江森自控 (JCI) 2016 Q4 法說會逐字稿

Welcome to Johnson Controls fourth-quarter 2016 earnings call.

(Operator Instructions)

I will turn the call over to Antonella Franzen, Vice President of Investor Relations.

Good morning and thank you for joining our conference call to discuss Johnson Controls' fourth quarter FY16 results.

The press release and all related tables issued earlier this morning, as well as the conference call slide presentation, can be found on the Investor Relations portion of our website at www.johnsoncontrols.com.

With me today are Johnson Control's Chairman and Chief Executive Officer, Alex Molinaroli, President and Chief Operating Officer George Oliver, and our Executive Vice President and Chief Financial Officer Brian Stief.

Before we begin, I would like to remind you that during the course of today's call, we will be providing certain forward-looking information.

We ask that you view today's press release and read through the forward-looking cautionary informational statements that we've included there.

In addition, we will use certain non-GAAP measures in our discussions and we ask that you read through the sections of our press release that address the use of these items.

In discussing our segment operations during the call, references to adjusted EBIT margins, exclude transactions, integration and separation costs, as well as other special items.

This metric is a non-GAAP measure and is reconciled in the schedules attached to our press release.

In addition to our earning release issued this morning, we filed an 8-K, which contains quarterly pro forma FY16 financials for Johnson Controls PLC.

The pro forma financials represent the combination of Johnson Controls excluding Adient and Tyco, including conforming accounting adjustments and recurring purchase accounting to provide you a comparable basis for our reporting in FY17.

The purpose of this call is to discuss the quarterly results for the fourth quarter.

If you have any questions regarding the pro formas, please contact me after the call.

Now let me quickly recap this quarter's reported results on a GAAP basis, which includes one month of Tyco.

Sales of $10.2 billion in the quarter increased 17% year-over-year on a reported basis, driven primarily by the contributions from the Hitachi joint venture, as well as Tyco.

Earnings per share from continuing operations attributable to Johnson Controls' ordinary shareholders was a loss of $1.61 and included net charges of $2.82 related to special items.

These special items were primarily composed of non-cash mark-to-market, pension, post-retirement and settlement losses, transaction, integration and separation costs, restructuring charges, and tax expense related to the Adient spinoff.

Adjusting for special items and excluding the Tyco results, non-GAAP adjusted diluted earnings per share from continuing operations was $1.21 per share compared to $1.04 in the prior-year quarter.

In order to remove the complexity associated with the closure of the merger with Tyco, the results discussed on today's call reflect the underlying non-GAAP operating results of legacy Johnson Controls.

Now let me turn the call over to Alex.

Thanks, Antonella, good morning everyone.

Thanks for joining us today on this call.

Before I get into the details for the fourth quarter, I'd like to spend a moment as I've done over the last few quarters, to reflect on the commitments we made last December.

Of course we're making some new commitments in the upcoming December, but to reflect on how we did against those commitments throughout 2016.

As you all know there was an awful lot that happened at Johnson Controls.

We will just start on slide 5 of the presentation.

As we started the year, we had a couple strategic objectives we needed to achieve during the year.

First, was our integration of Hitachi.

As you recall, first of last fiscal year we formed the joint venture with Hitachi.

I'd just like to say that the performance of the Hitachi joint venture, the integration activities, has far exceeded our expectations.

And I think it's a great platform for us moving forward.

The second thing that was important to us to get accomplished, and we just accomplished this on October 31, was the spinoff of Adient.

I just want to make a couple quick comments about that.

I was fortunate to be invited by the Adient team to be a participant at the New York Stock Exchange last Monday when they rang the bell and their first trade happened.

And I couldn't be more proud to be associated with the team and I feel great about what they have in front of them as it relates to the opportunity.

A great team and I'm happy for Bruce, and for all the Adient employees and wish them well in the future.

And then obviously one of the most important events was clearly, that's a watershed event for us, is the historic merger with Tyco which happened a month ahead of our schedule.

We scheduled it for October 1, and we were able to get that done a month early.

And we have our legacy Tyco team members here today.

In line with our vision three years ago that we started to transform ourselves to a multi-industrial leader, I can say now we truly are a multi-industrial.

We have a great position -- leading positions in building technologies, integrated solutions for buildings and energy storage, and George will give you some updates on the progress that we've made so far related to the integration and frame out the organization.

Second, our financial commitments, throughout this entire process, we've had every opportunity for our folks to be distracted and I couldn't be more proud of what they been able to accomplish.

150 basis points of adjusted EBIT margin expansion over the last year.

Most of that achieved at least in large part due to our Johnson Controls operating system initiatives and our cost reductions.

Earnings per share growth, 16% -- and without sacrificing the continued investments we have in our business.

And just to highlight a couple here on the page, we have strategic capital investments as you know, expanding our AGM capacity $245 million in North America, and then forming the joint venture in order to add our fourth plant with Bohai Piston, which is an affiliate of BAIC in China, in order to increase our capacity there in China.

We've accomplished a tremendous amount this year, in this quarter.

And I just want to thank all of our employees for the hard work.

It's truly remarkable.

Across the globe and across all of our segments in all of our businesses, everyone really pulled together as a team.

In our transformation coupled with our strong financial performance allows us to enter 2017 with great momentum.

We're really positioned well to deliver -- continue delivering strong results.

So if you turn to slide 6, I just want to reiterate, we exceeded our guidance for the fiscal fourth quarter and then we were at the high end of our guidance for the fiscal year.

Let's go to slide 7: so we finished the year strong, both from a top line and a bottom line perspective.

Organic growth, our sales increased 4% if you exclude automotive or Adient, with 2% growth in Building Efficiency and 8% growth in Power Solutions.

Building Efficiency -- I'll give you a little bit of color on that -- underlying strength in Asia, real progress in China.

When we started the year we weren't sure, but as the year has gone on, China has gotten stronger and stronger.

We've introduced some exciting new products in our HVAC product range around small [tonus] chillers for the Asian market, and really seeing good traction there.

Another thing that really happy about is our products in North America, our UPG business.

We are actually gaining share, both in residential and light commercial and seeing strong growth both in residential and light commercial.

Mostly because of new product introductions there and the investments we've made over the past couple years.

Power Solutions has benefited from strong growth across all of our regions.

Start-Stop technology has grown 30% globally.

That's held up over the year and as you know, we are adding more capacity.

And this year we shipped over 152 million batteries, which is an increase of 4% from a unit perspective.

Lastly, an added confidence as we move into 2017, orders grew 6% in the fourth quarter and it's the fourth consecutive quarter of mid single-digit growth in orders secured.

And we continue to see strength in our orders, in the institutional vertical markets, and that is on a tough comparison.

We've seen growth on a year-over-year perspective for the last couple of years.

Turn to slide 8, I just want to remind you this excludes any results from Tyco.

Revenues in the quarter increased by 7% to $9.4 billion.

If you take out FX and M&A, the overall revenue was level, and Brian will give you more detail business by business.

Profitability: we continued to show improvement year-over-year with all of our -- across each and every one of our businesses with segment income adjusted up 16%.

Our adjusted margin expanded 90 basis points overall for the quarter.

EPS up 16% to $1.21, and I think as Brian goes through the numbers I think you will see that we had strength in almost all of our regions and in each of our businesses.

So great performance.

With this I'm going to turn it over to George, and he will give you an update on how we are doing with integration.

Thanks, Alex, and good morning everyone.

I'd like to start by thanking and congratulating both the legacy JCI and legacy Tyco teams for all of their hard work and dedication over the last nine-plus months.

Our integration teams, working with our employees across the globe, have put in countless hours and an enormous effort to put us in a position to complete the merger a month ahead of schedule so that we can hit the ground running in September.

We have moved firmly into the execution phase of our Day One plan, and although we are only two months into the process I'm encouraged by what I'm seeing.

Including some very early traction on our $1 billion cost synergy commitment, as laid out on slide 9. We will update you in more detail and provide some timing around synergy achievement at our upcoming Analyst Day on December 5.

As we have come together as one team, it has become more and more apparent to me that the two organizational cultures have more similarities than differences, as I've seen that in nearly every region of business I visited within my first 60 days.

In the marketplace, we continue to receive positive feedback from our customers and channel partners.

And I can tell you they are just as excited about this combination as we and all of our employees are.

Turning to slide 10, we will be organized around two strategic platforms -- Buildings and Power.

The buildings platform represents a combination of the legacy Building Efficiency businesses within Johnson Controls, and the legacy Tyco businesses.

Together these businesses will generate roughly $23 billion in annual sales, and consists of several well-known and trusted brands across complex HVAC, building controls and fire and security systems.

We are well-positioned in the building with one of the broadest portfolios of products, integrated solutions and service offerings in the market.

We are also uniquely positioned with our customers and channel partners with a large installed base and significant scale in the direct channel.

Going forward as one Company, we will be able to leverage that global scale to expand our install base as well as our market reach.

And as the technology convergence in the building evolves, we will be prepared to lead the way.

The power platform includes a portfolio of leading battery technologies across the product technology continuum, with number one positions in conventional lead acid and AGM Start-Stop batteries globally.

Our Power Solutions business has a large and resilient aftermarket business with consistent performance in growth throughout the cycle.

I look forward to providing you more details on our strategic growth plans across the portfolio on December 5 at the Analyst Day.

Let me now turn it over to Brian to walk through the financial details of the quarter.

Thanks, George, and good morning everyone.

As you saw on our release this morning, our Q4 reported results, as expected were a bit noisy, and included a number of special items, which resulted in a net charge of $2.82 in the quarter.

We've summarized those adjustments for you in an appendix, but just given their overall size, let me briefly comment on each of them.

First of all, transaction integration and separation costs of $293 million -- those costs relate primarily to the Adient separation and the Tyco merger, and were in line with our expectations.

We also had a restructuring charge in the quarter, related to asset impairments, as well as some workforce reductions.

And the way you should view that, as outlined in the appendix, is about half of that charge is cash and the other half is non-cash.

And it's really spread ratably across the businesses and corporate.

We also had, as we always do in the fourth quarter, a mark-to-market pension adjustment given the accounting method that we use.

That adjustment was $514 million in the fourth quarter, related primarily to a decline in interest rates year-over-year.

There were also some nonrecurring purchase accounting items of $74 million.

A good example of that would be the requirement to step up inventory to fair value in the opening balance sheet and that turns out as that inventory turns.

That we've called out separately at $74 million.

And then there was $1.1 billion charge related to the Adient separation.

As I talk through the business results, I'll exclude the impact of the special items as well as the Tyco results, since they were not included in our previous guidance of $1.17 to $1.20.

Similarly, we've got the Hitachi joint venture, which closed in October of 2015.

So the Hitachi JV does impact the quarter-over-quarter comparability, and I'll comment on that as I go through the results.

And then for the first time, the automotive interiors joint venture, which closed in July of last year -- we do have comparability in Q4 this year versus Q4 last year as it relates to the interiors JV.

So with that, let me turn to slide 11, Building Efficiency.

Their fourth-quarter sales were $3.6 billion, which were up 25% from the prior year.

If you adjust for the impacts of M&A and FX, the sales grew 2% and had a strong comparable 2015 quarter, which saw a 5% growth rate.

Revenues in our systems and services North America business were level year-over-year, and we saw good growth in our residential business and products North America of 3%.

And as Alex mentioned, Asia was up 8%, ex-Hitachi.

We had good order growth in the quarter, up 6% and as Alex mentioned, it's the fourth consecutive quarter where we saw order growth above the 5% level.

Systems and Services North America was up 6%, products North America was up 7%, due primarily to growth in a residential business, and Asia was up 7%.

Our backlog ended the year at $4.8 billion, a 5% year-over-year improvement.

Turning to segment income at Building Efficiency.

It was up 17% year-over-year, due primarily to the contribution of the Hitachi JV entities and the North America residential business in Asia.

And as expected in the fourth quarter, we did see an 80-basis point reduction from the prior-year quarter to 11.3%.

That was due primarily to mix related to the lower margin Hitachi joint venture, and some ongoing product and sales force investments we made.

If you kind of step back and look at the full year as far as Building Efficiency margins, we ended the year up with 9.2% from 9.1% last year.

And that was far in excess of the guidance that we provided in December of last year at our Analyst Day.

Moving to slide 12, real quickly touching on the Tyco results, which, as you know, that merger was completed on September 2. Sales for the month of September were $828 million and segment EBIT was $86 million.

That $86 million does include $21 million of recurring purchase accounting amortization, so if you adjust for that the EBIT of $107 million reflects about a 13% loss in the quarter.

Overall as we look at the Tyco businesses moving into FY17, they've got solid momentum.

Turning to slide 13 on Power Solutions, they just had another great quarter.

Their sales were up 7% compared to last year, 8% if you adjust for foreign exchange and lead.

And in terms of units we saw higher volumes across all regions with global fourth-quarter shipments up 7%.

Asia was up 22%, Europe was up 11% and the Americas were up 3%.

As far as Start-Stop shipments, they continue to be strong up 30% year-over-year growing from 3.1 million units to 4 million units.

And all regions delivered higher year on year growth, with China up 136%, albeit on a very low base.

Americas up 87% in a growing market and EMEA is up 3% in a very mature market.

We also saw Q4 OE up 2% and aftermarket up 9%; again, strong showing.

If you look at Power Solutions segment EBIT for the quarter of $394 million, it was up 16%, primarily driven by the higher unit volumes, product mix and cost reduction efforts.

There was segment margins in Q4 were up 160 basis points and were well above our expectations for the year.

For the year we had 19% margins and we had guided in December to 17%.

So another great year for Power Solutions.

Touching quickly on slide 14, on the auto business.

Their sales were down 5%.

The higher volumes in Asia were offset by lower volumes in North America and Europe.

As far as China, we did see the 100% sales numbers for our non-consolidated JVs up 26% in the quarter to $2.9 billion.

And if you adjust for foreign exchange, that was actually 31% compared to industry production of 21%.

So the JVs continue to perform exceptionally well.

For the quarter, automotive segment EBIT of $281 million, up 13% year-over-year.

And overall auto margins were 7.1%, up 110 basis points for the quarter.

So let's move to the financial highlights on slide 15.

Overall fourth-quarter revenues were up 7% to $9.4 billion, that was primarily driven by the Hitachi JV, offset by some headwinds for FX.

If you look at gross margin for the quarter, it was up 90 basis points to 20.5%.

And as Alex mentioned, we continue to see the benefits of the Johnson Controls operating system efforts on a global basis.

SG&A was up 13% from last year.

If you remove the impact of the Hitachi joint ventures, the SG&A is actually down 4% year-over-year.

And I think this is really reflective of the continued focus that we have on rightsizing our cost structure in connection with the Adient spinoff.

Equity income was up $150 million, that's due primarily -- equity income of $150 million was up 43%.

That was due primarily to the interiors joint venture, which added about $8 million year-over-year and the Hitachi JV was $30 million.

So overall a great fourth quarter with double-digit EBIT growth at 16%, and segment margins improving to 11.6%, which is a 90-basis improvement.

Turning to slide 16, fourth quarter net financing charges of $77 million were slightly higher than last year, due primarily to the portion of the Adient debt proceeds that we drew on in the quarter.

Tax rate remained at 17% and the noncontrolling interest was up $40 million due primarily to the Hitachi joint venture entities.

So as Alex mentioned diluted earnings per share of a buck $0.21 was up 16%.

And I too give a lot of credit to our Management teams globally to continue to focus on our external financial commitments that we've made in a period when it would be pretty easy to point to the transformational activities and other initiatives that we've got in our businesses being a distraction.

So, well done to our global teams.

On slide 17, balance sheet and cash flow at quarter end.

Our net debt to cap ratio was 39.4%, which is right in line with expectations.

We do have kind of a grossed up balance sheet at the end of this fiscal year, primarily related to the $2.2 billion of debt we assumed in connection with the Tyco merger.

In addition there was the $4 billion of newly issued debt in connection with the merger, the cash of which went to the JCI shareholders.

And this balance sheet that you have at September 30, includes $3.5 billion of debt related to Adient, and there's $2 billion of cash in escrow, $1.5 billion of which will be retained by JCI and $0.5 billion will go to Adient -- has gone to Adient as of October 31.

Our cash flow in the quarter was $900 million, which exceeded our expectations and for the year adjusted free cash flow was $1.7 billion versus a plan of $1.5 billion.

So I was pleased with the progress we made there in FY16.

CapEx was pretty much in line with expectations.

Just a waterfall chart on slide 18, to kind of show you the pro forma net debt.

You can see we started at the $16.4 billion, and the $3.5 billion in debt with that went with the Adient spin on October 31.

We have net cash of $700 million at the end of the year, and then we will have $1.5 billion of the $2 billion in escrow come to us.

So our true pro forma net debt position as we move forward is $10.7 billion, which is right in line with where we expected after the transformational activities.

Before we open it up for questions, I'd just like to take a couple minutes here on slide 19 and talk about items of interest as we move into FY17.

First of all, as we've talked about throughout the quarters this year, even though the Adient spinoff has already occurred from an accounting standpoint, we can't report that as a discontinued operation until the date of the spin.

So the first time we will report Adient as a discontinued operation will be in Q1 of FY17 and all prior periods will be restated.

Consistent with George's comments regarding our two strategic platforms, we do plan on changing our reportable segments, probably in the later half of 2017.

So within the buildings platform, there will be more granularity that we provide as we move forward into 2017.

And we will talk about that a bit more at our Analyst Day on December 5.

We are also going to report corporate as a standalone segment.

We think that's going to provide better transparency to our underlying business unit margins and the overall level of corporate cost.

We'll also finalize the Tyco purchase accounting.

As of September 30, 2016, we've done a preliminary allocation based upon some preliminary work done by our outside valuation firm.

There will be some true ups to that as we move through the first half of FY17.

We will continue to have some restructuring impairments and integration costs, as well as our Q4 pension mark-to-market in 2017.

But I think those will be communicated as far as range and expected cost, again on December 5. As Antonella mentioned, we did file a form 8-K this morning, which shows the FY16 quarterly and full-year EPS numbers on a pro forma basis.

The full year is $2.31, and that includes about $0.31 of annual consolidated amortization expense.

So on slide 20, to wrap up here, please join us on December 5 at the Mandarin Oriental Hotel in New York for our Analyst Day.

And at that meeting we will present our Q1 and full FY17 guidance.

And with that, Antonella, we can turn it over for questions.

Thanks Brian.

Operator could you please provide the instructions for asking questions?

(Operator Instructions)

Dean Gray from RBC Capital Markets.

Thank you.

Good morning everyone, and congratulations on getting to the finish line -- and then starting your next marathon, as well.

Thanks.

And just the slides were real helpful, as were the 8-K, just to us through the changes.

And maybe just for the legacy Tyco analyst like myself, George can give us a perspective on the quarter consistent with the metrics that we are used to seeing on organic revenue growth orders and so forth?

Sure, Dean, let me give you a high-level summary.

Certainly as the year played out we saw continued softness in the high-hazard heavy industrial end markets, and that had a fairly significant impact on our product businesses as they played out for the year.

That does impact about 35% of our revenues in that segment and certainly these are high-margin businesses.

Overall though, the orders for Tyco were up low single-digits so we continue to expand orders.

The backlog year on year is up 4%, which does position us well here to get out to a good start in 2017.

And then, Alex, this might be a good question for the Analyst Day -- but your comment that the transformation is complete?

Certainly JCI has arrived is a multi-industry Company, but the idea is portfolio optimization never ends.

Where do you think at the margin, do you expect portfolio moves over the next year or so?

Yes that's a good question.

I'm not sure if I have an adjective in there or not.

At the margin, we will be looking at our portfolio that's not going to change.

But I think the comment that I made was the major transformation to get us to a platform that we can truly call ourselves a multi-industrial is complete.

And I think that probably means more to the legacy Johnson Controls people that have followed us, because we've gone through this transformation in the last three years.

And if you've been a spectator it's been quite a transformation.

I think where we are is, we are in a position we can truly call ourselves a multi-industrial now.

Now we have to -- that just means, I think you just said it a minute ago, that's the new marathon begins.

And portfolio optimization is not going to be something that's going to be lost on us.

We're actively looking at our portfolio, both in the legacy Johnson Controls and legacy Tyco businesses and that will continue.

We will talk a lot about that, or at least we will talk some about it, in December as it relates to not only capital allocation, but strategically how we want to position ourselves.

More to come on that, but if I left you to believe that we were done, that's not correct.

I think I want to make sure you understand, everyone understands, particularly our employees, that we've got ourselves now positioned where we need us to be as a true multi-industrial.

The automotive business is set up to be successful and I think now we have a platform for us to optimize.

Great to hear.

Appreciate that, thank you.

Jeffrey Sprague from Vertical Research Partners.

Thank you, good morning, everyone.

Good morning.

Just some questions, really on the numbers so we are just level-set here.

Because I think we're not getting lot on forward guidance.

But first just on the amortization, maybe it's for Brian?

It looks like the deal-related amortization came in on the low side of what was expected?

Can you provide a little bit more color on what drove that, and if that number is likely to move around some more?

Yes, I don't think that number is going to move around significantly.

I think we're pretty well grounded with the valuation firm we're working with relative to the amortizable and tangible asset base.

So I think the number that's out there in the pro forma is a pretty solid number as we look at it going forward.

You are right, it did come down from the preliminary filings that were made.

I think it came down roughly $100 million or so and I'm probably rounding there.

But that had to do really with the original information that was provided to the outside firm.

As you go through that process of finalizing the valuation, there's tweaks you make to it based upon variations and earnings levels by geography.

And what ended up happening is, as a result of some of those changes we made, some of the amortizable asset base came down as far as intangibles.

And it really got reallocated to either indefinite live intangibles or to goodwill.

So I think that number, where it stands right now, Jeff, is a pretty good number to use.

And that number will be with us for a while, because the life associated with those amortizable assets is anywhere from 10 to 15 years, so that's a pretty good number.

Okay thank you very much for the detail.

And then also, just on the baseline number of $2.31?

I believe stranded cost would be conceptually in that number?

Can you give us a sense of what that is, and how rapidly that could come down?

Or how we should think about that?

The stranded cost number that we've been talking about related to the Adient spinoff was about $150 million.

I think a little over half of that was taken out in FY16, so it's already reflected in the results.

The other half will come out during FY17, and it's really part of the $300 million of productivity that we've talked about, that will be recognized over the next three years as part of the JCOS benefits that we are going to realize.

I think that's the way to think about that, Jeff.

Thanks, and if I could sneak one more bigger picture in.

George mentioned early traction on cost synergies?

I'm also wondering, early reaction from customers on the sales side?

I doubt you have some big marquee order to share with us today.

But how is the sales funnel looking?

And do you guys see some early traction on that effort?

Sure, Jeff.

As you know, and Alex and I have talked a lot about this, we had an outstanding integration team put together over the last 10 months, and they've done some great planning work and now we're into the implementation phase.

Revenue growth is a key component of the merger, and we've had commercial teams across the globe laying out the existing customer bases, how we serve them today, the opportunity that we have to be able to cross sell and serve them with more of our portfolio, build services, and how we create additional value for those customers that we serve, and we feel really good about the planning process, and now we are putting in the right incentives.

So that no matter where our commercial people sit across the globe, they are going to be properly incentivized to be able to bring the new capabilities to their customer base, to be able to drive growth.

We are going to lay this out in a lot more detail at the Analyst Day in December.

But we're certainly feeling very good about this, because this certainly was a key component of the merger, to be able to accelerate the ability to be able to serve customers, being able to capitalize on the full portfolio, being able to converge some of the technology to be able to longer-term change the game and how we serve buildings.

And I feel really good about the progress we've made.

Jeff, I'll just add -- its Alex -- that we had an opportunity to work on this almost in a lab environment for nine months.

So it wasn't real except for the fact that we had a chance to visit with customers.

What I've seen happen with the integration team over the last couple months, it has gone from an idea to reality.

And I've seen a lot of confidence building in our team.

And as we get an opportunity to meet with the integration team and now moving into the business -- George put together an organization that's going to activate it.

He talked about incentives, I know he will talk about that.

But I'm really pleased with what I see.

One of the things I didn't mention earlier, I'm just going to sneak it in and it doesn't have anything to do this question.

But it relates to being able to get synergies.

We've actually seen almost $100 million in secured in the CVRE relationship.

We've learned a lot -- it's not the same, but we learned a lot in being able to pull through activities from activities like that.

So I think our team is seeing those things too and it gives them confidence.

I think we're going to be pleasantly surprised.

Obviously we've got to secure it before we revenue it, but in December we will have a couple of those stories we can share with you.

And your questions about customers -- I met with a number of customers in my first 60 days here with the integration.

They are very excited about the combined capabilities and our ability to be able to better serve them, combining the work that we do across our channels.

Thank you very much.

Gautam Khanna from Cowen and Company.

Good morning guys.

Congratulations.

I had three quick questions.

First I was wondering, at the Investor Day do you plan to lay out multi year target revenue and EPS like you used to at Tyco?

I can't speak to Tyco but we will give you some ongoing metrics that you can look at that you can hold us accountable to and hold ourselves accountable to.

I think, based on what I've seen in the past, very similar what we've done at Johnson Controls Investor Day.

So you will get something that gives you guidance on each aspect, whether it be cost reductions, productivity, top line, bottom line, we will give you some guidance on how we think about capital allocation also.

I think we will probably give pretty a solid focus on FY17 and then we will give medium-term guidance relative to key financial metrics, sales growth, segment EBIT growth, et cetera.

That's reasonably consistent with what JCI has done historically, as well.

You will be able to kind of take it through 2020, based upon the way we are doing things.

Okay that will be helpful.

Second question was on Power Solutions and the strong growth you experienced in the quarter?

Was there any one time effect in the quarter, or is this kind of what we should be anticipating going forward, in terms of organic growth based on the mix shift in AGM and what have you?

Well I think the unit growth -- I don't really think about it quarter to quarter, because there are -- depending on a lot of times it depends on pricing and stocking.

A quarter can move around a little bit.

But I think what you've seen if you look at our average growth across the year, I think that's really consistent.

I think when you look at it quarter to quarter, it's a little bit dangerous as each one of our customers is either filling their channel getting ready for the season or finishing the season.

Sometimes that doesn't happen the same quarter after quarter.

But if you look on an annual basis, I think it's fairly consistent which is around 5%.

I think that's probably a pretty good number.

And the mix is obviously going to help us because there's more and more AGM and of course a lot of our capacity is moving into China, so it's going to be heavily focused on Asia growth.

Thank you, and lastly I'm just wondering maybe you gave us this before, but what is the dividend for the go forward Company?

That will be approved by our Board at the November meeting, and it's still under review.

So we don't have the go forward dividend for 2017 established yet.

We will be announcing that at Analyst Day, as well.

All right thanks a lot, I'll turn it over.

Steven Winoker from Bernstein.

Thanks, good morning and congratulations on the milestone everybody.

Thanks, Steve.

I just wanted to start with getting a little more granularity if I could on the HVAC side, and specifically York equipment as opposed to services - resi versus non-resi?

Can you give us some color for the quarter of what was the organic growth in that business that you saw on resi, non-resi in the Americas, maybe?

Well, yes, we had a great quarter.

I will put it in units.

Our residential unit growth was 23%, which is outstanding.

Now we had a lot of new products come out, we also announced some pricing that's going to be effective first of November.

So I'd have to say I'm sure some of that impacted it, but we are seeing an awful lot of growth in those residential and our light commercial growth was in the upper teens also.

From a unit perspective.

That's really a benefit from a lot of the product investments we've been making over the last couple years.

And then we are also making some investments in some of our channel structures.

So great quarter, gained share, glad you asked the question.

And the second part of the question was non-resi?

Non-resi, like in the unitary, was close to 70%.

And applied?

Around 4%.

Okay, and are you specifically on the applied side for maybe large absorption chillers?

Are you seeing large product activity picking up on the bid front?

We are seeing project activity, because that would be aligned with our SSNA channel in North America.

Where we are seeing weakness is in the Middle East and Europe.

Particularly as it relates to when it starts moving towards the energy-related markets, is where we are seeing some weakness.

So we are seeing strength in China.

We are seeing steady as she goes in North America.

And having, like the rest of the market, almost a near collapse when you think about the Middle East, because of the energy-related part of the market.

Of course that bleeds into our industrial refrigeration.

So a lot of the gains that we are getting are being offset by industrial refrigeration and some of the toughness in the Middle East market

That's really helpful, and sounds good.

Secondly on CapEx and cash -- maybe just a little bit of picture?

You may defer this to December, but how should we think about, and George, also as you are starting to look across the organization, how that CapEx may pace down over years?

Or how working capital may improve on the combined business?

A little color there would be helpful.

Yes.

I mean we ended the year with CapEx right at $250 million, which is what we planned for the current year.

Included in that number, round numbers was about $300 million to $350 million related to the automotive business.

If you look at Tyco's historic CapEx, it's in that $300 million to $350 million range, as well.

So I think in the near-term here, we don't see a significant reduction in CapEx.

I think a number between $1.2 billion and $1.3 billion will be steady-state for us for the next two or three years as we ramp up some of the investments that Alex talked about in the Power Solutions business.

That does give us a reinvestment ratio around 1.5% or thereabouts.

So we recognize it's probably a bit higher, but I also will tell you that the growth investments we're making have good business case financial metrics associated with them.

Great, I will leave the rest for December.

Thank you.

Julian Mitchell from Credit Suisse.

Thank you.

I just wanted to start with the Building Efficiency organic sales growth?

You called out that the EMEA region was very soft in line with other companies, but if we look at the North America systems and service specifically -- flattish sales there, and I think that did drag down the global organic sales average a little bit?

Did you see any delays in customer conversion of orders into revenues?

Or it's classic lumpiness and we should expect that revenue number in North America systems and service to accelerate soon?

Yes I think we had a pretty strong comparable last year in North America, but I do think it's just project flow.

There's nothing that you would look inside there and see an aberration.

The orders are strong, backlog's up.

So I don't expect that's something to be concerned about.

I think it's probably, as you just said, the timing of projects themselves.

Nothing sticks out as being unusual.

Thanks.

Related to that, you called out the strength in some of the institutional buildings verticals?

Remind us, how much of your Building Efficiency segment is institutional?

Well over half, probably two thirds of our buildings business is institutional related.

And just remind you, when we say that would be the government verticals, healthcare and education.

Thanks.

And then, secondly would just be on the Power business?

Very good incremental margins -- 40% to 45% or so?

Could you remind us where we are on the cost build out within China?

On and off in the past 18 months that has been a headwind on your EBIT margin within Power.

Was there any kind of one-time factor driving that down in Q4?

Or do you think the margin headwind from China is behind you largely in Power?

We're going to continue to launch plants.

I think that instead of -- if you look at China, and you separated it, what you would see because we are adding capacity, obviously it's because of launch cost its going to be a lower margin than in other regions.

But I think the right way to think about it is the plant economics are no different in China than anywhere else.

We are getting good economics, but we also have the launch costs.

They're going to be there for awhile, but as we continue to add, as our capacity can increase, it becomes a much smaller percentage of the overall cost structure.

Launch costs in that business are fairly significant.

It takes a while to launch those products.

Some of it is quirkiness of the China market as it relates to the testing required to go to market.

And of course having the capacity of the plant that's got open capacity also has some cost.

But I would say that the plant economics, which is probably the most important thing, are really no different in China than anywhere else.

I think our EBIT margins of 19% for FY16 were pretty strong relative to what we expected.

But I think if you look at the investments that we are making in Power Solutions in China over the next 2 to 3 years, there will be a bit of drag on margins, simply because of the launch costs that Alex referred to.

But we will actually be providing both 2017 and guidance through 2020 on Power Solutions margins on December 5.

Very helpful, thank you.

Joshua Pokrzywinski from Buckingham Research Group.

Good morning guys.

Just a follow-up on a couple of the questions on your non-resi businesses, particularly in legacy JCI?

I think there's been a lot of debate around where we are at in the non-resi cycle.

Clearly, institutional verticals are a little later positioned than some of the other ones.

Can you just talk about the lead time, and the visibility, and maybe the percentage of revenue that you have booked for 2017?

Just to give people some comfort about the level of its building, the long cycle nature of that business as we stand here today?

Yes, so the good news about our business is it is late cycle, and the bad news is it is late cycle.

In this particular case it's good news.

Because as we build our backlog -- typically our projects are more complex larger and late cycle, so our position is probably we're probably in a better -- it was tougher for us to get to this point.

We're probably in a better position than we have been, because if you look 6 to 9 months out, our business is fairly predictable.

Just because of the nature of the type of projects that we have.

So if you look at the flow rates of our projects, it would -- on average you are talking 9 to 12 months.

Its pretty easy for us to see 6 to 9 months out.

Then we look at our forelog, which is our pipeline, we can pretty much look at the next quarter and see what we can expect.

So I think we feel, if you look at it from in FY17 perspective, I think we have pretty good visibility in North America.

Great, and following up on some of the strain of cost questions?

I understand that JCI US productivity has been deemed to bring those down, I think it was $100 million a year that we should expect?

Brian talked about $75 million left over, stranded in the next year that comes out?

Does that come out on a run rate basis or is that actually come out in $75 million?

Not trying to put too fine a point on it, but it seems like this has been a source of confusion.

I think the $300 million that I referred to was $100 million over each of the next three years.

I think we took out a little bit more than half of the $150 million in 2016, and the remaining piece is really part of the productivity $100 million that is embedded in the 2017 plan that we will present December 5. It's part of the productivity piece that's been out there, given the fact that we knew that we were going to be spinning Adient.

Probably the way to think about it, is because you take out $75 million last year on stranded cost.

Whether it's an exit rate or an ongoing rate, it is probably a zero sum game here, because you've got last year's costs benefiting this year and this year's cost benefiting next year.

I think you could -- I know that you are probably a little more detail and we will give it to you.

But I think is going to be fairly consistent what we've seen over the last year.

That's helpful, thank you.

Jill Ritchie from Goldman Sachs.

Good morning, guys.

This is actually Evelyn Chow on behalf of Joe.

Maybe just starting with Power for a minute.

Your EBIT was very strong and represents a much higher level of EBIT dollars and you've historically achieved it in 4Q -- can you just help give us a sense of what were the headwinds and tailwinds you saw on the margin line?

Maybe the lower lead prices potentially is a mix shift from the better aftermarket in Start-Stop growth?

A little color there would be helpful.

Yes.

When we give you the numbers we are trying to make sure we take out the effect of lead.

Lead is, right now it's about where it was last year, but it's kind of been a round-trip.

Its gone down, its back up to about where it was a year ago this time.

I think that's probably not much of a change year on year, if I think of it intuitively.

One of the things that is obviously a tailwind is the more AGM Start-Stop batteries we sell, the better.

The second thing that's happened is that we are seeing some really strong growth in the market in North America particularly.

I think what the people inside the business call an echo of the five years ago when the OE build -- we started to see the aftermarket from that grow and registrations pick up.

So we are seeing some strength in North America, which is good for us.

We do well when we are able to run at capacity and then Start-Stop in China and China aftermarket growth has been incredibly strong this year, which is something that we had always planned for, but we were just really pleased to see it happen.

Understood.

Not a lot headwinds, a lot of tailwinds.

Makes sense and maybe a similar question on the Building Efficiency side?

I think you called out some investments both this quarter and in prior quarters too.

I just want to get a sense of what the puts and takes are on the margins?

And maybe a little bit more context around the year-over-year decline you saw in the business on the margin line?

Yes, I'll let Brian talk about the specific margins for the quarter.

But just to give you overall what's happening, first off, we knew that Hitachi was going to be a drag on our overall margins in general, because it is a lower margin business.

However, Hitachi is doing better than we expected, but still diluted.

So that's one of the things that's fighting us on the year on year basis.

Brian can give you some more specific color.

But the investments that we've been making to specific investments -- some in our product ranges.

There's been refrigerant changes, plus as many of you may know over the last few years, we've had to catch up on some investments in our UPG business -- light commercial, residential.

We're seeing the benefit from those investments now.

Then we made a significant investments in sales headcount over the last year.

So those are the three buckets of investments.

Brian you might want to give a little bit of color on the margins.

Yes I mean the margins for the year at Building Efficiency were 9.2%, and that's a 10-basis point improvement.

But I think what you are referring to, is it was pretty choppy quarter to quarter.

I think in the first quarter for Building Efficiency, we had a 50-basis point improvement; second quarter we were down 50 basis points.

Third quarter we were up 90 basis points and fourth quarter here that you are referring to, with the 80 basis point decline.

So it's been choppy and a lot of that has to do with the timing of when we're making some of these product and sales force investments, and also the timing of some new product launches.

And in particular in the fourth quarter, there were some new product launches that impacted the basis points reduction in the quarter.

So I think to step back and look at it, I think you really should look at it on a full-year basis.

And say, we improved 10 basis points versus what we thought going into the year.

We thought our margins were going to be in the 8.1% to 8.3% range.

I think the folks that be are actually pretty happy with where they ended up margin-wise.

And what I would say is -- we did that, and we didn't jeopardize any of our investments.

We made the investments we needed to not only help us with the growth we're seeing now, but allow us to position ourselves well for the future.

So I think being able to get those margins and maintain our investments -- in our product investments, I feel good about.

Thanks, guys, I'll get back in queue.

Shannon O'Callaghan from UBS.

Good morning.

In terms of cash flow, you're going to have the elevated CapEx continuing in Power.

It seems like a lot of the opportunity cash conversion-wise has to come out of Building Efficiency?

Can you talk about where that stands as you've looked at the initial integration plans, et cetera?

Just frame a little bit the opportunity you see for that piece of the business cash-wise?

I think if you look at free cash flow, adjusted for next year -- and the reason I say adjusted, is we've got some really choppy tax impacts that will hit us from a free cash flow standpoint in FY17.

But as I step back and look at Building Efficiency, I think the opportunities for improvement are probably in the, geographically in certain pockets in the accounts receivable area.

I do think there might be some opportunities in Power Solutions in the inventory area.

And I think on a combined basis, as we look at Tyco and JCI together, and put together the JCOS operating system embedded across the organization, I think there's going to be some working capital opportunities there as well for legacy JCI and Tyco combined.

So I guess when we look at FY17 it's going to be choppy, but on an adjusted basis I think we're going to probably be in 75% to 85%.

Okay, thanks.

And then in terms of the treatment of restructuring and special charges?

There's obviously some things to be called out, but is there also a pay-as-you-go restructuring or repositioning element that you are going to include?

Can you maybe clarify what's going to be in and what's going to be out of the numbers?

I think the adjustments that we've historically made have been the tax payments, and we've had separation costs included in the adjustments, and then any other significant one-time charges.

We are going to put only items that are viewed by us to be material on a quarterly basis in that adjusted free cash flow number.

Just to clarify on the historical Tyco side because, Shannon, I think you are referring to how we typically grouped restructuring and repositioning all into one line item.

So what's reflected in the pro formas is the restructuring dollars or charges are out, but those repositioning charges that Tyco took in 2016 are part of the $2.31 pro forma.

Okay, great, thanks.

Operator, I think we have time for one more quick question.

Robert Barry from Susquehanna.

Good morning.

Thanks for fitting me in.

Just wanted to follow up on a couple things.

One is on the government vertical within North America non-res -- I know last year in the quarter that was a pretty significant pressure?

Did that snap back, or what are you seeing in government?

Still under pressure.

So if you look across the institutional that would be the one place.

And healthcare is reasonably flattish, and the government business is down, continues still down under pressure.

Everything else is really strong, but we're still seeing pressure there.

I don't think that is anything that's unusual to us.

I think what we are seeing right now is maybe it has to do with the environment we're in.

Hopefully things will free up here after today.

Got you.

You talked about strength in Hitachi?

I think half of that is residential air-conditioning in Japan?

Is that what is doing well, or what's growing there?

I wouldn't say it's across the board, but it's in a lot of places.

The residential is doing much better than we expected.

But what we're seeing is -- it was really quite impressive, maybe George can comment.

He had a chance to see some of the integration activities.

On the cost side across the board, we are seeing an awful lot of benefit it will bring to our integration and synergy activities.

There have been some pricing actions and channel restructuring as it relates to the residential business.

There's been some new product introductions.

China business, with our partner at Hisense is doing really well, and Taiwan is doing fantastic.

I would say it's not everywhere, but it's more places than not we are seeing improvement.

Both on the cost and on the sales side.

There's still opportunity, but it's been pretty impressive.

Just a quick comment on that.

I had the chance to join the team at the one-year anniversary, and was very impressed with the work that's been done from an integration standpoint, deploying the JCOS across all of their business processes.

As you talked about, how do we now leverage that platform in many other markets that are very attractive markets, that we don't ultimately serve today?

And the team has got plans, detailed plans on how we take that product and truly capitalize on the growth opportunity that we see in any other markets beyond Japan.

I would tell you my first view there.

I was very impressed with the team, very impressed with the performance in the first year, and truly is going to be a strategic platform for the future of the Company.

I think originally that was targeted as a 4% to 5% out margin -- it sounds like it's tracking well ahead of that?

Well ahead of that.

It was a great investment for us, it was an even better investment for Hitachi.

Great, thank you.

Thanks.

Operator, that concludes our call.

Thank you and that concludes today's conference call.

Thank you all for joining and you may now all disconnect.