Kathryn Campbell - Director-Global Investor Relations Alex A. Molinaroli - Chairman, President & Chief Executive Officer Brian J. Stief - Chief Financial Officer & Executive Vice President Robert Bruce McDonald - Vice Chairman & Executive Vice President.

Colin Michael Langan - UBS Securities LLC Joshua Pokrzywinski - The Buckingham Research Group, Inc. Robert Barry - Susquehanna Financial Group LLLP Mike Wood - Macquarie Securities Julian Mitchell - Credit Suisse Securities (USA) LLC (Broker) Jeffrey T.

Sprague - Vertical Research Partners LLC Richard Kwas - Wells Fargo Securities LLC Patrick Archambault - Goldman Sachs & Co. Noah Kaye - Oppenheimer & Co., Inc. (Broker) Joseph R. Spak - RBC Capital Markets LLC.

Welcome and thank you for standing by. At this time, all participants are in listen-only mode. Today's call is being recorded. If you have any objections you may disconnect at this point. I'll now turn the meeting over to Ms. Kathie Campbell. Ma'am, you may begin.

Thank you, Jen, and welcome to the review of John Controls second quarter 2016 earnings call. If you didn't already receive it, the slide presentation can be accessed at our Investor page at johnsoncontrols.com.

This morning, President, Chairman and CEO, Alex Molinaroli, will provide perspective on the quarter as well as some progress updates on our transformation.

He'll be followed by Executive Vice President and Chief Financial Officer, Brian Stief, who will review the results of the individual businesses as well as the company's overall financial performance. Following those prepared remarks, we will open the call for questions, and we are scheduled to end at the top of the hour.

Before we begin, just want to remind you that today's comments will include forward-looking statements that are subject to risks, uncertainties and assumptions that could cause the actual results to be materially different from those expressed or implied by such forward-looking statements.

The factors that could cause results to differ are discussed in the cautionary statement included in today's news release and the presentation document. We also remind you to review the extended disclosures related to the proposed transaction with Tyco, which can also be found in the earnings document today. With that, I will turn it over to Alex..

Great. Thank you, Kathie. Good morning, everyone. So, I'm extremely pleased to talk to you today about our results and our outlook and our future. Before I get started, I'd just like to make a couple of comments.

I was reflecting about our discussion at the Analyst Day in December, and I thought I might just spend a couple of minutes reviewing a few things with everyone. In December, we talked about opportunity, opportunity that was in front of Johnson Controls and what a bright future that we had. And at that meeting, we committed to a few things.

One is execution, and that's both our strategic and financial execution and meeting our commitments. Transformation, of course, at the time, we were really talking about the Adient spinoff and the Hitachi integration. Of course, things have changed since then, but we continue to be committed to transforming our business.

Making strategic acquisitions, those that made sense and where it makes sense in order to support our growth platforms. Continuing on our drive for operational excellence; we're seeing that in the maturation of our Johnson Controls operating system and we continue to see and realize tangible results.

Building a growth platform, a platform that includes both building technologies and energy storage, and a focused separate automotive company with a shifted orientation toward growth.

And increasing shareholders value; focused on our multi-industrial company vision to create value through improved cash flow, improved margins, and a sustained top line. I hope you're seeing this through our actions and that we're laser-focused in order to make this vision a reality. So, let's start on slide seven.

For the second quarter, I'm really pleased to talk about what our team was able to accomplish. We're able to execute and make significant progress as we transform ourselves into two leading global companies. We saw organic growth across all of our businesses this quarter.

In Systems and Services North America, we continued to see positive momentum with revenues up 9% in the quarter and strong orders secured of 7%. Our backlog is up 2%. If you recall, it was flat last quarter, and so we continue to add to our backlog.

And our North American pipeline is up 8% driven by activity in healthcare, higher ed and public transportation. In North America, we're seeing strong year-over-year growth in most of our HVAC businesses and we continue to gain share with a focused account management and solutions based approach. We continue to make investments in our future.

We're launching new products in direct expansion, we've made increased investments at our chillers through our screw products, and we have new investments in our Metasys control systems, in fact, we're launching a new launch here in June for our Metasys controls.

For Power Solutions, our investments in our additional capacity in China is paying off in a really big way; record shipments for the quarter, up 60% versus prior year.

We've more than doubled our aftermarket shipments and we've grown our original equipment shipments over 20%, and sales of AGM units in China are nearly twice what they were last year this quarter. Our operational execution demonstrates our ability to continue to deliver as we effect our transformation.

Our segment margins are up 160 basis points, including the contributions from Johnson Controls-Hitachi and, along with some offsets, as we continue to invest in new products and salespeople to fuel our future growth. Our adjusted EPS is over 18% up over prior year.

Feedback from our customers, as we move towards our Adient spin and our Tyco merger, is extremely positive. In May, we'll be at the EPG Conference. We'll have an opportunity to talk about some of the feedback that we're getting. So I'll leave those comments to then.

But just suffice to say that our customers, both from an Automotive perspective and our customers in our Buildings business are pretty excited about the opportunity in front of us. Speaking of our Building Efficiency business, we've had some great wins in the quarter.

We secured a 20-year contract, $68 million with Norfolk Navy Base in our energy solutions business. And we've also got a partnership with Target to replace 3,600 rooftop units at 225 Target stores. And this is a three-year project in order to improve the efficiency of the units that they currently have with more efficient HVAC equipment.

Our automotive seating order wins continued to accelerate during the first half of 2016, where we have nearly the same amount of orders in the first half of this year that we had all of last year. And our Interiors joint venture, which is deconsolidated, has secured business of over $7 billion since we made the announcement last summer.

Our Johnson Controls-Hitachi joint venture integration is going extremely well. The strong quarter in Q2 exceeded our plan expectations; great performance in Taiwan, Japan, and in China, where we continue to take share in VRF.

We're making great progress in our market plans across Europe and Asia and we're beginning to see increased backlog in base's design work in North America.

We're making product investments within our base business in order to support the joint venture and you'll see this impact of the increased spending when you see our Products North America segment this quarter. We're reducing our tax rate for the year from 19% to 17%.

And we benefit from the continuous long-term tax planning initiatives that we have underway. I'd like to address our top line growth. If you noted on our first quarter earnings call, we continue to gain momentum in our future top line. We're not converting the pipeline as quickly as we originally expected.

So we now estimate our sales growth for BE to be 2% to 4% for the year, and we're very encouraged with what we see in North America. Unfortunately, we have some headwinds in the Middle East in our industrial refrigeration business, mostly driven by the lower oil prices in the region.

A little bit of softness in China, more than what we expected in new construction starts, but, overall, when we look at our pipeline and our backlog, we're pretty pleased. For Power Solutions, we're updating our estimates to 4% to 6% growth for the year.

Its positive share growth in North America and in China, but it's being impacted by lower lead prices. We're also seeing some warmer weather in Europe and North America than we expected, but we really feel very good about what's happening within Power Solutions. In Auto, we're increasing our estimates.

Where in the past we talked about a decline of 2% to 3%, we think we'll be able to have that as we see benefits in the U.S. from higher SUV mix, more content, luxury segment is doing well, and that helps drive our volume. We have Bruce here, so later on, he'll be able to answer some specific questions that you may have.

Our pipeline and backlog continues to build. We continue to effectively manage our cost and improve our productivity and so, as a result, we're able to increase our full year guidance. This is a result of a strong operating performance as well as a reduction of our go-forward tax rate, and Brian will cover more about that in a future slide.

Move to slide eight. Let's talk about the financial highlights. I'll hit this quickly, so Brian will get into more detail.

We really have a lot of moving pieces on our top line with the deconsolidation of the Interiors joint venture is about $1 billion, and the addition of our Johnson Controls-Hitachi revenues is about $740 million, but, as I noted earlier, we're seeing overall organic growth in all of our businesses that results in a 3% organic growth for the quarter, 3% in BE, 5% in Power Solutions and 2% in Automotive.

Segment income is up 22%, excluding FX, with margins up 160 basis points; EPS up 18%. I'd like to talk a little bit about Auto. Record profitability in the quarter with production levels ahead of our plan levels, and we're benefiting both from the restructuring actions and our operational efficiencies. Great margins expansion, 250 basis points.

Power Solutions has higher volumes that are being offset by our China launch cost. So we're seeing 10 basis points improvements in margins. And BE segment income is benefiting from the Johnson Controls-Hitachi joint venture, higher volumes, and that is being offset by our continued product and sales force investments that will drive our future growth.

Let's go to slide nine and talk about the Johnson Controls-Tyco merger. There's a lot of discussion about the recent announcement and what the impact is on our plans. We're moving full steam ahead. We're executing against our day one and we're making tremendous progress. And our teams are working well together.

And I'm really personally energized by the strategic nature of the deal and the opportunities it presents. Every day, as we get involved in this, I see more and more opportunity. We have an Executive Steering Committee that George Oliver and myself lead, along with integration teams from both companies.

We're on a clear path to capture the value of this unique combination. As you all know, Tyco filed the S-4 on April 4. We received HSR regulatory approval during the quarter, and we do expect all the remainder approvals to be received within our timeline.

We anticipate that the Johnson Controls and Tyco shareholder meetings will happen in the July/August timeframe and we're targeting October 1 as the merger date. I know many of you are aware and many of you have been asking about the new Treasury regulations that were recently released.

Early this morning, we filed an 8-K jointly with Tyco, confirming that following the review of the U.S. Treasury's Temporary and Proposed Tax Regulations issued on April 4, that we will proceed with the merger and continue to expect $650 million of previously announced synergies over the next three years after closing.

Those synergies will include operational and tax synergies. We'll provide additional updates on the progress at the EPG Conference in May when George and I will be presenting together. Let's move on to slide nine and talk about Adient. The Adient separation is on track to be a successful independent public company.

Great momentum, just talked about great new business wins, record profitability and tremendous progress both on the organization and on the business. Bruce has the executive team already in place and its Board of Director appointments is substantially complete.

The project management office, which is being led by our Vice President of Enterprise Operations, Jeff Williams, is on track toward our targeted internal day one of July 1. So we've got plenty of time in order to make sure that we are successful on the public date.

The Form 10 we expect to file by the end of April and you should expect the separation cost to be within the disclosed range that we talked about earlier of $400 million to $600 million. Half of these costs come from IT. We're targeting a spin date of October 31, 2016. And Adient will be a foreign domiciled entity when we spin.

Adient's employees, plants and income is primarily outside the United States and, as a result, we expect the effective tax rate for Adient to be in the range of 10% to 12%. This adds significant value and improved cash flow for our shareholders. Turn it over to Brian..

Thanks, Alex, and good morning, everyone. So we had a very strong underlying Q2 quarter here.

As you saw in our press release, our reported results do include transaction, integration and separation costs associated with our portfolio activities of $131 million, a restructuring charge of $229 million and a couple of non-recurring tax items that net to $765 million, which resulted in a net charge of $1.68 in the current quarter.

We've included a summary of these items in the appendix, but given their size, let me just provide a brief overview on those three items.

As far as the transaction, integration and separation costs, as you can imagine, those relate primarily to the Adient separation, and as Alex mentioned, those were in line with the previously provided amounts of $400 million to $600 million.

As far as the restructuring charge of $229 million, that relates to the Automotive business as well as the ongoing stranded cost reductions that we're going after as we move toward the Adient separation date of 10/31. I would just note that substantially all of the Automotive restructuring will be funded in fiscal 2017 and beyond.

There were two items in the tax charge.

One item is really consistent with some of our previous divestiture transactions, GWS, Interiors and electronics, where we had a $780 million non-cash charge, and this relates to the required accounting for earnings, which are offshore, which were previously deemed to be permanently invested, which no longer will be, and we need to provide a book charge on that.

But, again, it's a non-cash charge. The second piece of that is a benefit of $15 million that came through in the second quarter. That really reflects the first quarter impact of our tax rate reduction from 19% to 17%.

As I talk through the business unit results and the financials, I'll exclude the impact of these three items from my comments as these items were excluded from previously issued guidance.

And then also, consistent with Q1, the formation of the Automotive Interiors joint venture, which occurred in July 2015, and the closing of the Johnson Controls-Hitachi joint venture in October of 2015, those do impact the comparability of quarter-to-quarter results, and I'll comment on that as we move through the slides.

So moving to slide 11, Building Efficiency second quarter sales of $3.2 billion were up 33% from the prior year. If you adjust that for the impact of the Hitachi joint venture as well as FX, our sales grew 3%.

We did see strong Systems and Services North American growth, which was up 9% year-over-year, as we continued to see strength in our North American branch business. Ex foreign-exchange, Asia was up 3%, Europe was down 4% and Latin America, although small, was down 15% from the prior year.

Orders in the quarter, excluding the Hitachi venture and FX, were up 5% for the second consecutive quarter. We experienced share gains in Systems and Services North America where our orders increased 7% year-on-year.

In addition, our Asian orders were also strong, up 9%, and we did experience some softness in Latin American orders, which were down 19%. And as Alex mentioned, backlog is up to $4.7 billion, a 2% improvement.

Year-on-year segment income of $245 million was up 43%, excluding the impact of FX, due to the contribution from the Hitachi joint venture as well as higher volumes in North America and Asia.

I would point out that the integration of our Hitachi business is now well underway, and VRF product and sales force investments are being made on a global basis. Given these aggressive global integration efforts, the Johnson Controls-Hitachi actual results are really becoming difficult to measure on a stand-alone basis.

However, we estimate that BE had mid-single digit segment income growth exclusive of the joint venture. Just as an example, as you'll see in our Form 10-Q, you'll see VRF product investments impacting the Products North America segment margins throughout fiscal 2016. Overall, BE segment margins of 7.8% were up 50 basis points from the prior year.

So a strong quarter from BE. Turning to slide 12 and Power Solutions, sales were level compared to the last year. However, if you adjust for FX and the lower lead prices, sales were actually up 5%. In terms of units, overall second quarter shipments were up 3%, with the Americas up 2%, Asia up 28% and Europe down 4%.

We continue to see strong AGM growth with year-over-year volumes up 18% to 3.1 million units and Q2 global OE and aftermarket volumes each increased 3% year-over-year.

Segment income in the quarter of $264 million was up 3%, excluding FX, primarily the result of higher unit volumes, partially offset by the planned launch costs associated with capacity investments we're making in China. Segment margins were up 10 basis points in the quarter and remain above our expectations on a year-to-date basis.

Moving to Automotive, who had another very strong quarter, sales were down 18% compared to last year. But as Alex mentioned, adjusting for the Interiors consolidation and FX, sales were actually up 2% on strong global production. And we saw production up North America 5%, China 4% and Europe 3%.

Seating volumes in North America and Asia continued to be very strong, although, we did see some weakness in Europe and South America within the second quarter. In China, where we go to market primarily through unconsolidated joint ventures as you know, our 100% sales improved by 51% in the quarter to $2.9 billion.

Adjusting for the Interiors joint venture and FX, China sales were up 9%, which compares very favorably to industry production of 4% in China.

For the quarter, segment income of $324 million was up 26% year-over-year, total Automotive margins was 7.5% or at a record level, up 250 basis points, and that's 140 basis points if you adjust for the Interiors deconsolidation.

And these significant positive results reflect the benefits of the higher volumes as well as ongoing restructuring benefits at Automotive as well as continued operational efficiencies around JCOS.

Turning to slide 14, on a consolidated basis, overall second quarter revenues were down 2% to $9 billion, but that was driven by the deconsolidation of Auto Interiors business and the unfavorable impact of FX, offset by the consolidation of the Hitachi joint venture.

Excluding the impact of these items, sales were up 3% with all three businesses showing year-over-year increases. Gross margin for the quarter of 19.1% was up 200 basis points versus the prior year, as we continue to see the favorable impact of the Johnson Controls Operating System efforts as well as improved product mix.

You'll note that SG&A was up 6% from last year. This really reflects the consolidation of the Hitachi joint venture as well as the products and sales force investments that are being made in BE, and that's partially offset by the deconsolidation of Interiors and ongoing cost reduction activities within the company.

Equity income of $117 million was 43% higher than year ago levels, and that relates primarily to the Interiors joint venture, as well as some of the joint ventures within the Hitachi consolidated venture that we have. Overall, second quarter margins were 9.2%, 160 basis points better than 2015.

Turning to slide 15, net financing charges of $74 million were slightly higher than last year. I guess the highlight on the page is that we have reduced our effective tax rate from 19% to 17%, related primarily to tax planning associated with the Adient spinoff and, of course, that gave us a $0.02 benefit in the quarter.

This is a sustainable rate at the 17% level in the near term. And we continue to see the tax rate benefits of our global tax planning initiatives that are being put in place in connection with our portfolio transformation over the last couple of years. Income attributable to non-controlling interests is up $41 million compared to last year.

That primarily relates to the contribution of the Johnson Controls-Hitachi joint venture and, as we've talked before, that venture has several majority-owned ventures within it as well, and so that year-over-year increase is significant.

Overall, very strong second quarter results with diluted earnings per share at $0.86, up 18% versus $0.73 year ago. Turning to the balance sheet and cash flow at quarter-end, our net debt-to-cap ratio of 40% compares to the prior year second quarter of 41.2% and 39.1% and 12/31/15.

Our net debt of $6.7 billion is down $700 million versus a year ago and level with 12/31/15. And our capital spending remains in line with our target for fiscal 2016 of $1.3 billion.

Turning to cash flow, I'm pleased to report that our Q2 cash flow of $400 million is an improvement of $300 million versus the prior year and that includes $100 million of transaction, integration and separation costs.

However, I should also point out that in the second quarter of last year we did have $200 million of one-time tax payments, but still, on a net basis, we're plus $200 million for the quarter. So we're making progress in this area. We still have some work to do, but we had a good second quarter.

And then, finally, we plan to resume our share repurchase program shortly and expect to buy back $500 million of shares by the end of fiscal 2016. Moving to slide 17 and our guidance, we expect third quarter earnings per share of $1.01 to $1.04, which will be up 11% to 14% from the prior year.

And consistent with prior guidance, this would exclude any transaction, integration and separation costs or any other one-time items that we would have in Q3.

And then, lastly, we are raising our full year guidance from $3.70 to $3.90, up to $3.85 to $4.00, which is up 13% to 17% from fiscal 2015, and this really reflects the momentum we have from our strong year-to-date operational performance as well as the reduction in our effective tax rate from 19% to 17%.

So with that, Kathie, we can open it up for questions..

Operator, we'll now start the Q&A. We have a long queue today, so if you could please limit it to one question and one follow-up and then get back in the queue, it would be much appreciated.

Operator?.

Thank you. And our first question comes from the line of Colin Langan from UBS. Your line is now open..

Oh, great. Thanks for taking my question. I guess, my question is pretty straightforward, but any update on the stranded costs post the Adient spin? I think at the Investor Day, you said it was $150 million to $200 million.

Is that still the range or is that actually maybe a little worse or better?.

The $150 million to $200 million is still a good number and we're on track to take those costs out prior to entering fiscal 2017..

And I guess one – and then one maybe a quick follow-up here. Any color on free cash flow conversion? That would be a popular topic among investors.

Do you think the 77% is still on track? And you're on track to get it to your midterm of, I think, it was 80%, 85%?.

Yeah, I think, Colin, when we put the free cash flow conversion slide together at Analyst Day, we did have a couple of pro forma adjustments in there for tax payments that would be one-time related to transactions, but we were $200 million ahead in the second quarter and we're $100 million ahead in the first quarter.

Some of that might be a bit of timing, but I think the 77% that we gave you, I like to think there's a bit of upside to that, but we're certainly comfortable with the 77% still..

Thanks, Colin..

Okay. All right. Thank you very much. I'll get back in the queue..

Thank you. And our next question comes from the line of Josh Pokrzywinski from Buckingham Research. Your line is now open..

Hi. Good morning, guys..

Good morning..

Good morning..

Good morning, Josh..

Just a follow-up on the BE guidance, Alex, I think the 2% to 4% probably more in line with where you guys are tracking on sales and orders.

But could you maybe hash out how that looks on an EBIT basis because, clearly, margins are performing better here in the interim?.

Yeah. So I think that what you probably heard and maybe this is a good opportunity to even talk about a little bit is, what you're seeing is, we're seeing an improvement in Hitachi better than what we expected.

But one of the things that's causing us a little bit of tentativeness here is we're spending an awful lot of money in the core business outside of the Hitachi joint venture in order to build a pipeline. So our sales efforts in North America, Europe and parts of Asia and South America are outside of the joint venture.

And so that will impact our core margins a bit.

So when we talk about our margins, it will be very difficult for us to talk about core margins versus consolidated margins, because we're doing stuff in and outside of the joint venture, but I think what we're seeing some – we're seeing leverage on the BE business more than what we expected, even though we're making the investments we're making.

I don't know that we have a guidance at this point, but we probably just need to follow up on that..

Okay. That's fair. And then just as a follow-up, I noticed when you guys reiterated the $650 million of synergies, it didn't quite get bucketed out.

Should we still think of it as a $500 million of operational, $150 million of tax? And maybe as a corollary to that, you mentioned some of these integration teams coming together and the excitement building.

Do think that means that those numbers look conservative? We're realizing them earlier? How should we think about some of that early excitement?.

Well, I think that the early excitement should translate into more synergies. Obviously when you get teams together, they're probably more excited about the revenue opportunities than anything else and that's one of the things that we still haven't talked about and, hopefully, we'll be able to, at a minimum, start giving examples.

But what I would say is we want to break out the $650 million. Obviously, the new regulations do have – would have an impact on our tax planning. And so it wasn't without us having to go back and revisit what the tax planning would be to see what we could recover from the new regulations.

But I don't know that we're comfortable talking about what the split is, but the new regulations did have an impact on us, but we are going to be able to achieve tax synergies, but they're global tax synergies. It's not always in the U.S. when you look at where our opportunity is. I don't know if you have any more comment on that..

Yeah, I would just add to that. When we came up with the synergy numbers of $500 million and $150 million, that was early on in the process and we obviously had ranges around each of those areas; synergies from costs and synergies from taxes.

And I would just say that as we've gone back and looked at the opportunities for global tax planning as well as understanding Tyco's tax footprint and their understanding of ours, that the range that we had for tax, we're still very comfortable that we're going to be able to be within the range of tax synergies that we quoted previously.

So I think from our standpoint, it's full speed ahead..

Perfect. Thanks for the color, guys..

Thanks, Josh..

Thank you. And our next question comes from the line of Robert Barry from Susquehanna. Your line is now open..

Hey, guys. Good morning..

Good morning..

Good morning, Rob..

Hey, Rob..

I had a question on tax as well. I just wanted to clarify.

So, as we think about JCI ex Adient, so the piece that's merging with Tyco, is it going to be joining with Tyco having this 17% tax rate? Is that the idea?.

Yeah, I think, what we're saying, Rob, is our tax rate in the near term we think is sustainable at 17%. So when I say near term that takes us through fiscal 2017. The Tyco tax rate, I think, has historically been in that 17% to 18% range.

So if you put the two companies together and then layer on, over a three-year period, that we think there's $150 million of tax synergies, I think that's kind of the way to think about it. So as we put the two companies together, we're just going to have to kind of work through what the ultimate rate is.

But I think we've been talking in terms of 17% to 18%, and I would say that the guide down to JCI of 17% means that we think we may do a little better than that..

Got you. Okay. I just wanted to clarify that. And then maybe just....

Rob?.

Yeah?.

Just wanted to make sure that you also – kind of the news on this was the Adient tax rate was something that we hadn't talked about previously also..

Yes, indeed. And it was pretty striking to see it at that level. So I was curious if somehow the split between the two impacted the way the business would look as it entered the merger..

No, in fact, a big part of the integration process is to make sure that as we do our planning that we do tax planning during the – I'm sorry, the separation over the last year..

Got you. And then maybe just on BE, it looks like there's definitely some good momentum building there, especially, in North America. I think, Alex, you called out healthcare and education was where you were seeing the strength and so, perhaps, is government a lagging? Any color on the verticals? And then, if you could also just comment on pricing.

As this order momentum builds, is the pricing of the backlog, would you say, accretive or dilutive to the segment margins? Thank you..

I think that – I don't know that (33:04) these are mostly contracts, so I think it's really a variable margin play. I don't know that we're really looking at a fixed cost play. So I do think that it's accretive. Now, it's going to come down to the mix of the size of projects.

Typically, the larger the project, the lower the margin, but also, it has lower SG&A to go along with that. So I think that we're going to see accretive – the business is going to be accretive as volume runs through it, particularly, as we have pull-through.

Again, a lot of this business is not performance contracting business, so a lot of this business is core construction business, which means it's going to drag along equipment and controls, which will have an accretive component to our business. Those are real positives. The other thing that I'd say is around the verticals.

We talk about transportation, I would call that really more of a state and local government vertical, which is infrastructure related. That seems to be holding up; education, healthcare.

We're also – and we didn't talk about it in our comments, we're also seeing in our commercial business is doing pretty well, and that's really on the back of our CBRE business. We're seeing significant orders through our relationship with CB Richard Ellis.

So, we're hitting on a lot of key initiatives and the market seems to be holding up with an 8% pipeline in front of us..

Great. Thank you..

Thank you. And our next question comes from the line of Mike Wood from Macquarie Capital. Your line is now open..

Hi. Thanks for that color on the commercial verticals. Could you also provide some trends on commercial in terms of split between renovation activity and new construction and what you're seeing in the pipeline? And also maybe the various size tonnage equipment and where you're seeing most of that pipeline come from? Thank you..

Well, so this is kind of a global picture. If you look at from a global perspective, actually, our large tonnage business is not doing well as more of our mid-market or mid-tonnage spends. And that's primarily driven by markets like the Middle East, markets that are driven by infrastructure spending.

When you look at North America, I think what we're seeing is, basically, the same thing. It's kind of a mid-market on revenue, but on the secured, there's some very, very large infrastructure projects. So I think, today, our mix would probably be more toward mid-size equipment.

I think that the secured pipeline is looking toward larger projects and larger tonnage..

And you'd mentioned Hitachi exceeding expectations initially.

Is that sales or margins? And do you have a clear plan at this point now with how to fix the resi business or has that began?.

So, I would tell you, on the Hitachi, we're seeing both the top line has been something that's been a pleasant surprise. Tremendous growth, particularly, in the Asian markets in market share, and we're also seeing margins better than what we expected. So I think, on both counts, we're seeing with Hitachi.

As it relates to residential, right now, the plan that we have in residential, we have a lot of new products that are out in the marketplace. We're making some initiatives, but nothing transformative at this point..

Thank you..

Thanks, Mike..

Thank you. And our next question comes from the line of Julian Mitchell from Credit Suisse. Your line is now open..

Hi. Thank you. Just a first question maybe on Power Solutions. You had obviously enjoyed exceptional margin expansion and then, obviously, that seems to be sort of leveling out a little bit.

I just wondered if you could call out how severe and how long do you expect the headwind from those China launch costs to be? Was that sort of a blip that you saw in Q2 and the second half margin expansion should be more considerable? Any color there?.

Yeah. So when we talked at the December meeting, we actually guided margins down 50 basis points from 17.5% to 17%, and I think we called out at that meeting there was going to be some China launch costs, certainly, throughout fiscal 2016. So, we're starting to see those now.

Even with those, we had a 10-basis point improvement in Power Solutions margins, and year-to-date, they're still up pretty strong. So there will be more of that in the second half of the year.

And then, as you know, we're also in the middle of constructing a plant in the north in China, and so I think the investment and some of the launch costs in China we're going to continue to see for a period of time.

But I would tell you, sitting here today, when we look at the margins for Power Solutions, the 17% that we guided to in December, we're well ahead of that pace right now for fiscal 2016..

Got it. Thank you. And then, back to Building Efficiency. I think there's been sort of very mixed and mostly negative sort of comments on China construction for quite some time. Your own sort of Asia orders though have been very good actually, up 9% to 10% the last six months.

So maybe give us some background as to how you're able to drive that? Any particular verticals or countries that you think are key behind that sort of very high-single digit above-market average growth?.

This is Alex. So, what I would tell you is that China has been a headwind for us, with the exception of what we're seeing through Hitachi in our VRF business. So that business is growing pretty quickly.

When you look outside of China, I don't know that you can point to one particular country, but, across the board, the ASEAN countries were seeing growth. And what I would tell you, as it relates to China, it's kind of a mixed bag. We're – it's choppy. We're seeing some orders.

We saw some – I wouldn't call it momentum, we saw some sprouts here in the last few months. We're also seeing some new infrastructure projects that are on the board when you look out west, and so we're hopeful that it will come back with some stimulus money here..

Great. Thank you very much..

Thanks, Julian..

Thank you. And our next question comes from the line of Jeffrey Sprague from Vertical Research Partners. Your line is now open..

Thank you. Good morning..

Good Morning, Jeff..

Good Morning, Jeff..

Hey. A couple of follow-ups. First, just on the Target deal, I'm intrigued by that. Your name doesn't usually come to top of mind when I'm thinking kind of big retail retrofit job, so congrats on that. But could you elaborate on what drove that? Was there – it sounds like there were some performance contracting tied to it.

And do you have a pipeline of some additional opportunities there?.

No, actually, it wasn't a performance contract, it was more of a – it was based off of energy savings, but it really wasn't a performance contract, and I think that what you should see is that, over time, I think we'll continue having more activity there, but it's probably something that we are under-utilizing. I agree.

It's something that you don't see a lot. I do think that we have a set of new products that makes us more competitive in that market, so we probably haven't been approaching it aggressively, so, hopefully, you'll see more in the future..

And on the government side, Alex, things have been hung up there for a while. This Navy project broke free. Do you have a decent size front log (40:44) on the U.S.

government side in particular? And how do you think that plays out over the balance of the year?.

Yeah, I think we talked about, about $150 million if I remember the recall that got hung up. I think we're going to see about half of that and the Navy project would be in that half as it relates to projects that were hung up. Moving forward, we still have a headwind around the U.S. federal government related to our historical plans.

So, we're not really counting on that this year to save our day until we get kind of through this fiscal situation that we have with the U.S. government. But we are glad to see that we were able to get that project freed up. There are probably a few more, but we'll get about half of what we expected..

Yeah. Thank you.

And then just a quick one on Adient, should we still be kind of thinking dividend roughly two terms on EBITDA?.

I'm going to let Bruce talk to you about that..

Well, actually, I think, on the slide in the deck here, when we talk about the Adient separation, we're just finally icing that with our advisors. The first turn here of the Form 10, it won't have the dividend in there, but that's something that is top of mind for us and we're working with Brian and his team on that..

All right. Thank you..

Thanks, Jeff..

Thank you. And our next question comes from the line of Richard Kwas from Wells Fargo. Your line is now open..

Hi. Good morning, everyone. Just a follow up on Power, so Start-Stop coming in at 18% for the quarter, that's good growth, but down pretty considerably from the 30% and 40%s run rate that you've been realizing over the last several quarters.

Just curious in terms of was there a timing of launches around in North America or China that affected the growth rate.

How should we think about the progression of the growth rate?.

Well, two things. One is, the numbers are getting bigger and the second thing is that we're capacity constrained. So, if you remember as we talked about last year, things were happening much quicker than what we expected, and so as we're putting in capacity, we're chasing a little bit here..

And, Alex, are the economics still the same with regards to the price and the margin dollars two times, three times on sales and operating profit, respectively?.

Pretty much. Even though you see the basis volume – you kind of have to look through the numbers, but if you look at our unit growth rate and you look at our margin growth rate, you can sort of see it.

There's so many moving parts with lead costs and FX, but we are seeing that, and as we're able to continue that capacity, more and more of that will get realized on the bottom line, but, yeah, we're still seeing it..

Okay. And then just a quick one on Auto for Bruce, so in the deck it says European softness on production here in Q1 or fiscal Q2, I should say. You've had production get raised here recently.

Just curious is that a customer-specific issue or what's going on?.

It really just relates to some business that we have that's rolling off. So, as you know, the last couple years, we had some business losses that we didn't renew in Europe and so we're just sort of seeing the tail-end of that..

And that would be pure seating, not including Interiors?.

Correct..

Okay. All right. Thank you..

Thanks, Rich..

Thank you. And our next question comes from the line Pat Archambault from Goldman Sachs. Your line is now open..

Great. Thanks, again. Yeah, just two for me. Number one is, what's the pricing like on those seating contracts? It just strikes me as obviously fairly remarkable acceleration, right? To do sort of all of what you did in bookings in a half a year in terms of compared to what you did a year ago in a whole year.

Are you finding that the environment is just willing to take in some new orders at reasonable pricing or is this kind of an aggressive push to kind of reassert yourself at your proper share? How should we think about that?.

Well, first of all, it's great progress, and I think when you think about the rationale for spinning off the Automotive business, it's really been because we wanted to free up Automotive to reinvest the cash flows to grow the business.

And so, if you were to look at our reinvestment ratio in the Auto business compared to our closest North American competitor, what you would see is our reinvestment ratio is about 30% to 40% lower than theirs. And so, our growth has been stunted because of our lack of commitment on future CapEx and engineering expense.

So it's not that we are chasing things at lower prices here, it is – our business – and probably the best way to think about (46:01) around for a while is, we have a long 20-year, 30-year track record of aggressive growth in Automotive and we're giving them back the access to resources and let them flourish again.

And that's what we're seeing in the first half..

Got it. All right. Thanks, Bruce. And just one other side one maybe more generally, it just feels like in the last four months or five months like the noise on – not noise, but the discussions on 48 volt have gone up a lot.

Can you just remind us like sort of your positioning there and how much of an opportunity that could be for you?.

Yeah, so I think that, for us, the 48 volt discussion is one that's a positive discussion, because as we've talked about our technology portfolio and the fact that vehicles will move from one powertrain to another powertrain, we'd rather see an incremental move and one that's not 100% disruptive, but more of an evolving portfolio.

And for us, this is something that we actually predicted. The timing of it is something that's unique around the discussion, but I do think it makes an awful lot of sense and we're encouraged by it. If you look at our investments in R&D, it's directly related to low-voltage lithium-ion products..

And just to follow up really quickly, is this – are these products that you could see in the market within kind of a two-year timeframe? Is it that soon?.

No, I think you're – if you think about the cycles of the Automotive business, you'll probably have some pilot projects, but you're really talking about five years plus out just because of the product cycle times..

Okay. Got it. Thanks, guys. That's all I have..

Thank you..

Thank you. And our next question comes from the line of Noah Kaye from Oppenheimer. Your line is now open..

Good morning, and thank you. Let's start with Building Efficiency. You had mentioned the new Metasys launch in June.

So as you work towards the Tyco merger and the integration, I was wondering to what extent are you already starting to design building automation products for integrating some of their fire and security products and controls? It seems like a good opportunity and just wondering how much of that might be baked into how you think about synergies versus potential upside, and maybe what you think the integration of those product suites will do for your competitive positioning..

Well, as you probably know, the Metasys platform has been around for a long time. It's an evolving product platform. And it already has an integrating capability with lots of fire alarm products, including products like the Simplex products through open protocols. I think what you're going to see is a much tighter integration.

We haven't really gotten into the details of the product planning. You have to remember, we're still two public companies, and there's certain planning that we can't do until we're further along in this process.

But, clearly, when we talk about – and I think Tyco talks about their Tyco On product and we talk about Metasys, that's really a convergence of technology that will need an integrating platform. What that really looks like, the opportunity to look under the cover, we really can't do that yet.

So I'm excited about that as part of the synergy opportunity. It wouldn't be the near-term synergy opportunity; it would be like the second wave of opportunity. The first wave of opportunity is going to really be cross-selling and commercial opportunity..

We'll look for that.

And then just a question on Power Solutions; you mentioned in your guidance for the year, the change in the guidance earlier, just wondering how you think about regional volumes in kind of the remainder of the year, North America, China versus Europe and kind of the puts and takes of that and where you think that might end up impacting pricing..

I think that the mix will be very similar to what it's been up to this point. We have actually gained share. There's been a little bit of market growth in North America. Europe has had a pretty mild weather. It hasn't lost share, but it's pretty competitive in Europe.

And so what I would expect is that our share will continue to grow pivoting toward Asia, specifically China, and we'll see moderate growth in the other regions..

Okay. Great. Thank you very much..

Thanks, Noah..

Thank you. And our last question comes from the line of Joseph Spak from RBC. Your line is now open..

Oh, thanks for squeezing me in here. Just one quick one on, I guess, the Yanfeng JV, where we just get a little transparency. It seems like things have really accelerated there by some of the clues you dropped here; China up 51%, but only 9% ex that JV.

And then if you could just sort of back out the margin improvement as well, is that – I guess, is that just the fruits of some increased business, because it seems to be up way more than China production would have otherwise suggested?.

I just want to clarify.

You're talking about the Interiors joint venture, correct?.

Yes. Yeah..

Well, yeah. Keep in mind, Joe, it's a global joint venture. So, roughly speaking, it's a little bit more than 50% is China and the balance of it is North America and Europe, just to remind those on the call that maybe aren't familiar with it.

But we – this joint venture, we basically took Johnson Controls' business, which was a global Interiors joint venture, or operation, and combined it with Yanfeng's business, which was almost all in China. I think they had one North American plant.

And really, the rationale here was combining the Chinese cost base that they brought and access to low-cost tooling and capital, and marrying it up with our global footprint and our global customer relationships. And what you've sort of seen there is putting that all together, is we've got a business that's got a return on sales of more than 6%.

That's somewhat stunted because of the costs that we're incurring to set it up as a separate entity. We see good strong growth and we've got a global business that's growing nicely. And we see the $7 billion of – that's lifetime awards of revenue, so it's not the same as our backlog.

But that – if I looked at that backlog, that's the customer validation of the investment thesis and I think if you look underneath that, about two-thirds of the new business is Daimler, BMW and Porsche on business, and that's a global mix, so it's not just winning it in one region.

So, great customer acceptance, the marrying of the customer relationships and the cost base, it just has played out perfectly for us and we're real excited about how that venture's starting off year..

And just to confirm that it's the after-tax portion of that JV that you're reporting in that segment income number, right? So, I guess, the difference suggests sort of something about like almost $50 million contribution which just seems to be a little bit higher than, I guess, some of the initial color you had..

Yeah, I don't think the – maybe after the call, Kathie can straighten you out there, but I think it's not quite – I don't think its $50 million from the Interiors joint venture. But your point is actually bigger than you said.

All of our Chinese equity income, which is more than $50 million in the quarter is all after-tax income, and I think one of the things that, from a value perspective, is generally speaking I think people give us an EBITDA type multiple on our equity income rather than a PE type multiple, and I think there's lost value there..

Yeah, we can walk through the math afterwards, but remember that's a 30% – we've got a 30% interest in that joint venture and you're correct, it is after-tax. So we can walk you through those numbers..

All right. We can take it offline. Thanks..

Yeah..

Thanks, Joe..

Okay..

Alex, closing comments?.

All right. Appreciate it. I thank everyone for joining the call today and I just want to just to mention, just as I always do, but it can't go unmentioned is that how could you not be more proud of our employees and what they're accomplishing. We've got a significant amount of things going on.

If you look at the summer we have ahead of us, it's not slowing down, but I think we can see the path to be clear of all this. Things are becoming much more clear for our employees, for our customers, and I think that the execution that they're delivering on is something to really be proud of.

So, I just want to thank our employees and I want to appreciate everyone's great, great questions, and sticking with us through this transformation. We're going to be – we're a great company today and we're going to be an even be a greater company, a great two companies when we come out of this. So thanks a lot. Have a great day..

Thank you..

Thank you, speakers. And that concludes today's conference call. Thank you all for joining, and you may now disconnect..