Glen Ponczak - Vice President, Global Investor Relations Alex Molinaroli - Chairman and Chief Executive Officer Bruce McDonald - Executive Vice President and Vice Chairman Brian Stief - Executive Vice President and Chief Financial Officer.

Emmanuel Rosner - CLSA Colin Langan - UBS Robert Barry - Susquehanna International Group, Josh Pokrzywinski - Buckingham Research Johnny Wright - RBC Capital Markets Brian Johnson - Barclays Capital Pat Nolan - Deutsche Bank Joe Spak - RBC Capital Markets Rich Kwas - Wells Fargo Securities.

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. [Operator Instructions] Today’s call is being recorded. If you have any objections, you may disconnect at this point. Now, I will turn the meeting over to your host, Mr. Glen Ponczak.

Sir, you may begin..

Thanks, Ashley and welcome everybody to the call to review Johnson Controls’ third quarter fiscal 2015 earnings. If you have not received the slide presentation, you can access it at johnsoncontrols.com. Click on the Investor link at the top of the page and then scroll down to the Events calendar section.

This morning Chairman and CEO, Alex Molinaroli will provide some perspective on the quarter and review some of the details on this morning’s announcement regarding the planned spin-off of our Automotive Experience business.

He will be followed by Executive Vice President and Vice Chairman, Bruce McDonald, who will review of the business unit results and then Executive Vice President and Chief Financial Officer, Brian Stief will review the company’s overall financial performance.

Following those prepared remarks, we’ll open the call for questions and we are scheduled to end at the top of the hour. Before we begin, I’d like to refer you to our full forward-looking statements disclosure and the news release.

You can also find it in 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.

Those factors include potential impacts of the planned separation of the Automotive Experience business and business operations, assets or results. Required regulatory approvals that are material conditions for proposed transactions to close, the strength of U.S.

or other economies, automotive vehicle production levels, mix and schedules, energy and commodity prices, availability of raw materials and component products, currency exchange rates and cancellation or changes to commercial contracts, as well as other factors discussed in Item 1A of Part I of Johnson Controls’ most recent Annual Report on Form 10-K for the year ended September 30, 2014.

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, I will turn it over to Alex..

Alright. Good morning, everyone.

I want to start by recognizing the fact that our employees, once again I feel like a broken record and it’s fantastic to be able to say that our employees continue to deliver in an environment that externally has some mix markets and we will talk about that a bit, but probably more importantly for us through the significant amount of change that we are going through, our employees continue to deliver in each one of our businesses and I am particularly proud that our margins continue to improve lot of that from an perspective as we follow and implement our Johnson Controls operating system.

So, if we are on the first slide there that I have, we will start to talk about the markets. In a minute, I am going to talk about China.

But for the most part, the markets are participating in a way and improving in a way except for China that we have been able to take advantage of and it’s good for us both in buildings market and in our automotive market and in our battery market.

And I have a slide here in a second we will talk about China specifically, but if you take a look at where we are and what I am particularly proud of, our revenue and backlog, we will talk a minute about building efficiency. We are starting to see particularly the strength in our institutional markets.

Over the last year, I think it was either a year ago or 9 months ago, we talked about the fact that we saw our pipelines improving and consistently we are seeing growth in our markets and now we are starting to capture those opportunities.

And I am happy to say the second quarter in a row we have got 6% once you adjust for ADTI and just for FX a 6% improvement in our secured line and a 5% improvement in our backlog.

I asked Glen to look and see when was the last time we could talk about our backlog improving and the last time we had an improvement like this was the third quarter of 2012. So, we finally have turned the corner here. The outlook for the next quarter also seemed strong as it relates to the secured business in the secured part of our income statement.

And the reason I feel confident is that as we look at the institutional markets, where we mostly participate they seem to be healthy. And in fact what you will see is we have hired almost four dozen sales people in the last couple of months and we have got another four dozen, more to go in the next quarter.

So, we are staffing up to capture the opportunities and it’s a great opportunity and it’s a great problem to have the fact that we need to staff up. We haven’t been able to exercise that muscle for quite sometime.

The other thing that we will talk a little bit about this is that the battery business continues to perform quite well are the OE and aftermarket demand continues to be strong globally. We have increased sales in China and our AGM business for the last quarter actually increased 47%.

And so if you start looking at the strategies that we put in place many years ago, we are starting to see the market come to us even outside of Europe.

We will have a slide here in a second about China and you can see what the opportunity is, but the Power Solutions business is really clicking on all cylinders right now and are very proud of what they are accomplishing.

Also, the progress around our initiatives, the Yanfeng Interiors JV closed on July 2 and we will reconcile our numbers going forward. Brian will talk about that. The GWS sale is on track and we expect to close that here in the fourth quarter. And the Hitachi JV is expected to close early in the first quarter of 2016.

So, all of the initiatives around portfolio are on track. And in fact I would say that looking back retrospectively we are doing as well or better than what I expected when we embarked on these initiatives.

Let’s talk about China a bit because there has been a lot of noise around China, specifically as the market is slowing down, there is no doubt about that. But I want to talk about how that’s impacting our business and how we are performing. So, if you go to Slide 5, we will start with Power Solutions.

What we see when you look at the Power Solutions business, because the market is not only an OE business, but we are going to be able to participate in the growing aftermarket business. We see a CAGR of 8% to 9% through 2020 even with the slowdown in the OE business, because the aftermarket was growing so rapidly.

For us, because of the future growth in AGM, we even see the market expanding much quicker than that. And in fact if you once more look at this year-to-date, we have 9 times the sales that we did a year ago for AGM in the year and we continue to see that part of our business growing significantly.

And in fact, you will see here we have got a huge order with another OE customer that we are putting capacity in place for. If you look at our aftermarket shift, it’s 58% prior Q3 a year ago. And so you can see the capacity that we are putting in, in place.

In fact, we recently announced I think in the last couple of weeks that we have located our plant for our third facility in Northern China in Shenyang and we continue to gain share in Power Solutions in China.

Talking about gaining share if you move to Automotive Experience, one of the things that we feel good about is that not only our position in the market with around 40% market share in seating, but we have the right customers and we certainly participate with the right programs.

And there is no doubt as it relates to our partners, we have extremely strong partners. So, even though that we do acknowledge the market slowing down, we have the right mix of customers and the right mix of programs.

And in fact, one of the things that you need to make sure that you understand you look at our business is we are in the passenger car business.

And if you look at the numbers that people talk about as far as the market slowing down, the path of the business has not hit as hard as the overall market, particularly in the truck and third-party van business. And in building efficiency, I am quite proud of what they have accomplished.

Certainly, the market has been under some stress for quite some time. But if you look at our orders for Q3, our equipment business is up double-digit. Our controls business is up almost 50%. And we are growing an emerging service business, 16%. So, we are gaining share. This is in our York brand.

And then when you see here on the slide I talked about VRF, Johnson Controls has a small position with our York branded VRF system, but this 10% also speaks to our future partner gaining a share of 10% in a very fast growing VRF market. So, our position in China is unique.

I think that we are not immune to the market changing, but we are in a really good position. And all of our businesses are gaining share and really doing well based off of some of the activities that we put in place over the past few years. So, let’s talk about the real news of the today. So, I want to congratulate Bruce McDonald.

Bruce have been named to be the new Chairman and CEO of the Automotive Spin [ph] Company that we expect will be completely separated and spend 12 months from now plus or minus. We believe that based on the work plan that we have that we will be able to get that accomplished in fiscal year 2016.

And my belief about this business is that it – we are already being one of the largest automotive companies in the world, but I would certainly believe it will be, if not the best, one of the best automotive suppliers because I think we already are in the world.

And I think that and in fact Bruce and his team will be able to take this business to new heights. As we get more information we will continue to keep you updated. But I thought it was good for you, for our employees and for our ability to be able to move forward for us to bring some certainty around that.

So we will – what we have to announce today is the path that were on. It doesn’t preclude us being able to sell this business if it came up, but we are focused on making sure that we can control our own destiny and spend this business in fiscal year 2016.

And I want to congratulate Bruce again, he is here and he is pretty interested in making sure that this works for us and for the remaining – the remaining Johnson Controls. So I will conclude my remarks. I will come back later and talk about the quarter. Pretty impressive numbers with FX adjusted we saw growth of 5%.

You can see our earnings per share of 15%, our segment income up 14%, 19% if you FX adjust. And then as I have talked about earlier, 120 basis points of margin improvement and that’s been a consistent theme that we have been able to talk about over the last couple of years. And I see no reason that we won’t be able to continue to expand margins.

So with that, I will turn it over to Bruce and we will talk about the business..

Alright. Thank you, Alex and thanks for the kind words. So let me start with Slide #8 on building efficiency. You can see, if you look at the numbers here we had a nice quarter. Sales were up 5%, $2.7 billion. I think it’s important to really look at the FX adjusted number.

Here we can see that without foreign exchange, our revenues were up 10%, so double-digit increase in underlying revenues. To look at that kind of by region, North America – our North American business up about 4% and we are finally starting to see higher demand in the institutional markets.

So for the last probably six quarters to eight quarters, we have been talking about how the HVAC market we have seen the smaller end of the market, the residential side picking up.

And I think what’s exciting here and Alex alluded to the fact that we are adding resources, program management and sales force is that we are finally starting to see the long awaited recovery of the institutional market, I think that’s pretty noteworthy.

Elsewhere around the world, Middle East is up 18%, still pretty soft in Europe, about down 1% and Latin America not surprisingly continues to be a problem for us, it was down 10%.

Orders for the quarter were up 9% if you take out foreign exchange and ADT, underlying orders were up 6% with really strong growth in local and state and federal government. Those were the vertical markets that really drove the growth in our orders in the quarter.

Outside of North America, if we look at Asia, up 13%, the Middle East was up 11%, Europe down 1% and Latin America down 11%. Backlog is up about 5% at $4.7 billion if you adjust for foreign exchange.

Regionally if you look at our backlog, North America was up 5%, Middle East was up 16%, Asia was up 9% with Latin America being down 19% and Europe being down 3%. So the Latin America and European we are not seeing any signs of recovery in those markets.

But when you look at the overall total, North America key emerging markets for us, the strength is really stronger than the overall number. Turning to segment income, you can see for the quarter, we are at $272 million, up 3%. This includes – ADT was in part of last year’s quarter.

So this is the last quarter you will see ADT results in one quarter, not in the previous year. So that will clean itself up. Margins, real strong at 10%, that’s for those of you that follow Johnson Controls from a time know that our target margins for building efficiency is to get them for the 10% level.

They were down about 20 basis points versus last year, but that really reflects the fact that we have to bring on the resource in anticipation of an improving growth outlook. So a good strong quarter for BE and margins of 10% are something that we are really happy about.

Turning to power solutions, sales were down 2%, again if you adjust for foreign exchange, here we are up about 6%. Led in the quarter really was an issue. It was pretty comparable from the top line perspective versus last year. Geographically our volumes were flattish in North America.

Asia was up 8% and Europe really driven by the strength in the aftermarket. You know last year we said aftermarket demands have been somewhat constrained with channel destocking. If you just look at the year-over-year aftermarket growth in Europe, it was about 43%.

And that’s a poor comp last year, but also indicative of the fact we just continue to gain share in that market. Looking at it by OE versus aftermarket, OE was up 2% globally, aftermarket was up 7%. Alex touched on AGM in China early on, but if you look at overall, our AGM growth was accelerating.

That’s pretty exciting, because that’s the product that’s really driving a lot of our margin expansion, so that 47% in the quarter to nearly $2.9 million. We have really seen growth in all regions.

And one other things that we are starting to see now is because we have got a little bit of capacity we are able to start building up our aftermarket AGM business both as replacement, lot of units in the market that need replacement right now, but we are seeing our customers interested in AGM as a premium replacement battery.

So that’s pretty exciting for us. In terms of segment income, a great quarter here, looking it without foreign exchange, up nearly 30% to $234 million, really seeing the benefit of strong operating performance, higher volume and improved product mix, so great quarter for the power solutions here.

And lastly on Slide 10, we will flip you over to automotive. In terms of the auto business, it continues to deliver very strong results. In the quarter, again taking out exchange sales were up about 3%.

And if you look at it geographically, we are down about 1% in North America against the industry being up 2% that kind of is the reflection of some of the new business that we were – or some business that we lost associated with some commercial issues, that just started to roll off against us.

In Europe, on FX adjusted numbers our revenues were up 3% against the sort of flat production environment. In total Europe, but up 4% increase in Western Europe. And then in China, which we mostly do business by a non-consolidated joint ventures, you can see in the quarter our sales were up about 10% to $1.9 billion.

In terms of the our interiors joint venture, Alex talked about it early on but that business closed on July 2 and as a result as – on a go forward basis, the business will be accounted for an equity affiliate, so you will see the earnings flowing through in our consolidated results, but about $1 million of sales per quarter will be de-consolidated.

So when you start just to look at the auto numbers here, the revenue will be down for the next three quarters year-over-year as a result of the de-consolidation. Turning to segment income results, you can see our margins were up about 110 basis points to 6.5% versus 5% – or 110 basis points.

If you look at interiors – that was seating, sorry seating was up 110 basis points to 6.5%. Looking at interiors you can see 5.8%, about 240 basis point improvement year-over-year.

The turnaround in the interiors has been pretty breathtaking and kind of what you are seeing here is the benefit of us taking the restructuring actions in some of our loss making product lines and in some of our high cost country locations.

So over the next 12 months we will be winding down the bits and pieces of interiors that did not get contributed to our joint venture. And you will start to see the strong results and the growth that we will see coming through from our global interiors business with Yanfeng. So, with that, I will turn it over to Brian..

Okay, thanks, Bruce and good morning, everyone.

As you saw in our press release, our results from continuing operation included $26 million worth of transaction integration cost associated with the number of portfolio activities that we have going on and then also included a non-recurring tax charge of roughly $75 million related to some tax plan done in connection with the Interiors JV which closed on July 2.

These items resulted in net charges in aggregate of $0.15 in the quarter. As I talk through the financials, I will exclude the impact of these items in my comments. And in addition, you recall that our results from continuing operations will exclude GWS as we continue to report that as a discontinued operation.

Overall, third quarter revenues were down 2% at $9.6 billion with higher revenues from Building Efficiency related primarily to the ADT acquisition offset by lower revenues in Power Solutions and auto. But as Bruce and Alex mentioned, each of our three businesses were impacted negatively by FX in the quarter, primarily the euro.

If you exclude FX, our revenues in the quarter were up 5% and that’s across all businesses showing year-over-year solid increases ranging from 3% to 10%. If you look at gross profit for the quarter, it was 17.8%, which was up 170 basis points from the prior year.

And that’s really due to improved product mix and the ongoing benefits we are seeing from the implementation of the Johnson Controls Operating System. SG&A is up 2% year-over-year that relates primarily to building efficiency where we have got the ADT, SG&A in this quarter and it wouldn’t have been in the prior year quarter.

And as well we have added the sales personnel in North America that both Alex and Bruce referred to, to capture market growth opportunities. So overall, when you look at our SG&A line, our JCOS benefit some cost control efforts are really in line, if not exceeding our expectations.

Equity income of $91 million was 3% higher than last year just a general reflection of improved profitability across most of our JVs. And overall, third quarter segment income was up 14% if you back or adjust for FX, it’s up 19%. And segment income margins of 8.8% or 120 basis points better than last year’s 7.6%.

So, turning to Slide 12, net financing charges of $75 million, or $8 million higher than the prior year. That simply reflects the financing cost associated with the ADT acquisition in June of 2014 as well as our ongoing share repurchase program.

As far as our tax rate in 2015 and 2014, the underlying rate from continuing operations approximates 19% in both quarters. Income attributable to non-controlling interest is up $12 million and again that just reflects the improved profitability of our Power Solutions and Automotive consolidated joint ventures.

So, overall a very strong third quarter across all of our businesses, diluted EPS at $0.91, a 15% improvement versus the $0.79 a year ago. So, turning to Slide 13, I would like to spend just a few minutes reviewing our balance sheet and cash flow position as well as providing some guidance for Q4.

If you look at our Q3 free cash flow of approximately $400 million, that’s slightly behind plan and the prior year. However, this is due to one item, which was $170 million dividend that we expected to receive in Q3 from one of our unconsolidated automotive joint ventures and that’s not lined up to receive that in Q4. So, it was simply timing.

As far as year-to-date capital spending, $820 million is in line with our expectations. And based upon current forecast, I think we will be slightly below our CapEx plan of $1.3 billion for the year. As everyone knows we embarked on a 3-year $1.2 billion per year share buyback program beginning in fiscal ‘14.

Through Q3, we have now executed on $1 billion of our fiscal ‘15 plan of $1.2 billion. Trade working capital as a percentage of sales continues to improve and that’s down 110 basis points year-over-year and this continues to be an area of focus and I think an opportunity for us as we move forward.

Net debt to cap is 40.7% at the end of the third quarter. And given our free cash flow and divestiture proceeds in Q4, we expect that percentage to be in the low to mid 30s by the end of the fiscal year.

So, as we look into Q4, we expect to receive about $1.3 billion in net proceeds from the sale of the GWS business to CBRE and we continue to target approximately $1.5 billion in free cash flow for the full fiscal year.

As far as our Q4 guidance, the range is now $1 to $1.3, which will result in $3.38 to $3.41 for the full year, excluding transaction and integration costs and any other non-recurring items.

And our Q4 guidance now assumes the euro is at 110 versus the 105 we assumed in previous guidance, that benefit is going to be substantially offset by some increased commodity prices and some other currency exposures that we see in Q4. So, in summary, we are very pleased with the Q3 results.

We have seen strong performance across each of our businesses and we continue to meet our financial commitments even during a period of significant portfolio change and a number of internal initiatives.

Building efficiencies year-over-year improvement in orders secured is a very positive sign and we continue to see the strength in the North America institutional market. As Alex mentioned backlog at $4.7 billion, an increase of 5% is the first time that we have seen that since Q3 of 2012.

Year-over-year segment margin improvement of 120 basis points reflects our commitment to reduce cost and the implementation of the Johnson Controls Operating System. And I think we have talked about the portfolio changes that we are making, all of those we have now got really line of sight to complete within calendar year 2016.

So with that, Glen, we can open up for questions..

Actually, we are ready to take some questions. I would ask everyone to limit their questions to your best and follow-up. And if you got other things to ask, please get back in the queue, so we give more people an opportunity to participate.

Ashley?.

Thank you. [Operator Instructions] Our first question comes from the line of Mr. Emmanuel Rosner. Sir, your line is open..

Hi, good morning everybody..

Hi, Emmanuel..

So many things to talk about. Let’s maybe start with the spin-off decision. I was a little bit surprised to see such a rapid decision just over a month after you sort of announced that you were exploring strategic options.

Can you maybe talk to us about the decision process maybe the rationale to spin-off the business as opposed to maybe selling it? And you see it back from your automaker customer so far..

Yes, that’s a great question. So, actually it was not too tough a decision. If you think about the size of that business and the natural buyers of that business, we have the opportunity to spin the last bit speaking to those potential buyers and understanding what the real opportunity is.

And it came very clear to us that we needed to make sure that we focused on the spin. And just like I said in my comments, it’s possible you could still sell, but we need to provide the same amount of work in order to make the spin decision.

And I think our customers also needed to have some certainty about what it is that we were going to do, particularly our Chinese customers, because as you know we have many partnerships in China and uncertainty is just not a good thing.

So, I think for us and our employees and for our customers and our partners in China, it made sense for us to make this decision. And quite frankly because of the resources that we have on our GWS transaction, our JV with Yanfeng, we have the resources right now to transfer on to this project right now and so it just made sense..

Okay, that’s clear. And just switching gear quickly, I wanted to ask you about building efficiency services, in particular, I was a little bit surprised to see your service revenues which are now ex-GWS down quite significantly year-over-year. I think you have been running at $900 plus million a quarter for the past.

So far this year as well as last year the same quarter and now this fell sort of like to the $700 million type of range.

And so I was curious what maybe happening in services ex-GWS and also why your margins overall down year-over-year, a little bit despite revenue growth?.

Yes. So, I will need to look at the numbers on service. Without having – without getting to some of the specifics, it could be some of our services.

We went through a process with GWS as we went through the disposition to decide what part of our service business belong with GWS and what part of it with building efficiency as there is nothing underlying this exchange.

So, we will follow up on that, but my guess is it has something to do with how we parsed out what meant the GWS and what stayed with the buildings business. But I will validate that. Nothing – just rest assured, nothing has really radically happened differently around our service business.

And in fact what I would tell you is our service business particularly is driven by North America. The margins are up. Our renewal rates are up. And so I don’t think we have any deterioration of that business.

I think as it relates to the overall margins of the business and I think you are talking about a year-on-year basis, Brian went through some of the specifics, but one of the things and I did signal this last quarter is that we were going to be staffing up in advance of the growth of the market.

And then quite frankly, I will be honest with you not that I would like to see the margins under pressure, but we are having a hard time hiring at the pace that we need to hire in order to capitalize on the opportunities for next year.

So, I do expect that we will be hiring in anticipation of the market, because you remember, our business which might be different than some of our competitors, most of our sales go through brands or company-owned operations, so that SG&A cost hits us immediately..

Great, thank you very much..

Okay. Our next question comes from the line of Colin Langan. Your line is open..

Hi, Colin..

Great, thanks for taking my questions. I was hoping to get some color on the joint ventures in Auto Experience in China. Can you give us any color on the size of the EBIT margin for those joint ventures, if there is any cash stuck in those joint ventures, do you know what their balance sheet look like? And all we really have is the net income..

So, this goes really good. I am going to turn this over to Bruce..

Yes. As we have gone through this process, I think one of the things that sort of become apparent from a valuation perspective is we are not doing a good job giving the analyst community a lot of color around our Chinese joint ventures.

And from a valuation perspective, we are probably not getting the full valuation there, but I can tell you that I would think for – I am not so sure we can pull together from the next quarter, but definitely by the time we put together our analyst presentation here in the December timeframe, we will provide a lot more clarity there.

They are accretive to overall automotive and otherwise the business, the joint ventures of higher margins, not in our base business. But generally speaking, if joint ventures have any debt, it’s nominal, but net-net there is a significant cash balance in the JV. It’s probably in the $700 million to $1 billion range..

Okay, that’s very helpful.

And any color on the cost savings program that was announced with any opportunity there to get margins to your targets a little bit faster?.

Color on the cost reduction activity initiative?.

So, I think as it relates to the Johnson Controls Operating System, I think in the last call we mentioned that we were going to get about $50 million of run-rate benefit in fiscal ‘15 and there would also be another $125 million in run-rate benefit in 2016.

And in addition to that, we announced in the press release and maybe this is also what you are referring to that we were going to be looking at really a cost savings review here in the fourth quarter.

And those activities are really being done in conjunction with looking at the separation of auto and standing up both those companies as separate public companies and to see whether there is some operating model changes or cost savings that can come out of that process.

So, that’s something that we will look at beginning immediately and will probably take place and take action on throughout the next 12 months or so..

Yes, we are bringing more information to you about that. This is Alex. I am sure you are referring to what was in the press release.

As we go through separation process, it’s going to be clear that we need to take the opportunity in advantage of not only setting up a new automotive company with the proper operating systems and cost structure, but we need to do the same thing for remaining Johnson Controls. And so that’s what you are referring to.

We don’t have anymore information on that, but you can expect to hear more..

Okay, alright. Thank you very much..

Welcome..

Your next question comes from the line of Mr. Robert Barry. Sir, your line is open..

Hey, guys. Good morning..

Good morning..

Good morning..

Hey, Bruce congrats on the new role.

Quick actually housekeeping item, could you give us or maybe I missed the North America orders in BE?.

Yes, I think that – North American orders in BE up 8%..

8%..

Got it. Thank you.

And then also I had a quick follow-up on the spin, I know it’s still early, but just your thoughts on the anticipated balance sheet at auto and whether the plan is contemplating any kind of dividend back to JCI?.

There will be a dividend back to JCI. We are still working through what the proper leverage is, but you can expect that we will make sure that the automotive business is in a position to compete. So, it would be similar to its peers..

Got it. And then just given how much advancement you have made in some of the portfolio initiatives, I guess I would expect M&A to start to become a larger part of the story you have alluded to that in some of the comments.

Maybe just provide an update on what the M&A pipeline looks like and in particular the size of some of the deals in there and what the timing is on when we might see something of size in BE or Power?.

Yes, so that’s a great question. And I don’t think that we can answer it to fulfill you.

But I can tell you that as busy as we are on the things that we are talking about as we are just as busy and the things that we are not able to talk about, but we are looking at deals that will complement us from a product standpoint will help us geographically and shore up some of the technical product challenges that we have.

So, we have plenty in the pipeline. And I would say, they span the gamut from being bolt on to being things that are transformational..

Got it. And then maybe just one last housekeeping item, what’s the net impact that you expect from the interiors kind of income going out of the P&L versus picking up the 30% ownership in the JV? Is that relatively neutral or is….

It’s neutral..

The equity, 30% of the JV is pretty close to 100% of the remaining parts..

Yes, I think the difference is going to be as we move forward and we pick up the joint ventures income on an equity basis, you end up where you pick that up on an after-tax basis. So, there is going to be essentially a flip between segment income and our tax rate as it relates to how we look at the Interiors joint venture income..

Okay, thank you..

Okay. Our next question comes from the line of Mr. Josh Pokrzywinski. Sir, your line is open..

Hi, good morning guys..

Hi, guys..

So, just on some of the comments you made on moving the staff up in BE and I guess that’s pressuring the margins in the short-term.

But how long should we think of the staffing drag weighing on the margin expansion? And then given that you are seeing budding strength, particularly in North American institutional where you have always had a big presence.

How should we think about the leverage on the North American institutional web recovery, maybe X some of these staffing up periods, but more ongoing as we get into late ‘15 or I guess late calendar ’15, ‘16 and beyond?.

Yes. So, I think that as I said we have some variable cost, because of the sales staffing and it’s going to be in advance.

I think without being able to put numbers on that, I don’t have a calculator in front of me, but what I would say is over the next [Technical Difficulty] is going to be a little bit of a catch-up, so make sure they catch up to the marketplace.

And then we should see, because remember we are selling and then our backlog is about a 6 month – it’s about a 6-month backlog before we usually start to see the income from that. So that’s when you will start to see the leverage and we won’t be seeing the sales – the sales headcount as just a cost, we will be seeing that as.

We will start seeing the earnings from that. I don’t know that I have that exact leverage in front of you but you can expect some margin expansion. Today we are seeing the margin expansion based on the back of our cost profile. We should start seeing some margin expansion based off of our top line..

Yes maybe add a bit to that.

I mean we have already sort of talked about those who have been around for a while that our margin improvement trajectory in building efficiency being sort of 50 or 60 basis points a year and over the last couple of years, we have seen growth a lot stronger than that which we attributed to the fact that in a normal business environment, we have to add project managers, people that can do the work on an installation business.

And so in weak times, we saw margins growing a lot quicker than that that, that 50 basis points to 60 basis points was a result of some of the improvement activities that we are doing.

And here for the next couple of quarters, you are going to see a little bit of lower than that because of the sort of headwind that we have which is absolutely necessary to grow the installation business. So we can’t grow the installation business without putting the resource and training them in advance..

Those two more quarters of that or how should we think about how long this?.

So the way that I would think about it is, look at hopefully continuing adding sales resources, but it’s going to take us a couple of quarters to take advantage of the backlog we just put in place. And two quarters the backlog that you just see, the 5% up backlog, is when we will start to see that flow through.

And that’s when we will see that at least the effect of the initial hiring behind us and we should see it more of an ongoing hiring as revenues continue to grow. So I think we have got a couple of quarters before we see the real benefit of the sales people that were put in place today.

We should see in the backlog but we won’t see in the income statement..

I don’t think what we will see it in the next few quarters. We are going to see margin contraction. That’s not the takeaway here. The takeaway is we are doing a lot of things to grow our margins in all the three of our businesses that we expect to continue. This is a little bit of the headwind against that..

Yes, two quarters out from now then we should be able to attribute our margin improvement not just from our operating efficiencies but also because of the fact we will have some volumes, right..

Alright, that’s helpful. Thanks guys..

Our next question comes from the line of Mr. Johnny Wright. Sir your line is open..

Hi guys. Thanks for taking the question.

Alex just looking at the slide you gave on China is very helpful and sort of putting out the color longer term actually maybe just talk a little bit about what you are seeing right now in China, next couple of quarters and how you are going to see the auto demand playing out over the second half of the calendar year?.

I think what we see talking to our customers, remember we are talking about passenger vehicles, is that we see the market is going to be growing out about a 6% clip.

And we continue to see that and remember for us because we have got some of the right customer some of the right program and we are gaining share in metals, we should be able to continue to outpace that..

So I was in China last week and so maybe I will just add a bit more stories from Ground Zero there. If you look at the passenger curve looks for 2016, so for our next fiscal year, I just anticipate that being in about the 6% range. If you look at our business mix and by that, I mean we tend to be very strong in the premium brands.

We don’t have stronger share in the Chinese loan brands or with the Japanese that are doing well in the market. Our production volume based on that 6% for 2016 we anticipate being up 8% to 9%. And then like Alex said, on top of that, we still have some incremental programs, market share wins and the penetration of our metals business.

So we still – we feel like with the industry work is now we are well positioned to continue to drive double-digit growth for 2016..

Okay, great. Thanks.

And then just on free cash flow, I know we are taking $1.5 billion for ‘15, but given the CapEx now $100 million to $150 million low than you originally expected, what are kind of the puts and takes in the operating cash flow lines versus your original expectations for the…?.

So, I think the $1.5 billion is still our target for the year in order to get to that target we are going to have to generate free cash flow in the fourth quarter of roughly about $1.4 billion.

We have got plans to do that I would say there are some opportunities that we still have in the trade working capital area and also be benefited by the dividend that I mentioned earlier that did not come in Q3 but will come in Q4.

So we are going to be pretty close to that $1.5 billion number I wouldn’t expect any significant movement either up or down from that number..

Okay, thanks..

Our next question comes from the line of Mr. Brian Johnson. Sir your line is open..

Yes, good morning. Want to talk a bit about BE in China.

You posted some fairly healthy order numbers A couple of things, when would those come through? Is there anything difference around the conversion and backlog in revenue? Just second, given the slowdown in the China economy, where is that coming from? Are there segments of the Chinese institutional market that you are better exposed, are you gaining share in the segments that you are in and just how you are able to get that order pace?.

I don’t know that I would call it episodic, but the fact that we are able to see it across our equipment business and our controls business and our service business I think it has a lot to do with some of the operating models and the changes that we are making as it relates to how we are going to market in some of the cities that are Tier 2 while we have been focused in Tier 1 cities.

I don’t know that our backlog is much different in the rest of the world than it does in North America. And the reason is because we are selling the same products. I am hopeful and I believe that, that will change over time.

It will be a lot more rapid as you bring on Hitachi product line since you remember that’s a different product and a light commercial product line, and that market is actually going quicker.

So I don’t know that I will be able to be a whole lot of color except that about the market as much as this is more about us and I think how aggressive we have been in the marketplace to gain share. I don’t know that it’s about the marketplace I think it’s more about us.

And I would expect as soon as we are able to bring Hitachi on board to be able to see the benefits of being able to participate in the VRF market, which we see is growing almost 10%..

Okay.

And just where are you in that expansion to second and the third tier cities as well in terms of building out the brand for whatever structure using branch distribution are there more cities to come?.

Absolutely. I think we are in the early stages, as it relates to the opportunity particularly as we get more products because as you move further and further away from Tier 1 cities, you need a broader set of products particularly at the light commercial and we really just haven’t had that full complement of products.

So I think we are going to have even more impetus around that. We have got a long way to go..

And on North American HVAC, you are definitely seeing orders picking up.

But how long do you think this recovery could last? Is this just a kind of bounce off the bottom or do you see any structural tailwind in your institutional markets?.

I just think – this is Alex. I think by its nature the fact that it’s happening in the institutional market is usually a much more of a structural than some of the commercial markets.

So I think when we are seeing the institutional and government money being spent, I mean, I think the thing to keep our eye on is health care because it has grown some and I would say if there is anything that would be less certain and less predictable is what’s going to happen in the health care market.

But if you look at the local government, schools, state government, those seem to be pretty strong in the pipeline strong. So I think that we are in a good cycle for those markets.

For health care, I would never consider a victory yet because I think that market is still under a bunch of change, but we are seeing improvement but I don’t know that if I would consider it a victory..

Okay, final quick housekeeping question, Power Solutions, China, can you kind of update us on the OEM versus aftermarket split there and how you see that developing?.

Yes. Brian its Bruce here I think Glen will follow-up with specific numbers. But I think what we are sort of giving you that commentary here on the market. I think the most noteworthy thing that we are seeing is we have talked about this last couple of quarters, but really rapid acceleration in AGM demand from the customers.

We were awarded just in this quarter a $1.4 million unit order. We talked on our last couple – on our last call around that we are adding AGM production in the north plant, where we are looking to do sort of half AGM and half SOI. It’s looking like we are going to have to pivot away from that and put in all AGMs.

So, lot of customer interest in the AGM product line and that’s great for us..

We do have, it’s Glen here, on aftermarket in China, it’s somewhere between 45 million and 50 million units today going to somewhere around 80 million by the end of the decade, Brian. And we think our share goes by 40% of our business being aftermarket to like 60% of our business being aftermarket only at the same timeframe..

Okay. Okay, thanks..

Okay. Our next question comes from the line of Mr. Rod Lache. Sir, your line is open..

Good morning, everyone. It’s actually Pat Nolan on for Rod..

Okay..

A couple of quick questions just to follow-up on that last year’s questions on the healthcare side of the business.

Can you just refresh us, because it seems like that part is actually not growing, how big of your business today is just healthcare, not institutional, just healthcare?.

About $1 billion, $1.5 billion, something like that..

Yes, I was going to say it’s around 20% overall, but we could get back to you to specific numbers..

Okay, that would be perfect. And to switch gears a little bit, on the Power Solutions business, it seems like you are getting incrementally more positive on the gross and AGM.

How does that play into the 5% to 6% annual growth that you have been expecting over the mid-term? Do you think that could potentially push you beyond that target or push towards the high-end? How do you think about that expanding growth in that context?.

That’s a good question. I think we have – just to be completely honest, I think that we have been caught off guard with how fast the AGM market has grown in the last couple of quarters.

As you can tell as we talk about the orders that we have received in China, the growth that we are now seeing in North America we had been expecting at some point, but it’s really come very quickly. So, I don’t know that we have those exact numbers.

It’s something that we need to pull together, but you could probably tell by the way that in reacting we are adding capacity at a rate that we didn’t actually expect even a year ago. So, good question.

I think we probably owe everyone some follow-up, but the bottom line is really good news for our business, because our position in the AGM market is significant..

It’s still probably somewhat smallish as far as moving the needle even without acceleration here early on at least, because I mean we are talking about 10, 11 million units in ‘15 here, as we exit ‘15 out of 140 million units total.

So, while the percentage is moving and it probably doesn’t have an impact, it’s not like it’s going to move at multiple points..

Got it. Thanks so much, guys..

Our next question comes from the line of Mr. Joe Spak. Sir, your line is open..

Thanks, everyone. Maybe just one more on AGM, while we are talking about it, you sort of talk about the profitability on those units being about 3x of that asset. It’s been a while since we heard an update on that.

Is that still – is that what you have been realizing and is that still sort of the right way to think about that profit mix?.

It hasn’t changed. Yes, same, so still 3x the profit dollars I believe is what we have talked about it..

And I think – I have made some comments about we are starting to see some aftermarket growth here. So, I think there is an opportunity to improve on that as we go forward..

Right.

And then I know it’s too early to think about – maybe it’s too early to think about the pressure on the auto spend, but what about the other side of that? Any thoughts on what the leverage opportunity is on remaining JCI?.

On the – so, I don’t think we are ready to talk about the capital structure. But what I would tell you is that we will – regardless of what the dividend side is we will be in a very good position to make – to need to make those choices around capital structure, but what we do is with a very, very strong balance sheet..

Okay.

And then quickly on – I appreciate all the color on China, specifically with the controls growth you are showing there on the order side, is that related to sort of the build out you are talking about in the other tier cities or because that’s mostly goes with new construction as opposed to retrofit, is that correct?.

Yes. So, I will just be 100% honest. When I saw those numbers, that can’t be just – that has to be some unique success that we have had with the quarter, certainly not the marketplace.

So, I don’t want to make something up to know why those numbers are as high as they are, but I think it’s just representation as why we wanted to bring it is that we are seeing it across all of our product lines. I don’t know they have a lot more information on that exactly why it’s so much different than our equipment business..

Okay, alright. Thanks a lot..

Okay. Our next question comes from the line of Rich Kwas. Your line is open..

Hi, good morning, everyone..

Hi, Rich..

Just, Alex, on the – so, on the proceeds, the net proceeds from GWS $1.3 billion, you got Hitachi you are going to make the payment for that here in the next quarter or so.

The remaining funds how should we think about that? I know M&A is the focal point, but what’s the appetite to do incremental buyback above and beyond what you outlined?.

Yes. So, I will turn this over to Brian in a second, but from a strategic standpoint, I think that when we start embarked on this, hopefully we demonstrated that we are going to make what’s the right choice not only for where we are at the moment, but also strategically.

And it’s probably going to have a lot to do with where we are with some of our opportunities for investment, but we do recognize that we will have an opportunity to maybe change the pace at which we do some of the buybacks if we choose to..

Yes. I think, if you look at the $1.3 billion, Rich and then it’s roughly $500 million investment we will make in Hitachi joint venture that leaves you with $800 million.

Couple areas that we are going to be looking at, we have got potentially a pension contribution that we could make on a discretionary basis to essentially get the plans funded at the level we have historically targeted.

We are going to have in the fourth quarter here through the adoption of some new mortality tables about a $200 million increase in our liability. So, we may use some of the proceeds to pre-fund the pension.

There is also certainly in the share repurchase area we have got $200 million left on this year’s program and we could pull some forward potentially from next year’s $1.2 billion. And then there is also some moving parts just relative to tax payments.

So, I would say, we are kind of – we are going to look at various options there and we will see certainly keep our flexibility..

Would the discretionary investment be matched at $200 million increase in the liability be more than that?.

The $200 million is right now what we think the ballpark increase in the liability from the new mortality tables..

Okay. So you would match that and then go from there..

Yes..

Okay.

And then just the couple of housekeeping items, Brian, the $1.5 billion of free cash, does that include the $150 million from GWS?.

We include what?.

The $150 million from the joint ventures..

I thought GWS generated about $150 million in annual cash flows.

So, does the $1.5 million include that? Does it include the disc ops?.

Yes, it does. Yes..

Okay, alright.

And then for the fourth quarter, you cited in terms of the guidance commodities, I just wanted to get some additional color on that given that metals prices have come down and I don’t know if that’s material?.

Yes, I think its diesel cost is what we are looking at. And then from a currency standpoint, the real or kind of the two items that seem to be offsetting the benefit of going from 105 to 110 in the euro..

Okay, okay. Thank you..

I think actually we are done here, because we are at the top of the hour.

Alex, any concluding remarks?.

Yes. I just want to once again thank our employees for not only the incredible performance that they have provided, but all the support that they are giving us is as we move forward with this transformation to accomplish an awful lot, we have got more to do.

And I think our employees are not only are they actually making this happen, but I think they are very proud of what they have been able to accomplish and they should be. Thank you..

Great. Thanks, everybody. Kathy and I are available for the balance of the day with any follow-ups that you have got. Thanks very much..

Thank you. That concludes today’s conference. Thank you all for participating. You may now disconnect..