPS gain. Probably more importantly is the underlying health of our individual business operations. You adjust for FX, our segment sales were up 5%, and our income was up 16%. Slide 6. I've already talked about our record fourth quarter and our key portfolio actions. I'd like to point out that these business improvements aren't happening just because everyone at Johnson Controls is working harder. We continue to work smarter. We utilize the principles found within our Johnson Controls Operating System, and we continue to focus on managing the anticipated cost structure and the new operating models that will be necessary to run the remaining Johnson Controls and also our new automotive company independently. We're doing all this simultaneously and while we're able to achieve the results. I'd like to talk a little bit about our end markets. In China, Bruce will talk a little bit more about this, and we'll be happy to answer in the Q&A. We do have some good news. By the time we got to the end of the fourth quarter in the China automotive market, we were able to see that the dealer inventory began to get depleted and the sales began to move. We are actually feeling much better as we move into the fiscal year as it relates to China sales. What we saw is a tough quarter began to get a lot better as the months went on July, August, and September. One of the important things, and I've had an opportunity to see in some of the pre-reports, is I'd like to talk about our BE backlog. We actually have a slide on that, but first, I just want to give you a takeaway. The core of our business, selling equipment and selling controls through our branches, is growing. Because of the changing nature of our business, one of the things that's become more and more important for us is as we become product and distribution dependent. Our backlog, and I'll give you more color on this in a slide or two, is becoming less and less of a most important metric. Certainly, our sales are important, but if you look at our revenues have continued to increase even though we have a backlog that's been under pressure. That has to do with the mix of our business. I'm also incredibly excited to talk about the fact that we have our Hitachi deal done, and simultaneously, we've already released our VRF product, one of the leading VRF products in the world. We already put ourselves in a leadership position in China and in Asia, now we've released that product for sales and have already begun selling that product in North America. Then if you look at our battery business, specifically, if you want to look across the region, but if you look at our AGM sales, we'll talk about that in a little more detail, but essentially, we're selling every battery that we can make, and those sales are incredibly robust. Move on to slide seven. On slide seven, you could say we put it in a quarters perspective. Another strong quarter, if you look at our 150 basis points of margin improvement within our segments, it's something that we continue to be proud of. I guess, the context I'd like to keep that in is that we've done this quarter after quarter over the last couple of years, we continue to see improvements in all of our businesses and in our ability to execute. On slide eight. It's kind of a complicated slide, but I think it's really important because it seems to be one of the things that is giving people pause about where we are in our performance and our continuum here. I'm actually very pleased about what's happening in Building Efficiency. If you look at our Building Efficiency orders, Europe and Asia were down and we expected that. What we were really surprised is that at the end of the quarter and in September, which is usually a very large month for us for the federal government, there's some political realities that were the case and still the case, specifically in September, around the continued resolution. Our orders for the federal government business in North America were down 37%, that all actually really happened the last week of September. Hopefully, some of this work will come back over the next few months. That assumes a constructive resolution in Congress around the federal budget. This one's a bit out of our control. As you think about us and you think about our orders moving forward, our pipeline is robust. We expected to have a much different set of numbers. The federal government continued resolution discussion and challenges was something that caught us by surprise and is outside of our control. If you look at it and take it in context, orders in our branches were up 4%. If you look at our pipeline, that's 4% over the year, and if you look at our pipeline going forward, we still continue to see single-digit growth in our pipeline moving forward. The other thing that's important to note is that in the past, backlog was always an important measure of our business at Building Efficiency, and it was because our dependency on our branch and our projects business. As you all know, that people that have followed us in the past, three-quarters of our future sales usually came through our backlog, and that was a fairly good predictive measure. Since we made our acquisition of ADTi, we've increased our distribution sales, and now with the inclusion of Hitachi joint venture moving forward, that backlog information is become less and less connected. Certainly correlates, and it's important to have a backlog, but it'd be less and less important as we talk about our sales moving forward. Our truck plate sales were up over 4% for the year. Our distribution sales were up. The ADTi sales were also up. All those things are not reflected in our backlog. And you can see that if you look at the disconnect between our sales number, our actual revenue number, and what our backlog numbers were in the past. One thing that's not on this slide that I'd really like to point out is that the pull-through activity that's happening with CB Richard Ellis, something that we probably should bring more focus on in the future, and I think that's something that should become a topic, is something that we're very pleased with. It's actually started quicker than we thought. It actually began before we even closed the deal. A lot of that probably won't flow through our backlog either because it is dealing with individual customers and individual facilities. But we're seeing a real uptick in orders and a very large pipeline and backlog of opportunities. I'd like to talk a little bit about our growth opportunities and just give you some examples. If you go to slide nine. We're in the midst of launching many products, expanding our channels. I'd like to talk about a couple of our products that we've introduced over the last quarter, and specifically around our residential and light commercial business. You see the Champion LX Series. We also upgraded and enhanced our flagship security product offering, which is the P2000 access control system. And we've also launched some online tools for our residential contractors to help them be more effective and efficient and able to support their consumers more effectively. In Power Solutions, we announced our new plant to be built in China, in Shenyang, 6 million units. And we debuted in Frankfurt a new generation of advanced start-stop products that include both lead-acid and lithium-ion chemistries. In China, we also signed an MoU with BAIC to support them and their partners for their growing needs for start-stop batteries. Finally, we recently formally announced our lithium-ion distribution energy storage solution. We already have pre-sold and actually installed some of these systems, it's a launch that we're actually leveraging the technology we have from Building Efficiency with the distribution resources we have. I'm sorry, the technology at Power Solutions and leveraging the distribution that we have at Building Efficiency. Moving on to slide 10. In automotive, lots of new products and launches. If you look at some of the product launches we have within our automotive business, we continue to provide new products for our customers, personalization products that are becoming more and more important for a new generation of customers. We've launched our BMW 7 Series in the Czech Republic. Our core product portfolio and our mechanism family, very important part of our strategy moving forward. Our T3000 recliner and our Hydrogestor being released globally for multiple customers. In Frankfurt, we unveiled a new seat and interior technology, talking about the future when we talk about autonomous driving. Obviously, autonomous driving and the new technologies that are going in the vehicle is going to be a big part of our seating business in the future. Lastly, before I turn it over to Bruce, I'd just like to point out that we have incredible momentum in each one of our businesses, and we're going to continue to focus on our operational excellence through our Johnson Controls Operating System, improving margins, lowering our costs, and increasing our quality. We're going to do that in the same time we go through our automotive spin activities. Our pipeline of investments is strong, and if I think about what's happening with our AE separation, and you'll get more color on this when we see you in December, we're on track, on schedule, on task. This time next year, we'll be talking about two powerful new companies. I take that overall, if I look at our progress over the last two years, we're well on our way to be a leading multi-industrial company. With that, Bruce McDonald, you take us from here. All right. Well, thank you, Alex. I think as I go through the business operations, what you're going to see is, despite the fact that we've had a lot going on from a portfolio perspective, that our business leaders and all the people at the company have really been focused on delivering solid year-over-year results here. If we start on slide 12, we were really pleased with Building Efficiency's results here in the fourth quarter. You can see sales of $2.9 billion were approximately the same as they were last year, though stripping out foreign exchange, we had organic revenue growth of 5%. In North America Systems and Service, our business was up 6% year-over-year, and we saw good strength in our branch business, though that was offset by some of the softness in the federal government business that Alex talked about earlier in his comments. We've been talking a lot this year about the Middle East. We finally ran up against some more favorable comps. Middle East business were up 54%. Asia was level with prior year. Europe was down 3%, and Latin America, which continues to be very soft, was down 16%. If you look at our segment earnings in the quarter, $351 million were up 5%, and as we've noted here on our slide, backing out foreign exchange, it was up 8%. The year-over-year improvement will really be due to higher volumes and favorable price and product mix. The margins, which was a really strong story in the quarter, were up to 12.1%, a 60 basis point improvement versus last year. I would point out that this was the first quarter where the ADT acquisition has been in both sets of numbers. That business, you'll recall, closed in June of last year. This quarter, we had a clean comparable quarter from a year-over-year basis. The incremental benefit of ADT isn't what drove the numbers here. It was really just business performance. Lastly, I would just note for the full year, BE margins were up about 70 basis points. I think we're pretty pleased that despite the fact that we saw some currency headwinds and some of the markets didn't recover like we thought they were going to going into this year, the business delivered segment margin improvement of about 70 basis points, which was about 20 basis points better than the guidance that we gave at the beginning of the year for Building Efficiency. Turning to slide 13 in Power Solutions. For the fourth quarter, our sales were down 6%, though again, adjusting for foreign exchange, we saw organic growth of 3%. In terms of unit shipments in the quarter, we're up about 1%. Europe and North America were each up 1%. Asia was up about 4%. AGM continues to be a huge benefit, and you can see our growth is accelerating here. In the quarter, we were up 44% to just under 2.9 million units. If you look at our mix between aftermarket and OE, aftermarket was up about 1% globally, and OE was up 2%. Segment income in the quarter, you can see a nice improvement, up 5% to $340 million. Again, if you took out the impact of foreign exchange, we would've been up about 11% on a year-over-year basis. Exceptionally strong margin performance in the quarter, up about 200 basis points to 20.2%. I would just caution folks that that level of margin improvement, while we're pleased with it is not something that's sustainable. We don't see our business continuing to sort of grow at that level. The 160 basis points improvement for this year, we sort of went into the year guiding to 50-60 basis points of improvement on a year-over-year basis. The Power Solutions team, in the face of some of the headwinds that they had around foreign currency, I mean, just did a great job for us. Lastly, on page 14, I'll just talk a little bit about automotive. As Alex mentioned in his comments, our interiors joint venture closed at the beginning of the quarter on July 2nd. This is the first quarter that we're reporting our automotive results showing interiors as an equity investment. In other words, our interiors business is deconsolidated. When you look at our sales, and we'll see this for the next three quarters, our sales were down 21% in automotive, though if you were to back out the impact of foreign exchange and the deconsolidation of interiors, our organic growth in automotive was 3%. That's slightly lower than the industry production environment, where we're up about 5% in North America and Europe. The reason for that really being some business discipline and a courting process, primarily in North America. In China, in here you'll see a bigger number now. We're talking about our sales being about $2.3 billion, up about 27%. That's because we're now picking up the Chinese portion of the Yanfeng joint venture here. If you were to sort of adjust for that, what you would see in China was our underlying sales were down about 3%, and that compares a little bit favorably to the industry production environment, which was down about 5%. Just spending a bit of time on our interiors joint venture, which closed in the quarter. I would say we're sort of pleased with how that business has started out, that the numbers are looking pretty good there from a top-line perspective. If I looked at the sales in the quarter, about $2 billion, they were down about 2% or 3% versus the prior year. Though, if you looked at that by region, you'd see quite a different story. In our interiors business, North America was up 14%. Europe was up about 16%, really as a result of some of the new business launches that we had. China was down 16%. A pretty mixed picture from a top-line perspective in interiors. In China, it's been a hot topic lately, and I know there's a lot of comments about what's going on in that market, and I thought maybe I could share some perspective. I personally was in China three times in the last four months, maybe I could just comment on some of the things that we're seeing and some of the discussions that we're having with our partners and customers. First of all, I would tell you that the passenger car market, which is where we tend to compete, is holding up better than the overall market. Though, in the quarter, it wasn't a big difference, about down 4% versus down 6%. We have very little content on the light commercial vehicles. We're primarily exposed to the passenger car side. Many of our customers cut production in the quarter significantly more than sales, which led to some inventory destocking. We continue to see the SUV and the luxury car segment doing very well on a year-over-year basis. Right now, the market is in a little bit of a transition where the Chinese-owned brands are picking up share at the expense of some of the transplant customers. I would also commend our joint ventures on doing a great job in flexing their cost base down in light of lower production. Just to sort of give you a feel for that, if you were to look at our China seating business in the quarter, the equity income was a $5 million year-over-year decline. Even though our sales are down 3%, the impact to our bottom line here at JCI level was about $5 million. A nice job flexing the cost base. Lastly, as Alex talked about, we did see production improve sequentially throughout the quarter. As you look at the dealer inventory level stabilizing here, and with some of the benefits that we expect to see as some of the government incentives kick in on the smaller vehicles, we do see double-digit production schedule increases ramping up here into the first quarter or the last calendar quarter here. I'm pretty optimistic that the worst is behind us here in China, and we're going to start to see modest to mid-single digit type growth. Lastly, just comment on segment income, which was up about 4% after adjusting for the adverse impact of foreign currency in the quarter. If you look at the margins, our margins were 6%, 120 basis points higher than last year. Here we're really starting to see the benefit of some of the restructuring actions that we've taken over the last year or so, and then the benefits that we're getting in our plants from the introduction of our Johnson Controls Operating System. Maybe I would just point out, I've seen in some of the early notes a little bit of confusion around the margins and what the segment margin expectation was in automotive, and maybe just give a little bit of color there. As it relates to interiors, we showed segment income of about $10 million, which was down, I think, from $40 million the prior year. Just a few things I would point out in there. What you're seeing in that line item is the after-tax income from our Yanfeng joint venture. Previously, that number would have been a pre-tax number, that's worth about 15% or 20% is sort of the effective tax rate in that joint venture. We've also got about $10 million or $12 million of separation-related costs in the JV. That's cost of setting up new IT systems and things like that. Lastly, what you see in that line item is the wind down cost that we have with some of the retained plans. That's a loss, we expect that's going to continue here for the next 3-4 quarters. Overall, a solid performance from automotive, a solid performance from all three of the businesses. With that, Brian, I'll turn it over to you and the financials. Thanks, Bruce, and good morning, everyone. As you saw in our press release and as outlined in the appendix to today's slide deck, the Q4 results from continuing operation include five significant non-operational items, which resulted in a net charge of a $1.04 in the quarter. I'd just like to touch quickly on those five items. First of all, we had a non-cash mark-to-market pension and post-retirement charge of $422 million. The way to think about that, I think we've mentioned this before, about half of that roughly relates to the fact that we had to adopt some new mortality tables in the pension calculations. That caused right at about a $200 million impact. There was also with the August and September investment returns, we got hit hard in those two months, and we ended up, for the entire year, having about a $200 million difference between expected investment returns and our actual returns. All in a 422 charge. Secondly, we had a restructuring charge in the fourth quarter of just short of $400 million that related primarily to our automotive business, and then some non-cash impairment charges we took as well. The third item would be a gain from the formation of the interiors joint venture that Bruce referred to. That net gain was $145 million. Interiors is reported in our continuing operations, but we've excluded that $145 million from what I'll talk about this morning. We also had, as we have in prior quarters, had the transaction integration and separation costs associated with all of our portfolio actions that we're taking. The last item would be the net tax expense charge that was taken as a result of the tax effects of the previous four charges or credits that I mentioned, as well as some planning around foreign cash repatriation that was done in connection with a couple of the transactions. As I talk through the financials this morning, I'll exclude those items from my comments. Also remember that in the current year, GWS has been reported as a discontinued operation, and we've done that on a comparable basis in fiscal 2014. You may recall as well, electronics is a discontinued operation in 2014 also. Last item that Bruce mentioned was the formation of the auto interiors joint venture, which was formed on July 2nd. We deconsolidated that in the quarter, and we now maintain a 30% equity interest in that venture. As I go through the income statement movements, I'll refer back to the impact of the interiors deconsolidation. Overall, fourth quarter sales were down 12% at $8.7 billion, but that was due to the deconsolidation of the interiors business, which is about $900 million, an unfavorable foreign exchange of about $600 million, really across all three of our businesses, and that was primarily the euro. Excluding the impact of those two items, consolidated sales were up 3% and up across all three of our businesses. Gross profit for the quarter was 19.6%, which is up 160 basis points from last year. We really see the continued benefits of a shift in product mix, as well as the ongoing benefits we're seeing in the Johnson Controls Operating System initiatives. SG&A was down 12% year-over-year. Again, this was due primarily to foreign exchange and the deconsolidation of the interiors joint venture. We also had some benefits from certain of the cost reduction actions that we've taken, beginning in the fourth quarter here and as we move into fiscal 2016. Equity income of $105 million was 14% lower than last year, and that was due to the fact that in the prior year, we did have an equity interest gain related to one of our joint ventures. In the current year, the interiors joint venture income of $10 million that Bruce referred to, which is an after-tax number, that was offset by some shortfalls in certain of our Chinese auto seating joint ventures. Overall, fourth quarter segment margins were 10.7%, or 150 basis points better than 2014. Really strong operational performance across all three of our businesses. Turning to slide 16, net financing charges of $73 million were $7 million higher than the prior year quarter. That was really the function of average debt levels were a bit higher this year throughout the year. As far as the tax rate, both 2014 and 2015 have an underlying tax rate of roughly 19%. If you look at income from attributable non-controlling interest, that's down $12 million, and that really relates to some of the reductions that we've seen in earnings at our automotive consolidated joint ventures, as well as the deconsolidation of the interiors business. Overall, EPS of $1.04 is a record, up 7% versus the $0.97 of a year ago. Turning to page 17, I'd like to just spend a few minutes on some balance sheet and cash flow highlights. Then spend a couple minutes also on our Q1 guidance for fiscal 2016. During the year, we executed share repurchases of $1.4 billion. That $1.4 billion, of that, $400 million was in the fourth quarter. We also paid throughout fiscal 2015, about $700 million in dividends to our shareholders. At this point in time, if you look at our share repurchase program, we've executed on about $2.6 billion of our $3.6 billion authorized level. GWS divestiture proceeds in the quarter were at $1.4 billion. If you think about where we really used that cash, we had about $400 million in tax audit settlements. Just as a point of reference, that $400 million that was paid really closed out about 33 or 34 open tax years in the United States, Germany, and Mexico. It's a positive thing as we move toward the auto spin as well. We also made some voluntary pension contributions of about $400 million. Of course, the Hitachi joint venture that Ash referred to that closed on October 1st, that was about $550 million in cash. That's kind of the way to think about the GWS divestiture proceeds. As we move into 2016, our balance sheet remains strong with net debt to cap of 36.7%, which is about 400 basis points better than last quarter, and comparable with the 35.7% that existed at the end of fiscal 2014. Net debt is $6 billion. At 9/30/2015, reflects a net debt reduction in the quarter of about $1.3 billion, and our adjusted cash flow for the year was about $1.4 billion, as we've outlined in an appendix to the deck. Capital spending of $1.1 billion was $200 million below plan, and that was primarily due to timing and some deferred projects at Power Solutions and BE. As far as fiscal 2016 guidance, our strong fourth quarter provides us good momentum as we enter the year, and we expect earnings per share in Q1 of $0.80-$0.83, which is up 8%-12% from $0.74 last year. I would point out that this guidance, consistent with our practice this year, does exclude transaction, integration, and separation costs. I would just note that given the size and complexity of the AE separation and spin-off, the separation costs in fiscal 2016 will likely be significant, and we will provide some more color around a range of those costs in the December meeting. In the December analyst meeting, we will provide more details on the full-year guidance. With that, Glen, I will turn it over to you. Great. Thanks, Brian. Abby, I think we are ready to take calls here. I don't know how many are in the queue here, but just so that we give more people a chance, if you can keep it to a main question and a follow-up, and then if we have got more, get back into the queue, that would be helpful. Abby, we are ready to take questions. Thank you, sir. We will now begin the question-and-answer session. If you would like to ask a question, please press star one. Please unmute your phone and record your name clearly when prompted. Your name is required to introduce your question. To cancel your request, please press star two. One moment, please, as we wait for the first question. Our first question is from Robert Barry. Your line is now open, sir. Hey, guys. Thank you. Good morning. Good morning. Good morning. I guess I wanted to start on the building business in North America. It looks like the orders slowed. I guess a lot of that was the government. The comps also got a lot tougher. Maybe can you just update us on how you feel about the momentum in kind of the key non-res verticals for the non-res applied business. Specifically on that government piece, things are looking a little brighter on a budget deal. How much line of sight do you feel you have to a kind of book of government business that could flow through if, in fact, things move forward with the contemplated deal? That's a great question. Well, first, I hope it came through in my comments. It was very frustrating. Literally because of when the end of the fiscal year happened, I believe it was over the weekend. A lot of this came to light at the very end as it relates to the continuing resolution and what that meant to the different agencies we do business with. They actually didn't realize that they were going to be curtailed because of the uncertainty. You're right, the budget looks like it's going to get resolved. We're not sure what the resolution exactly is going to be. We would expect some of these projects to come back soon. We also know that some of them may not come back right away because a lot of these projects are the type of projects that come at the end of the year when agencies find that they have additional funds in their budget. I think it's going to be a mixed bag of us being able to get some of these projects in earlier than waiting for the end of the year. It certainly wasn't something to expect. The good news in any of this, if there's any, is that these projects typically are very large and very slow moving. It does not have a real huge impact on us this year. It was disappointing because we have such a strong pipeline and such a lot of momentum in that business. The team was just really deflated when they were kind of dealt this curve ball here over that weekend. The pipeline is as strong as it was when we talked about it Two quarters ago and last quarter, what we see is the secured pipeline looks very strong, particularly in the institutional vertical markets. We continue to add salespeople. I think we'll continue to see growth. What I hope everyone takes away from this is, this is not a change. What this is, was something that we couldn't predict. For us, we do an awful lot of business out of federal government, it was a significant blow to us. I'm just as strong, if not more bullish, because if you look at where we were, we talked about one quarter, then two quarters, then three quarters, I think our line of sight is over the next couple of quarters, we should continue to see strong orders. Got you. Maybe just a question on the Power business. Really two questions. If you could address the slowdown in the growth in the aftermarket, on the margin in Power, can you kind of bridge that gap between the guide of 50 basis points and the 150 that you did? To what extent specifically was there any change in planned investment spending that caused that much stronger performance in Power? Thanks. Yeah. I don't know that it was a planned investment spending. I do think that what we can't predict at the end of each and every quarter is how our customers are going to order as they get ready for the winter months. What I would expect, in fact, I was with one of our customers yesterday, is what I would expect is that some of the profits that we saw in this quarter may have been in a different year next quarter. I think it's a little fungible quarter to quarter. As it relates to the slowdown in the aftermarket, I think what our team is seeing overall, let's use North America, I guess, as the best proxy, is they're seeing a 3%-4% growth. In fact, our team would tell you right now they're struggling to get batteries to get prepared for the winter. We're really concerned about our service levels. Absent whatever's going to happen with the weather, I can't really control that. Our biggest challenge right now is to make sure that we do have batteries to be prepared. I think that that's good. AGM, as far as where we are with that is we are capacity constrained. We're building them as fast as we possibly can, and hopefully we're not going to have to get to an allocation. All a positive. Yeah. I think one point, though, around the investment is we are opening up our plant in China. We are starting to ship AGM batteries out of China. There is going to start to be some heavier investment in China next year versus this year around some of those new capacity adds. That's true. Yeah, it's a good point, Bruce. I did see in some of the forecasts that we have some launch costs in China specifically. As we start to use our global network for batteries, we probably are going to have some additional expense costs as we move batteries around versus capital costs. Yeah. How much of a headwind is that? We'll talk more in December. Yeah. I'll give you more detail around that. Yeah. I guess with the numbers I saw, I really don't know if I got to the root cause of it. It's not something to be concerned about. Yeah. Okay. Thank you. Thank you. Our next question is from Julian Mitchell. Your line is now open, sir. Hi. Thank you. Morning. Good morning. Morning. Just a question on the segment margins within Building Efficiency. You had a good increase in Q4 and through the year. Just wondered if you could parse out at all how much of that was driven by price net of raw material costs, and how the hedging works and what kind of benefit you think you will see in Q1 from that effect. Yeah. This is Bruce here. You kind of broke up a little bit. We usually do not like to talk about pricing versus commodities. Commodities would have been a benefit with them trending down throughout the quarter. I would say equally, that is not unique to Johnson Controls, our competition would have been faced with the same tailwinds there. That tends to be reflected in how people look at quoting. I do not think it is a big deal. Probably the best way to think about it is, we have pretty consistently said that we see our glide path in BE margins around 50 basis points a year. When sales tend to be soft, we tend to be able to do a little bit better job, because we do not have to sort of ramp up resources in advance of new business. We are adding salespeople. I think we talked about that a little bit on our last quarterly call. It would really be if we have flat top-line performance, we can do a little bit better than the 50 basis points. When we start to see it turn, you will probably see a little bit worse than the 50 basis points. That is probably the best way to think about it. Yeah. I would just add to that, I think in the fourth quarter, the Building Efficiency team did a pretty good job of addressing early on some actions it was going to take from an SG&A standpoint. There was a benefit in the fourth quarter from some of those actions that they would be able to accelerate versus some of the other actions that relate to the restructuring charge we took in the fourth quarter likely will not happen until sometime during fiscal 2016. There was a bit of a benefit there as well. Thank you. Just my follow-up question is on the Asian business within Building Efficiency. The revenues were flat, ex currency orders down slightly. I think China's a pretty high margin business for you in that segment. Maybe just give some color on not the auto side, but what you're seeing on the buildings side in China right now. Let me give just a little bit. I don't want to call victory. Bruce's conversations around the automotive business, I think is something because of our unique relationships that we have, we probably have more visibility into exactly what's going to happen. I can tell you that I've got more positive comments, but I would call that anecdotal versus something that in automotive, we would see something more structural happening. The phone calls have been better, the anecdotes are a little bit better, but I certainly don't think we're out of the woods yet in China, as it relates to building business. With all that being said, remember, we just went through the Hitachi joint venture. Our presence in China has changed dramatically. We have a new partner in Hisense in China. We participate much more broadly in the market, I think we have the opportunity to see some increases, because of that new participation and new products that we can cross-sell, but we haven't really identified that. I think that we may be able to do better than the market as we move forward because we have new products that we can sell through multiple channels. Great. Thank you. Thank you. Our next question is from Emmanuel Roelofsen. Your line is now open, sir. Hi, good morning, everybody. Hello. Good morning. I wanted to ask you first about the automotive spinoff. If I heard you right, I think it's scheduled for about a year from now, which is obviously a decent amount of time. I was curious if you could just give us some color on, I guess, what does the process look like? What do you have to accomplish in order to be able to get that done? Why does it take so long? Also, how do you reassure clients and customers, the automakers in particular, about the future? Some of your seating competitors seem to imply that they're taking advantage of the uncertainty and they're getting more business as a result. What can you do over that time period to sort of make everybody more comfortable? I'm going to turn this over to Bruce because he's so deeply into this. I just want to address that last piece as it relates to what our competitors may or may not be saying. I'm not privy to that. I actually think that our position with our competitors is probably more about the fact that the way we manage the business today, not about who we're going to be tomorrow. Because if you think about how we manage the business today, we've been very selective in the way that we allocate capital and how we compete within the automotive business, particularly the seating business in North America and Europe. That doesn't necessarily mean the way that Bruce and his team will run it in the future. I think when you hear our competition talk about it's probably less to do about the spend and more to do about the fact that, as a whole, Johnson Controls has had a capital allocation strategy, that may have benefited them. That's the only way that I can relate to that comment. As far as how the spend's going and why it takes so long, I think Bruce probably has a couple of facts that he can give you. Yeah. Well, it's taking longer than I would like to happen. I think, just to sort of walk you through the main work streams. First of all, and probably the most complicated, is the separation and establishment of a new corporate entity. Unlike, say, a divestiture, where we're pretty used to, say, carving something out and selling it, and have had a fair amount of experience over the last couple of years doing that, here we have to do all the separation work, but also set up all the corporate functions starting from scratch. That's a big work stream. The IT systems are always a challenge, and again, we're used to sort of separating them out, and automotive tends to be fairly separate here at Johnson Controls. There's not a lot of commingled systems or assets. Again, on the corporate side, we have to set up brand-new systems from scratch. That's what really drives the timing. I think if you look, like we have, Emmanuel, in terms of how long some of these spinoffs tend to take, as we looked out in the market, we've seen sort of nine months would be a quick one, nine or 10 months to 18-24 months would be a slow one. We tend to be, I think given the size of it, nearly $20 billion. We're in 35 countries. We have 225 plants, 75,000 employees. In the scheme of them, I would say we're a large, complex separation, and I think the timetable that we've established is pretty aggressive given the complexity. I would say it's on the shorter end of normal, and it's on the much more difficult end than normal. Okay. That's helpful. Just my follow-up on automotive again. I guess the margin came in maybe a little bit lower than we would have expected. I realize there's a lot of moving pieces now because obviously on the denominator is just the consolidated sales. Yeah. On the numerator, you have the consolidated earnings, you have now the interiors earnings, you have the China earnings that are not consolidated. Can you maybe give us some directional comment on how the performance for margins was for these different pieces. North American, Europe seating, up, down, and then China seating, and then interiors. Yeah. You know what? I don't have it on the top of my head. Maybe we can follow this one up, Emmanuel, but I'd say, if you just look at seating margins, we're up 90 basis points in the quarter, 5.9% versus 5% last year. Interiors, in my comments, I talked about some of the noise that's in there around the wind-down cost, the fact it's flipping from pre-tax number to post-tax number now. The fact that we've got cost to set up the new joint venture flowing through those numbers. You're quite right, there's a lot of noise. We do intend next year to continue to show seating and interior separate. I think as we sort of hit our stride on getting the JV set up here, I think it's up to us to maybe do a bit better job educating folks on what the interiors piece of it is going to look like. Because I think that's where the confusion is coming about. I think the Street had auto margins being about 70 or 80 basis points higher than we came in at, and I think that was because they sort of looked at last year's segment income and interiors and figured that would repeat, and that's where you see the $30 million year-over-year delta. Yeah. I think there's a lot of moving points and it's something that we can do a better job, and we will in Q1. I think one of the things we'll do as part of the December analyst day is we'll kind of unpack both the consolidated and unconsolidated automotive sales and related margins. We'll get into that in a bit more detail in December. All right. Thank you all. Thanks. Thank you. Our next question is from Richard Klatten. Your line is now open, sir. Hi, good morning. Hi, Richard. Good morning. Alex, wanted to just touch base on your comment about backlog. Yeah. GWS wasn't included in backlog, and resi and the light commercial stuff, you're implying that backlog is going to be less relevant. If I look at the business as a whole, GWS was a part of it. Why is backlog less relevant going forward here? I understand the ADPPs, that's now in the business. That's not part of backlog. It just seems like from an institutional standpoint, your mix hasn't changed all that much, it should still be pretty relevant. I just wanted to get some additional color from you on that. Yeah. I guess what I would say is, first off, as I thought about GWS, I never really thought about it in the context of being part of BE in the construction projects. What I mean by that is that the way that we're going to market, the way that we're selling our products, whether it be ADTi, whether it be our Hitachi products, whether it be our strengthening of our other products that go through distribution, not only in North America, around the world. We've gone through a place where 75% of our business used to be backlog, not including GWS, just separate GWS out, now to something that's around 50% or less and probably continuing to be less and less. What I just wanted to say that over time, we're going to have to make sure that we continue to give you the information that you want to see around our projects and our projects business moving forward. Our projects business moving forward will continue to be important, but won't be the dominant part of our business in the future. That's really what the comment then means. In fact, you can see our ongoing sales have continued to increase, adjusted for FX, our backlog has been under pressure. I'm just pointing out that that's becoming more and more disconnected. That's it. Okay. Is that more kind of differences in how you've gone to market here over the past year or so with new opportunities and whatnot? Absolutely. I think it speaks to when we talk about having multiple channels, multiple ways of getting to the market, and serving the market more broadly than just a complex market, and becoming much more of a product company. I think all these things, this whole conversation is really an outcome or an attribute of how we're going to go to market and what kind of products we're going to sell. We'll become more and more talking about our product sales, and less and less pivoting on the contracting part of our business. That's all. Okay. Not that we're shrinking the contracting. Yeah, we're not getting rid of it. Yeah. Don't overread. I'm just saying that the mix is changing, that's all. Okay. Just broadly speaking on M&A, there's been some speculation around a business that would fit into Power Solutions here recently. Yeah. You've talked about trying to expand your scale in the mid-market, light commercial, residential, et cetera. How are you thinking about this right now with the transactions? There's still work to do with some transactions, how are you thinking about the landscape right now and where you see capital deployment going here over the next year or so? Yeah. Great question. This is a good pivot to talk about our December analyst day. We're going to have all of these conversations are going to be in real detail, because one of the things that you should expect from us is, and I don't think we've done a great job. I do think our capital allocation strategies have become much more robust in the last couple of years. I think philosophically, we need to talk more about that. We'll do that in December. How we're going to make these decisions, what process and set of analytics and what metrics are we going to use? Not only what parts of our business need to be levered because they have strengths as it relates to adding geography or technologies, but also where we have gaps and how we would do that and what kind of metrics we'd be. I've gotten a lot of feedback from individuals, I'm sure you also, to make sure that we continue with a disciplined capital allocation strategy. We'll talk about that in December. I think that you should keep that in mind, understanding that we do know that we need to add capabilities and take advantage of some of our portfolio to lever it, make it stronger. We also realize that we need to make responsible capital allocation choices. More in December. Okay. Thank you. Thanks, Richard. There'll be time for one more, operator. Okay, speaker. Our next question is from Ryan Brinkman. Your line is now open, sir. Hi, this is Amik for Ryan. Thanks for squeezing us in. Just wanted to go back to the seating margins. You've seen a good increase in the margins there. Just curious, where are you on the restructuring savings? Should we be expecting that margin improvement to be sustainable, or are the margins going to sort of flatten out going into FY 2016? It's Bruce here. I think it would be normal for us here in December. We'll give our margin expectations by business for all three of our businesses in December. I'd sort of hold off on that. Okay. Can you just share your thoughts on where you are on the restructuring process in terms of getting the savings there? You're talking about restructuring for the company? For seating. For seating. Yeah. Well, it plays right into the margin. I think we'll just leave that till our December meeting. No, that's fine. Just to follow up, thanks for your comments on the China market regarding automotive. Curious again if you're seeing any delay in new programs or new launches coming to the market because of the slowdown, or is that really something that's not playing out at all? I would say not so much on any launches at this point in time, but I do think there is a couple of OEs that are rethinking or possibly going to defer some capacity increases. Okay. Great. Thanks for taking our questions. Thank you. Thanks very much. Thank you. I think we have a couple of closing comments, Alex? Yeah, just a couple. I mean, as far as it's become an enjoyable broken record to thank our employees for everything that they've accomplished over the last quarter, and now I get the opportunity to thank them for what we've accomplished over the last year. It's quite outstanding. I certainly don't want to leave anyone out. When I think about what our employees accomplished in each one of our businesses, they perform extremely well. Each one of our geographies, depending on what they've been faced, have been faced with different challenges and opportunities, and I think where we've had opportunities, we've exploited them, and I think where we've had challenges, we've been able to mitigate those challenges. If you look at our corporate teams and our teams that are supporting our portfolio transformation, not much can be said except that I think on each one of these transactions and each one of the things that we've accomplished, I feel absolutely proud of what we've been able to make happen, not only from the standpoint of the time that it took to do it, but the outcomes. We'll hopefully get to see everyone in New York in December. I think it's going to be an important meeting, one of the most important meetings we've ever had in New York, because we're going to talk about the remaining Johnson Controls and our strategy moving forward, bring more and more clarity around that. We're going to have to give you details around the automotive spin, which I think that there's a need for everyone to understand that, it can help you put the right values down in your models as you move forward. Once again, I just want to thank you for your interest, and hope you have a great day. Take care. Thank you. That concludes today's conference. Thank you for participating. You may now disconnect.