Antonella Franzen - Johnson Controls International Plc Alex A. Molinaroli - Johnson Controls International Plc George R. Oliver - Johnson Controls International Plc Brian J. Stief - Johnson Controls International Plc.

Deane Dray - RBC Capital Markets LLC Jeffrey Todd Sprague - Vertical Research Partners LLC Gautam Khanna - Cowen & Co. LLC Steven Eric Winoker - Sanford C. Bernstein & Co. LLC Julian Mitchell - Credit Suisse Securities (USA) LLC (Broker) Joshua Pokrzywinski - The Buckingham Research Group, Inc. Evelyn Chow - Goldman Sachs & Co.

Shannon O'Callaghan - UBS Securities LLC Robert Barry - Susquehanna Financial Group LLLP.

Welcome to Johnson Controls' Fourth Quarter 2016 Earnings Call. Your lines have been placed on listen-only, until the question-and-answer session. This conference is being recorded, if you have any objections, please disconnect at this time. I will turn the call over to Antonella Franzen, Vice President of Investor Relations..

Good morning and thank you for joining our conference call to discuss Johnson Controls' fourth quarter fiscal 2016 results. The press release and all related tables issued earlier this morning, as well as the conference call slide presentation can be found on the Investor Relations portion of our website at johnsoncontrols.com.

With me today are Johnson Controls' Chairman and Chief Executive Officer, Alex Molinaroli; President and Chief Operating Officer, George Oliver; and our Executive Vice President and Chief Financial Officer, Brian Stief.

Before we begin, I would like to remind you that during the course of today's call, we will be providing certain forward-looking information. We ask that you view today's press release and read through the forward-looking cautionary informational statements that we've included there.

In addition, we will use certain non-GAAP measures in our discussion, and we ask that you read through the sections of our press release that address the use of these items. In discussing our segment operations during the call references to adjusted EBIT margins, exclude transaction, integration, and separation costs, as well as other special items.

This metric is a non-GAAP measure and is reconciled in the schedules attached to our press release. In addition to our earnings release issued this morning, we filed an 8-K, which contains quarterly pro forma fiscal 2016 financials for Johnson Controls Plc.

The pro forma financials represent the combination of Johnson Controls, excluding Adient and Tyco, including conforming accounting adjustments and recurring purchase accounting, to provide you a comparable basis for our reporting in fiscal 2017. The purpose of this call is to discuss the quarterly results for the fourth quarter.

If you have any questions regarding the pro formas, please contact me after the call. Now, let me quickly recap this quarter's reported results.

On a GAAP basis, which includes one month of Tyco, sales of $10.2 billion in the quarter, increased 17% year-over-year on a reported basis, driven primarily by the contribution from the Hitachi joint venture as well as Tyco.

Earnings per share from continuing operations attributable to Johnson Controls' ordinary shareholders was a loss of $1.61 and included net charges of $2.82 related to special items.

These special items were primarily composed of non-cash mark-to-market pension/post-retirement and settlement losses, transaction, integration and separation costs, restructuring charges and tax expense related to the Adient spin-off.

Adjusting for special items and excluding the Tyco results, non-GAAP adjusted diluted earnings per share from continuing operations was $1.21 per share, compared to $1.04 in the prior-year quarter.

In order to remove the complexity associated with the closure of the merger with Tyco, the results discussed on today's call reflect the underlying non-GAAP operating results of legacy Johnson Controls. Now, let me turn the call over to Alex..

underlying strength in Asia, real progress in China, when we started the year we weren't sure, but as the year has gone on, China has gotten stronger and stronger. We've introduced some exciting new products in our HVAC product range around small tonnage chillers for the Asian market, and really seeing good traction there.

Another thing to really happy about is our products in North America. In our UPG business, we are actually gaining share, both in residential and light commercial, and seeing strong growth both in residential and light commercial mostly because of new product introductions there and the investments we've made over the past couple of years.

Power Solutions has benefited from strong growth across all of our regions. Start-Stop technology has grown 30% globally, that's held up over the year, and as you know, we're adding more capacity. This year we shipped over 152 million batteries, which is an increase of 4% from a unit perspective.

Lastly, an added confidence as we move into 2017, orders grew 6% in the fourth quarter, and it's a fourth consecutive growth – fourth consecutive quarter of mid-single-digit growth in orders secured. And we continue to see strength in our orders in the institutional vertical markets, and that is on a tough comparison.

We've seen growth on a year-over-year perspective here for the last couple years. Turn to slide eight. I just want to remind you this excludes any results from Tyco. Revenues in the quarter increased by 7% to $9.4 billion. If you take-out FX and M&A, the overall revenue was level, and Brian will give you more detail business-by-business.

Profitability, we continue to show improvement year-over-year with all of our – across each and every one of our businesses with the segment income adjusted up 16%. Our adjusted margins expanded 90 basis points overall for the quarter, EPS up 16% to $1.21.

And I couldn't – I think as Brian goes through the numbers, I think you'll see that we had strength in almost all of our regions and in each of our businesses, so great performance. With this, I'm going to turn it over to George, and he will give you an update on how we're doing with integration..

Buildings and Power. The Buildings platform represents a combination of the legacy Building Efficiency businesses within Johnson Controls and the legacy Tyco businesses.

Together, these businesses will generate roughly $23 billion in annual sales and consists of several well-known and trusted brands across complex HVAC, building controls and fire and security systems. We are well-positioned in the building, with one of the broadest portfolios of products, integrated solutions, and service offerings in the market.

We are also uniquely positioned with our customers and channel partners with a large installed base and significant scale in the direct channel. Going forward as one company, we will be able to leverage that global scale to expand our installed base as well as our market reach.

And as the technology convergence in the building evolves, we'll be prepared to lead the way. The Power platform includes a portfolio of leading battery technologies across the product technology continuum, with number-one positions in conventional lead acid and AGM Start-Stop batteries globally.

Our Power Solutions business has a large and resilient aftermarket business with consistent performance and growth throughout the cycle. I look forward to providing you more details on our strategic growth plans across the portfolio on December 5 at the Analyst Day.

Let me now turn it over to Brian to walk through the financial details of the quarter..

Their sales were down 5%, the higher volumes in Asia were offset by lower volumes in North America and Europe. As far as China, we did see the 100% sales numbers for our non-consolidated JVs, up 26% in the quarter to $2.9 billion and if you adjust for foreign-exchange that was actually 31% compared to industry production of 21%.

So the JVs continue to perform exceptionally well. For the quarter, Automotive segment EBIT of $281 million, up 13% year-over-year, and overall Auto margins were 7.1%, up 110 basis points for the quarter. So, let's move to the financial highlights on slide 15.

Overall fourth-quarter revenues were up 7% to $9.4 billion, that was primarily driven by the Hitachi JV, offset by some headwinds for FX. If you look at gross margin for the quarter, it was up 90 basis points to 20.5%, and as Alex mentioned, we continue to see the benefits of the Johnson Controls operating system efforts on a global basis.

SG&A was up 13% from last year. If you remove the impact of Hitachi joint ventures, the SG&A is actually down 4% year-over-year, and I think this is really reflective of the continued focus that we have on right-sizing our cost structure in connection with the Adient spin-off. Equity income of $150 million was up 43%.

That was due primarily to the Interiors joint venture, which added about $8 million year-over-year, and the Hitachi JV with $30 million. So overall, a great fourth-quarter with double-digit EBIT growth at 16%, and segment margins improving to 11.6%, which is a 90 basis point improvement.

Turning to slide 16, fourth-quarter net financing charges of $77 million were slightly higher than last year, due primarily to the portion of the Adient debt proceeds that we drew on in the quarter. Tax rate remained at 17%, and the non-controlling interest was up $40 million, due primarily to the Hitachi joint venture entities.

So as Alex mentioned, diluted earnings per share of $1.21 was up 16%, and I too give a lot of credit to our management teams globally to continue to focus on our external financial commitments that we've made in a period when it would be pretty easy to point to the transformational activities and other initiatives that we've got in our businesses being a distraction.

So, well done to our global teams. On slide 17, balance sheet and cash flow at quarter-end. Our net debt-to-cap ratio was 39.4%, which is right in-line with expectations. We do have kind of a grossed up balance sheet at the end of this fiscal year, primarily related to the $2.2 billion of debt we assumed in connection with the Tyco merger.

In addition, there was the $4 billion of newly issued debt in connection with the merger, the cash of which went to the JCI shareholders.

And this balance sheet that you have at September 30, includes $3.5 billion of debt related to Adient, and there's $2 billion of cash in escrow, $1.5 billion which will be retained by JCI, and $0.5 billion has gone to Adient as of October 31.

Our cash flow in the quarter was $900 million, which exceeded our expectations, and for the year adjusted free cash flow was $1.7 billion versus a plan of $1.5 billion. So I was pleased with the progress we made there in fiscal 2016. And CapEx was pretty much in-line with expectations.

Just a waterfall chart on slide 18, to kind of show you the pro forma net debt; you can see we started at the $16.4 billion and the $3.5 billion of debt that went with the Adient spin on October 31. We have net cash of $700 million at the end of the year, and then we will have $1.5 billion of the $2 billion in escrow come to us.

So our true pro forma net debt position as we move forward is $10.7 billion, which is right in-line with where we expected after the transformational activities. Before we open it up for questions, I'd just like to take a couple minutes here on slide 19 and talk about items of interest as we move into fiscal 2017.

First of all, as we've talked about throughout the quarters this year, even though the Adient spin-off has already occurred, from an accounting standpoint we can't report that as a discontinued operation until the date of the spin.

So the first time we'll report Adient as a discontinued operation will be in Q1 of fiscal 2017, and all prior periods will be restated. Consistent with George's comments regarding our two strategic platforms, we do plan on changing our reportable segments, probably in the later half of 2017.

So within the Buildings platform, there will be more granularity that we provide as we move forward into 2017, and we'll talk about that a bit more at our Analyst Day on December 5.

We're also going to report corporate as a stand-alone segment and we think that's going to provide better transparency to our underlying business unit margins, and the overall level of corporate costs. We will also finalize the Tyco purchase accounting.

As of September 30, 2016, we've done a preliminary allocation based upon some preliminary work done by our outside valuation firm. There will be some true ups to that as we move through the first half of fiscal 2017. We'll continue to have some restructuring, and impairment and integration costs as well as our Q4 pension mark-to-market in 2017.

But I think those will be communicated as far as range and expected costs, again on December 5. As Antonella mentioned, we did file a Form 8-K this morning, which shows the fiscal 2016 quarterly and full-year EPS numbers on a pro forma basis. The full-year is $2.31 and that includes about $0.31 of annual consolidated amortization expense.

So on slide 20, to wrap up here, please join us on December 5 at the Mandarin Oriental Hotel in New York for our Analyst day, and at that meeting we will present our Q1 and full fiscal 2017 guidance. And with that, Antonella, we can turn it over for questions..

Thanks, Brian.

Operator, could you please provide the instructions for asking questions?.

Thank you. Our first question is from the line of Deane Dray from RBC Capital Markets. Your line is now open..

Thank you. Good morning, everyone, and congratulations on getting to the finish line and then starting your next marathon as well..

Thanks..

Thank you.

The slides were real helpful as were the 8-K just to kind of sort us through the changes.

And maybe just for the legacy Tyco analysts like myself, George, can give us a perspective on the quarter consistent with the metrics that we are used to seeing on organic revenue growth orders and so forth?.

Sure, Deane, let me just give you a high-level summary. Certainly, as the year played out we saw a continued softness in the high-hazard heavy industrial end markets, and that had a fairly significant impact on our product businesses as they played out for the year.

That does impact about 35% of our revenues in that segment, and certainly these are high-margin businesses. Overall though, the orders for Tyco were up low single-digits so we continue to expand orders. The backlog year-on-year is up 4%, which does position us well here to get out to a good start in 2017..

And then, Alex, this might be a good question for the Analyst Day, but your comment that the transformation is complete, certainly, JCI is – has arrived as a multi-industry company, but the idea is portfolio optimization never ends.

And where do you think – at the margin do you expect portfolio moves over the next year or so?.

Yeah, so that's a good question. So I'm not sure if I had an adjective in there or not. At the margin, we're going to be looking at our portfolio. That's not going to change. But I think that the comment that I made was the major transformation to get us to a platform that we can truly call ourselves a multi-industrial is complete.

I mean, and I think that probably means more to the legacy Johnson Controls people that had followed us, because we've gone through this transformation over the last three years, and if you've been a spectator, it's been quite a transformation. I think where we are as we're in a position we can truly call ourselves a multi-industrial now.

Now we have to – that just means – I think you just said it a minute ago that it's the new marathon begins. And portfolio optimization is not going to be something that's going to be lost on us. We're looking at our – actively looking at our portfolio both in the legacy Johnson Controls and legacy Tyco businesses, and that will continue.

And we'll talk a lot about that, or at least we'll talk some about it in December, as it relates to not only capital allocation, but strategically how we want to position ourselves. So more to come on that. But if I left you to believe that we are done, that's not correct.

I think I want to make sure that you understand, everyone understands, particularly our employees, that we've got ourselves now positioned where we need us to be as a true multi-industrial. The Automotive business is set-up to be successful, and I think now we have a platform for us to optimize....

Great to hear. Yeah, that's – I appreciate that. Thank you..

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

Thank you. Good morning, everyone..

Good morning..

Hey, Jeff..

Just some questions really kind of on the numbers so we're just kind of level-set here, because I think we're not getting a lot on forward guidance. But first, just on the amortization, maybe it's for Brian. It looks like the deal-related amortization came in on the low side of what was expected.

Can you provide a little bit more color on what drove that, and if that number is likely to move around some more?.

Yeah, I don't think that number is going to move around now significantly. I think we're pretty well grounded with the valuation firm we're working with relative to the amortizable intangible asset base. So I think the number that's out there in the pro formas is a pretty solid number as we look at it going forward.

You're right, it did come down from the preliminary filings that were made. I think it came down roughly $100 million or so; I'm probably rounding there. But that had to do really with the original information that was provided to the outside firm.

As you go through that process of finalizing a valuation, there's tweaks you make to it based upon variations in earnings levels by geography, and what ended up happening as a result of some of those changes we made, some of the amortizable asset base came down as far as intangibles, and it really got reallocated to either indefinite-lived intangibles or to goodwill.

So I think that number where it stands right now, Jeff, is a pretty good number to use. And that number will be with us for a while because the life associated with those amortizable assets is anywhere from 10 years to 15 years, so that's a pretty good number..

Okay. And then – thank you very much for that detail. And then also just on the baseline number of $2.31, I believe stranded costs would be conceptually in that number.

Can you give us a sense of what that is, and how rapidly that could come down, or what we should think about that?.

Yeah, I mean, the stranded costs number that we've kind of been talking about related to the Adient spin-off. It was about $150 million, and I think a little over half of that was taken out in fiscal 2016, so it's already reflected in the results.

The other half will come out during fiscal 2017, and it's really part of the $300 million of productivity that we've talked about that will be recognized over the next three years as part of the JCOS benefits that we're going to realize. So I think that's the way to think about that, Jeff..

Thanks. And if I could just sneak one more bigger-picture in. George, you mentioned kind of just an early traction on cost synergies.

I'm just also wondering early reaction from customers on the sale side, I doubt you have some big marquee order to share with us today, but how is the sales funnel looking? And do you guys see some early traction on that effort?.

Sure, Jeff. As you know, and Alex and I've talked a lot about this. We had an outstanding integration team put together over the last 10 months and they've done some great planning work and now we're into the implementation phase.

Revenue growth is a key component of the merger, and we've had commercial teams across the globe laying out the existing customer bases, how we serve them today, the opportunity that we have to be able to cross-sell and serve them with more of our portfolio. Build services and how we create additional value for those customers that we serve.

And we feel really good about the planning process, and now we're putting in the right incentives so that no matter where our commercial people sit across the globe, they are going to be properly incentivized to be able to bring the new capabilities to their customer base, and to be able to drive growth.

We're going to lay this out in a lot more detail at the Analyst Day in December, but we are certainly feeling very good about this because this, certainly, was a key component of the merger to be able to accelerate the ability to be able to serve customers, being able to capitalize on the full portfolio, being able to converge some of the technology to be able to longer-term change the game, and how we serve buildings.

And I feel really good about the progress we've made..

Hey, Jeff, I'd just add as Alex said, you know we had an opportunity to work on this almost in a lab environment for nine months, so it wasn't real except for the fact that we had a chance to visit with customers.

And what I've seen happen with the integration teams over the last couple of months, it's gone from an idea to a reality, and I've seen a lot of confidence building in our team. As we get an opportunity to meet with the integration team and now moving into the business.

George put together an organization that's going to activate it, he talked about incentives, I know he'll talk about that. But I'm actually really pleased with what I see. One of the things I didn't mention earlier, I'm just going to sneak in, it doesn't have anything to do with this question, but it relates to being able to get synergies.

We've actually seen almost $100 million in revenue – in secured the CBRE relationship, and we've learned a lot. It's not the same, but we've learned a lot in being able to pull-through activities from activities like that. So I think our team is seeing those things too, and that gives them confidence. I think we're going to be pleasantly surprised.

Obviously, we've got to secure it before we revenue it, but I think in December, we'll maybe have a couple of those stories we can share with you..

Yeah. And your questions about customers, I've met with a number of customers in my first 60 days here with the integration, and they're very excited about the combined capabilities and our ability to be able to better serve them on combining the work that we do across our channels..

Thank you very much..

Thank you. And our next question is from the line of Gautam Khanna with Cowen and Company. Your line is now open..

Good morning, guys. Congratulations..

Good morning, Gautam.

Good morning, Gautam..

I have three quick questions.

First, I was wondering, at the Investor Day do you plan to lay out multi-year targets, revenue and EPS like you used to at Tyco?.

Well, I can't speak about Tyco. But we will give you some – we'll give you some ongoing metrics that you can look at that you can hold us accountable to, hold ourselves accountable to, which I think, look, based on what I've seen in the past, very similar to what we've done at Johnson Controls Investor Day.

So you will get something that gives you guidance on each aspect, whether it'd be cost reductions, productivity, top-lines, bottom-line. It will give you some guidance on how we're thinking about capital allocation also..

I think we will probably give pretty solid focus on fiscal 2017, and then we will give medium-term guidance relative to key financial metrics, sales growth, segment EBIT growth et cetera. And that's reasonably consistent with what JCI has done historically as well.

So you'll be able to kind of take it through 2020 based upon the way we're doing things..

Okay. That would be helpful. And the second question was on Power Solutions and the strong growth you experienced in the quarter.

Was there any one-time affect in the quarter? Or is this what we should be anticipating going forward in terms of organic growth based on the mix shifting to AGM and what have you?.

Well, I think the unit growth, I don't really think about it quarter-to-quarter because there are – depending on – a lot of times it depends on pricing and stocking. A quarter can move around a little bit. But I think what you've seen if you look at our average growth across the year, I think that's really consistent.

I think when you look at it quarter-to-quarter, it's a little bit dangerous as each one of our customers is either filling their channel getting ready for the season, or finishing the season and sometimes that doesn't happen the same quarter after quarter.

But if you look on an annual basis I think it's fairly consistent, which is around 5%, and I think that's probably a pretty good number. And the mix is obviously going to help us because it's more and more AGM and of course, a lot of our capacity is moving into China, so it's going to be heavily focused on Asia growth..

All right. Thank you.

And lastly, I was wondering, maybe you gave us this before, but what is the dividend for the go-forward company?.

We didn't get into that. (40:02).

That will be approved by our board at the November meeting, and it's still under review. So we don't have the go-forward dividend for 2017 established yet. We'll be announcing that at the Analyst Day, as well..

All right. Thanks a lot. I'll turn it over..

Okay..

Thank you. And our next question is from the line of Steven Winoker from Bernstein. Your line is now open.

Thanks. Good morning, and congrats on the milestone, everybody..

Thanks, Steve..

Thanks, Steve.

Thank you..

So I just wanted to maybe start with getting a little more granularity, if I could, on the HVAC side, and specifically YORK equipment as opposed to services, resi versus non-resi.

Can you just give us some color for the quarter of what was the organic growth in that business that you saw, resi, non-resi in the Americas maybe?.

Why do you ask? We had a great quarter. I'll put it in units. Our residential unit growth was 23%, which is outstanding. Now we have a lot of new products to come out. We also announced some pricing that's going to be effective the first of November.

So I'd have to say that, I'm sure some of that impacted it, but what we're seeing is an awful lot of growth in both residential and our light commercial growth was in the upper teens also, from unit perspective.

And that's really a benefit from a lot of the product investments we've been making over the last couple years, and then we've also been making some investments in some of our channel structures. So great quarter, gained share. Glad you asked the question.

And the second part of that question was non-resi?.

Non-resi in the unitary was close to 17%.

And applied?.

Around 4%.

Okay.

Specifically, on the applied side for, maybe large absorption chillers, are you seeing large project activity picking up on the bid front?.

We're seeing project activity because that would be in line with our SSNA channel in North America where we're seeing weakness is in the Middle East and Europe, particularly as it relates to when it's starts moving toward the energy-related markets is where we're seeing some weakness. So we're seeing strength in China.

We're seeing steady as she goes in North America, and having, just like, the rest of the market, almost a near collapse when you think about the Middle East because of the energy-related part of the market. And then of course that bleeds into our industrial refrigeration.

So a lot of the gains that we are getting are being offset by industrial refrigeration and some of the toughness in the Middle East market..

That's really helpful and sounds good. Secondly, on CapEx and cash.

Maybe just a little bit of picture or you may defer this to December, but how should we think about in Georgia, also, as you're starting to look across the organization, how that CapEx may pace down over years or how working capital may improve on maybe the combined business? A little color there would be helpful..

Yeah. We ended the year with CapEx right at $1.250 billion which is what we planned for. The current year included in that number. Round numbers was about $300 million or $350 million related to the Automotive business. And if you look at Tyco's historic CapEx, it's in that $300 million to $350 million range, as well.

So I think in the near-term here we don't see a significant reduction in CapEx. I think a number between $1.2 billion and $1.3 billion will probably be steady-state for us for the next two or three years as we ramp up some of the investments that Alex talked about in the Power Solutions business.

That does give us a reinvestment ratio that's probably around 1.5 times or thereabouts. And so we recognize it's probably a bit higher, but I also would tell you that the growth investments we're making have good business case financial metrics associated with them..

All right. Great. We'll leave the rest for December. Thank you..

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

Hi. Thank you. I just wanted to start with the Building Efficiency organic sales growth. You'd called out that the EMEA region was very soft in line with other companies. But if we look at the North America Systems and Service specifically, sort of flattish sales there and I think that did drag down the global organic sales average a little bit.

Did you see any delays in customer conversion of orders into revenues? Or it's just sort of classic kind of lumpiness and we should expect that revenue number in North America Systems and Service to accelerate soon?.

Yeah, I think we had a pretty strong comparable last year in North America, but I do think it's just project flow. There's nothing that you would look inside there and see an aberration. The orders are strong; backlog's up. So I don't expect that that's something to be concerned about.

I think it's probably, as you just said, just the timing of projects themselves. Nothing sticks out as being unusual..

Thanks. And then related to that, you called out the strength in some of the institutional buildings verticals..

Yes..

Remind us, I guess how much of your Building Efficiency segment is institutional?.

Well over half. Probably two-thirds of our Buildings business is institutional related. And just to remind you, when we say that, that would be the government verticals, healthcare, and education..

Thanks. And then secondly would just be on the Power business. Very good incremental margins, 40%, 45% or so. Could you remind us where we are on the cost build-out within China? On and off in the past 18 months, that has been a headwind on your EBIT margin within Power.

Was there any kind of one-time factor driving that down in Q4? Or you think that the margin headwind from China is kind of behind you largely in Power?.

Well, we're going to continue to launch plants. So I think that what you – instead of what I – if you look at China and you separated it, what you'd see because we're adding capacity obviously is – because of launch costs, it's going to be a lower margin than other regions.

But I think the right way to think about it is the plant economics are no different in China than anywhere else. And so we're getting good economics, but we also have the launch costs that are in. And they're going to be there for a while.

But as we continue to add, as our capacity increases, it becomes a much smaller percentage of the overall cost structure. But launch costs in that business are fairly significant. It takes a while to launch those products. Some of the quirkiness of the China market as it relates to the testing required to go-to-market.

And then of course, having a plant that's got open capacity also has some cost. But I would say that the plant economics, which is probably the most important thing, are really no different in China than anywhere else..

I think our EBIT margins of 19% for fiscal 2016 were pretty strong relative to what we expected. But I think if you look at the investments that we're making in Power Solutions in China over the next two years to three years, there will be a bit of drag on margins simply because of the launch costs that Alex referred to.

But we'll actually be providing both 2017 and guidance through 2020 on Power Solutions margins on December 5..

Very helpful. Thank you..

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

Hi. Good morning, guys..

Good morning..

Good morning..

Good morning..

Just a follow-up on couple of the questions on your non-resi businesses, particularly in legacy JCI. Alex, I think there's been a lot of debate around where we're at in the non-resi cycle. Clearly, institutional verticals are a little later positioned than some of the other ones.

But can you just talk about the lead time and the visibility and the – maybe the percentage of revenue that you have booked for 2017, just to give people some comfort about the level of visibility, kind of the long-cycle nature of that business as we stand here today?.

Yeah, so the good news about our business is that it's late cycle and the bad news, it's late cycle. In this particular case it's good news, because as we build our backlog, typically our projects are more complex, larger in late cycle.

So our position is probably – we're probably in a better – it was tougher for us to get to this point, but probably in a better position than we have been because if you look six months, nine months out, our business is fairly predictable just because of the nature of the type of projects that we have.

And so if you look at the flow rates of our projects, on average you're talking 9 months to 12 months. And it's pretty easy for us to see six months to nine months out. And then we look at our forelog, which is our pipeline, we can pretty much look at the next quarter and see what we can expect.

So I think that we feel, if you look at it from a FY 2017 perspective, I think we have pretty good visibility in North America..

Great. And then, just following-up on some of the stranded costs questions. I understand that JCOS productivity has been aimed to bring those down. I think it was $100 million a year that we should expect. Brian talked about $75 million of leftover stranded in the next year that, that comes out.

Does that come out on a run rate basis or does it actually come out in $75 million lower. I'm not trying to put too fine a point on it, but it seems like this has been a source of confusion..

Yeah, I think the $300 million I referred to is $100 million over each of the next three years and we took out a little bit more than half of the $150 million in 2016 and the remaining piece is really part of the productivity $100 million that's embedded in the 2017 plan that we'll present December 5.

So it's part of the productivity piece that's been out there given the fact we knew that we were going to be spinning Adient..

Probably the way to think about it is, because you take out $75 million last year, take out $75 million on stranded costs, whether it's an exit rate or ongoing rate, you probably at a zero-sum game here because you've got last year's costs benefiting this year, and this year's costs benefiting next year.

So I think you can – I know that you – probably a little more detail and we'll give it to you, but I would think it's going to be fairly consistent with what we've seen over the last year..

That's helpful. Thank you..

Thank you. And our next question is from the line of Joe Ritchie from Goldman Sachs. Your line is now open..

Hi. Good morning, guys. This is actually Evelyn Chow on behalf of Joe. Maybe just starting with Power for a minute. Your EBIT was very strong and represents a much higher-level of EBIT dollars than you've historically achieved in 4Q.

Can you just help give us a sense of what were the headwinds and tailwinds you saw on the margin line? Maybe the lower lead prices, potentially as some mix shift from the better aftermarket and start-stop growth. A little color there would be helpful..

Yeah, a lot of time when we give you the numbers – I think when we gave you numbers, we were trying to make sure we take out the effect of lead. Lead is, right now, it's about where it was last year but it's been a round trip that's gone down and it's back up to about where it was a year ago at this time.

So I think that that's probably not much of a change year-on-year if I think of it intuitively. One of the things that is obviously a tailwind, is the more AGM Start-Stop batteries we sell, the better. The second thing that's happened is that, we're seeing some really strong growth in the market in North America, particularly.

I think what the people inside the business call is an echo of five years ago when the OE build started, we're starting to see the aftermarket from that grow and registrations pick up. So we're seeing some strength in North America which is good for us.

We do well when we're able to run at capacity and then Start-Stop in China, and China aftermarket growth has been incredibly strong this year, which is something that we had always planned for, but we're just really pleased to see it happen..

Understood. And then maybe....

Lots of tail – a lot of headwinds, not tailwinds..

Makes sense. And then maybe a similar question on the Building Efficiency side. I think you've called out some investments both this quarter and in prior quarters, too.

I guess I just want to get a sense of what the puts and takes are on the margins and maybe a little bit more context around the year-over-year decline that you saw in the business on the margin line..

So as Brian talked about the specific margins for the quarter, but to give you overall what's happening. First off, we knew that Hitachi was going to be a drag on our overall margins in general because of the lower margin business. However, Hitachi is doing better than we expected, but it's still dilutive.

So that's one of the things that's kind of fighting us on a year-on-year basis.

Brian can give you some more specific color, but the investments that we've been making, two specific investments, some in our product ranges, you know, there's been refrigerant changes, plus, as many of you may know, over the last few years, we've had to catch up on some investments in our UPG business, light commercial and residential.

We're seeing the benefit from those investments now. And then we've made significant investments in just sales head count over the last year. So those are the three buckets of investments. Brian, you might want to give a little bit of color on the margins..

Yeah, I mean, the margins for the year at Building Efficiency were 9.2%, and that's a 10 basis point improvement. But I think what you're referring to is it was pretty choppy quarter-to-quarter. I think in the first quarter for Building Efficiency, we had a 50 basis point improvement. Second quarter, we were down 50 basis points.

Third quarter, we were up 90 basis points, and fourth quarter here that you're referring to is the 80 basis point decline. So it's been choppy. And a lot of that has to do with the timing of when we're making some of these product and sales force investments and also the timing of some new product launches.

And in particular, in the fourth quarter, there was some new product launches that impacted the basis points reduction in the quarter. So I think to step back and look at it, I think you really should look at it on a full-year basis and say we improved 10 basis points versus what we thought going into the year.

We thought our margins were going to be in the 8.1% to 8.3% range, so I think the folks at BE are actually pretty happy with where they ended up margin-wise..

Yeah. And what I would say is we did that and we didn't jeopardize any of our investments. We made the investments we needed to so to not only help us with the growth that we're seeing now, but allow us to position ourselves well for the future.

And so I think being able to get those margins and maintain our investments and our product investments, I feel good about..

Thanks, guys. I'll get back in queue..

Thank you. And our next question is from the line of Shannon O'Callaghan from UBS. Your line is now open..

Good morning..

Good morning..

Good morning..

In terms of cash flow, I mean, you're going to have the elevated CapEx continuing in Power. It seems like a lot of the opportunity cash conversion-wise has to come out of Building Efficiency.

Can you talk about where that stands, and as you've looked at the initial integration plans, et cetera, just frame a little bit the opportunity you see for that piece of the business cash-wise?.

So, I think if you look at free cash flow adjusted for next year, and the reason I say adjusted is we've got some really choppy tax impacts that will hit us from a free cash flow standpoint in fiscal 2017.

But as I step back and look at Building Efficiency, I think the opportunities for improvement are probably in the – geographically in certain pockets in the accounts receivable area.

I do think there might be some opportunities in Power Solutions in the inventory area, and I think on a combined basis, as we look at Tyco and JCI together and kind of put together the JCOS operating system embedded across the organization, I think there's going to be some working capital opportunities there as well for legacy JCO (57:48) and Tyco combined.

So I mean, I guess when we look at fiscal 2017, it's going to be choppy, but on an adjusted basis, I think we're going to probably be in 75% to 85%..

Okay. Thanks.

And then in terms of the treatment of restructuring and special charges, I mean, there's obviously some things to be called out, but is there also sort of a pay-as-you-go restructuring or repositioning element that you are going to include? Could you just maybe clarify what's going to be in and what's going to be out of the numbers?.

I think the adjustments that we've historically made have been the tax payments, and we've had separation costs included in the adjustments, and then any other significant one-time charges. I mean, we're going to put only items that are kind of viewed by us to be material on a quarterly basis in that adjusted free cash flow number..

Yeah. And just to clarify on the historical Tyco side, because Shannon, I think you're referring to how we typically grouped restructuring and the repositioning all into one line item.

So what's reflected in the pro formas is the restructuring dollars or charges are out, but those repositioning charges that Tyco took in 2016 are part of the $2.31 pro forma..

Okay. Great. Thanks..

Operator, I think we have time for maybe one more quick question..

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

Hey, guys. Good morning. Thanks for fitting me in..

Good morning, Rob..

Just wanted to actually follow-up on a couple of things. One is on the government vertical within North American non-resi, I know that last year in the quarter that was a pretty significant pressure.

Did that snap back? Or what are you seeing in government?.

Still under pressure. So if you looked across the institutional, that would be the one place, healthcare is reasonably flattish, and the government business is down, continue still down under pressure. Everything else is really strong, but we're still seeing pressure there. I don't think that is anything that's unusual to us.

I think what we're seeing right now is – maybe it has to do with the environment we are in, hopefully things will free up here after today..

Got you. And then you talked about strength in Hitachi. I think half of that is residential air-conditioning in Japan.

Is that what's doing well? Or what's growing there so well?.

Yeah, I wouldn't say it's across the board, but it's in a lot of places. The Residential is doing much better than we expected. But what we are seeing is it's really quite impressive. Maybe George can even comment.

He had a chance to see some of the integration activities, but on the cost side across the board we're seeing an awful lot of benefit that we've been able to bring through our integration and synergy activities. There's been some pricing actions and some channel restructuring as it relates to Residential business.

There's been some new product introductions. The China business with our partner at Hisense is doing really well, and Taiwan is doing fantastic. So I would say it's not everywhere, but it's more places than not we are seeing improvement, both on the cost and on the sales side. There is still opportunity, but it's been pretty impressive..

Yeah, just a quick comment on that. I had the chance to join the team at the one-year anniversary and was very impressed with the work that's been done from an integration standpoint, deploying the JCOS across all of their business processes.

As you talked about, how do we now leverage that platform in many other markets that are very attractive markets that we don't ultimately served today. And the team has got plans, detailed plans and how we take that product and truly capitalize on the growth opportunity that we see in any other markets beyond Japan.

So I would tell you my first view there and I was very impressed with the team, very impressed with the performance in the first year. And truly, it's going to be a strategic platform for the future for the company..

Yeah. Been a great partner too. (1:02:06).

Got you.

I think originally that was targeted as like a 4% to 5% Op margin, and it sounds like it's tracking well ahead of that?.

Well ahead of that. It was a great investment for us, it was even better investment for Hitachi..

Great. Thank you..

Operator, that concludes our call..

Thank you. That concludes today's conference call. Thank you all for joining and you may now all disconnect..