江森自控 (JCI) 2017 Q1 法說會逐字稿

Welcome to Johnson Controls' first-quarter 2017 earnings call.

(Operator Instructions)

This conference is being recorded.

If you have any objections, please disconnect at this time.

I will now 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' first-quarter FY17 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 johnsoncontrols.com.

With me today are Johnson Controls 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 results during the call, references to adjusted EBITDA and adjusted EBIT margins exclude transaction, integration and separation costs, as well as other special items.

These metrics are non-GAAP measures and are reconciled in the schedules attached to our press release.

All comparisons to the prior year are on a combined basis, which excludes the results of Adient, which is presented in discontinued operations, and includes the results of Tyco, net of conforming accounting adjustments and recurring purchase accounting.

Now, let me quickly recap this quarter's results.

Sales of $7.1 billion in the quarter increased slightly year over year on a reported basis.

Organic growth of 1% was partially offset by the net impact of FX, M&A and lead pass-through pricing.

Earnings per share from continuing operations, attributable to Johnson Controls ordinary shareholders, was $0.39, and included net charges of $0.14 related to special items.

These special items were primarily composed of transaction, integration and separation costs, as well as nonrecurring purchase accounting charges, which were partially offset by discrete tax items.

Adjusting for special items, non-GAAP adjusted diluted earnings per share from continuing operations was $0.53 per share, compared to $0.48 in the prior-year quarter.

Now, let me turn the call over to Alex.

Thanks, Antonella.

Good morning, everyone.

Before I get into the details of the first quarter, I'd like to take one minute and turn to slide 5 in your deck, and talk about the key priorities -- and we talked about this when we were together in December.

I just want to remind everyone what it is that we are focused on before we get into some of the specifics.

When you think about this merger and the intangibles of this, it is bringing together two cultures of these two great companies, and we share with you that we have put together a vision mission values, and we talked about that at the investor day.

We're well on our way on our journey to institutionalize this framework that we shared with you across our enterprise.

At the same time, we remain focused on delivering our operating and financial plans, and we started off Q1, I'd say not exactly where we wanted to on the growth front, but certainly ahead of our plan on both margin and expansion of our earnings.

And I remain confident in our ability to achieve our commitments for the full year.

We are deeply engaged in a process of developing a new strategic plan for the combined company.

It's informed by our insights from our customers and the convergence of technology.

Evaluating our portfolio is an ongoing process that we do here, and we're ensuring that we're investing in the right businesses, not just because they're good businesses, but they're right businesses for Johnson Controls.

We've installed a disciplined capital allocation strategy, we talked about that in December, which balances our investments for future growth and returning capital to shareholders.

Our current set of businesses are well-positioned for the right markets, for the long term, and I'm confident will continue to execute and drive shareholder value.

Let's turn to slide 6. Let's talk about our start.

We started off this year with a great start, with solid activity, particularly around our integration activities.

I'm incredibly proud of what's been accomplished by the Team.

If you think about our first quarter with the spin of Adient and the merger activities around Tyco, I feel, and George will get into the details, I feel very good about our start.

The first quarter profitability in both our buildings and power are better than we expected, and our teams are focused on what's in their control and they remain focused on execution.

We began to realize our cost synergies, and we're actually a bit ahead of where we expected for the quarter, and that bodes well for the future.

In terms of our end markets, the nonresidential market continues to improve.

Specifically the institutional markets continue to be strong, and we saw good order activity there, particularly in healthcare.

More importantly, our sales teams are excited about the opportunity to work together and our quoting pipeline remains very active and cross-selling activity continues to build.

As you know and I just referenced, we completed the Adient spinoff at the end of October, and I would like to take the opportunity to wish Bruce McDonald and his team continued success at Adient.

Let's go to slide 7, we put this slide in just to remind everyone about our investments in Asia-Pacific.

It really occurred to me that we wanted to make sure that we continued to talk about that, and so I'd just like to spend a few minutes updating you on our progress.

You know, you've heard us talk about Asia-Pacific, particularly China and how excited we remain about the growth opportunities in the near term, and also in the long run, and we're seeing both top-line and bottom-line improvement.

We see performance across all of our businesses.

In buildings, the organic growth is in the low to mid-single digit range and in power we are seeing excellent results growing north of 20% year on year on an organic basis.

We're really seeing the benefits of these strategic investments we've made over the past few years.

More importantly, we continue to improve our profitability in the region with several hundred basis points of margin expansion.

We're leveraging the expanding infrastructure that we have, and the infrastructure of our customers and a growing middle class, and our scale continues to accelerate both our growth and our improved profitability.

I'm also impressed with what's been accomplished, we've been at Hitachi and our integration with Hitachi for over a year, and all the work that has been put in place to implement our Johnson Controls operating system within the Hitachi joint venture is continuous contribute an even stronger market year, year-over-year improvement.

I'm proud of our Asia-Pacific team, I want to give them a shout out and I am confident that they will continue to grow while continuing to improve our profitability.

Let's move to slide 8 and talk about the quarter.

Sales in the quarter were basically flat, with prior-year $7.1 billion on a reported basis.

Organically, sales grew a little over 1%, with a modest decline in buildings more than offset by increased volume and a favorable mix and power.

We continue to see strong growth in start-stop, George will give you more details on that in a few minutes.

Continued in profitability an EBITDA of 10% year over year on a reported basis, and if you adjust for FX and lead, they're up 13%.

Extremely strong execution across all of our businesses.

Adjusted EBIT margins expanded 90 basis points overall, far exceeding our expectations of 30 basis points.

EPS for the quarter was up 10% versus prior year at $0.53.

Above the top end of our range of an adjusted, a range of $0.50 to $0.52, great start to the new year.

And I look forward to getting into the details.

With that, I will turn it over to George.

Thanks, Alex, and good morning, everyone.

Before I get into the detailed business review, I thought I would start with a quick integration update.

As I discussed with you at our investor day back in December, I've been spending quite a bit of my time with our business unit leaders across the organization, getting deeper into the businesses and developing our strategies as a go-forward company.

I've also had the opportunity to meet with several of our sales teams, and I can tell you that energy levels are high, with some early wins in the quarter, which set us up for future revenue synergy opportunities.

Let me share with you a few of these recent wins, which highlight collaboration among the teams.

Building off a strong legacy building efficiency performance record, a government customer contacted our branch regarding a fire system issue with another competitor's equipment.

Our local branch teams worked together to secure a life-safety repair project, including a complete SimplexGrinnell fire alarm system.

In Canada, our fire team was able to leverage a strong Johnson Controls customer relationship to secure an order for a very large fire sprinkler project.

And in Latin America, the joint team had a combined win, including a building management system, HVAC, access control, video and a communication system for a hospital.

Again, these are just a few examples of early wins.

On the cost synergy side, we have implemented a strong governance structure to track costs and all related synergies.

As we laid out for you in December, we expect to capture $250 million to $300 million in cost synergies and productivity savings in 2017, and as Alex mentioned, we are off to a strong start.

We achieved roughly $50 million in synergies in productivity, or about $0.05 on an EPS basis in the quarter.

We expect to capture a similar amount in the second quarter, and then based on the timing around things like headcount reductions, we expect to achieve $0.07 in the third quarter and $0.08 in the fourth quarter.

The integration of two large organizations requires a lot of heavy lifting, commitment and leadership.

Not all decisions are easy, but we have a strong team leading the process, ensuring we execute on decisions made and we move forward to the next step.

Both the integration team and the businesses are guided around four main objectives.

Grow, integrate, change, and operate.

We are making good progress, and I look forward to keeping you updated on our continued success.

Let's turn now to a review of the businesses, starting with building technologies and solutions on slide 10.

On a reported basis, building sales declined 2% or a little less than 1% organically, to $5.2 billion in the quarter.

When you look at the field side of the business, which represents about 70% of total sales, organic growth was relatively flat overall.

With a few positives and a few areas of pressure.

We had strong growth in applied HVAC systems, which was up mid-single digits.

In fire and security, both North America and the rest of the world grew in the low-single digit range.

On the other hand, performance contracting continues to face pressure tied to federal government budget delays, as well as a tougher prior-year comparison.

While industrial refrigeration is pressured by the oil and gas and process end markets.

These two businesses were down about 20% in the quarter on a year-over-year basis.

On the flip side, our products business, which represents the remaining 30% of sales, declined 3% organically year over year.

We continued to see very strong growth in UPG, which was up low teens, driven by increased shipments in both residential and light commercial.

The strength in UPG was more than offset by a mid-single digit decline in fire and security products, related to the high hazard heavy industrial end markets.

Turning to orders, overall growth of 2% year over year, excluding FX and M&A was driven by a 3% increase in sales orders, which was partially offset by a 3% decline in our quick-turn product orders, which pressured our sales growth in the quarter.

We have seen some early signs of stabilization on the orders front in industrial refrigeration, which is encouraging.

Additionally, we expect a decline in fire and security products to ease with revenues starting to flatten out.

This stabilization, combined with the timing of backlog conversion, gives us confidence in improved sales growth in the second quarter.

Backlog of $8.1 billion was up 6% year over year and up 2% sequentially.

Excluding the impact of foreign exchange and M&A.

Buildings EBITDA increased 3% year over year or 6% excluding their headwind from foreign currency to $578 million.

The margin increased 60 basis points year over year to 11.1%, benefiting from strong productivity savings in the early traction we are seeing on cost synergies, which more than offset planned incremental product and channel investments during the quarter.

Also contributing to the increased margin was the Hitachi JV, which continues to execute well, with another quarter of solid operational improvement, although aided by an easy comparison to the prior year.

Recall the Hitachi JV closed early in the first quarter of 2016, but the benefits from restructuring actions and plant productivity initiatives did not begin to bear fruit until the second quarter.

We would expect that as we move forward in 2017, the magnitude of year-over-year profit improvements generated by the Hitachi JV will become smaller.

Turning now to power solutions on slide 11.

Sales increased 9% year over year on a reported basis and 7% organically, to $1.9 billion.

As a reminder, the organic change excludes the impact of lead pass-through, which benefited power's top line by just over 250 basis points.

Overall, global unit shipments increased 5% year over year, driven by aftermarket shipments, which were up 7%.

Global [start-stop] shipments continue to expand with a 27% increase year over year, with another quarter of significant growth in China and the Americas.

Power solutions segment EBITDA increased 8% on a reported basis, or 12% excluding foreign currency and lead to $390 million.

Powers margin was down 20 basis points year over year on a reported basis, including a 110 basis point headwind from the impact of higher lead cost.

Underlying margins, excluding the impact of lead, increased 90 basis points year over year, driven by leverage on higher volumes and favorable product mix, both higher aftermarket and higher start-stop shipments.

Now, let me turn the call over to Brian to walk through corporate and the consolidated financial details of the quarter, and our outlook for the second quarter.

Thanks, George, good morning.

So, for the first time, we will be reporting corporate as a stand-alone segment.

I think this provides a bit more transparency to the true underlying EBITDA performance of our businesses.

This segment is really comprised of enterprise-like costs, like executive management cost, public company cost and other functional administrative costs that really are directly attributable to our primary businesses.

Our corporate segment expense did decrease 12% year over year, and this was primarily due to some of the productivity initiatives and the merger synergies that we had identified as part of the planning process last year, and both were a bit better than expected in the quarter.

If I turn to slide 13, there are a lot of moving pieces in this quarter relative to the special items and also the fact that Adient is for the first time reported as a discontinued operation.

Given the size of some of the special items, let me just briefly comment on each of those.

The first being transaction integration of separation costs associated with our portfolio activities, that was roughly $134 million, and the way to think about that is about half of it is transaction-related and have of it is integration-related.

We had a restructuring and impairment charge for $78 million, the majority of that would be severance-related.

We had a lump sum pension buyout in the first quarter, and as a result of that, which was done in connection with the Adient spinoff, there is a requirement to go through a remeasurement of the liability and assets in the first quarter, and that resulted actually in $117 million gain in Q1.

We had some nonrecurring purchase accounting expenses that Antonella referred to, the two primary areas there are the inventory step-up amortization, which is now fully behind us at the end of Q1, and also we continue to amortize the backlog asset that was set up as part of purchase accounting.

And lastly, there was a discrete tax benefit related to some planning at our foreign entities that resulted in a $101 million benefit.

The net of all that is a $0.14 charge, which when added to the $0.39 reported, gets to the $0.53 that we have been talking about this morning.

So as I go through my comments, I will exclude these special items, and also the comparison will be the pro forma combined financials that we put out on FY16 in the November 8-K that we filed.

So, overall first-quarter revenues were up slightly at $7.1 billion, if you exclude FX, lead and M&A activity, organic sales were up 1%.

Gross margin was constant at 31.2% and SG&A was down 3%, which is reflective of the cost reduction initiatives that we have across our business and merger synergies.

If you move to equity income of $55 million, it is 20% higher than year-ago levels, again related primarily to the strong Hitachi year-over-year performance.

And then as Alex mentioned for the first quarter, we delivered double-digit segment EBIT growth and we had EBIT margins of 10.7%, which were 90 basis points better than the first quarter of 2016.

Again, both of those exceeded our expectations for the quarter.

If we turn to page 14, net financing charges were $119 million, which were slightly higher than last year.

Our effective tax rate as we communicated on analyst day was 15%, which compares favorably to last year's rate of 17%.

Hitachi continues to perform well, and that is also the reason for the increase to $40 million in the minority interest addback line item on the income statement, it is up $11 million year over year.

Overall, we had a really strong first quarter with diluted EPS of $0.53 versus $0.48 a year ago.

And our business unit Management Team has really continued to deliver strong results during this period of transformation and the level of integration activity that is going across our Company.

So, turning to cash flow on slide 15, our first quarter adjusted cash flow was an outflow of $300 million.

As mentioned at analyst day, there are a number of one-time expected payments that we realized in the first quarter.

The most notable is the $1.2 billion tax payment we made related to the Adient spinoff.

We also had some other items related to Adient's cash outflow for the quarter of $300 million, and we had some restructuring and change control payments of $300 million, and transaction integration and separation costs of a couple hundred million dollars, which would include Adient.

Q1 has historically been a cash outflow quarter for us, so the adjusted free cash flow number is consistent with our expectations, and we remain focused on delivering the $2.1 billion in adjusted free cash flow for the year.

If we move to the balance sheet at quarter end, we had net debt to cap of 33.6% versus 39.7% at year end.

That is really related to the fact that as part of the Adient spinout, there was a $4 billion reduction in our equity, and as a result that drove the increase in the ratio.

Also during the quarter, we completed our previously announced debt exchange offers, related to both the legacy JCI and Tyco debt, and we also made $535 million of scheduled debt repayments in the quarter.

I would also just point out that beginning in Q2, we commenced a share repurchase program and expect to buy back about $200 million to $250 million of our shares during the rest of FY17.

And as we have mentioned, this is really focused on countering the dilutive impact of stock option exercises.

Finally, I'd just comment that we continue to evaluate our overall capital structure in order to take advantage of opportunities related to the current interest rate environment, as well as the timing of our future debt maturities.

So, if we move to slide 17, just a couple of things I would like to point out here.

We have already talked about Adient being reflected as a discontinued operation, just as a reminder, beginning in the third quarter of this year, we will be changing our segment reporting for the buildings business.

At this time, we were looking for the first and second quarter, we will continue to report segments for, I would say, the legacy BE business, and the same four segments we've reported previously.

And Tyco will be reported as a single stand-alone business within the buildings set of businesses.

And as you may recall from analyst meeting, when we get to the third quarter we will have a global products segment, and then we will have our installation project service business, really our field business in three geographies, North America, Europe, EMEA and Latin America, and Asia.

Also, as we move through FY17, we will continue to have some special items in our guidance that we gave here today, we will exclude any of the impacts of those special items.

And lastly, I just wanted to point out that we did end the first quarter, harmonized the backlog definitions between Johnson Controls and Tyco.

The primary adjustment related to the way both legacy companies had treated renewable service contracts, and so the backlog that we are reporting here that is up 6% reflects those new definitions.

Moving to slide 18, which shows a waterfall for our first-quarter results.

You can see the $0.05 year-over-year EPS improvement.

That really comes from cost synergies and productivity savings, which drove $0.05, along with volume mix which is $0.02, both in line with our expectations.

In fact, the cost synergies and productivity savings is a couple of pennies higher.

That was partially offset by planned investments in our buildings and powers solution businesses, which was a $0.02 impact, and the favorable tax rate was offset by the FX headwinds we had in the quarter.

All in all, $0.53, which represents a 10% growth over the prior year, and we really are off to a solid start as we move through FY17.

Turn to page 19 and fiscal second quarter.

You can see here that our organic sales will be up 2% in EPS at $0.48 to $0.50, which was up 7% to 11% year over year.

And this reduction in Q2 earnings compared to Q1 earnings sequentially is consistent with the historic patterns of both Johnson Controls and Tyco, and really is a result of the seasonality in our power solutions business, where our customers go through a strong customer stocking period in the months of October through December.

The waterfall also shows the benefits of synergies and improved synergies and productivity improvements.

That does remain at $0.05 through the second quarter.

I will tell you that the first-quarter synergies and productivity savings were really a lot of the low-hanging fruit that we were able to quickly move on as part of the integration activities.

I think as we get the processes and procedures in place here over the next quarter to [re-fence] both the legacy Tyco business as well as our federal business, I think we will begin to see the second half ramp up in synergy savings.

And then I've got a last slide here that I just want to go through relative to the phasing in the first half and second half of our EPS build.

Just to provide some context around this.

You can see that the normal seasonality is contributing a lion's share of the improvement in the second half, along with the ramp-up in the synergy saves that we expect.

And as Alex mentioned, we are really running a bit ahead of our first-quarter target, so I think that bodes well for us looking at the second half of the year.

But all in all, we remain very confident in delivering a very strong FY17, and we reaffirm our full-year guidance of $2.60 to $2.75, which will represent a year-over-year increase of anywhere from 13% to 19%.

With that, Antonella, we can open it up for questions.

Operator, can you please provide the instructions for the Q&A session and open up the lines?

(Operator Instructions)

Nigel Coe, Morgan Stanley.

Thank you, good morning, everyone.

George, your addressed in your prepared remarks the impact of the heavy industrial declines on the first few products.

I'm just curious that the field and products growth divergence is about 6 points this quarter, and we have seen (inaudible) compared, and I am just wondering if in addition to that the pressure from the heavy industrial whether we're seeing from inventory clearance, and any (inaudible) now would be helpful.

And as we look to the guidance of 2% to 4% for building this year, just given the first half order trends and the one (inaudible) performance, so were you already looking at the [2% zone] for the full year?

Nigel I think the first question was related to the fire and security products within the heavy industrial high hazard space.

It is more just interested in the divergent field sales and product trends, and the extent which we have seen inventory clearance in products.

Let me start with the field within fire and security.

We have been building and this holds true also for the legacy JCI building efficiency business.

We have been building orders consistently about 3% or 4% over the last year or so, and that has been building a backlog.

And what we are beginning to see is the conversion of that backlog within the fire and security space.

So, both businesses, both North America and the rest of the world are up somewhere 2% to 3%, which actually is a reflection of the progress we have made with orders and building the backlog.

Relative to products, you know products are a shorter-cycled turn business, and as we have seen, our first quarter last year was pretty good within the fire and security space, so now we have the last of our [a tough] compare within the first quarter within fire and security.

I believe we've seen the inflection point based on the current trends that we see with the activity that's taking place.

A lot of this is being driven by the Middle East, and so the Middle East when you look at both combined businesses is down pretty significantly, that's driving both the Middle East field business, as well as our products businesses.

We've seen some real bright spots here over the quarter.

With some nice wins in orders coming through.

And I think that bodes well here as we project the remainder of the year, both within the industrial refrigeration business, within the legacy BE business, as well as now the flow of our product businesses supporting the heavy industrial high-hazard end markets within the legacy Tyco product businesses.

We continue to make the investments in our products, and so we have not slowed the investments.

And I think as the market begins to recover, we're going to be positioned extremely well to be able to capitalize on the recovery.

Okay, and then depart on the 2% to 4% for the full year on building, is the high end of that range a stretch at this point?

So, when you look at the orders that we have had in the backlog that we have built.

So, the orders in the first quarter up about 2%, but the backlog was up 6% year on year, 2% sequentially, organically.

So, although we are a little bit off where we expected, just recognize that in the first quarter we only expected modest growth within buildings in the first quarter, and so we came in a little bit short of that.

And we're going to accelerate during the course of the year to be able to deliver on the 2% to 4% organic growth for the year.

That being said, now that we're off to a little bit slower start than we expected, but we'll put pressure to get to the higher end of that organic growth range.

But we are still positioned with the orders that we have been able to generate, the backlog that is in place, our ability to be able to get into that range, most likely most likely to the lower, to mid end of that range that we provided guidance to back in December.

This is Alex.

From a buildings perspective, probably (inaudible) this a little bit between myself and George, I would agree with what George said.

I think that what we're seeing is the backlog continue to develop, just the sheer math of it will tell you that we're probably going to be at the midrange of that or lower.

So, that being as offset more on the positive is I think the synergies are coming a lot faster than what we expected.

So, I think as we move forward, I'm just glad we continue to build a backlog, eventually that has got to flow, but what we do have is reducing the cost coming through with a better pace than what we expected.

Okay, thanks for the color, guys.

Deane Dray, RBC Capital Markets.

Thanks, good morning, everyone.

Good morning.

Just to follow up on Nigel's question, can we extend that same discussion to the overall core revenue growth guidance for 2017 to 2.5% to 4.5%?

I don't think I heard that explicitly reaffirmed.

Maybe some color on that.

I think it's probably a bit of a carry-on to what Alex and George said regarding buildings.

I think 2.5% to 4.5% consolidated is very doable for us at this point in time, and I think power solutions continues to [reform] extremely well, and if some of the backlog starts to flow in the back half of the year on the building side, I think we're very comfortable at 2.5% to 4.5% as a target we can get.

That is good to hear.

And then on the reference in performance contracting the government delays, maybe you can expand on that.

Is that anything unusual?

Is it election-related?

Is it a pause before potential infrastructure spending?

Just some context around that, please.

I will take those, because it needs a little bit of historical context with Johnson Controls to understand.

I think we knew this was coming because a year and a half ago at the end of FY15, I think that would have been, what we saw that had to do with all the budget issues with the federal government is a significant decline in our secured sales in the federal government business.

As I think you know, or at least you will begin to understand, is that business flows really over an 18-month period, so now we are seeing the result of that federal government business that really never came back as kind of the new normal of that business, which is a significant part of our performance contracting portfolio normally secured in the fourth quarter of each fiscal year.

And that new normal is now what has come flowing through our books.

So, I think if you had a historical context of Johnson Controls, this is sort of the output of a secured sales challenge that was due to the federal government that I think is kind of a new normal, quite frankly.

Who knows what the future bodes, but at least over the last year and a half has become the new normal.

That is helpful color, thank you.

Jeffrey Sprague, Vertical Research Partners.

Thank you, good morning, everyone.

Good morning.

I was wondering if you have been able to dig a little bit deeper into kind of the whole border adjusted debate and analysis.

Obviously, there is not a lot of import export with guys driving around in trucks and the like, so I get that relative to your service business.

What can you share with us on kind of the product side here, you know your import-export flows and any other frame of reference?

There is border adjustment and there is a whole Mexico conversation, and they are related but not completely.

I think we will have to kind of wait and see how the dust settles.

But it we just take as a reference point, because I think what most people are using is essentially the house blueprint as kind of a tax policy and a border adjustment I assume that is kind of your reference point, too.

Yes.

If you think of it that way, we have modeled it what the impact would be, say the 20% tax rate, and a border adjustment it is kind of neutral to us.

If you look at the overall effect, because we are on that importer mostly because of our battery business, but it's complicated, because our supply chain, we take core batteries into Mexico, we manufacture batteries for the Mexico market and for the US market.

We bring batteries back in the US and then we finish them in the US So, when you look at our total cost and our value chain, it is a very complicated equation, and we really don't know the details of the tax plan.

The best we can tell when we do our own modeling, we are kind of net neutral on this.

Great.

And I was wondering also we're all just kind of sorting out new company, new guidance, a lot of things moving around.

Looking forward now into the back half and kind of what you gave us, I just went back and looked at Q3 last year for both JCI and Tyco, and it was clearly the strongest organic quarter of the year for both companies.

In the scope of what could be a recovering market maybe not something to be overly concerned about.

As we try to get our models straight here, is there anything we should be thinking about as we weigh that second half together off the second-quarter guide that you gave us?

So, I don't know that we could give you much more come to quarter to quarter, but I don't see anything that's unusual this year versus last year.

I think what for us at legacy Johnson Controls in particular, as we saw the models that were put together for the second quarter, and when we knew internally that we were going to have growth, but that we understood our seasonality and we think a lot of folks really did not really understand our seasonality on the second quarter.

So, for us the second quarter that we're giving is not a surprise, and the backend is also not a surprise.

I just think that there is a learning process that's going on between us and a lot of the folks that are following us that don't really understand the seasonality of the battery business.

The battery business is fairly predictable, there are some quarter-to-quarter lead adjustments, but overall, it is fairly predictable.

I think if you look at the back half of the year with our backlog, and if you also think about it from the historical perspective, I think we feel relatively comfortable, and that is why we put that slide and it showed both the synergy cost and kind of backend flow of the business.

George, you may have a [personal view of the Tyco business].

I would say, Jeff, that within the Tyco portfolio, I think we start to see better compares as it relates to the heavy industrial high-hazard end markets recognize that within our products business and all those market structures and about 30% of our revenue of our volume in revenue.

And so I think we start to see a better compare their.

The field businesses are executing well with the continued order growth and the backlog growth that we are seeing that is going to play out here, I think, well as we now project the second half of the year.

We typically have a seasonal decline in the second quarter, is typically the slowest quarter because of the install segment of our business.

And then it becomes very strong it strengthens in the third and fourth quarter.

So, I don't see anything unusual, except for that I believe that we're seeing an inflection within some of the key end markets that we served.

And just one quick one for Brian.

Corporate in the quarter is clearly run rate in lower than the annual guide.

I assume some of that flexes up on higher sales and the like, but how are you thinking about corporate for the year, relative to that for $480 million to $500 million guide that you gave us in December?

Pretty consistent.

We did have some synergies that came up at $15 million reduction in the quarter.

Related some to cost synergies that were permanent takeouts, there was some expense deferral that will probably come back and end up in the second quarter for us.

So, I would not necessarily go with that $108 million times 4. I do think there is probably a slight build in corporate expenses into the second quarter.

So, the range we gave before is pretty reasonable still.

Thank you.

Shannon O'Callaghan, UBS.

Good morning.

Morning.

Alex, you emphasized Asia in the beginning of the call, I mean the building efficiency orders in Asia were down about 3%.

Just wondering what your view is in that in the context of generally sounding pretty bullish in Asia.

When I look at Asia, I will give you some qualitative, what I see is that the activity is strengthening in Asia, and if you think about orders being the field part of our business and you think about revenues on the other side, which show up in our, I think our Hitachi joint venture, we are seeing a mix change, too.

So, it is not just it is not just a projects business, which kind of shows up in our orders, but when you think about our products business, we are going to continue to see strength in things like our VRF products that we got through the Hitachi joint venture.

But I think overall, I would expect that we will start to see orders build in Asia not, you know, that won't be near the pace that we're seeing in power solutions, because I think we have a unique situation there, but I do think that we are bullish on growth in Asia.

Okay, thanks.

Maybe one along the same lines, the products in North America orders for building efficiency up 12%, that was probably the strongest area that we see in the Company.

Maybe just a little bit more color by product and any other flavor there.

Thanks.

We've had some real strong performance here within our residential light commercial business.

When you look at our product businesses here even in the first quarter our sales were up in those two businesses up 12% organically.

Units actually up even further than that.

So, that's continuing.

And we see that coming through strong as we project the Business going forward.

We've also seen within the HVAC space some real strong performance in our applied HVAC across the globe and building up what Alex said about Asia, a lot of that strength is coming through the work that we've done to improve our products as well as expand our channels within Asia.

So, we're seeing nice pickup there within the HVAC.

As I said, we have short term seen the pressure with the industrial refrigeration as it relates to the heavy industrial high-hazard oil and gas type end markets.

But the good news there is that in the quarter we have seen some nice pickup in order activity, as well as orders secured.

And I think that's going to start to benefit us here as we project the remainder of the year.

So, I think in the legacy BE portfolio, with the exception of the performance contracting, with the investments that are being made we are starting to see pickup within the product channels, and then within the, when you look at within the Tyco business product businesses, we continue to invest in spite of some of the pressure that is coming through, and the end markets that we serve and truly believe that we are at an inflection point and will start to see the progress here over the remainder of the year.

I will take the opportunity to talk about this performance contracting.

That is under pressure because of some of the end markets, but one of the things that is going to be important for us as we go forward we will talk about the branch businesses that pull through products, so whether it's our applied businesses or controlled business, and of course what is happening in products.

The performance contracting business is a separate business unto itself and so as we compare ourselves whether a gaining share or a losing share, if you look at both the applied and the unitary products, we feel very good about the investments we have made and we're seeing share gains, and so that's one of the reasons why we wanted to separate that out, because it bodes well for our future.

We should see it both on the field side and [it will give us leverage at] the factory.

Great, thanks.

Gautam Khanna, Cowen and Company

Thank you, good morning.

Morning.

Just to follow up on a couple of those questions, so could you first remind us of the size of the performance contracting business, as well as industrial refrigeration.

And maybe what that 20% sales decline meant in terms of absolute dollar decline in the quarter.

The performance contracting business is roughly $500 million on an annual basis.

And industrial refrigeration is probably $400 million to $500 million.

Okay, so going forward given the orders that have picked up at least on the industrial refrigeration side, what are you expecting the full year to be down, or what do you think it is going to be net in 2017?

Between those two.

I think it is a little bit too early to see what is going to happen here.

I think what we've been doing is try to mitigate the risk that we have seen with the softness that we've experienced, and we've been sizing the business appropriately to be able to still execute on the plan.

Now, that being said, the pickup in orders that gives us some confidence now that with the actions that are being taken that we are going to be positioned to deliver, like I said, on the guidance that we provided from an organic standpoint going forward.

And hopefully, we will be able to accelerate some of these orders so we can convert within the calendar year.

But I think at this stage, it is hard to forecast what ultimately the overall impact would be for the year.

I guess the qualitative I would say performance contracting will remain under pressure for the year.

Industrial refrigeration, we have got some good order growth, and so if we can get the conversion on that it probably has less pressure on it, that is qualitative but I think that is the way I think about it.

And just a followup on Jeff's question about tax reform and some of the impacts.

Does it have any impact on how you go about restructuring and where you go about restructuring?

Does this give you any pause on the pace or maybe the nature of some of the plans you laid out at the investor day?

No.

I don't think it impacts us from that perspective at all.

I think the only thing that pause it would give if you were making an investment in plant equipment, you probably, we don't have a new formula which you don't really know what that is yet, but it really does not affect the plans we have in place when you think about our synergy efforts and our productivity efforts.

Thank you very much, guys.

Julian Mitchell, Credit Suisse.

Good morning.

Morning.

My first question would be around the EBIT margin expansion, it was around, I think, 90 basis points year on year in the first quarter, you're guiding only 20 basis points to 30 basis points of increase in the second.

What is behind that 70 basis points of deceleration in margin improvement?

I think that really relates primarily to the fact that the Hitachi transaction occurred at the beginning of the first quarter in last fiscal year, and coming out of the box with Hitachi, as you may recall, they had lower margins.

And as we look at the first quarter of this year, moving into the second quarter of this year, the Hitachi piece of that is really what is driving it, because the Hitachi margins, dollar margins and actual margins in the second quarter of last year obviously are more comparable to the second quarter of this year than the first quarter was.

So, I guess a year ago we had Hitachi, we had just closed the transaction and we did not really see any of the cost synergies out of that transaction until we started the second quarter, so that's really the primary driver.

Got it, so in power, there's nothing strange going on with lead or the cost impact of new capacity or anything in the margins.

That 90 basis points had lead out, so that the numbers you're using is sort of neutralized for lead.

Understood.

Secondly, on the adjusted free cash, as you said, the Q1 is often an outflow for a sort of legacy JCI.

When we're thinking about the path to get to that $2 billion-plus number for the year, when do you think we start to see positive sort of adjusted free cash?

Is that really a second-half issue or you think Q2 you will start to see an improvement?

It will certainly be improvement in Q2, I don't know if we will turn fully positive in Q2.

It would be plus or minus $100 million, probably, off break-even.

But as we've seen historically in both companies, the second-half rampup is quite significant, and there are a couple specific things that we're looking at to drive throughout the remainder of this year.

I think a lot of the things that have been done at Hitachi to date have been very focused on cost synergies and there's an opportunity I think at Hitachi from a trade working capital improvement standpoint, which I think could benefit the second half of the year.

And then when we talk about the JCI Tyco merger as well I think there's an opportunity as we look through some of the integration activities that we are going to see some improved trade working capital at the combined business.

So, I would say those are both probably more back half of the year, and when you take that accompanied with the back-ended synergies and the related cash flow that will come off of that, and then look at the legacy two businesses and how they generally had a second-half cash performance, I think there is a road map to the $2.1 billion target we've got.

Thanks.

And thanks for all the color in the slides.

Steven Winoker, Bernstein.

Thanks, good morning, all.

I just want to make sure on the growth versus synergy element here, you guys in that $250 million to $300 million synergy target this year, none of that is linked to growth or is some of that on the cost side?

In other words, large purchases that are volume related that are on the cost side.

That is all cost.

But it is not volume-linked cost.

Correct.

Secondly, I would like to dig a little bit more onto the cash side.

You have talked about the 10 points of conversion opportunity over time, you just gave us some detail about how the year normally sequences.

But George, maybe from also an operating perspective, when you think about that trade working capital, some of your competitors, I know at [ASHRAE] and others are now maybe perhaps maintaining higher inventory levels to accommodate significant growth, at least in North America.

How do you deal with that in what appears to be a pretty heavy trade working capital-intensive business right now?

Let me grab that.

I think most of the inventory that you see in that business is probably has to do is more seasonality, because a lot of that inventory [is owned] in the channel, so I'm not familiar with what you heard at ASHRAE, but if you look at Johnson Controls' working capital and our inventory, it is really more of a power solutions conversation than it is an HVAC, as it relates to the differences.

And quite frankly, even though our products business is growing significantly, it's not as big a part of our business as it is probably with our peer companies.

Our credit working capital, a lot of that sits in our field organization more than it sits in the channels.

But when you think about channels and you think about the product stocking, I don't think that we've seen [inordinate] amount of buildup.

I think a year ago this time, when we were having a conversation around UPG, we were talking to channels that we had some product changes.

I don't know that we have had anything inordinate right now.

I would say, Steve, just based on the performance that we have seen here, we are turning that pretty quickly.

We're producing and at a double-digit rate on units, and as you have seen in the UPG channel, our business they were up 12% organically year on year, and we're projecting that to continue to be able to outperform the growth in the market.

And so I think based on what we've seen, we're efficiently utilizing that inventory and it's turning pretty well.

Okay, great, and I just want to make sure on the building side, it sounds like it is.

Thanks

I just kind of a footnote, we have seen a change in inventory that is half of our sales rate in our UPG business.

So, to George's point, it is turning quite quicker than it was.

Operator, we have time for one more question.

Joshua Pokrzywinski, Buckingham Research.

Good morning, and thank you for taking my question.

Morning.

On the backlog conversion, which I think is really what you're trying to say George and Alex on the underpinnings of the second half acceleration in the buildings business.

How do you think that's trended over the last call it 18 months?

It seems like orders have steadily grinded higher in both JCI and legacy Tyco conversion or I guess the way we've seen organic growth has had its heads and fits and starts, and some of that is products, which don't really make it into it, some of that is compares.

But how much of the second half outlook is really just execution on what you have in the backlog already versus hoping the products business kind of picks up some steam as maybe the channel inventories move around or [you guys want your] comparison.

Let me start by giving you the fundamentals of each of the businesses.

If you go back historically the BE backlog turns anywhere from nine to 18 months.

The Tyco backlog on the install business is nine to 12 months.

And recognize that every project is unique in how we ultimately go to market and execute on these projects.

If you look at the total buildings business, about 70% of the business is driven by the field orders.

And so, when you go back historically and do an average based on that backlog and the type of projects that are in the backlog and then project what is going to happen here over the next nine months, we feel very comfortable that with where we are in how those projects are going to convert, that we get into what we ultimately guided towards, which is the 2% to 4% for the total buildings, because this is a significant piece of that within 2017.

And so, at this stage, I think it's all about execution.

We're going to see some continued orders come in that are quick in turn to supplement that backlog.

But it's fairly predictable at this stage, where we are through the year and ultimately what we expect here over the next three quarters.

It sounds like, not to put words in your mouth, George, but if the products business either accelerates or does not, we are talking about maybe a half point of variance, not a point or even multiple points, just given the relative sizing.

Correct, on a [full basis] on the product side, as you know we are continuing to expand our channels across both sets of businesses, that's helping us being able to accelerate the product growth.

And that combined with the product that we support our internal channel with, it set us up here fairly nicely for the next three quarters and continuing to accelerate the overall growth that we're going to achieve and deliver on the guidance that we provided.

[I'm going to] give you this one piece of color on that legacy BE business.

When we look at it internally, kind of a lot of large numbers, when we go into a fiscal year because of the turn rate, and you can do this math yourself, we are about 40% confident, about 40% of what we're going to get in the year is already in our backlog.

Obviously, as the year goes on, that percentage goes up, so if it was 40% at the beginning of the year, you can kind of do your math.

And so you can see as we go later in the year, as George was saying, we gain more and more confidence or not, because it's either in the backlog or it's not.

And so hopefully, that makes sense, but that kind of 40% number walking into the year is from a legacy BE when you look at our flow rates, is how the math works.

Any final comments before we end the call?

I would just like to finish the call out and once again to thank our employees.

Nothing changes is incredible, and we have moved past talking about Adient in the spend, and I am proud of what we accomplished there, but as we bring the two companies together, it's what I feel good about is the momentum that we're gaining around the stuff George put into place around organizational structure, about getting the buildings business organized, and advocates organize we're going to be able to not only see the cost synergies, but be able to fulfill the promise of the merger.

I want to thank our employees for a great quarter.

I feel confident about the year, I hope that comes through in the call.

It just a lot of work for us to do, but I am confident we have the right team doing it, so thanks a lot, have a great day.

Thanks, Alex, and thanks everyone for joining.

Operator, that concludes our call.

This concludes today's conference.

Thank you for your participation, you may now disconnect at this time.