Kathryn Campbell - Director-Global Investor Relations Alex Molinaroli - Chairman, President and Chief Executive Officer Brian Stief - Chief Financial Officer and Executive Vice President Robert Bruce McDonald - Incoming Adient Chairman and CEO.

Joshua Pokrzywinski - Buckingham Research Group Robert Barry - Susquehanna Financial Group Noah Kaye - Oppenheimer & Co. Richard Kwas - Wells Fargo Securities Emmanuel Rosner - CLSA Julian Mitchell - Credit Suisse Nigel Coe - Morgan Stanley.

Presentation:.

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode until the question and answer session starts. [Operator Instructions] This call is being recorded. If you have any objections you may now disconnect. I would now like to turn the call over to your host Kathie Campbell. Ma'am, you may begin.

Thank you, Dale, and welcome to the review of John Controls Third 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 some perspective on the quarter, as well as some progress updates on our merger with Tyco. He will be followed by Bruce McDonald, incoming Adient Chairman and CEO, to provide some updates on the Adient spin-off.

Executive Vice President and Chief Financial Officer, Brian Stief, will then 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 documents today. With that, I will turn it over to Alex..

Thanks, Kathie. Good morning, everyone.

So, I'd like to get started before we jump into the slides, just as a reminder and I’ve done this the last couple quarters to remind everyone what we talked about back in December as we made commitments to ourselves and to our shareholders and to the folks that were at our December Analyst Meeting and talk about the few things that are guiding light here as it relates to being able to achieve our objectives.

First that is around execution delivering both on our strategic and our financial commitments; second one is our transformation activities to make sure that we are able to complete successfully our portfolio actions.

Recall the time when we had made those statements then we were talking mostly about the spin we weren’t really including the Tyco transaction.

Maintaining a strong balance sheet for the future in order to be have flexibility for our growth investments and then continue our drive toward being coming out real benchmark for operational excellence and I just like to make a comment, I believe that our Johnson Controls operating system continues to deliver tangible results and I think we just had more to come.

So I am very pleased about that and then position ourselves with business platforms and you can think about the sectors that we participate in and operating models to be able to drive sustainable organic growth. All these with an eye, what’s important to us is to increase shareholder value. I am really proud to say that we’ve stayed focused.

We’ve been able to execute inline with the strategy and objectives that we talked about in December. With that, I’d like to jump into the slides, just move to the Slide 7 please. On Slide 7, we have some highlights here I just like to report on. First our Q3 was a great quarter and excellent with the continued execution.

Just for the Hitachi joint venture and currently in our lead cost pass-through our organic sales were 4% in Building Efficiency and 5% in Power Solutions. Building Efficiency growth was driven by both North America where we saw 3% growth and Asia at 9% and we are seeing some strength in China which is really encouraging.

Power Solutions our unit growth across all of our regions, we’ve had growth in all regions, what’s particularly we are seeing strong growth in Asia, across at Asia 12% and our start-stop growth which is the future of our business over the next five years grew 22% driven by the Americas and China at 78% and 79% respectively.

We have continued trend of our segment year-over-year profitability improvement with segment margins in all business units up 170 basis points across the board. Our adjusted EPS up 18% at $1.07 which is above our guidance for the quarter and with the strong operating performance we’ve tightened our guidance to the higher end of our previous range.

Brian will get into that later as it relates to our full year guidance. We continue to invest in our future. During the quarter, we announced our joint venture with Bohai Piston Group which is an affiliate of BAIC in China to build our fourth plant.

This strategic partnership is pretty important to us because it gives us access from an OE perspective to 5 million vehicles by 2020 and it also gives us access to distribution channel in 2400 outlets of OES shops in order to sell batteries to the aftermarket.

With this local partner it’s going to help us continue with our objectives to gain share in the region. We’ve also announced that we are doubling our AGM expansion in North America by 2020 and while increasing our capacity up to 11 million units and we are taking advantage of the growing demand for start-stop.

And I mentioned this earlier what we see is this technology is becoming more and more ubiquitous and vehicles as they come out and for our customers to meet the increasing regulatory targets.

Our Hitachi joint venture continues to exceed our expectations and I’d just give you a little bit of color on, if you look across the regions we are seeing strong performance in China, Japan and Taiwan and we are starting to see some opportunities in North America as we’ve made significant investments in both product and sales.

In order to drive profitability within the Hitachi joint venture and across the board our pricing, we’ve brought pricing discipline along with cost reductions and across our operating system functions, manufacturing, procurement, and design. We also completed in the quarter, our $500 million stock repurchase that we announced last quarter.

So we’ve completed that and we are at share count that we talked about in the previous call. We continue to make great progress on our portfolio transportation – transformation activities.

In fact, we are in a position now that we can talk about our merger date with Tyco moving to September 2nd and we continue to be on track for Adient spin date on October 31 as we previously communicated. Both Bruce and myself will talk about both of these transformation activities in further slides.

If you go to Slide 8, financial highlights and we had a lot of moving pieces as we all know, if you look at the top-line and kind of break that down, you take the Interiors joint venture, where we deconsolidated the revenues for that and then you add back the Johnson Controls Hitachi revenues, you adjust for these two events and currency, our overall organic growth was 1% for the quarter.

I noted previously that we saw strong growth in Building Efficiency and Power Solutions at 4%, 5% respectively.

Overall, Automotive Experience is down 1%, Seating grew 1% and there is some remaining plants, if you recall in our discussions around our Interior joint venture, we maintained some of the plants in Interiors and as we wind those plants down as where we are seeing the decline in sales, not in our Seating businesses.

Segment income was up 19% excluding FX with margins at 170 basis points. Our adjusted diluted EPS up 18% and it’s a second quarter in a row.

Building Efficiency segment income continues to benefit from the contribution of Johnson Controls Hitachi, both higher volumes and cost improvements, that is being offset by some of the product and sales force investments we are making outside the joint venture.

Auto had another exceptional profitability quarter driven by the performance of the Seating business. It was partially offset by lower than expected results from Interiors. Power Solutions continues to drive segment margin expansion with higher volumes both through manufacturing and pricing disciplines.

Let’s move to Slide 9, I’ll give you an update on where we are with our merger with Tyco. We’ve made a lot of progress in the quarter as we combined Tyco and JCI teams continue to work extremely well together. In the quarter, we’ve announced our combined leadership team.

Tyco has received an effective S-4 in our perspective it’s clear and we’ve set both shareholder meetings for August 17. The shareholders of record of June 27 should have received all the proxy materials in order to vote for the merger. We’ve received all of our antitrust clearances. So the shareholder vote is one of the last hurdles necessary to close.

And based on that, we are expecting to accelerate the closing date to September 2. So we feel good about the progress we are making around synergies.

And I’d just like to reiterate the commitment that George Oliver and myself made during the quarter at the EPG Conference where we talked about $1 billion in runrate savings coming from the combination of the ongoing productivity and improvements at both Tyco and Johnson Controls along with the synergy cost reductions we remain committed and are optimistic that we’ll achieve those.

And finally I am lucky to say the date, we are going to have our first as a new company Analyst Day will be at the Mandarin Oriental in New York City on December 5 and if you could save that date it’d be great because it’s going to be an opportunity for us to talk about both strategically and financially on what the merged company would look like and what the expectations you should have and it’s a main important event for us as we start our new journey as a combined company.

With that I’d like to turn it over to Bruce and he will update both around the Adient progress and the separation activities. .

Okay, thank you, Alex and good morning to everyone on the call today. I am real pleased to talk about where we stand in terms of the Adient separation, like the activity is ongoing with the merger with Tyco. We on the automotive side have had an extremely busy quarter as well. For us, July 1 was a huge milestone.

It’s the internal date that we said we were going to have effectively our separation largely completed. So we call that operational day one. So with that, we changed over the bulk of our IT systems, clone what we had to clone. We’ve got new treasury systems in place. Good progress on the corporate organization structure.

So for all intents and purposes, we are operating independently within Johnson Controls, we’ve got a four months kind of running in parallel health until we get to our true separation which will be at the end of the October.

In terms of the tracking of the cost of the separation, Brian had given an estimate of cost being in the $400 million to $600 million range. We are tracking well within those estimates. Those costs will quickly drop-off here in the fourth quarter and I think there is a little bit that hangs into the month of October.

But that separation costs are on a pretty down – a pretty steep downward trajectory here as we’ve done most of the activities.

In terms of our Form 10, which we filed – which we filed during the quarter, the second version, it had our pro forma financial results in there and our 2-B balance sheet, in there we disclosed that we’ll have $3.5 billion of gross debt. We’ll retain $500 million and pay $3 billion dividend back to Johnson Controls just before the spin-off.

In terms of our financing, great progress here. We are nearly, probably early next week we’ll wrap up the first part of our financing plan which involves us putting in place $1.5 billion revolver which will be for working capital purposes and give us some cushion. And $1.5 billion of term loan A.

Those – that we are just wrapping up the commitments from our lenders and we expect to close that out early next week and make an announcement. Then we’ll shift into our bond programs.

During the first two weeks of August, we will be marketing our bonds we expect to issue $2 billion of 8 to 10 year bonds here and close that transaction into escrow here in mid-August.

In terms of our credit rating, I think we’ve published that we’ve received the double B Plus rating from S&P was consistent with our expectation at sort of one notch below investment grade and I really think it speaks to the underlying strength of our business and this bright future that we have.

Moody’s will publish a rating on us probably here within the next two weeks. In terms of the next version of the Form 10, that will be filed late next week. In there, I guess the most noteworthy thing is we’ve decided in there to change our domicile from the UK to Ireland.

That reflects really as we sort of working through the complexities of the separation with the new Johnson Controls entity being domiciled in Ireland, it was just more tax-efficient and less complex transaction structured for Adient to be Irish domiciles and so we made that change and you will see that reflect in the next version of the Form 10.

I think the main issue from a financial perspective with that is it really doesn’t have any impact on our numbers and with the Irish domicile we are still confident that our tax rate will be in the 10% to 12% range as we’ve previously communicated.

Lastly here, I would just comment as save the date, we expect to have our first Adient Analyst Meeting here in September 15, so prior to the spin-off we will be doing a number of shareholder outreach and one-on-one things from mid-September through our spin-off date, but sort of kicking that off will be an Analyst Meeting that we scheduled here for the morning of September 15 in New York.

Teams are excited, working hard and really looking forward to legal day one. Maybe just transitioning into Slide 11 here, maybe just comment on our investment thesis and why the team is so excited before I turn things over to Brian.

So first of all, I just point out our market position, I mean, clearly, we are the market leader in many, many sense of the word, if you look at our market share we are globally number one. It was 50% bigger than our next close competitor.

Our product line up, we’ve got a very diverse product line up from a vertical integration point of view we’re the most vertically integrated. So extremely well positioned in the industry. Then I think really uniquely to us for Adient is our customer diversity that we have and I think it’s clear that we are the envy of the industry.

If you look at our share, our market share and we are leaders in all three of the major regions and we’ve got great customer diversity with Japanese, with Chinese customers, our business really reflects the diversity of our – of the auto OE-based globally. So, we are not overly exposed to any one customer, any one region.

We are the envy of the industry. In terms of looking forward, obviously automotive here is on an upward trajectory in terms of our margins and profitability this year and we expect to see that to continue as we get into – as we become our own separate company.

We’ve got a lot of self help initiatives, some operational efficiencies that we are going to implement and you can see here on the slide and we’ve talked about this before that we expect to deliver 200 basis points of margin expansion over the mid-term here. Then lastly, coming out with $3 billion of net debt. We are not too worried about.

We expect to have extremely strong free cash flow, I mean the automotive business is a strong free cash flow business.

We will be ticking up our capital expenditure here to invest in some growth initiatives as we go forward and pay a competitive dividend, but all in all, very strong stable source of cash flow that will enable us to both quickly delever, paying attractive returns to our shareholders and also invest in growth initiatives to get the top-line moving again for automotive.

And so with that, I thank you and I’ll turn it back over to Brian to go through the business results..

Okay, thanks Bruce and good morning everyone. As you saw in our press release, our Q3 reported results include transaction, integration and separation costs of about $167 million, a restructuring charge of $102 million and a non-recurring non-cash tax charge of $85 million, which resulted in a net charge of $0.48 per share in the current quarter.

We've summarized those items in an appendix, but just given their size, I’d like to just briefly comment on each of those.

As far as the integration, separation and transaction costs, the majority of those costs in the quarter relate to the Adient separation, and as Bruce indicated we should be on the downside of those costs as we move through Q4 now and there will be some trailing cost into Q1 toward the separation date of October 31.

As far as the restructuring charge, there is some non-cash impairments included in that. Stranded cost reductions in connection with us moving toward the Adient spin date as well as some footprint changes at the Automotive business.

And then lastly the tax charge again is non-cash and it relates really to some Adient spin-off tax funding that’s been done in the quarter.

So as I talk through the business unit results and financials, I’ll exclude these items from my comments and also consistent with Q1 and Q2, as you know we formed the Automotive Interiors JV in July 2015 and we closed on the Johnson Controls to Hitachi or JCH joint venture in October 2015 and those impact the comparability of the quarter-to-quarter results and I’ll comment on those as I go through the slides.

So with that, turning to Slide 12, on Building Efficiency, third quarter sales of $3.6 billion were up 36% from the prior year. If you adjust for FX and JCH sales grew by a solid 4%.

Revenues in Systems and Services North America were up 3% as we saw good growth in the North American branches and in Products North America residential business drove year-over-year growth of 20% and Asia was up 9% ex Hitachi.

In our rest of world segment, it was level with Q3 of 2015 with a few unpacks at Europe was up 5%, Latin America was up 3% and there was softness in the Middle East, it was down 10% and that’s tied into oil prices.

As far as orders secured in the quarter, excluding M&A and FX we were up 5% for the third consecutive quarter and we saw share gains in Systems and Services North America and Products North America related to our residential business.

Asia orders were also strong in the quarter up 6% and we ended the quarter with a backlog of $4.8 billion, which is up 2% year-on-year. As far as segment income of $397 million, it was up 48% ex FX, due primarily to the volumes in North America and Asia and the contribution of the Hitachi joint venture.

As I mentioned last quarter, it’s now difficult to isolate the Hitachi joint venture standalone results given all of the integration work that’s going on and the investments that we are making in products and sales force that Alex referred to, but based upon some pro forma calculations we’ve done, we would estimate that we’d be in mid single-digit segment income growth without Hitachi.

And overall BE segment margins in the quarter were very strong at 10.9%, up 90 basis points. So turning to Power Solutions in Slide 13, sales were up 3% compared to last year and 5% if you adjust for FX and the lead price. So lead price is today around 1700 versus last year at about 1950 and of course that impacts our top-line sales numbers.

In terms of units, we saw higher volumes across all regions with global third quarter shipments up 2%, again if you unpack that, Asia was up 12%, Europe was up 2% and the Americas were up 1%. We continue to see strong start-stop growth with year-on-year volumes up 22% from 3.3 million units last year to 4 million units this year.

All regions delivered higher year-on-year start-stop volumes with China at 79% and the Americas up 78% in growing markets and then in the mature markets, EMEA we are up 4%. We also saw Q3 global OE and aftermarket volumes increased 5% and 1% respectively.

So from a segment income standpoint, Power Solutions delivered $262 million, which is up 13% ex FX and that continues to reflect the higher volumes, some strong price discipline and the ongoing favorable products mix that we are seeing at power. Their margins were up 130 basis points year-over-year and remain well above our expectations year-to-date.

Moving to Automotive Experience, sales were down 19% compared to last year, but if you adjust for the deconsolidation of Interiors and FX, they were down 1% and we really saw strong global production in Asia and Europe that were offset by some expiring programs in North America.

If you look at our China non-consolidated joint ventures on a 100% sales basis, they were up 49% in the quarter to $2.9 billion, but again, if you adjust for the Interiors joint venture and FX, they are only up 11%, but still very favorable relative to industry production of 5% in the quarter.

Our Automotive team has been quoting significant new business and have secured wins of $4.3 billion year-to-date which already exceeds the fiscal 2015 full year total of $3.6 billion and they are well on their way to a record year of new business secured at Automotive.

For the quarter, segment income of $344 was up 1% year-over-year as we continue to see the benefits of cost reduction and restructuring initiatives and overall Seating results were very strong however as Alex mentioned, we did see some softness in the Interiors business related to the retained plants that we have at Johnson Controls that were not contributed to the joint venture.

China translation and some launch cost that were beginning to incur on new business. So total auto margins of 7.9% was very strong in the quarter, up 160 basis points year-on-year and up 20 basis points if you adjust for the Interiors deconsolidation.

Moving to Slide 15 in the consolidated results for the quarter, overall third quarter revenues were down 1% to $9.5 billion, but if you adjust for Interiors FX and the Hitachi joint venture, sales were up 1% as Alex mentioned.

Gross margin for the quarter of 19.8% was up 200 basis points and this just continues to reflect the benefits we are seeing from the favorable impacts of Johnson Controls operating system initiatives and our improved product mix.

SG&A was up 7%, this increase is really a function of the consolidation of Hitachi joint venture as well as product and sales force investments in BE and this is offset by the deconsolidation of Interiors and our ongoing cost initiatives and I will just comment here as I think the overall focus that we have on G&A cost remains strong as we really right size our cost structure as we move toward the Adient spin-off in October.

As expected, equity income of $134 million was 40% higher than year ago levels, again that was due to about $19 million in the joint venture related to Interiors and certain joint ventures of JCH contributed another $30 million.

So overall, third quarter segment margins of 10.5% were a 170 basis points better than 2015 and this is well ahead of the 70 basis point expectations that we had for the year.

Turning to Slide 16, net financing charges of $69 million was slightly lower than last year and that’s due primarily to the favorable interest rate environment we have today and consistent with the last quarter our tax rate remains at 17% which is favorable compared to our Q3 of fiscal 2015 which was at 18.5%.

Income attributable to non-controlling interest is up $49 million compared to last year and that’s primarily due to JCH and overall, we had a strong third quarter up 18% from $0.91 a year ago to $1.07 this year.

And I just comment, I give tremendous credit to our business unit management teams as they continue deliver these outstanding results during a period when a lot of these portfolio transformation activities could be a potential transaction for our global teams. So, they are doing a great job.

Turning to the balance sheet on Page 17 at quarter end, we have a net debt-to-cap ratio of 44% compared to the third quarter of last year which was at 40.7% and 40% at the end of last quarter. That increase really is a function of the share repurchase and some of the separation cost that were funded in the third quarter.

If I turn to cash flow, our third quarter adjusted cash flow of $400 million was inline with our expectations. We have included an appendix in the deck which provides a reconciliation of our reported to adjusted free cash flow and to similar to the format we presented at our Analyst Day in December.

And as you can see in the third quarter, we had transaction cost, separation cost in tax payments that totaled about $600 million. We do expect to be inline with the $1.5 billion free cash flow guidance that we provided at the December Analyst Meeting.

If I turn to Slide 18, there are lot of moving pieces as we enter Q4 and I just like to comment on a couple of things before we get into Q&A here.

As Alex noted, the expected merger date is now September 2, which will mean that we will pick up one month of Tyco results in our fiscal 2016 consolidated financial statements including the purchase accounting adjustments.

Additionally, the consolidated balance sheet at the end of our fiscal year will include Tyco’s historical debt of about $2 billion plus the new debt raise of around $4 billion that will be completed in connection with the transaction.

And on our year-end earnings call, we will provide you with some pro forma financial information to demonstrate Johnson Controls performance exclusive of Hitachi as we provide our upcoming guidance here.

Yesterday you may have seen we announced the fall order of our fourth quarter dividend of $0.29 to shareholders of record on August 5th and the payment date will be August 19th and we will continue to see the one-time or non-recurring items I guess, or special items related to transaction and separation cost in Q4, we will have likely another restructuring charge as we move closer towards the spin-off of Adient and the integration efforts associated with Tyco and we will have our normal Q4 mark-to-market adjustment related to our pension and OPEB plans.

One technical thing from an accounting standpoint, we are not able to show Adient as a discontinued operation until the date of the spin. So, our year end financial statements will continue to show Adient as a consolidated entity and it won’t be until Q1 that we show that as a disc-op.

Turning to Slide 19 and our guidance and I’d emphasize that the guidance that we are providing you excludes any impacts of the Tyco merger.

Our Q4 earnings per share is expected to be in the range of 1.17 to 1.20 which is up 13% to 15% from Q4 last year and it does reflect the tightening of our full year guidance to 3.95 to 3.98 which will be up 15% to 16% from fiscal 2015.

And I would just say with our fourth quarter guidance reflects the positive momentum we have going into Q4, but it is somewhat tampered by uncertainty around potential currency and volume headwinds that could exist in our Automotive business as we move through the fourth quarter. So with that, Kathy we can turn it over for questions..

Dale, we will now begin our Q&A. If you could please limit yourself to one question and one follow-up and then get back in the queue will be much appreciated.

Dale?.

Thank you. We will now begin the question and answer session. [Operator Instructions] We have one from Joshua of Buckingham Research. Your line is now open..

Hi, good morning folks. .

Good morning. .

Just a quick question on BE margins, I guess, could you break down maybe some of the headwinds, tailwinds or are you moving pieces around price cost and then I know you had some investment spending last year, how did that look on a year-over-year basis? And then, maybe Brian just go through where we are at versus that $100 million of cost savings you expect it to get this year whether running ahead of that at this point or if that’s all part of the performance in the quarter?.

I won’t put the numbers to it, Brian can do that, and then kind of give you a overview.

As we’ve quickly integrated the Hitachi business it’s becoming more and more difficult for us to be able to tease out the margins inside Hitachi and outside Hitachi not because we don’t have the results, but because we are making investments outside of Hitachi around on Products North America.

So what you see was when you get into the Products North America, in particular you are going to see some margin pressure and you’ll also see a little bit of margin pressure although because of the volumes been overcoming in SS&A where we are hiring sales people.

And then we also have some products that we are building for our EPG business which had an excellent quarter, this quarter. We are making investments in new product development there. So those are the three, I guess, those are the three major headwinds we have as it relates to cost.

All of them are investments and future products and a lot of that is real self help from the standpoint that we’ve been able to lower G&A and reinvest it in the business in both products and sales people. I think, Brian could give you maybe some of the details around that..

Yes, Joshua, I think on the $100 million number, of course that was the number that we showed at the Analyst Day and that was the gross save from our JCOS initiatives and then the net save was the 100 you referred.

That of course is across all three of our businesses, but BE certainly is benefiting by that and I think some of that is reflected in certainly the margin improvement we are seeing at BE. But that $100 million would be across all three of our businesses and I would say we are pretty much on target with what we expected there. .

Perfect, and then, I guess just a follow-up, on the Tyco close moving forward, certainly good news there. Any expectation that we would update the synergy target or maybe some more crystallization or timing around that.

At close, are you guys going to wait until you report the fourth quarter?.

So we will wait till December, yes, because I think that we want to make sure that as we get into post-close activities that we validate a lot of the things that we are working on now.

We’ve done an awful lot of planning, but I think as we put together our plans, as you remember we not only have synergy cost that we talk about as it relates to the deal itself, but also cost reduction initiatives with both companies, because we are still two separate companies, we don’t have the level of details that we need to talk about it now, but when we come out December, I think we’ll be able to have the level of details that becomes ourselves accountable and that you folks will be able to have some transparency too..

Perfect, appreciate it guys..

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

Yes, hey everyone. Good morning. .

Good morning. .

So, I think there were some concerns in the quarter perhaps about non-res flowing a little bit perhaps due to the Dodge Momentum Index slowing though it rebounded a lot in June. It looks like your orders in BE showed good growth, but steady versus last quarter even though the comp got a little easier.

So just curious how you’d characterize the momentum there and anything since last update, any verticals in particular got better worse?.

So, across the board, we are seeing strong, but if you try to tease out underneath the overall North America what you trying is both in our HVAC business and our Controls business, we are not only seeing growth in the market but we are also gaining share.

Where we having a tough comp is in our performance contracting business and our federal government business, those businesses are under some pressure and so, what, if you get underneath you will find the institutional markets in our core business, HVAC controls and ironically fire and security are growing extremely fast and then if you look at our performance contracting business, particularly the federal government business, we are seeing some slowdown there.

And I think that is probably something that we are going to live with for a while. We're seeing a diversion of funds away from the type of activities we have. So there is just less opportunity there and in the Performance Contracting business particularly federal government. But I see strong momentum in the core of our business. .

Gotcha and then maybe I did actually want a follow-up on the comments about the residential business, just because I think it’s struggled a little for a while, it sounds like the momentum there is actually really good.

So can you give us a little more color on how it performed and it sounds like it inflected and why that might be the case?.

Well, it’s a question, because we’ve been on suppression, I mean, I think the comps are better, but we’ve also had a lot of new products out in the marketplace. So we are seeing mid-teens growth in the quarter. So we had some strong growth. We’ve had some specific wins. We’ve also added some distribution throughout the region.

So, we are pretty pleased with some of the growth that we are seeing because we haven’t as we noted over a period of time, but mid-teens..

Is that revenue or orders?.

Revenue..

Revenue..

And the distribution you added, was that, I know you had some shortfalls or coverage weakness in Florida, in Texas because that were at….

Yes, we lost – as you recall, we lost some distribution and in Florida we put some back and we’ve also got some distribution across multiple regions, but in Florida specifically we have added back some distribution. .

And Rob, revenue and orders are both up mid-teens..

Well, great. Even though maybe the weather wasn’t super helpful. So, that’s good..

Yes, that’s great. .

Thank you..

Thank you. Our next question comes from Noah Kaye of Oppenheimer & Company. Your line is now open..

Thank you. Good morning.

Maybe just a follow-up since day with BE, so we do obviously have a little bit ongoing non-res tailwinds, you had mentioned a lot of new products in the marketplace, I was just sort of wondering particularly on VRF, what kind of traction you’ve been seeing there in North America? You’ve spent some resources that kind of integrate this the strength we are seeing seems to be kind of in the mid-market which is really kind of the sweet spot there.

So, how is that tracking and kind of how much room do you think it has to run?.

Well, a long way to go. I think we have, we are starting to get products out. We’ve had some product gaps as part of the investment we are having to make because the products that were built by Hitachi were really not to serve the North American markets. So we are getting to where we have a full set of products.

Our quoting activity is up quite a bit, but I’ll tell you we still got a long ways to go and I think we will have the right product positioning and we are starting to see distribution sign up, but I would say that we are seeing most of that growth is, right now outside of North America. .

Okay, thank you. And then just a quick clarifying question on Adient. The tax rate, it looks unchanged from previous expectations, but you did mention that you thought there might be some tax benefit moving from – moving to Ireland, certainly it’s got a lower statutory corporate tax rate than the UK.

So, can you just kind of clarify that for us a little bit. Is there a benefit, how should we think about that? Thanks..

This is Bruce here, maybe I’ll just make a few comments and Brian, you may want to add in, but we disclosed that we would have a rate of around 10% to 12% previously when we thought we are going to be domiciled in the UK and with the change to Ireland, there is no difference and the reason why we don’t have a reduction is because we really don’t have any Irish income.

We don’t have any plants or anything like that in Ireland. So it wasn’t a positive from a rate perspective for us. .

Okay, that’s very helpful. Thank you. .

Thanks, Noah..

Thank you. Our next question comes from Rich Kwas of Wells Fargo. Your line is now open. .

Hi, good morning everyone..

Hi, Rich..

Good morning, Rich..

Just wanted to ask Alex on Brexit here.

I know it’s kind of early days still, but are you seeing any impact on quoting activity, particularly as it relates to BE?.

You know what, well first off when we put in context, our revenues in the UK are pretty small, I think it’s 3%. So we started from a small place.

We do have reports that not necessarily quoting activities, but things are just a little slow right now, because people are – some products that are into queue have slowed down, probably people are just trying to figure out where things are.

So I think that people are at kind of the wait and see mode, so we do see some indications of slowdown, but I don’t know that we’d be the bellwether for the UK..

And then how about broader Europe? Anything where there is any early signs of any contagion or…?.

No we don’t see it across Europe. We do see a little bit in the UK. In fact you look at our European business, it’s not doing badly, it’s actually seeing some growth, because we have developed in the rest of the world where we see some deterioration it’s actually in the Middle East where we are more petroleum energy dependent..

Okay, and then on North America, on the product number, which I think is new, I hadn’t seen that disclosed previously in terms of your orders. So that was up eight, so that suggests there is pretty good activity on the institutional side.

Is that a fair assessment of what you are seeing right now based on that number?.

Well, the way I would think about it when our products business is probably more skewed towards the light commercial, and our branches are more skewed to institutional, because of the channel, I am sorry..

Okay, all right and then, so just, and then lastly on to the clarification on the mid-teens number for residential, is that residential and light commercial combined or just residential in terms of the orders of the revenues?.

That’s both, that’s combined. .

Okay, combined..

That’s the old EPG..

Right, okay, thanks..

Thanks, Rich. .

Operator?.

Dale, you are still there?.

Yes, can you hear me now?.

Yes, is there another question?.

I do apologize. Our next question comes from Emmanuel Rosner from CLSA. Your line is now open. .

Hi good morning everybody..

Good morning..

Good morning Emmanuel..

Just a couple of questions on the auto side. First on the margin performance in the quarter. You mentioned a few factors that sort of like may have sort of been keeping a lid on margin expansion there.

Can you please just go back over, some of these factors were what’s happening in Seating and Interiors? And then how should we think about that the margin expansion enough for the near future and in particular in the context of your ability to expend that by couple hundred basis points?.

Maybe share buyback..

Maybe, I’ll talk to what I think is going to drive the improvement in the future and then maybe Brian can just read, he went through a number of things, so maybe he can touch on those. But, from a go forward perspective, what we are seeing, we are looking for a couple hundred basis points of margin expansion. It really falls into a few big buckets.

First of all, is us have any – I’d say a leaner corporate SG&A structure then we have as part of Johnson Controls it would be a single industry company and we – that will and smaller and I think that will offer us some attrition. So these I think as we look at the cost associated with standing up the company to be a public entity that’s a big driver.

Secondly is, we are on an upward trajectory in terms of our business performance right now, really and things there you would sort of see is some improvement on metals business on a go forward basis, that’s probably the single biggest bucket there and then, I guess the other thing I would point to from a margin expansion would be the growth of our equity income which flows through as our Chinese businesses grow.

So those are the three main areas Emmanuel where the 200 basis points come from..

And I think if you look at the segment income in the quarter, seating results were very strong and I think it continues to reflect some of the cost initiatives as well as some of the JCOS benefits that they are seeing is, it was really offset in the quarter by softness in Interiors and those would really come in three areas.

As you may know in connection with the formation of the Interiors joint venture a year ago, certain plants, the unprofitable plants were retained by Johnson Controls and we’re essentially winding those down as we move through about mid fiscal 2017 and so those losses have been a bit heavier than we expected, that would be one.

The second item which is kind of a good news, thanks the new business that’s being won by the Chinese joint venture is significant and they are incurring some front-end launch cost associated with that business. So, again that was a bit of a way down in the quarter on their results.

And then lastly just the currency in China has given us some headwinds as well. So, those will be the three big buckets I guess that would explain the Interiors. .

Great, that’s and just a real quick follow-up on the business wins in the autos business, obviously a very strong acceleration there.

Can you provide any color either by product like Seating versus Interiors or geographically where you sort of like seeing the most traction with the new Adient proposition?.

Yes, well, first of all, that the number that we quoted, just Seating. So, when we are talking about new business wins on a year-to-date basis, just the Seating side, okay.

And then, if I was – we’ve historically, if you sort of go over last couple years most of our new business has been in China and that continues to be the case, so, well I would say our backlog is building on the consolidated side of our business in North America and Europe.

So, I think in the last couple of years and we talked through our backlog it’s almost all the growth has been in non-consolidated operations, what you sort of see when we probably touched on this a bit more in our Analyst Day here in September, you’ll see, we do have some consolidated new business opportunities that are coming through.

So that’s good because it will help us turn our top-line performance around here. .

Great, thank you so much..

Thanks, Emmanuel. .

Thank you..

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

Hi, thank you. .

Good morning..

Good morning. .

Good morning. Just on Power Solutions, the aftermarket shipment growth was lower in the quarter that we’ve seen for a while.

Just wondered if there was any background you could give on that and if you see that picking off now in the fourth fiscal quarter?.

Yes, so, I sort of take that, I think that, it’s really a function of the market itself, I mean, as you know, it’s a very mature market and with our size, our size in North America and the Western Europe is one where it’s very hard for the growth we have in China at this point to move the needle.

So that’s one of the reasons why that the growth would not be at some of the same rate, particularly you see is around the technology changes. We had a lot finished here. We’ve maintained our customers and the mature markets and we are gaining share in China.

I think if you look at the fourth quarter, we’ve got, we are going to see some growth in the fourth quarter. What we don’t know is, how it will compare to last year, because what we need to make sure is our customers are starting to stock up for the winter to make sure that we are able to – they are able to serve their customers.

So the market itself is one that we were kind of reporting because we are such a big part of the market, we are really reporting the market growth. .

Thanks and then, just my second question is if the free cash flow guidance is still around sort of $1.5 billion for the year, and a quick follow-up would be any color at all you can give on expected sort of Tyco financial impact in the fourth quarter?.

I am sorry, the Tyco financial impact in the month of September?.

Correct.

Maybe you can’t talk until the actual earnings, but if there was any context you could give and then on the free cash flow guide, is that still $1.5 billion?.

Yes, I mean, the $1.5 billion is still our plan. I guess, if you take where we are free cash flow-wise through three quarters that we provided in the appendix we may be short a bit of free cash flow Q4 this year versus Q4 last year and that would really be related to three items.

There is a couple $100 million of additional CapEx in Q4 this year versus Q4 last year.

In addition, there was a dividend that we received in the third quarter of this year from a Chinese joint venture partner in the Auto business that last year was received in the fourth quarter and then there is probably about $50 million to $100 million more in cash restructuring cost that we are going to have in our fourth fiscal quarter this year.

So that’s – that probably is $300 million to $400 million less than last year’s Q4 number, but with that, we still end up being on or above that $1.5 billion number that we guided to in December. So we still feel pretty comfortable with that.

As far as Tyco’s impact, I really don’t have visibility to that right now and we’ll certainly lay it out for you on the year end call. .

Thank you. .

Thanks, Julian. .

Thank you. Our next question comes from Nigel Coe of Morgan Stanley. Your line is now open sir..

Thanks, good morning..

Good morning..

Good morning, Nigel. .

Hi, so just circling back on the aftermarket, the plus 1%, I am wondering did the cooler weather in both North America and Europe, do you think that has an influence or maybe dampened down the market a little bit?.

Well, it always does, Nigel. I mean, there is two things that influenced the market, one is, we are at - what position our customers are in as it relates to their own inventory and then whatever is weather-related.

So I could say that’s probably the case, but if you look at the overall growth of the aftermarket in both the US and Western Europe, you are really talking about a 1% to 2% growth over a long period of time, that’s – it’s kind of what you can expect. And so it can be a little choppy, but you are really going to be sticking around that 1% to 2%..

Okay, that’s very fair. And then you called out China as an area of strength in Building Efficiency, probably not a huge surprise, but it’s obviously a big debate about durability of that strength. So I am just wondering if you can maybe add some context about what you are seeing in some of the quoting activity and the general health of that market..

So the quoting activity is strong. We are seeing – a year ago, I didn’t want to say that we felt that we were pessimist about the market.

We felt like that was the place to stay there over a period of time that would – it would sort of felt up and I wouldn’t declare a victory today, but I would tell you that we are seeing quoting activity be strong, we are certainly getting an awful lot both on our VRF sales not only in the joint venture, but outside of the joint venture and then we are seeing some fairly significant size orders in the core of our large tonnage business.

We are also making investments in tier-3 and tier-4 cities where we are getting – we are gaining share and moving into markets that we have previously served us well.

So I think the market seem, how durable it is, but it seems less choppy than it was and I think our folks feel more optimistic each and every quarter, we’ve had a couple of quarters here where we could feel like things are getting stronger. .

Great and then a quick one for Brian. On Slide 18, you call out pension OPEB mark-to-market..

Yes..

I don’t know if I missed the comments in the prepared remarks, but what does that relate to?.

What is it referring or what do you think? Are you asking….

No, no, it’s a bullet point, so I am just wondering if anything to say about that..

Well, we have adopted mark-to-mark accounting.

So, in the fourth quarter of each year we will have either a charge or a benefit to record based upon investment experience, actual investment experience versus expected in our assumptions and then also there is a movement in interest rates that gets taken into consideration in the valuation of the obligation at each year end.

So, as it relates to that adjustment, we are working through the magnitude of that right now, but with the rates being down, I think we are assuming there is going to be a mark-to-market charge. We don’t have that framed yet as to size..

Okay, on the low discount rate, it doesn’t cause any cash confusions next year?.

It does not..

Great, thank you very much..

Thanks, Nigel. I’d like to turn it back over to Alex for some closing comments..

So, I just want to once again thank our employees for everything that have been accomplished. Brian touched on it. It’s absolutely amazing to see what’s been accomplished.

Probably the biggest accomplishment of this particular quarter, for me is to be able to see the Adient spin and we really are running as two separate companies inside Johnson Controls today and we are going to be well positioned and feel really comfortable that we are going to be in a place where in October of 31st that we are going to be confident that we will be able to turn this thing over officially.

And then as it relates to the quarter coming up the one that we are in, obviously we’ve got the anticipated merger with Tyco and the activities going on with Tyco and George Oliver and his team, I can’t say anything, but good things about what I’ve seen, the people at Tyco and the opportunity in front of us.

So I think that, I feel great about what we’ve been able to accomplish and I feel even better about the future. So I appreciate the questions and I am sure there might be some follow-ups. Thank you, operator. .

Thank you. That concludes today's conference. Thank you all for your participation. You may now disconnect at this time..