江森自控 (JCI) 2018 Q4 法說會逐字稿

Welcome to Johnson Controls Fourth Quarter 2018 Earnings Call.

(Operator Instructions) This call is being recorded.

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

I will turn the call over to Antonella Franzen, Vice President and Chief Investor Relations and Communications Officer.

Good morning, and thank you for joining our conference call to discuss Johnson Controls fourth quarter fiscal 2018 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, 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 review 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 discussion, 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 EBITA and adjusted EBIT margins exclude restructuring and integration cost as well as other special items.

These metrics are non-GAAP measures and are reconciled in the schedule attached to our press release and in the appendix to the presentation posted on our website.

GAAP earnings per share from continuing operations attributable to Johnson Controls ordinary shareholders was $0.83 for the quarter and included a net charge of $0.10 related to special items.

These special items primarily relate to restructuring and integration costs in the quarter.

Adjusting for these special items, non-GAAP adjusted diluted earnings per share from continuing operations was $0.93 per share compared to $0.87 in the prior year quarter.

Now let me turn the call over to George.

Thanks, Antonella, and good morning, everyone.

Thank you for joining us on the call today.

Let's get started with a high-level review of what we have accomplished over the last 12 months, starting on Slide 3.

2018 was a year of significant progress for Johnson Controls.

We executed on our commitments and exited the year with strong momentum.

We made significant strides on all of our target metrics and key initiatives, and I will touch on a few of those in just a minute.

We executed a disciplined approach to capital allocation, having paid down nearly $2.6 billion in debt and returning excess cash to shareholders, including $300 million in share repurchases and almost $1 billion in dividends.

We established the Cash Management Office and challenged the team to drive operational improvements by establishing sound, fundamental processes and metrics across the organization, which resulted in a 30% increase in cash from operations year-over-year and improved free cash flow conversion to 88%.

We changed our annual and long-term compensation incentives to better align with shareholder priorities.

And lastly, we have made significant progress over the past several months related to the strategic review of Power Solutions.

We have assessed multiple options and are now in the final stages of that review as we weigh all possibilities before reaching a final decision.

We will provide an update when complete.

While I am very proud of what the team accomplished this year, there is still a lot of opportunity ahead of us, and we are taking action to make sure we capture it.

Turning now to our scorecard on Slide 4. In the interest of time, I won't spend a lot of time on each item listed here on the slide, but these were 8 major commitments that we made to you at the start of the year and how we performed against each of those.

Contributing to our successes here is our effort to better align senior leadership with driving execution and creating a performance culture.

Over the course of the year, we focused on setting more grounded expectations with increased transparency and increased accountability.

Just to touch on few of these themes, you will notice the top 4 all pertain to improving the organic growth trajectory within Buildings.

In 2018, we delivered 5% organic growth in aggregate across our Buildings platforms, which compares to our original guidance of up low single digits.

One of the major drivers of the upside was improved execution in our service businesses across all of our regions, which is the result of the work we began in 2017 to expand our commercial capabilities, strengthen operations and increase our service technician capacity.

Service revenues grew 4% for the full year, and we exited with Q4 growth of 6% with momentum continuing into next year.

We set and exceeded an aggressive target to increase our global sales capacity in Buildings, adding 950 salespeople, net of attrition, representing roughly an 11% increase on the existing sales force.

Additionally, by applying our commercial excellence principles, we were able to improve sales productivity for both the new and veteran sales forces.

The combination is visible in the 7% organic order growth performance across our field businesses this year.

Against the backdrop of healthy end market demand, orders for our service equipment and installed businesses should see continued strength in 2019.

You will notice 2 yellow checkmarks on organic growth in power and underlying EBIT margin expansion.

In both cases, we came in at the low end of our original targets.

On the margin front, although we are at the low end of what we communicated to you at the start of the year, we navigated through an accelerating inflationary environment and offset all but $30 million of cost with incremental price in 2018.

We also continue to reinvest in our businesses, primarily through engineering and R&D within our products divisions but also the incremental costs and underabsorption associated with the sales force additions I just mentioned.

Lastly on free cash flow, we exceeded our target for 80%-plus conversion at 88% for the year, driven by solid performance in underlying cash from operations as well as a disciplined CapEx reduction.

Turning over to Slide 5. Building field orders continued to accelerate in the quarter, up 9% year-over-year organically.

Underlying order strength in the quarter was broad-based with all 3 regions up high single digits or better.

We are seeing continued strength across most of our core product domains, including bookings for our installation and service.

Orders for large applied systems grew low double digits in both North America and EMEA/LA.

I am very proud of the work our teams have done over the course of this year, driving 7% organic order growth for the full year.

Our project pipeline remains robust, and we expect continued order momentum across our end markets as we look into 2019.

Backlog ended the year up 8% at $8.4 billion.

With the combination of a solid backlog position and strong order growth expectations, our visibility into 2019 has improved and gives me confidence in our outlook for continued growth in field revenues next year.

Turning now to Slide 6. Let me recap the financial results for the quarter.

Sales of $8.4 billion increased 3% on a reported basis and 6% on an organic basis with 8% growth in Buildings and 2% in power.

Adjusted EBIT of approximately $1.2 billion grew 4% on a reported basis and 9% when adjusting for the impacts of the Scott Safety divestiture, foreign exchange and lead.

Favorable volume and mix as well as the benefit of cost synergy and productivity savings more than offset incremental organic investments back into our business.

Overall, EBIT margins expanded 10 basis points year-over-year on a reported basis or 50 basis points excluding the impact of the Scott Safety divestiture, FX and lead.

Underlying performance was led by Buildings, which expanded core margins by 60 basis points in the quarter.

Adjusted free cash flow in the quarter was approximately $1.3 billion, which brings the full year to $2.3 billion, representing 88% conversion.

Brian will discuss our performance in more detail later in the call, but I would like to recognize the Cash Management Office as well as the numerous dedicated individuals throughout the organization who put in a tremendous amount of effort this year, significantly improving our cash processes and positioning us to deliver sustained strong free cash flow.

Slide 7 bridges our EPS growth year-over-year with respect to some of the items I just discussed as well as a number of other small items, which impacted us during the quarter.

Adjusted earnings per share was $0.93, up 7% over the prior year.

With that, I will turn it over to Brian to discuss the performance within the segments.

Thanks, George, and good morning.

So starting with Slide 8, let's take a look at performance of Buildings on a consolidated basis.

You can see that Buildings sales in the quarter of $6.2 billion increased 8% organically with our products revenues up 9% and field up 7%.

And that was really led by a strong 6% growth in service and accelerating growth in project installations, which we grew 7%.

Divestitures, primarily the sale of Scott Safety, were a 3 percentage point headwind, and FX was about 1 percentage headwind.

Buildings consolidated EBITDA of $939 million grew 11% organically with strong growth in both our field and shorter-cycle products businesses.

Buildings EBITDA margin expanded 10 basis points to 15.2%, which includes the 50 basis point headwind from the divestiture of Scott Safety and FX.

So on a normalized basis, our margins expanded a solid 60 basis points.

As you can see in the margin waterfall, synergy and productivity save and favorable volume leverage and mix contribute 120 basis points, which includes positive price/cost in the quarter, and this was partially offset by 50 basis points of planned incremental product and sales capacity investments.

As George mentioned, field orders increased 9% organically, and our backlog is up 8% to $8.4 billion.

Now let's review each of the segments within Buildings.

So turning to Slide 9 in North America, sales of $2.3 billion grew 8% organically as we saw project installation activity accelerating 10% with service growth up 4%.

We saw another quarter of solid performance in applied HVAC & Controls platforms, which grew mid-single digits organically, led by an 8% growth in core applied HVAC equipment installation and service.

Fire & Security grew high single digits with balanced growth across each platform, led by mid-teens growth in security project installations.

Our solutions business, which is only about 10% of North America's revenue, grew high teens on a relatively easy prior year compare.

Just as a reminder, this business can be a bit choppy from an order and revenue standpoint on a quarter-to-quarter basis.

So if you look at North America, adjusted EBITDA of $336 million, it grew 7% year-over-year, and EBIT margin was flat at 14.5% as we saw the benefits of volume leverage and synergy and productivity save being offset by the planned sales force investments and an unfavorable mix as we saw install revenues grow at more than twice the rate of service in the quarter.

Orders in North America increased a strong 8% organically, driven by applied HVAC orders up low double digits and Fire & Security orders up mid-single digits.

Backlog of $5.4 billion increased 6% year-over-year.

So moving to EMEA/LA on Slide 10.

Sales of $948 million grew 6% organically with continued strength in service, which was up 8%.

And we saw an inflection in project installations plus 4%, which had been soft as we worked off the lower backlogs as we entered 2018.

Growth was positive across all regions and across all lines of business with the exception of the Middle East HVAC business.

Europe grew high single digits, driven primarily by a rebound in industrial refrigeration and HVAC, and orders in Europe increased high single digits organically in Q4 led by strong demand in IR, HVAC, fire suppression and security.

In the Middle East, revenues were up slightly as continued growth in service was mostly offset by continued softness in HVAC project installations.

In Latin America, revenues increased high single digits led by strength in our security monitoring business in addition to solid growth in controls and fire suppression.

Adjusted EBITDA of $103 million increased 8% on a reported basis with 15% organically, and EBITDA margins expanded 60 basis points to 10.9%.

But again, this includes a 30 basis point headwind from foreign currency.

The underlying margin improvement of 90 basis points was a result of favorable volume and mix and the productivity and synergy save, which was again offset by sales force investments.

Orders in EMEA/LA increased 10% with solid growth in all regions across both service and project installation, and our backlog ended up at $1.5 billion, up 9%.

So moving to Slide 11 on Asia Pac.

Sales of $689 million grew 4% organically, driven by strength in service.

Project installation revenue grew a modest percent through strong growth in Fire & Security and IR, offset by continued weakness in HVAC.

Adjusted EBITDA of $105 million declined 4% year-over-year and adjusted EBITDA margin declined 90 basis points to 15.2% where we again saw the benefit of productivity save, cost synergies and favorable volumes more than offset by sales force additions and underlying margin pressure.

As we highlighted for you at the end of Q3, we did expect to see some margin pressure in Q4 related to the highly competitive environment in China, but we do expect our margins to stabilize in the early part of fiscal '19 and expect overall modest margin expansion throughout the year of fiscal '19.

Asia Pac orders increased 8%, driven primarily by service orders, which were up 20% in the quarter.

And our backlog increased 11% to $1.5 billion.

So turning to global products on Slide 12.

Our sales increased a very strong 9% organically to $2.2 billion with high teens growth in Building Management Systems, high single-digit growth in HVAC and Refrigeration Equipment and low double-digit growth in Specialty Products.

In BMS, we saw a strong growth across our controls, fire detection and security businesses.

Sales across HVAC and Refrigeration Equipment grew high single digits.

Global residential HVAC, which does include our consolidated Hitachi JVs in Japan and Taiwan, grew low double digits in the quarter.

Our North American residential HVAC revenues grew just over 20% in the quarter, which was aided by a relatively easy prior year compare, but we did see the favorable weather, which drove higher replacement demand, and we gained market share with new product introductions as well as the expansion of our distribution footprint.

We also saw a strong price realization in the channel during the quarter.

Global light commercial HVAC grew low single digits led by mid-single-digit growth in North America despite a real tough mid-teens prior year compare.

IR equipment revenues grew mid-single digits in the quarter led by high teens growth in North America.

And our applied HVAC equipment business grew low double digits, reflecting strength in our indirect channels in both North America and Asia.

And finally, our low double-digit growth in Specialty Products was driven by an increased demand for fire suppression with broad-based growth across all of our regions.

Segment EBITDA of $395 million was up 3% on a reported basis but up 18% if you exclude the impact of the Scott Safety divestiture.

Our reported segment EBITDA margins of 60 basis points include 100 basis point headwind related to Scott Safety.

So our underlying segment margins expanded 160 basis points in the quarter to 17.8% where we saw the higher volume leverage and mix, positive price/cost in the quarter and the benefits of cost synergies and productivity save, partially offset by the planned channel and product investments we've talked to you about in the past.

So let's move to Slide 13 and talk about Power Solutions.

Sales of $2.2 billion increased 2% organically on a tough prior year compare, and this was driven mostly by a decline in unit shipments, primarily in our aftermarket channel.

Total battery shipments declined 1% year-over-year with shipments to OE customers up 5% and aftermarket shipments down 2%.

And I would just note that on a comparative basis, we shipped a record number of batteries in Q4 of last year after a relatively soft Q3.

Our growth in OE shipments outpaced global market growth and also reflect several new business wins that we expect to continue as we move forward.

In addition to the tough prior year compare, shipments to the aftermarket channel were impacted by about 1 percentage point related to Hurricane Florence.

Global shipments of start-stop batteries increased 20% year-over-year, with strong growth in the Americas, China and EMEA.

Segment EBITA power $424 million decreased 2% on a reported basis and 1% organically, and margin declined 80 basis points year-over-year to 19.4%, which included a 10 basis point headwind for FX.

So power's underlying margins declined 70 basis points, which was reflective of the continued pressure around transportation costs, some unfavorable volume and mix, lower fixed cost absorption in our plants, and those items were offset by some favorability and productivity save.

I would point out that freight cost do remain elevated, and we expect some continued pressure in the near term in transportation costs as we work to offset these incremental costs through pricing as we renew agreements with our customers.

On Slide 14, corporate expense was down 11% year-over-year to $95 million.

And again, we made good progress on the synergy and productivity saving front.

So let me turn to Page 15 and talk about cash flow.

Our reported cash flow was $1 billion in the quarter.

And if you exclude the planned integration and restructuring payments and a nonrecurring tax payment of about $300 million, our adjusted free cash flow is a strong $1.3 billion in Q4.

For the full year, adjusted free cash flow was $2.3 billion, which was up roughly $1 billion over the prior year, and as George mentioned, represented free cash flow conversion of 88%.

For the full year, we delivered significant improvement in cash from operations and also reduced our CapEx spend by about $200 million relative to our original plan of $1.250 billion.

And as we go forward, we'll continue to use a very disciplined CapEx approach.

If I look forward to fiscal '19, adjusted free cash flow conversion will approximate 90%, and that guidance excludes special cash outflow items of about $300 million to $400 million and also excludes the $600 million tax refund that we expect either in late fiscal '19 or early fiscal '20.

Turning to balance sheet on Slide 16.

Our balance sheet position continues to improve with net debt down nearly $1 billion sequentially in the quarter to $10.8 billion.

Our net debt to EBITDA leverage is 2.2x, and our net debt to cap declined to 33.8%.

During the quarter, we repurchased 1.2 million shares for $45 million.

And for the year, we repurchased 7.7 million shares for $300 million, in line with our original plan.

Additionally, as we look to '19, we're now in a better position to return more cash to our shareholders.

The Board of Directors has approved an additional $1 billion share repurchase authorization, which is in addition to the $900 million that remains in prior authorizations.

We do expect to complete approximately $1 billion of share repurchases during fiscal '19.

And finally, let me just touch on a couple of other items on Slide 17 before I turn it back over to George.

I'd like to give you a quick update on U.S. Tax Reform.

As you know, our original assessment was that the effect on our fiscal '19 rate could be in the range of up to a rate of 16% to 18%.

And as we've worked through the details of the provisions of the new tax code, we now expect our effective rate to be 16% in fiscal '19, which compares to the 13% rate in fiscal '18.

And then lastly, as we mentioned on the third quarter call, we've got a new revenue recognition accounting standard that will become effective for us in the first quarter of '19.

The impact of this standard on Buildings is not significant, but for Power Solutions, even though there is not a significant impact on EBITDA, there is an impact on revenue and as a result, there will be a gross-up in sales, which will impact our EBITDA margin rate by 200-plus basis points.

We have provided, in the appendix to the deck, normalized financials for the quarters for power so you can update your models with the new information.

So with that, I'll turn it back over to George.

Thanks, Brian.

Before we open up the line for questions, I want to provide you with our outlook for 2019.

Let's start by walking through the puts and takes embedded in our 2019 guidance on Slide 18.

As Brian mentioned, our tax rate for fiscal 2019 increases to 16% from the 13% effective rate reported in fiscal 2018, and this equates to a $0.12 headwind year-over-year, which normalizes our fiscal year 2018 EPS to $2.71.

We expect mid-single-digit organic growth, which will drive approximately $0.28 of earnings, and we expect this growth to be primarily driven by improved volumes and price.

Additionally, we will have the continued benefit of synergies and productivity savings, which we will realize over the course of the year that will contribute an additional $0.23 of earnings.

As you are all aware, the U.S. dollar has continued to strengthen.

Based on recent rates, we expect this to result in an $0.08 foreign currency headwind year-over-year.

Additionally, the carryover of the sales force investments as well as a few cents of incremental investments in our product businesses are expected to total about $0.07.

As you can see, there are various other items which net to a $0.07 headwind in fiscal 2019.

All of these factors contribute to our fiscal 2019 EPS guidance range before special items of $2.90 to $3.05.

This represents growth in the range of 7% to 13% adjusting for the impact of the increased tax rate.

The full guidance -- details of our guidance is included on Slide 19.

Our guidance is based on strong underlying EBIT growth of 8% to 12%, driven by strong top line performance in synergy and productivity benefits.

While we are pleased with our 2018 results and continuing momentum into 2019, there is still a lot of opportunity ahead, and we remain focused on driving execution.

With that, let me turn it over to our operator to open the line for questions.

(Operator Instructions) And our first question will come from the line of Nigel Coe from Wolfe Research.

So I'm sure this is a question you don't really want to address, but I think it has to be asked at least.

I'm sure you were hoping to have an announcement about the outcome of your portfolio review.

There's been a lot of press reports around potential bidders for that business.

Can you maybe just talk about have you narrowed the range of options for power?

And if you have, maybe just address that.

Or alternately, is everything still on the table for you?

What I would say, Nigel, we've gone through a very thorough process and have been assessing multiple options.

I would tell you we've been very disciplined in making sure that whatever the outcome is that we're going to be positioned to be able to create the most shareholder value.

A little bit disappointed on the timing, but it's something that we can't control.

What I would say that we have made significant progress, there are a significant number of considerations that we've taken into account, and what I believe is most important now is making the right decision versus keeping to a set time line.

We are evaluating all of the multiple options before we reach the final decision, as I said, and all options are still on the table.

Okay, I'll leave it there, maybe there'll be other questions then.

And maybe just turning to the cash flow outlook from '19.

Maybe this is for Brian.

Maybe just talk about what CapEx number is in there.

I'm sorry if I missed that in your prepared remarks.

And then the one-timers, the $3 million to $4 million of one-timers, can you maybe just talk about those?

Are there discrete tax items in there as well?

So the guidance at 90% free cash flow for fiscal '19 has in it roughly $1 billion of CapEx on a comparable level with where we ended this year, Nigel.

And as far as the special items for fiscal '19, that represents really a lot of the integration costs and restructuring that we've taken as part of the whole JCI-Tyco integration.

If you recall the billion dollars in save over the 4-year period, we'd commented that it was probably about a dollar-for-dollar cost to save.

And that really reflects the remaining portion of the cost to deliver the billion dollars.

There are not any unusual or nonrecurring tax items in that amount.

Okay.

And then just a quick one on top of that.

The cash tax rate, is that -- going forward, is that going to be similar to the GAAP tax rate?

It will be certainly closer than it's been in the past.

I think '19 could be, quarter-to-quarter, maybe a little choppy but for the year, pretty normalized.

And then when we get to 2020, it should be back very close.

Our next question will come from Julian Mitchell from Barclays.

Maybe just the first question on the Buildings margin guidance.

I think you'd guided that to grow about 40 to 60 bps in fiscal '19.

If I look at the Q4 margin performance, you are up about 60 bps excluding Scott Safety.

And I would've thought that maybe with less investment spend, maybe less price/cost headwind, your margin improvement may accelerate from Q4.

So maybe just help us understand what are some of the offsets?

Is it tariffs or mix or something?

Yes, Julian, we've made a lot of progress here when you look at the overall margins and when you look at the aggregate of what we're forecasting here for 2019, what we'll see is very nice progress on the price/cost within our products business, and that's coming through, as you've seen here in the last couple quarters.

And then within our field businesses, when you look at the field businesses, we've got the headwind of the sales force investments that we've made through the course of 2018 and that becomes -- especially in the first half of this year, some headwind on the margin rates.

And so if you look at the overall margin rate, we pick up about 30 basis points on volume with the continued strong organic performance.

We pick up about 60 basis points of price -- I'm sorry, productivity and synergy save.

And then that's being offset with the reinvestments that we have, a little bit of the headwind that we had from the sales force expansion that we made, and then some incremental investments here in products.

As we go through the course of the year though, as we position now through '19 and into 2020, you'll see those headwinds subside.

Because now that we've got the growth machine working, we've got the orders now at a rate that we believe is well above the market, we're now driving our service growth.

And with the investments we've made in products, that's ultimately what's going to drive the growth in the overall margin expansion longer term.

And so there is a little bit of headwind here in 2019, but we feel good about the 40 to 60 basis points that we've guided here for our Buildings business here in '19.

And then just my follow-up question would be -- apologies if I missed, but any clarity you could give on the impact of tariffs.

Maybe just what you thought the fiscal '18 impact from tariffs was on a gross or net basis, what you're assuming it is for fiscal '19, and maybe just any detail on how it affects the 2 segments differently.

Julian, when we looked at this in total -- for the total year, so we started to get hit with the 232s in 2018, and then subsequent to that, the 301s.

When you put order of magnitude across both, it's roughly about a -- I'm going to say, roughly about $130 million, $140 million.

And we saw about half of that come through in 2018.

And I would tell you from a pricing standpoint, as you all know, we got behind the price/cost curve early in the year in 2018.

We've been very aggressive with price through second, third and fourth quarter.

We're in a very good position right now from a cost standpoint, taking into account all of our inflationary cost, including tariffs that are on a go-forward basis here.

We're going to start to see price/cost being positive throughout the year with the work that's been done from a pricing standpoint.

So we feel that we've taken all of the 301s, even the full -- when you look at the 301s as it relates to China, all of the potential headwind that, that would potentially create, we factored that into our cost base, and we've taken the pricing actions to be able to offset that.

Next question is from Andrew Kaplowitz from Citigroup.

George, field installation picked up nicely in the quarter to 7%, helping you get to overall field revenue growth of 7%.

Are you at the point, given your increased sales force, where you think field revenue growth can basically match field backlog growth and installation growth at the same time?

Can you sustain that mid-single-digit growth that you saw?

And separately, just on the applied HVAC product acceleration, are you seeing new products really starting to gain traction, or is it just strong institutional markets there?

So let me start with the overall -- the backlog, the work that we've done this year within our sales force and how we built the backlog.

All of that has been broad-based across our field businesses, across HVAC, industrial refrigeration through across our Fire & Security businesses.

So I would tell you it's been globally very much broad-based.

Now with that backlog, we've also been able to accrete the book margins.

So we've been booking better margins in backlog and that's what ultimately is going to support the margin expansion as we go forward here through 2019 and beyond.

Now when you look at the growth rates, so we've got an 8% backlog going into 2019, that is what gives me tremendous confidence that as we go through 2019, the guidance that we've given is firm because as you look at where we started 2018, we started off with a backlog, I believe it was somewhere around 2%, and then we ultimately were able to accelerate through the course of the year to be able to get to the 5% Buildings organic growth.

So in regards to your question, I absolutely believe that you'll start to see the organic revenue growth in line with the order growth that we're achieving.

You started to see that in the fourth quarter.

And through 2019, you'll start to see those 2 lines converge on the installation side.

What I'm very excited about is service, that from a service standpoint we've been expanding service.

We're trying to expand service as rapidly as we're expanding our install business.

As you all know, that's where we get significant improved margins.

And across the board, we've expanded our -- not only our commercial teams but also the fulfillment capabilities to be able to drive service.

Recall that we were modest growth in 2017, like 1% or 2%.

We were able to ramp-up 3% to 4% to 5% to 6% during the quarters in 2018, and that gives me confidence we're going to see the orders that we've been able to achieve in service begin to convert to stronger revenue here in 2019 and beyond.

So in regard to that, I do believe that through the course of 2019, you'll be able to see the convergence of the organic revenue to what we've been able to achieve from an order standpoint.

Now the second question...

HVAC.

On the HVAC.

When you look at our HVAC performance, I couldn't be more excited about the progress we've made relative to -- with the new products that we brought into the market and then the expanded distribution that we've put into place across the globe.

If you look at a couple of segments, our North America residential HVAC equipment revenue is up 21%.

Now I would say that that's to an easy compare from last year.

But overall, when you look at whether it be the favorable weather that Brian talked about, the channel expansion that we've made, the price realization, that gives me tremendous confidence here that we're gaining share and making a lot of progress with the new products we've launched.

When you look at light commercial, when you look -- where we're up about mid-single digits, but that's to a much tougher compare from last year where we're up double digits.

And then when you look at our global applied HVAC equipment business, we've launched a lot of new products in that space.

We're beginning to see the pickup with those new products.

Globally, we're roughly at mid-single-digit growth.

But I would tell you, in North America, the success of the products and the expansion that we've had is driving double-digit growth in North America.

So I'm very pleased with the progress we're making in that space.

George, just a quick follow-up on Power Solutions.

If you look at the volume mix component in your margin [walk ,] it slipped from, I think, plus 30 last quarter, to minus 80 this quarter.

Obviously, slower growth this quarter, so a little more under absorption, but how much of the change was Florence-related disruption in the quarter?

And does that impact go away in Q1 this year?

Yes, so that was part our challenge that we had with a little bit of volume and then the margin pressure that we had.

I would tell you that most of it was driven by the mix.

So when you look at our Power Solutions business last year, the compare, we had a record of year volume fourth quarter of 2017.

In 2018, our OE volume was up 5%.

And then our aftermarket volume was down 2%.

So that was a significant impact to the margin rate.

Organically, we showed 2% overall, and that was driven by price and mix.

But then when you look at the mix between OE and aftermarkets, what drove that margin pressure.

That, in addition to all of the headwinds that we've had with our transportation logistics, was -- couldn't have been offset.

We had strong productivity but power offset the productivity that we achieved during the quarter.

What I see going forward is more balanced mix.

As we project the volumes here as we get into 2019, we are seeing some decent volumes given that this is our strong season.

And I am encouraged based on the volumes that I see coming through and that I think that will normalize the margin rate on a run rate basis as we go through 2019.

Yes, I would just add to that.

I think the way to think about the impact of the hurricane in power, it was probably roughly a $0.01 in the quarter impact to us.

Our next question will come from Steve Tusa from JPMorgan.

Just a question on the CapEx.

How much this year will be battery CapEx?

And then how much are -- out of the $1 billion is battery next year?

I would look, I think, in terms of probably 1/3 of the CapEx will be Power Solutions, and 2/3 buildings and corp.

Okay.

And that's going to be kind of consistent for next year?

Or the Buildings' CapEx stays flat and most of the reduction is kind of -- the sustainable reduction is in the -- is on the power side, most of the change?

It's going to be pretty consistent, Steve, between '18 and '19.

So 1/3, 2/3.

Okay.

Got it.

What...

Just a comment on that.

When we look at CapEx, what we're going through is, we're being very disciplined.

I mean, we are investing.

We are supporting the growth that we're achieving, and we're making sure that all of the capital expense that we incur is truly aligned to being able to achieve this accelerated growth.

So I can assure you that from a payback standpoint, we're well positioned with these investments.

Yes.

Absolutely.

I'm just curious so when you kind of look at the improvement in conversion, is that coming -- I'm just trying to kind of discern, is that -- part of that is from battery CapEx coming down, obviously, as you guys are disciplined on that business, correct?

Is that kind of how we're looking at it?

Yes, I mean, I think there's probably -- when you think about Buildings' CapEx versus power CapEx, there's probably 10% to 15% difference in conversion between Power Solutions and Buildings business.

So yes.

Okay.

Got it.

And then just anything around quarterly sequencing when it comes to kind of seasonality of the year?

Anything on cash or EPS that we should be aware of?

No.

I think historically, we've been about 19%, 20% EPS in the first couple of quarters, probably just short of 30% in the third quarter and then low 30s in the fourth quarter.

Based upon the plan that we put together, we don't see any major shifts from that, Steve.

And our next question will come from Deane Dray from RBC Capital Markets.

Just want to follow up on Steve's questions on CapEx.

And George, you emphasized a point about staying disciplined on CapEx.

There were some projects that got deferred.

Just give us a sense of what were those projects?

And are they being added into 2019?

Or are they canceled altogether?

Yes, when we did the review, I mean, there were certainly things that came out, but there was nothing that was deferred into '19.

I mean, we did it strictly, as George mentioned, on a return on invested capital basis and if it didn't have the payback.

It's something we're not going to move forward with.

So I don't think you should view the reduction in CapEx in '18 as something that flows into '19.

'19 will be evaluated on a stand-alone basis between the businesses.

Got it.

And then on the sales force investment, George, I'd be interested in -- since it has had such an impact across your businesses.

Could you talk a bit about how the new sales folks have been deployed, the businesses to geographies?

And at what point do they become productive?

You made a comment early about sales force productivity, and do you measure the veteran versus the newer folks?

And what's baked into your assumptions into 2019?

Right out of the gate, Deane, as I took over last fall, this was front and center and we immediately embarked on putting some tight processes around sales and putting the discipline and getting the right targets and getting the right incentives and most important is segmenting the market and how we serve the market.

And so when you look at our sales force, we've got multiple segments.

So you have enterprise selling.

You have HVAC equipment.

You've got Fire & Security.

You've got long-term contracts.

You've got short-term service.

And so getting that right was very important, and so we did that across the board.

And then we said, where is the market growth?

How are we going to compete?

Where do we need to add?

What skill sets do we need?

And so by doing that, we've been adding, through the course of the year, like I said, we netted 950, and then within that, making sure that as they are ramping up within each one of their segments that we have an expected level of production during that ramp-up, and every segment is a little bit different in how it works.

But what I would tell you, with the discipline, with the process, with the accountability, with the incentives, we've been exceeding the ramp-up in each one of the segments.

And so I have a lot of confidence here based on the [output].

We're still expecting here, from an order standpoint, to be high single-digit order growth again through the year as we're getting our sales force up to speed.

But I can assure you -- and then it was a process that also allows us to be able to address low performers to make sure that we're getting high-quality sales people coming in, we're giving them the right targets, they're ramping up appropriately and ultimately delivering on the expectations of the reinvestment we're making.

Our next question will come from Gautam Khanna from Cowen.

George, I was wondering if you could give us some context for the consideration of exiting Power Solutions.

The math, when we look at it, it looks like it could be dilutive if it were sold assuming reasonable multiples.

I'm just curious how you balance the potential for dilution versus the right portfolio long term.

How do you make those trade-offs?

Yes.

So we're looking at all of that.

So as you look at a business and the fundamentals of the business, the ability to be able to create value, short and long term, we've taken all of that into account.

And as we're looking at not only continuing to run, I mean, this is an incredible business with a market-leading position that is in an attractive vertical and it will be for some time, and we're focused on how do we continue to deliver value with that.

And then making sure, as we look longer term, that we can position it to be able to create the most amount of shareholder value.

And it also factors in, as we look at the portfolio and how the overall portfolio is performing, how do we continue to be positioned with optionality within Buildings so that we can continue to strengthen our Buildings position because we do have an incredible platform there that I believe both with the combination of our strong product technologies and capabilities combined with our channel that we're positioned extremely well now to be able to capitalize in that space.

So we take all that into consideration.

We've gone through thorough reviews as we've gone through the process.

We've made a lot of progress.

There's been a lot of learning in some cases, but it's making sure that we do what's right not only for our investors as well as for the employees that are part of that business.

That's helpful.

I appreciate it.

And just a quick follow-up on -- You mentioned the applied business in North America looks really strong.

Where do you think we are in that cycle?

I mean, how many years left do you think we have of, kind of, this mid to upper single-digit or perhaps double-digit growth?

And maybe what's the underlying market growth do you think?

And how long might we actually sustain that?

Yes.

All of the indices that suggest that there's continued expansion, whether it'd be ABI or there's other indices on starts and the like, we've been very successful in being able to expand our footprint and capacity and at the same time also be able to get more attractive projects with the pricing that we've been putting into place in the market.

So I'm still pretty bullish at least over the next year or 2 that this is going to continue based on what we've seen with the activity, what we're quoting on, a lot of the large projects that I've been involved with, with some of the key customers that we support.

And so it's hard to predict, I mean, I hear all the same reports that you hear and some of the concern, "are we at the mid or end of the cycle?" And based on what I see today, I see it continuing, and because of that, we're doing very well.

I mean, we're -- with the expanded footprint and the sales capacity that we put into place, we're getting more than our fair share.

The next question is from Steven Winoker from UBS.

This is David Silverman on for Steve.

So in the past, you've talked about potentially thinking about divesting 5% to 10% of the Buildings portfolio that you consider to be noncore from a portfolio management standpoint.

Is that kind of still on the table?

And if so, can you give us an idea of what you might be thinking of as noncore?

Yes, so we continue to review the Buildings portfolio.

We have made a number of small divestitures that almost don't hit the radar screen.

These are very small businesses that are distractions, and we've continued to look at those.

We've also made some small bolt-on acquisitions mainly in our Building Management Systems space.

Overall, one of the divestitures you might have seen where we did a -- we entered into a JV with ConEd on our distributed energy storage business here late in Q4.

So there's a lot of activity like that, that we're working to clean up the portfolio.

When you look at the overall 5% to 10%, I would say, we're still in that range.

These are businesses that when you look at our core strategy of strengthening our HVAC platforms and then leading in Building Management Systems, these are businesses that might not fit either of those 2 categories that are good businesses, are running well and timing-wise would be what's the way to be able to then potentially divest or reinvest that into core HVAC businesses and/or Building Management Systems.

So as we review the portfolio, that would be -- we're still in that ballpark, 5% to 10% of the overall Buildings portfolio.

Yes, I would say as it relates to that, just the way to think about it is these are smaller businesses that would be transacted over time, and it's probably a multi-year journey that we're talking about, that gets to that 5% to 10%.

And I think as we've talked about in the past to the extent that there are noncore Tyco businesses that could be sold, as you're aware, we can use the proceeds from the sale of those businesses to pay down the original Tyco TSARL debt of $4 billion, which, as we sit here today, is now down to like $1.4 billion after a couple of years.

So that would be another item that would be taken into consideration as we think about some of the portfolio moves.

Our next question will come from the line of John Walsh from Crédit Suisse.

So also late in the -- or I guess early in Q4, we saw this small LUX deal here around smart thermostats and home automation.

But I was wondering if you were take a look at your deal pipeline as it stands today, if there's any color around if it's more opportunity around consolidating existing building systems you're already strong in or if there's some opportunity to move into places where you might not be as strong in terms of building systems, thinking about a slide you presented a couple of years back around lighting and electrical.

Yes.

So what I would say is that right now, we're focused on -- these acquisitions have been bolt-on, mainly bolt-on acquisitions, mainly driven by technology or capabilities that we felt as we're looking at our organic investments required to ultimately lead and/or filling gaps inorganically, these are the size of businesses, so they're relatively small in the grand scheme.

Now my belief is as we go forward and develop more capacity here, we'll continue to look at opportunities to be able to take our platforms here and position them so that we can continue to accelerate.

At this stage, our focus has been execution, driving strong organic growth with the investments we're making.

And then if there are gaps, we've been building a pipeline to fill some of the small gaps, so there's been nothing significant at this stage.

Okay.

And then one from a higher level perspective here to Buildings.

I think a lot of times the systems, particularly around HVAC, are being sold more on -- around energy efficiency.

And one of the trends we're starting to see is a movement more towards wellness, so kind of moving away from "energy star rating" to more of a wellness rating.

Are you actually seeing this in your business today?

Or is that not something that's on the radar screen?

Well, I mean I can't speak for our team.

I mean, I wouldn't say that I've been directly involved in that type of dialogue, but I would tell you our teams are absolutely assessing the current trends that's happening in HVAC and making sure that from a technology standpoint, we're leading those trends.

And when I think about the work we're doing in our digital solutions, it's being able to take all of the data that's collected through these multiple systems and then, ultimately, not only optimize performance and reduce energy but also now it's tied to improving comfort and individualizing comfort, and a lot of other outputs with the work that we're doing.

So a lot of our work around digital solutions and the controls piece of what we do in HVAC is a critical component to being able to achieve that outcome that I believe you're talking about.

Operator, let's turn the call back over to George for some closing comments.

So thanks again for all of you joining our call this morning.

As you've seen, we've made a tremendous amount of progress in 2018, and we're fully committed to build upon that momentum in 2019 and look forward to engaging with many of you here over the next coming days and weeks.

So operator, that concludes our call.

Thank you, speakers.

Thank you and that concludes today's conference.

Thank you all for participating.

You may now disconnect.