Glen Ponczak – VP Alex Molinaroli – Chairman & CEO Bruce McDonald – Vice Chairman & EVP Brian Stief – EVP & CFO.

Colin Langan – UBS Robert Barry – Susquehanna Brian Johnson – Barclays Emmanuel Rosner – CLSA John Murphy – Bank of America Merrill Lynch Rich Kwas – Wells Fargo Patrick Archambault – Goldman Sachs.

Welcome and thank you all for standing by. (Operator Instructions). Today's call is being recorded. If you have any objection, please disconnect at this point. Now I will turn the meeting over to your host, Vice President, Glen Ponczak. Sir, you may begin..

Thank you, Madison and welcome to the Johnson Controls Fourth Quarter 2014 Earnings Conference Call. The slide presentation can be accessed at johnsoncontrols.com by clicking the Investors link at the top of the page, then scroll down to the Events Calendar section.

This morning, Chairman and CEO Alex Molinaroli will provide some perspective on the quarter. He'll be followed by Vice Chairman and Executive Vice President Bruce McDonald for a review of business unit results.

And finally, Executive Vice President and Chief Financial Officer Brian Stief will talk about the company's overall financial performance and give you a peek at our expectations for the first quarter of fiscal 2015. Following our prepared remarks we will open the call for questions and we're scheduled to end at the top of the hour.

Before we begin, I'd like to refer you to our full forward-looking statement disclosure in the news release and the slide deck and remind you that today's comments will include forward-looking statements that are subject to risks, uncertainties and assumptions that could cause actual results to be materially different from those expressed or implied by such forward-looking statements.

These factors include required regulatory approvals that are material conditions for proposed transactions to close, the strength of the U.S.

or other economies; automotive vehicle production level, mix and schedules, energy and commodity prices, availability of raw materials and component products, currency exchange rates and cancellation of or changes to commercial contracts; as well as other factors discussed in Item 1A Part 1 of Johnson Controls' most recent annual report on Form-K for the year-ended September 30th.

Johnson Controls disclaims any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this presentation. And with that, we'll get started.

Alex?.

I'm pretty excited to be here today. We've finished our first year – my first year and I'm really proud to talk about our record earnings from our continuing operations and also our earnings per share. At the beginning of the year, we talked about the way that we thought the building market would work and even the battery market.

And we were surprised – I think all of us were surprised with the tough market and the slow recovery.

Of course, on the upside we were surprised, all of us, about the production levels really across the globe from an automotive perspective and all that being said, if you look at our margin improvement across the board regardless where we had great growth or not. I'm really proud of what the team has accomplished.

The effectiveness, efficiency and quality of the products that we're putting in place, the processes are in place, are coming through and the results. You look across the board; everything from automotive which is at a record net income, almost 6%. I don't think we've ever done that in our history. I'm extremely proud.

In fact today I'm in Plymouth with our automotive team. So if we're a little bit clumsy today, the rest of the team is in Milwaukee. Let's talk about some of the things we did because what makes me so proud of the team is that we were able to accomplish all of this while we had so much going on.

And I don't know – I've only been with the company 30 years. So I don't know what happened before the 30 years, but I could tell you in the 30 years that I've been here. I don't know that we've tried to undertake as many things as we've done in the last year. And we've done that without skipping a beat on our operations.

In fact, our operations have improved. I would like to go through a few of the things. We've changed some of our capital allocations philosophy and we started our share repurchase program. We increased our dividend; we began implementing the Johnson Controls Operating System.

We'll talk more about that when we see you in December, but essentially that's leveraging our best-in-class manufacturing, our integrated supply chain capabilities, our purchasing scale and capabilities, commercial excellence programs, across the enterprise and we've had a tremendous amount of success and in fact, I think are further ahead than what I expected at this particular time.

So a lot of things happened in our portfolio, with the acquisition of ADT, the increase in BE's products and channels to market, it's going very well. I have the opportunity to sit in with that team and the ADT integration is going at or better than the pace that I expected from the standpoint of the team being on-boarded.

Our new employees seem to be well integrated and our new customers seem to be very happy with Johnson Controls being part of their solution. It seems like a long time ago when we divested the electronics, but it wasn't that long ago, so we were able to complete that this year. We set up the MOU with Hitachi.

It's very important to us to be able to acquire some of the technologies that we need for our building efficiency business.

We announced our joint venture with the interiors, one of our partners in China and taking that global joint venture which will be the largest and most profitable interior business in the world, taking that globally and we look forward to closing that in 2015.

Recently we announced some reorganizations, particularly within the building efficiency business. We separated the field operation in North America from the products and channel business and we put Bill Jackson in charge of the building efficiency business, and I will come back to that in a few minutes.

And then recently we announced our decision to divest the global workplace solutions.

I will also make sure that you understand not only did we have that distraction going on within the business, but they were able to have one of the best years in the history of that business not only on the bottom line, but they've been securing orders here in the last few months.

Around our operational improvements, the metals, month-after-month, quarter-after-quarter seems to be on a path to continuous improvements, and the interiors improvement is really not – it's almost breathtaking what they have been able to accomplish.

It's a real turnaround and it makes our joint venture arrangement much easier and much more successful as we come together with our partner. And if you look at our profitability in the automotive business, I referenced that we've never seen these profitability levels. And we're not done. The team is confident and moving forward.

I feel really good about what we've accomplished in our automotive business. Let's talk about the management changes, with all this going on, I think we’re at a place in our organization that we need to take advantage of the strong bench that we have.

We have got great leaders and I think that our ability to take advantage of that leadership will help us keep on pace to make sure that we can transform this organization while we meet our annual budget. Let me go through these changes.

I announced that Bruce McDonald would be Vice Chairman and if I talk about what Bruce is going to do, Bruce is probably one of the best CFOs in the Fortune 500, but he's really become CFO plus and I think the folks that know him know that Bruce has always done his job and a little bit more.

And so what we’re trying to do is make sure we take advantage of his capacity and not only his capacity but the fact that we have good succession planning. So Bruce will be managing our corporate development group, our M&A activities. He is consolidating our purchasing activities across the company.

He will be managing our discontinued operations and he's leading our multiyear, $1 billion ERP system implementation. He will also provide additional operations support and oversight for the organization and I'm really happy to have a partner like Bruce on the team. We couldn't do that without a great CFO. I think a lot of you know Brian Stief.

Brian has been with us for four or five years, but before that he was off and on our partner with PWC. This is going to be a seamless transition and you'll get more and more exposure to Brian as we move forward. I referenced Bill Jackson. I think that Bill's resume, even just talk about what he's done since he's been at Johnson Controls.

I think he's the right guy for the job. He was very successful in turning around both our electronics and our interiors business. He was a part of the GWS transformation activities. I think that Bill is going to hit the ground running.

He is more than pretty excited about the role that he has and I expect great things from Bill and the team at building efficiency.

And then last but not least, we talked earlier in the year announced about Beda Bolzenius [ph] moving to Shanghai to lead not only the automotive business which is becoming more and more centered in Shanghai, but also becoming the Vice Chairman for Asia Pacific as we put our second headquarters there allowing us to make the kind of investments in the future that we need to maintain our leadership position.

Let's talk about the fourth quarter, it's pretty obvious, I'm pretty happy with what was accomplished, 3% growth on the top line. I wish it was more, but the markets weren't helping us. But in spite of that, you can see that our segment income, up 11%, all-time record and then our EPS due to our operations and our buyback up 14% to $1.04.

I'll just keep saying it; the amount of change that the organization has gone through and our ability to stay focused is something to be proud of. I would like to spend a little bit of time on building efficiency.

It's been the one thing that's been a frustration and nagging at us, at least over the last year and really for the last few years and I haven't been willing to make a whole lot of commitments about when we were seeing the turnaround in the marketplace, but I have a smile on my face just so you know.

I would like to talk about what we saw in the quarter. Our sales for the applied equipment was up 22% versus Q4 in 2013. The industry grew at 10%. So we gained some share, but the industry growth is probably the most important part of this for us. And we've seen it across the board. It's not just in the commercial markets.

Not all the institutional markets, but if you look at healthcare, local government, the federal government – we're seeing projects – not only are we securing projects, but we're also seeing projects on the Board and our pipelines are improving. In the light commercial, I really wanted to highlight our ADT growth.

We’re in-line with the market and in-line with our expectations. At this point, I think that's the right message, because we just want to make sure that we are able to integrate everyone effectively and assure our new customers that they will be taken care of well.

And one part of our business that didn't perform from a top line as we hoped it would was our residential business. Our sales were flat; the market grew for the quarter. A big part of that was the fact that we've changed some distribution in some of our key markets.

So as we get through that, we’re going to have a period here until we come out of that change. I would like to come back about our secured, first time no matter how you slice it up, first time in a year that we've seen growth, 2% growth ex-FX – ex-FX ADT. We're seeing the billings from Architectural Monthly AIA go up.

You can see that on the chart and if you look at our pipelines which are usually looking out six months, we're seeing some significant projects on the board. So, for the first time – and you know I've been reluctant – I feel like there is some momentum in the business and unless something external happens, I think we've hit the bottom.

So let's talk about going into next year. We've got great momentum. I do think that this year will be a year of execution.

We have many things going on within the businesses around improvements, around continuous improvements, around integration of activities and we also have portfolio changes and different initiatives that are happening at the enterprise level.

We continue to invest in our long term, but we need to keep working on this margin expansion and when we get to talk to you in December. We will have more about that, but I'm pretty bullish that we will continue to expand our margins.

And the last thing I would like to leave you with and this is important, is that I'm not looking for any portfolio changes, significant portfolio changes particularly as it relates to divestitures. I guess that's the way to talk about it; over the near term, over the next few years. We right now are pretty happy with the businesses that we have.

We look across our portfolio, we have great businesses and we have some platforms whether it be technology or regional for growth. We do need to add value to those platforms, but we do think we have great platforms moving forward. So with that I'm going to turn it over to Bruce and he can give you some more fourth quarter highlights..

Okay. Thanks, Alex and good morning, everyone. So let me just start on slide 9, with automotive. Maybe just to comment, as I talk through the business results, I'm going to exclude the number of nonrecurring items that we had in this year and last year and Brian will take you through those in his comments.

But just starting with automotive, I think it's probably fair to say we just couldn't be more pleased with the results that we saw for our automotive businesses both here in the fourth quarter and also for the full year.

We saw strong improvements in our metals business in our European operations, in South America and certainly last but not least, our interiors business and if you look at our margins in the fourth quarter and the full year, significant year-over-year improvement.

The other thing I would note as it relates to automotive is we did maintain a disciplined approach to quoting new business during the year.

We've talked about focusing on winning customers, focusing on higher growth markets in China and we were pleased to talk to – for the full year, we booked a record amount of new and replacement business as we saw our customers really take advantage of the fact that we've got differentiated technology that we can offer.

We have a global, low-cost footprint. We've got global launch and program management capabilities and we just continue to be pleased to get the recognition from our customers with significant new business awards. And the areas where I would really point to would be metals.

We have won a number of large metals, huge contracts, huge multi-year, multibillion-dollar contracts that we thought was going to happen in the industry as customers commonize their seating metals platforms. We were really able to take advantage of that with the footprint that we have.

In China, our metals business – we started a couple years ago at low single digits. Our market share now is nearly up to the 20% level. Interiors, we talked on our last call about new business wins in our interiors business as the customer is really embracing the joint venture that we're putting together with Yanfeng Automotive Trim Systems.

In North America I would note in the quarter we won our first BMW. They've been a long – this is the interiors side, our first BMW order. We've done business with BMW for a long time in Europe and in China, but this was our first award in the interior side in North America.

We will talk a lot more about our backlog at the December analyst meeting, but I thought it was important just to sort of share with you the tremendous success we've had on the customer front here. So if you just look at the numbers, you can see from an automotive perspective our sales were up 3%.

Each of seating and interiors were up 3%, respectively. If you look at our geographic revenue mix, in North America we were up 6%, so a little bit below the 8% uptick in the North American market. In Europe, our revenues were down 1%, generally speaking in-line with the industry reduction.

You can see here and as we noted on our slides in China, we continue to see really strong momentum in that market as we gain share.

As you know, most of our business is through nonconsolidated joint ventures and you can see in the fourth quarter here we are seeing our sales were up 17% to $1.8 billion which substantially outpaced the 8% improvement in estimated production for the region. If you look at China for the year, we really hit a milestone this year.

Our sales grew by about 25% to slightly over $7 billion, so that's a huge year-over-year increase and really reflects the share gains that we have in that region. Turning to profitability, you can see in the fourth quarter our segment income of $261 million was up 27% versus last year and our margins were up 100 basis points.

We continue to benefit from strong operational improvements in metals and interiors and our cost reduction initiatives and get the benefit from a contribution level of higher overall volumes. In terms of margins, seating was up 20 basis points to 5.2% and interiors was up significantly 360 basis points to $3.9 million.

I didn't really talk about South America earlier, but a lot of industry comments and I know some of those left in the auto sector are having real difficulties down there. We've been focused on turning around our South American operations all year. We're really pleased to be able to exit 2014 here with basically a breakeven business in North America.

So we are really getting performance from the automotive team in the quarter and for the year. Turning to building efficiency, fourth quarter you can start to see the impact of ADT or Air Distribution Technologies, being in our numbers.

So with that acquisition, we have significantly increased our exposure to the light commercial sector and it's really opened up for us the independent distribution channel. As Alex mentioned in his comments, the integration is on track. Our fourth quarter numbers were right in-line with our expectations.

Importantly, I think from a sales perspective, even though its early days; we are already starting to see some of the benefits of cross selling. And in the quarter, we had about $1 million of combined, cross selling orders that came through our numbers.

So it's not a big number, but it's good to see that the thesis behind this investment was really driven on revenue growth and positioning us in higher growth markets and so it's good to see the sales synergies come through in such a quick pace. So when you put ADT into BE here, it just transforms our business.

We're now seeing top line, bottom-line and margin expansion and we expect to see that accelerate here as we go forward. If you look at the fourth quarter, you can see our revenues were up about 1% to $3.9 billion. If you take out ADT, which was about $240 million of revenue in the quarter and adjust for FX, our sales were down about 3%.

If you look at that, geographically what you would see is that Asia and Europe were up 3% to 4% respectively, North America was down 5% and the Middle East and Latin America were down double digits for us. In terms of our unexecuted backlog, you can see at $4.8 billion, we're up about 1%. This is the first increase we've seen in over a year.

Again, as Alex mentioned, our backlog was up about 1%, with softness in Latin America, we're down about 30%. Europe we are down 8%. Asia was down 3% and it was offset by higher backlog in the Middle East. In North America I would just comment our backlog was up 1%. Turning to orders and, again, if I adjust these for currency, they were up 11%.

Again, taking out ADT and it was up 2%. If you looked at that geographically, we would see North American orders were up 5%. So that was the strongest area for us in terms of orders, Asia was up 4%, Europe was flat to down 1% and again, Middle East and Latin America were down double-digits.

So I think the important thing for us here is the big markets, North America and Asia, we are starting to see sequential improvement in orders and quoting. Our overall numbers though are being dragged down by pretty big declines in the Middle East and Latin America where we really have tough economies.

So it was good to see those markets starting to turn positive. In terms of segment income, you can see a pretty significant increase, about 11% year-over-year to $393 million. If you take a look at the margins ex-GWS, they were 11.8%, up 20 basis points versus last year.

Here's where we are starting to see the benefit of improved results in Asia, the acquisition of ADT and the benefit of SG&A reductions. In terms of GWS, you can see here as we've noted, a huge improvement in our profitability – $61 million in the quarter more than double last year, a 290 basis points improvement.

And I would sort of like to add in to Alex's comments in terms of GWS's performance in the year. We saw significant improvement in both our profitability and our margins.

On the customer side, we won an awful lot of new business particularly in the second half of the year and if we look at the backlog for GWS which is not to be confused with the backlog that we quote in BE, it's the backlog of won customer contracts over the life of the contracts. It's up 47% versus last year.

So I think, just with the business improvement, the improvements we’ve made in the operating model, the customers are recognizing our ability to provide a global solution. And it has positioned the business really nicely in terms of our divestiture. We are not going to really get into the details of that.

I would just comment that we're working with Bank of America Merrill Lynch. We've got a robust process in place and we've got a lot of interest, but it's very early days. We've been at it for just over a month now. And lastly, turning to power solutions for the fourth quarter, you can see sales were up about 5% over last year.

Lead levels were comparable, so sometimes we've got big adjustments because of year-over-year lead, that wasn't really a factor for us this year. In terms of unit volumes, we’re up 4%.

Geographically we’re up 6% in North America, 10% in Asia and Europe down 3% where we're still seeing some destocking and if you were to look underneath those European numbers, you would see that the aftermarket was down 5%, whereas OE was up about 4%.

In terms of AGM, as we noted on the slide here, we’re up about 23% to just over $2 million in the quarter. We've added several new customers during the year in power solutions, as we've talked about on previous calls.

And if you look at our market share, what you would see is in the Americas – I'm being inclusive of South America, Central America and North America – in aggregate we improved our market share by 200 basis points to 55% this year and our European market share, despite the fact that we saw some destocking in the aftermarket side held steady at about 53%.

In terms of our segment income at $329 million, we were comparable to the level last year, although our margins were down about 100 basis points.

I think the key thing to note in terms of our margin performance in power solutions was we talked about changing from LIFO to FIFO inventory accounting and that really changed the way the timing and the amount of lead that we purchased and some of our inventory stocking and destocking on a quarterly basis.

So when you adjust that out, we had a little bit of choppiness in terms of the overall quarters as it flowed through in 2014.

But I think the key takeaway that I would like you to remember here is, if you look at our full year margin performance we went into this year with an expectation that power solutions would deliver a 50 basis point improvement in our margins and we came through with a 60 basis point improvement.

It could have been a little bit better had we seen the aftermarket be a bit firmer, but overall we’re pleased with the performance coming out of power solutions this year and the best 60 basis point margin expansion was a little bit better than our expectations. So with that I will turn things over to Brian..

Okay. Thanks, Bruce and good morning, everyone. Page 12, fourth quarter highlights. As you'll note in our press release, our Q4 results included four nonoperational items which resulted in a net charge of $0.58 in the quarter and I would like to just touch on those.

There was a restructuring and impairment charge for about $162 million related primarily to our building efficiency reorganization, about half of that charge is cash and the other half is noncash. The second item would be there is our annual Q4 noncash mark-to-market adjustment related to our pension and OPEB plans.

Given the decline in interest rates year-over-year, that charge in the current year was $290 million. The third item was transaction and integration related costs associated with the number of portfolio activities that we've got going on. It was $23 million.

And in the fourth area, there were three significant tax items, discrete tax items, in the fourth quarter that netted down to $18 million. So, the aggregate of those four items is the $0.58, and as I go through my discussion of the financials here, I will exclude those items from my comments.

Overall, fourth quarter revenues were up 3% to $11 billion, driven primarily by the automotive and power solutions businesses.

Gross profit for the quarter of 17.2% was in-line with last year and what you really see there is that growth in our gross margins for the automotive seating and interiors business, GWS and building efficiency in Asia that Bruce referred to were offset by declines in BD North America and declines in our power solutions business of the 100 basis points.

On a year-over-year basis, SG&A declined by about 2% which was a result of some aggressive cost reduction initiatives that we continue to implement across our businesses.

Equity income of $122 million was $28 million higher than year ago levels which reflects the improved profitability from our automotive and building efficiency joint ventures in Asia. And I would point out that about half of that gain in equity income resulted from a nonrecurring gain associated with the buyout of one of our joint venture partners.

Overall, fourth quarter operating income was strong, up 11% versus last year and segment margins of 9% were 70 basis points better than 2013, so overall a very strong performance.

Moving to slide 13, net financing charges of $66 million were up $12 million versus prior year levels and these higher financing costs are simply the result of the financing of the ADT acquisition in June of 2014.

As far as a tax rate, our effective rate for the quarter was 19.6%, a slight improvement from the 20.6% that we had in the fourth quarter last year.

Income attributable to non-controlling interests was a charge of $37 million in the fourth quarter of this year which is slightly higher than last year which is a function of the higher profitability in the automotive and building efficiency joint ventures that we’ve globally.

But overall a very strong quarter with diluted earnings per share from continuing operations of $1.04, which is up 14% versus the $0.91 a year ago, so very pleased with the performance. I would like to spend a little bit of time on slide 14, going through some of the highlights of our balance sheet and cash flow for the year.

Our fourth quarter cash flow from operations was $1.2 billion which allowed us to generate a net debt reduction in the quarter of $1.1 billion.

Trade working capital as a percentage of sales was 6.1% which was a 30 basis point improvement from last year, but I would point out this area of working capital is something that we need to focus on as we move into 2015.

We still aren't at a position that we would like across our businesses, so that's going to be an area of focus of mine as we move forward here. Capital spending of $1.2 billion for the year was in-line with our expectations. Free cash flow for the year inclusive of the electronics divestiture proceeds of $265 million, approximated $1.5 billion.

And in the current year, we doubled the cash return to our shareholders through our buyback programs and dividends to $1.8 billion in 2014 from $900 million in 2013. So as we move into 2015, we are very pleased with our balance sheet position. I think we're very strong as we enter the year.

Our net debt to cap ratio ended the year at 35.7% which is a 260 basis point improvement from the end of the third quarter and obviously up from last year's 26.5% level due to the share repurchase that we did in Q1 for $1.2 billion and then the $1.6 billion acquisition of ADT in Q3.

As far as our pension and OPEB liabilities, we are 86% funded as of the end of this year which was a bit lower than last year which was at 88%. And the delta there is really due to the lower discount rates. I would like to point out that during the fourth quarter we completed a lump sum buyout of certain current retirees in our U.S.

pension plan which was $300 million, and as you may recall, last year in Q4, we offered a lump sum buyout to certain of our deferred vested plan participants for $450 million. Now the funding of that $750 million in buyouts obviously comes from plant assets versus Johnson Controls.

Lastly, from a weighted average debt maturity at the end of 2014, it's 14 years which is up from nine years at the end of last year and this really is reflective of the opportunity that we took in connection with the ADT acquisition in Q3 to term out some of our debt and lock in the benefits of today's low interest environment on a long term basis.

And then finally I would say that, just to point out, when you look at the balance sheet, we have taken our GWS business and our interiors business and we've now classified those as assets held for sale in our year-end balance sheet, given the pending transactions with both those businesses that we expect in fiscal 2015.

So moving to slide 15, overall our fourth quarter performance was strong and provides us confidence as we enter Q1 of 2015. We continue to expect strong volumes in the automotive business to continue.

As Alex and Bruce mentioned, our pipeline supports continued order improvement in building efficiency and some of the reorganization actions that we have taken in Q4 of this year we expect to see some early benefits as we enter fiscal 2015.

Power solutions is expected to once again deliver year-over-year improvements and one other item that I had just mentioned relative to Q1 is we've got $1.2 billion in share repurchases that we are planning for all of fiscal 2015 and about $600 million of that will likely occur in our first quarter.

We continue to make progress with the previously announced portfolio activities which would be the GWS divestiture, the Hitachi JV and interiors JV. As we sit here today, our targeted completion for those is the second half of fiscal 2015.

In addition, as Alex mentioned, the ADT integration activities are well underway and progressing in-line or possibly even in excess of expectations. So as far as Q1 guidance, we expect earnings per share to be $0.74 to $0.77 which is up 12% to 17% year-over-year.

And, again, that would exclude transaction and integration costs just given the level of activity that we've got in that area and that impact on a quarterly basis could range anywhere from probably $0.01 to $0.03 depending upon how things play out timing wise with those transactions.

And then lastly, I would say we will provide full year guidance at our December 2nd, Analyst Meeting in New York. So with that Glen, I will turn it over to you for questions..

Great. Thanks, Brian. So we've got about 25 minutes until the top of the hour here and so to give as many people as possible a chance to ask a question, please limit yourselves to a question and perhaps a short follow-up and then get back in the queue if you've got more. So with that Madison, we will turn it over for questions..

(Operator Instructions). Our first question comes from the line of Mr. Colin Langan of UBS. Sir, you may now begin..

Just one sort of maintenance question, Brian, I just wanted to clarify, your guidance for this year, does that include – you mentioned that the GWS and interiors are moved in discontinued ops for the balance sheet, but your guidance does include that and until it actually officially happens from an earnings perspective?.

That's correct..

Okay and then just one strategically, seating margins seem pretty solid here for the last couple of quarters. Obviously there is some help with equity income.

What are the next steps to getting through your longer term targets for the business? What are the major drivers of getting margins higher from here?.

A lot of this is more of the same.

We’ve a lot more opportunity in metals just in the program that we have today and the other thing that is important to note is, as our backlog changes in metals, in particular we are moving from 3 to 4 different product lines because of the different companies that are being integrated to one set of SKUs and product lines for each one of the components.

And that's going to lower our costs on an ongoing basis, that will be further down the road, but that's an expectation we have as the metals continues to evolve.

The other thing is – and we talk about equity income and that's where a lot of our growth is going to be in the future because of the fact that the growth in China and where we're going to make the investments and with our partners.

We want to maximize that as much as possible, and we just still have – because of our pricing discipline, we’ve the opportunity to continue to increase margins in our mature markets. So I think there is not one single thing.

Our equity income is going to continue to increase at a fairly rapid rate, but I also think there's still improvement within our business, our core business, particularly around components and in Europe..

Thank you. Our next question comes from the line of Mr. Robert Barry of Susquehanna. Sir, your line is now open..

Just to Alex, I wanted to dig in a little deeper on the increased confidence level in BE.

Obviously nice to see the orders inflect and it sounds like the pipeline is full, but are you seeing more sustainable – what you think will be sustainable willingness to convert all of the pipeline activity into orders going forward and what do you think might be driving that?.

Well, it's interesting that you asked that question. Actually I would turn what you’re calling convert if you look at our pipeline to hit ratio, that is how our team would look at it and that has actually gone up. We do a fairly good job of making sure that we filter out our opportunities.

So one of the things that has happened is our hit rate has gone up and that makes me believe that the pipeline is very healthy. Also, the reason around it I think is sustainable. When you start seeing the institutional market and the larger projects start to get on the board.

I think you’re starting to feel some confidence that the market is going to respond. To be real specific, all the verticals institution, with the exception of the state government and I think that has to do mostly with the fact that we had this huge Hawaii project in our pipeline last year – have increased, some more than others.

In particular we’re seeing a rebound in healthcare which has really hurt us over the past few years. So I guess I'm not going to – the confidence level I have is I'm making sure that everyone realizes I do see a significant change in what's happening.

We're not out of the woods yet, but the fact that we are able to see what we saw on a continual basis over the last three months and what's happened in our pipeline. I just feel a heck of a lot better about it..

Yes, maybe just a quick follow-up on the offset to the equipment side, sounds like the equipment sale is looking very good. Maybe you can comment a little bit on what's happening on the service and performance contracting side. Maybe your comment about state government ties into that, but just curious about the thoughts and the outlook there.

Thank you..

Actually the one thing underneath everything is our focus on services increase, as you would guess because of the lack of capital projects. So our service business has been growing at a fairly good clip, particularly our planned services. Our retrofit business is growing, the pipeline is pretty strong.

Our pipeline is about equal – just to make sure you understand, our pipeline is about equal in our energy solutions business, but you’ve to remember we had the largest project ever of that we secured in December of last year with Hawaii.

And so with Hawaii and last year compared to the pipeline we’ve today with no project like that, it's about at the same level. So really pretty much across the board we're seeing some strength..

Can you quantify the Hawaii impact?.

Well, the Hawaii impact, it was over $100 million. I think it was around $120 million. It ended up being a $140 million project, but I think we had discounted about $120 million in our backlog. So, that's a good question, because when we see the results of our quarter, if we're able to secure similar to what we did last year in BE.

I would say that the real growth in that, you'd have to take that $100 million project and discount what you see in the numbers. But the pipeline supports that we will have a continued growth throughout the year, but we won't have a $100 million project..

Thank you. Our next question comes from the line of Mr. Brian Johnson of Barclays. Sir, your line is now open..

So, I want to drill more into the BE segment in a few questions. You put together through a price increase my understanding in BE.

Could you maybe clarify how broadly that was? Is that in the new services business or in the equipment business and will that be helpful to the margin going forward?.

So there was a couple price increases over the year. The UPG segment had a price increase back in the spring and then we announced another price increase which was really much across the board.

Now, it wasn't – every channel and every product didn't get the same price increase, but pretty much across the board we went for a price increase and what we're seeing so far for the most part, that the industry is following us. Right now we have tempered our expectation, so we've discounted a little bit of volume because of our price increase.

But our expectation – and it will be in our guidance, in our plan – is we built in the net effect of the price increase. We do think that there could be some discounting down the road, but right now things seem to be sticking..

Okay. And are you seeing any benefits yet from splitting services and products? And maybe just talk strategically about what that was meant to accomplish and then what we're seeing on it and does it open up even in the U.S.

broader distribution for what you are making beyond your traditional branches?.

Yes and we will cover that in some detail in December, but the bottom-line for that was that we had a business that was becoming very dependent on our branches for decades. And in order for us to be able to support multiple channels, we needed to disconnect the two organizations and make sure we built a world class product and distribution company.

The core of BE and that we continue to focus our branch business and being a great service and delivery organization and a channel for our BE products. So it was built to give ourselves some transparency and our ability to manage more effectively the products that we put in the portfolio and the new distribution that we are putting in place.

So that's the strategic rationale..

Okay, and any impact yet on the backlog or margins or we will have more in December?.

Yes, I don't know that there would be any impact yet, but I can tell you from an internal perspective, people are asking questions that they've never asked before, because there is a whole different set of dependencies or lack of a codependency that there used to be in the past. So I expect really good things.

I expect us to be more efficient and I expect us to be able to pick up our pace as it relates to new products and our ability to support our channels, but I can't really say that anything has happened yet, but I feel really good about the change..

Okay and final question, just very quickly.

Metals, big year-over-year dollar improvement, are you getting close to that 10% margin I believe you talked about in the past?.

No, we're not there. Yes, we've got a ways to go which is I'll treat that as opportunity. We won't get to those levels till we get through, first, making sure that the backlog that we’ve that we’re as effective as we can and then as we start transitioning our product line to a single product line where we’re able to get the real cost efficiencies.

So that's going to take a while, but we've got that opportunity in front of us..

Yes, I would maybe just add to that, Brian to Alex's point, we're probably in the lower 2% – 3% right now from a North American and European perspective because we are working that through.

But if you look at our metals business that we have right now in China which is about a $500 million or $600 million business, that business where we do have the 2B product portfolio and we have the manufacturing processes standardized. So we don't have the integration, we started it fresh, that business is at the 10% – 11% margins right now.

So we're confident we can get there. We're there in China, but it takes a long time for these customer programs to roll-off and for us to retool our metals facilities..

Okay.

So that's a long term margin improvement glide path?.

3 to 4 years..

Thank you. Our next question comes from the line of Mr. Emmanuel Rosner of CLSA. Sir, your line is now open..

I wanted to ask you – so global workforce solution is now officially for sale.

How is the process going so far? What sort of interest and from what type of buyers are you seeing? And then more fundamentally, I completely agree with the rationale of it not being core, but at the same time removing it will obviously will remove a little bit of earnings power.

Are you saying to divest it in a way that still creates some shareholder value or is it really just more strategically it makes sense?.

Okay. Like I think I talked about earlier, it's pretty early in the process. We're working with Bank of America Merrill Lynch.

We've put together you can say an offering, memorandum and we've met with a number of folks that are interested and we're coming up to the point in the process where we're going to get expressions of interest and then decide on a shorter list who are going to go forward in the process. But it's very early days and I think we are in good shape.

There is a lot of interest. The business has performed well, so we got I think a lot of good things going for us.

And from a timing perspective, we are probably 3 to 6 months – it's probably late Q2, I guess I would say is when we hopefully get to be in a position where we announce something and then, depending on who the buyer is we’ve to go through the normal regulatory process, but that's the timeframe.

In terms of your question then about is there any shareholder value implications, I think clearly with some of the people that are interested in the business that are already in that – the strategic players that are already in that space, what it does provide as you think about the reason we got into the facilities management business was to provide a channel for our products.

And so to the extent we sell GWS to another strategic buyer it broadens the channel that we’ve available to us to sell our products to.

So, as we're thinking through this divestment and particularly with the strategic buyers, then structuring an arrangement where we would have access to their expanded portfolio of real estate and customers is a key thing that we are looking at. So, we hope to get that, but we may not.

And then I think second part of that question would be how we choose to redeploy the cash and I guess we haven't really commented publicly on what we're going to do with the money. Right now I would say we're focused on getting the money..

And then just one follow-up on another update of a deal, can you maybe tell us how the Hitachi negotiations are progressing and the late estimate on when we may see a conclusion of that?.

We've gone it a long way since the last time we had a chance to talk about this. In fact, I will be heading over there myself in a couple weeks. We've got a few things that we need to work through, but I think we're pretty close to hammering out the few issues that we have. It's been a lot slower than we expected.

I think it was much more complicated than it was when we got involved. I'm still a little bit leery about giving you a date, but I'm just hopeful when we get together here over the next couple of months, we are able to talk about a date. But we're getting – it's closer than it was yesterday and I apologize I can't have better information..

Thank you. Our next question comes from the line of Mr. John Murphy of Bank of America. Sir, your line is now open..

Just a question around the seating and interiors business, the way that you are discussing it and the business is developing. It sounds like you're much more committed than a lot of people think to that business and certainly much more committed to it than some of your competitors are alluding to.

And just curious if you can comment on that and then as we think about margins going forward, if you could remind us what your targets are there for seating and interiors and how new business or what level of new business is rolling on as far as margins?.

From a strategic standpoint, in fact you're right. I wanted to make it very clear that at this time we're not making out any other major portfolio moves and the seating business, along with our interior joint venture that we have are core to us being successful in the future. And when we talk in December, you'll understand some of the rationale.

First off, the China opportunity for us is outstanding and it's based off our relationships with our partners and so we don't want to – we want to take advantage and exploit that and I'm not sure we get the fair value for that in the first place. I'm not sure we're getting fair value today for that to be honest with you.

And then the second thing that's really important to us is that we make sure that we take the expertise that we’re getting out of the automotive business because of the demands of our customers and leverage that across our enterprise.

So, one of the things that the automotive business brings to us around program management, our purchasing and engineering capability, our manufacturing capabilities and supply chain work, is world class because it has to be. And we're able to take those resources, take those people and take those processes and put it across our enterprise.

So when you think about that business and what value it brings to Johnson Controls. I think we’ve to look past just the seating business and in the interior business and what value it creates regionally with our footprint and what value it creates intrinsically inside our organization.

Bruce, you can give them some of the numbers that we are looking to get..

Well, I could just comment mainly on the segment income margins. The plan is to take that to 7% or maybe even a little bit above 7%, but as we sit here today, that's been kind of our stated goal for a number of quarters and that still continues to be the case. So I would say around 7%..

So it would be fair to say that new business is rolling on at that level or much higher to offset some of the older legacy business?.

Yes, I would say that. I'm not suggesting we are necessarily going to get that level in fiscal 2015 here, but that is certainly our goal over the next few years..

One of the things that's happened is our mix is changing. As Bruce talked about our metals backlogs, our backlog is shifting from just being jet business to being components business, particularly metals and that mix is favorable as it relates to our overall margin. So it's not only margin improvement in our business, it's a mix improvement..

And just to sneak in one, just on proceeds that you are going to raise ultimately from some of these asset sales.

Could you just run us through the funnel of where those proceeds may be allocated as far as acquisitions or returning value to shareholders or reinvestment in the core business?.

I will talk at that from a strategic level. We're not really ready to talk because GWS will be the first place where we see some cash coming in. We're committed to our share repurchase program at this point. There is no reason with our cash flows that we can't continue on that program and so we've got a couple more years to go with that.

As it relates to the use of proceeds for GWS, we’ve a significant amount of ideas, more ideas than we have resources. In a way they help continue to transform this business from an operationally capable business into adjacencies and other markets that we can support that are going to be outside of automotive.

So I'm hopeful that we’re going to redeploy that cash in a way that helps us build more growth platforms, that's what we need..

Thank you. Our next question comes from the line of Mr. Rich Kwas of Wells Fargo. Sir, your line is now open..

Two questions, Alex, on building efficiency, so applied sales up nicely in the quarter year-over-year, Ex GWS, the margin is up 20 bps.

It seems like the margins could've been better given that should be pretty good mix for you and I'm just curious if there is anything unique in the mix this quarter or from a regional standpoint that affected the limited leverage, if you will..

Yes. So, I actually don't have the numbers in front of me. One of the things that's been a drag to our margins all year is we've had some nagging large contracts in the Middle East and that has distorted our numbers off and on during the year. Brian, you probably have a view of that right now – but that's one of the things that I would look for.

And the other thing that we weren't happy about is you saw our residential business didn't perform at the same levels and that's a high margin business, too. Those are the two things I would point at, but the business that we are getting in the applied side is a good margin business, but it was in our backlog..

Okay, all right. And then I know you’re going to give more detail in December, but if we take a step back and look at the world, currencies have weakened or the dollar has strengthened and other currencies have weakened and global auto production is slowing down.

You've got some self-help certainly factored in for next year that could help nicely, but if we take a step back, how should we think about the longer term earnings growth profile for the company? You had a good earnings growth year – this year.

What are kind of the puts and takes that you think were broadly for '15?.

So if I look at 2015 and see what we're dependent on, the external market, I think that we still, even though there is a bit of a slowdown in China. We're outperforming the market in China. I think that will continue. We have lots of opportunity there.

I think we have been very smart, very clever and judicious on how we've allocated our resources in the mature markets for our automotive business. So I think our margins will continue there. The backlog is pretty much known and I think if something – absent something that happened a few years ago, I think we'll be fine.

Our power solutions business, one of the things that's really interesting is that we almost sold 1 million units of AGM batteries in North America, that may not seem like a lot of units, but if you remember last quarter, I think – I can't remember what I said – that we were up some godly amount of percent but we were up another 300% this quarter.

And so if that starts to take off, the mix is going to help in power solutions. It won't just be a European story. And I think that the China story is still intact as it relates to power solutions. That opportunity is there. It's just right there in front of us, we need to grab it.

And in building efficiency, I'm really bullish – we need the market to help us – but I'm really bullish that we're going to fix a lot of the issues that we had for us in places like the Middle East and the other thing that I'm bullish about is the changes that we have made in the organization are going to help us regardless of what the market does for us to be able to pull through on some of the products that we currently have in our portfolio.

So I think next year – I'm not saying it's all in the bag but I'm more worried in the long term about the growth than I'm about next year..

We've got time for probably one more, Madison..

Thank you, sir. Our next question comes from the line of Mr. Patrick Archambault of Goldman Sachs. Sir, your line is now open..

Just for me, wanted to just focus on power solutions a little bit what you were talking about. You were up I think 60 basis points you said in terms of your margins this year. However in the quarter there was some noise relating to that change over from LIFO to FIFO.

If I remember well, you had outlined a plan to run at similar levels of margin expansion over the next couple of years and wanted to get a sense of what the main drivers are, how much of this LIFO adjustment carries over if anything and maybe just fitting those pieces together for us. And then I have one follow-up..

I think what we said about power solutions at our Analyst Day last year was we felt we had a couple hundred basis points of margin expansion left in power solutions and that the pace of that was going to be around 50 basis points a year.

I know there is some analysts that think the pace should be faster than that 50 basis points a year, but I would point to the fact that we are stepping up our investment in some of the advanced battery things and particularly the micro hybrid and dual voltage 48 volt type systems.

So we’re spending more money here because as we look longer out beyond say, a three year or a four year period that that could be an important growth driver for us. So, we’re investing in that area. The LIFO accounting change, maybe I have confused folks with that in the past.

We've normalized each year from an accounting perspective, but we talked about the fact that we made that accounting change. We did some things because we are on LIFO that were not how you would optimally run that business and so what you are really looking at is two different years' results under the same accounting treatment.

But in the prior year, we ran the business one way in terms of when we procured lead cores or when we have run our inventory of cores low versus when the market price was high or low.

Now we can take advantage of when there is market seasonality in lead prices and buying more inventory when it makes the most sense and the same thing with our production.

We can smooth our production more in-line with seasonal demand, and so the choppiness that we've seen this year is really those two items that have sort of confused things-- It's really just going to be where are we going to get the other 150 basis points which we still have headwind against us I would say in terms of investing in advanced technology, but our China business continues to be – it's an area that we’re investing in to add more footprint and so not dilutive to our margins.

And then the other point that Alex referred to is the increasing mix shift that we’re going to see as AGM becomes a bigger portion of the pipe..

Yes, so I think the simple answer on that as it relates to the – it's actually smoother now than it was as compared to something that wasn't so smooth. I think this was kind of the new normal about how the quarters will flow. So we shouldn't see that as much of a whipsaw this coming year as we did last year..

If I can just do one follow-up, you had fairly mild temperatures during the summer.

How does that impact your battery demand going forward? Is there a restocking effect that might be something to think about as we get into the fourth quarter because people's batteries lasted longer or is that immaterial?.

In the end, I think it's really not going to matter. What will happen – the only thing that can happen if we don't get strong early sales is there will be one less cycle at the end of winter. This weather thing has been killing us the last few years.

And so I think what we have done is smartly try to manage our inventory and not forecast sales and historically try to get where we are forecasting sales in a much more conservative way because we haven't been able to predict.

If you’ve a good way of predicting the units, I would be open to it, but our tried and true methods haven't worked the last couple of years..

Okay. Thanks, Patrick.

Alex, a few closing comments?.

Yes, so I just want to close – I want to thank our 170,000 employees. It's an outstanding accomplishment. I couldn't be more proud to be a part of this team and lead this team. The folks that you hear on the phone and all the people that support us that really do the work. It's been outstanding, particularly with all the distractions.

All the anxiety and distractions inside this organization and this team has stayed focused, proud to be a part of it. Look forward to the coming year and I look forward to seeing you folks in December..

Thanks, Alex. Thanks to Bruce and Brian and thank you for your interest..

Thank you and that concludes today's conference. Thank you all for participating. You may now disconnect..