Johnson Controls International plc (JCI) Q2 2013 Earnings Report, Transcript and Summary

Welcome, and thank you for standing by. All participants are in a listen-only mode until the question-and-answer session of today’s conference call. (Operator Instructions) Today’s conference is being recorded. If you have any objections, you may disconnect at this point. Now I will turn the meeting over to your host Mr. Glen Ponczak. Thank you. Sir, you may proceed.

Thank you, Mica. Good morning, everybody, and thanks for joining us. Before we start, I'd like to remind you about our forward-looking statements. Johnson Controls will be making statements in this presentation that are forward-looking and therefore are subject to risks and uncertainties. All statements in this presentation other than statements of historical fact are statements that are or could be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In this presentation, statements regarding future financial position, sales, costs, earnings, cash flows, other measures of results of operations, capital expenditures or debt levels and plans, objectives, outlook, target, guidance and goals are forward-looking statements. Words such as may, will, expect, intend, estimate, anticipate, believe, should, forecast, project or plan, or terms of similar meaning are also intended to identify forward-looking statements. Johnson Controls cautions that these statements are subject to numerous important risks, uncertainties, assumptions and other factors some of which are beyond the Company’s control that could cause Johnson Controls’ actual results to differ materially from those expressed or implied by such forward-looking statements. These factors include the strength of the U.S. or other economies, automotive vehicle production levels, mix and schedules, energy and commodity prices, availability of raw materials and component products, currency exchange rates and cancellation of or changes to commercial contracts, as well as other factors discussed in Item 1A of Part 1 of Johnson Controls’ most recent Annual Report on Form 10-K for the year ended September 30, 2012, and Johnson Controls' subsequent quarterly reports on Form 10-Q. Shareholders, potential investors and others should consider this factors in evaluating the forward-looking statements and should not place undue reliance on such statements. The forward-looking statements included in this document are only made as of the date of this presentation and Johnson Controls assumes no obligation and disclaims any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this document. I’d like to talk a little about our agenda that we have this morning before we get started. Our Chairman and CEO, Steve Roell, will give us an overview of the quarter and provide some market highlights. Afterwards Vice Chairman, Alex Molinaroli will talk about results for Power Solutions and Building Efficiency. Then Executive Vice President and Chief Financial Officer, Bruce McDonald, will talk about our mode of experience and then provide a more detailed review of our financial results. And then we will do questions-and-answers until the top of the hour. And with that, I will turn it over to Steve.

Okay. Thank you, Glen. Well, good morning and thank you for joining us. As Glen mentioned, I’m going to make some general comments about the business environment and our outlook and then Alex and Bruce will provide highlights on each of the business segments. Entering the quarter we had modest expectations for our growth due to the depressed economic conditions in Europe and the softness in the non-residential building market. And while growth was hard to define, I think there are some signs we can point you today that conditions are improving in our markets. Looking first at the automotive industry, North American industry production was up 1% on the strength of passenger cars, which were up 4% and they were offset by a slight decline in light trucks. Industry production was up 10% in China, consistent with our view that the market will have high single-digit growth at this fiscal year. As many of you know that follow the European automotive industry, it was a difficult quarter were production declined 8%. In terms of the near-term outlook for the auto industry, in Europe we expect the upcoming quarter to be down about 3% versus the 8% decline we encountered in this past quarter, comparisons continue to improve in the second half of the year in Europe, in fact by the fourth calendar quarter the current projections are that the build will be slightly higher than the prior-year. North American production will rebound with growth of 4.4% and 6.8% respectively in the upcoming third and fourth fiscal quarters. Then finally, China production will be up 9% in the next six month period consistent with the comment I made earlier about the prospects for the full fiscal year. Non-residential markets will improve over time. Some of you watched the recent AIA…

Okay. Thanks Steve, good morning. Power Solutions sales were up 10%, and if you adjust for FX and lead, sales were up 7% in the quarter. OE volumes were up 7%, and the aftermarket volumes globally were up 1%. The overall quarterly shipments were up 2% in the Americas, up 14% in Asia and it was offset -- those gains were offset by a weaker Europe. The results were favorably impacted by some strong operational performance and the ongoing benefits associated with our vertical integration or in-house lead recycling. We’ve improved our pricing, and we also had a one-time favorable legal settlement in the quarter for $24 million. Just to make sure that you note that last year, we had a one-time gain of 9 million in the same quarter related to our joint venture transactions. Segment income was up to $221 million. That's 11% from $200 million in 2012. And if you normalize the results for the legal settlement and the prior year gain, the segment income was up 3%. Lead core prices remain elevated, but they're in line with what we expect. In the third quarter, we expect to see a favorable year-on-year comparison, because if you recall last year just about when we started seeing the high lead prices. Let's switch to building efficiency, which posted slightly higher earnings. And that's really despite some tough markets both in the institutional and construction markets which impacted the top line. For the quarter, sales were 3.5 billion. It's down 3%, down 2% if you adjust for FX. We saw revenue growth in North America Systems, it's up 2% but it was more than offset by weakness in Europe, Asia and our North American service business. Overall, at the end of the quarter, our unexecuted backlog was 4.9 billion. That's down 6% from a year ago, higher demand in Asia offset by our energy solutions, Europe and the Middle East. Order intake in the quarter was down 10%. Let me give you a rundown geographically; 12% in the Middle East, down 12% in Asia, down 10% in North America, down 13% in Europe and that's with one region Latin America up 5%. So overall it was a tough quarter for orders. I'll come back to that in just a minute. The segment income of 139% was 1% higher than 2012. That's 3% if you exclude the FX. The good news here is that year-over-year margins continue to increase by 10 basis points to 4%. Margin expansion in service and GWS were unfortunately offset by the market pressures that we're seeing at systems Asia and in Europe. Some of the positive signs we are seeing is our pipeline is increasing. Steve mentioned that in his comments earlier, and so we do see that although the backlog is under pressure, we do see orders picking up in the second -- our third and fourth quarter. With that, I'll turn it over to Bruce.

Okay. Thanks Alex. Start on page 9 here in terms of auto experience, for the quarter or generally speaking our results were in line with our expectations. As some of the analysts' notes out there have reflected volumes on a global basis came in a little bit stronger than we had thought coming into the quarter, so we're pleased to see this sort of outlook in Europe stabilized and we feel pretty good about where we're headed here in Q3 and our Q4 to start to see some sequential improvements. On the upside that we got from extra volume however was offset by a payment that we had to make to exit a distressed supplier which I'll comment on later. So just looking at revenues, we were down about 3%. That's the same with or without exchange. In terms of seating, we were down %, interiors down 3%, electronics business our sales were down 13%. That business was much more heavily exposed to Europe and in particular to some of the French OEs, so that business was overexposed to a weaker part of the market. Look at geographic, sales versus the production levels, North America were up 7% versus the 1% increase in the market, so good over performance there. In terms of Europe, we were down 11% versus the market being down 8%. If you sort of peel that back a little bit of underperformance that we had, what you would see in there is it's really attributable to our interiors and electronics business. Electronics being more heavily exposed to the French customers and also our exposure to Volvo, which had a weak revenue quarter for us. In terms of China, we continue to see very strong momentum here. Look at our sales in the quarter and I'm talking…

Great. Thanks, Bruce. Mica, we're ready to take the questions here. I've just been told that there's a lot of folks in the queue here wanting to ask questions, so would like to ask you to limit your questions to one and a follow-up at most. And I think everybody who's calling are professional financial analysts and you're good with numbers, so the number to think of is one. With that Mica, we'll take some questions.

Thank you. (Operator Instructions). Our first question is from Ravi Shanker of Morgan Stanley. Your line is open.

Thanks. Good morning. I wouldn't want to incur Glen's wrath so I'll keep it strictly one. Steve or Alex, can you elaborate a little more on the decision to divest or potentially explore the divestiture of automotive electronics? I thought you actually sounded pretty enthusiastic about the opportunities in that business at your Analyst Day in December, so what changed there and also what does that mean for some of the other businesses that you have that you may potentially consider non-core? Thanks.

Sure. I think we'll leave our discussions specifically, Ravi, to electronics. I think we had a meeting in the September timeframe where we talked about looking at our – we just completed our strategic reviews of our businesses with the Board and we had concluded that two things. One is if you recall even at the management meeting or the analyst meeting we had in December, I think it was pretty well recognized that that we're a niche player in the industry and that in order to participate in a bigger way and sustain that business we were going to have to make investments in navigation and other types of technologies. And we just had to make a decision whether or not that was the business we wanted to allocate capital to. And we concluded at that point in time that there were other opportunities for us in other businesses that we felt were better long-term bets where we had leadership positions. And so really the decision was to pursue that divestiture for purposes of being able to use that capital for other business growth opportunities and really a decision that we would not invest in electronics and maintain a niche position. It's really that straightforward, Ravi.

Great. Thank you.

Thank you. Next question is from Brian Johnson of Barclays. Your line is open.

Good morning. So sort of continuing on that theme, are there other areas of automotive in particular the interiors business, it looks the market reacted very positively when there was a mistaken leak that, that would be for sale or would be upper and then sort of retreated when it looked like electronics. I understand you’re thinking electronics, but interiors doesn’t seem like particularly a business that has a lot of scale advantages, it doesn’t seem to have any interesting technologies doesn’t tie to your broader themes of energy efficiency in you other business units. So, do you have any kind of thinking on that?

Yeah, let – Alex and I’ll talk. Alex, go ahead.

So I think if I remember that day that the market responded interiors retreated and then it responded positively to electronics if I recall, and I think that it's a fair observation. The best thing that we can say at this point is what we talked about electronics is that we’re looking at everything, but the decision for electronics I think the way Steve described that is we can’t afford to invest in everything to be a winner in everything and electronics decision was made based off of that. So, I don’t think we really want to comment on anything we’re going to do in the future, but just to let you know that as we’ve talked about it as we recognized that we have strong positions and lots of opportunity and we need to make sure we invest in those opportunities.

And in terms of the proceeds, would you see that going into organic acquisitions or dividends or share repurchases?

From my standpoint, I guess we’ve targeted some potential acquisitions but they would be – they had still a long ways to be determined yet, okay. So initially we probably would use it to pay down some of our debt, but we probably we then look to augment some of the investments we’re going to make in other businesses, okay. If I could just go back to the interiors comment, two things happened, Brian to be honest with you. One was the fact that the information that was out there was really inaccurate regarding the amount of proceeds and the market reaction it just was real, I wouldn’t put a lot of credence on how the market reacted based on proceeds people felt we can get from that business or anything else. But that business has a lot of opportunity for us too in terms of our – we have seen our ability to engage with customers and what we can do in total interiors with them. Some of our interior designs, there’s some real value in that business in terms of customer relation. So, I wouldn’t speculate that, that’s on our list right now.

Okay. Thanks.

Thank you. Next question is from Chris Ceraso of Credit Suisse. Your line is open.

Thanks, good morning. Bruce, I was wondering if you could take us through maybe a somewhat more detailed bridge for the automotive business where revenues were down $180 million, but EBIT was down $130 million, you highlighted the supplier payment which was $20 million and a couple of other items, a normal decremental margin on that lost revenue was maybe $40 million or $50 million worth. So how do you plug the rest of the gap? Can you give us some big buckets, how much is South America? How much is metals? How much is launch cost et cetera, so we can think about how and when those items diminish and profitability starts to get better?

Yeah, well there’s a lot in there, but I guess like I said -- I mean just to sort of quantify, about $22 million was distressed supplier, one the launch and engineering is a $17 million. So, let’s say there’s nearly $40 of the reduction. And then I think if you were to look at our metals business in the quarter we still, it's still a -- not much of an improvement. In fact I think if you look at the overall level of profitability there it would be down slightly. Like you said, if you look at our profitability in electronics negatively impacted by some of the investments that we're making in infotainment. But I think maybe just to sort of help you out, volume was probably worked maybe 35 million, pricing on the year-over-year basis worked maybe 30 million and I think the other thing that I touched on would sort of bridge that.

Okay.

I think, Chris, there's a lot of moving pieces here so I think maybe what we can do is set up a time and Glen and I can get on the phone. Maybe we can spend a little bit more time and maybe you can probably ask me five more follow-ups on that.

Yeah, probably. Okay, but I'll let that go.

Okay. Thanks, Chris.

Thanks.

Thank you. Next question is from Rod Lache, Deutsche Bank. Your line is open.

Good morning, everyone. In that automotive experience business, could you talk a little bit about what we should see as we moved into the June quarter? Was there around $60 million maybe of non-qualifying restructuring in the fiscal second quarter that goes away, was that distressed supplier issue a one-timer in that engineering thing unusual? I assume you're going to get a disproportionate amount of that 200 million of cost savings in the back half?

Yeah, that's right, Rod. I think I'm not sure I'll answer them all, in terms of the distressed supplier payment, that was a one-time event. So that is not – I mean not to say we don't have charges, but if you – I would say on average that number maybe 4 million or 5 million a quarter, so it's exceptionally high with one large amount in the quarter. So that's non-recurring. The restructuring item that you referred to, like we said on the [call] [ph], generally speaking it's right in line with what we were expecting for that. That's very consistent with what I think we told you in Q1. The benefits are going to start to flow through like you said, a couple of 100 million is in the annualized number, so it gets some good leverage in the back half of the year. Just to be a little more specific if you look at the European profitability that we're looking for, in Q1 it was 105 million loss here. In the second quarter, we were at 74 million. That number we're anticipating for the third quarter here should be in that 30 million-ish range it'd be sort of where we see that and get into a breakeven in the fourth quarter.

The only thing I can add, Bruce, is that engineering will continue higher in the third quarter and then by the time we get to the fourth, it looks pretty cut flat to the prior year, okay.

Okay, thank you. And just my second question is a clarification on power solutions. Did you say that the volume was up 7% but the earnings were up 3% ex the settlement? I'm not sure if I misheard that?

That sounds right.

Okay. And why would you not be getting the operating leverage on the additional volume.

I think that where the volumes are increasing as in Asia and our fixed cost structure is higher there as we ramp up.

Okay. But shouldn't there be some savings from the smelter and some of the other actions that you were taking to mitigate that.

Yeah. So we're starting to see that. The smelter will ramp up through the summer, so we should start seeing more and more favorability, but that's sort of where the offsets were.

I think Rod what you'll see is in Q3, you'll see the margins pop up here in power.

Particularly with pricing and everything else that takes place, so we're expecting power to be a big contributor to our third and fourth quarter.

Okay. All right, thank you.

Thanks, Rod.

Thank you. Our next question is from John Murphy, Bank of America Merrill Lynch. Your line is open.

Good morning, guys. To keep it one question, I just wanted to focus on Europe and just get your thoughts as we look at that – through that improvement sequentially that you're looking at in your losses to breakeven by the end of the year, I'm just curious as we think about that, how much of that is coming from stabilization and a potential recovery in volumes and how much of it is your internal actions? I'm just trying to really gauge what's micro versus macro in the improvement? And really the crux of the question is there is such risk to the downside in European volumes and maybe another 10%, I just kind of want to understand the sensitivity there, to that potential risk?

Yeah. Well, I would say by far the majority of what we're projecting for the third and fourth quarter comes from our internal actions and not from volumes. If I look at the current projections that we have for our Q3, we’re still expecting as I mentioned, Europe to be down about 3% year-over-year. Now you can take that range going to be down 10, but far John the majority of our improvement year-over-year is coming from the actions I described to you. Our commercial negotiations which, if you want to translate that, that’s getting paid for our engineering changes, it's our purchasing initiatives and moving our tools use, it’s a function of our launch cost and our efficiency in our manufacturing operations and its lower SG&A as we get into that fourth quarter, particularly from engineering…

And the restructuring.

... and the restructuring benefit, yeah.

And you’ve identified all the actions that you think you need to take even if volume were weaker, would there be incremental actions that you could take in response to potentially weaker volumes?

There’s some, but I wouldn’t want to say I could cover a full 10%. If its down 10%, John I would have – if we got some exposure we have to run hard at, okay?

Yeah, absolutely. But would there be more opportunities to maybe structurally shift the business further East or take other restructuring actions it might set you up better for the long-term?

Not in a quarter’s timeframe. Longer term, but not in a quarter, it cant move in that quick, okay?

Okay.

Okay.

All right. Thank you. Thanks a lot.

I think one thing that’s worth commending on though is, if you look at the European production levels if it were to go down another 10% in the back half, I think we have to sort of step back and think when are they coming back because we’re already at sort of 20, 25 year lows here in terms of volume and we’re not going to incur several $100 million of cost to take some actions that we’re going to regret when the volume start to bounce back here a little bit. So, I think I’m more optimistic that we’re starting to see the bottom and I’d be -- maybe I will be proven wrong, but I would be surprised to see it down that level.

Hey Mica?

Thank you. Our next question is from Tim Denoyer of Wolfe Trahan. Your line is open. Timothy Denoyer - Wolfe Trahan & Co.: Hi. Good morning.

Good morning, Tim.

Hi, Tim. Timothy Denoyer - Wolfe Trahan & Co.: Good morning. Just wanted to ask about the competitive dynamics in the U.S. battery market, I’m wondering if you’re seeing any changes based on some competitive issues, especially as it relates to the market share and prices for lead cores?

Timothy Denoyer - Wolfe Trahan & Co.: Okay. And did it -- sorry, just one quick follow-up on that, did the spring -- the late spring helped, end it with pretty lean inventories the prior quarter?

Well, inventories are more – I would put it as more normal. So they’re lower than they were a year-ago. I’d put it at a more normal level, what the inventories are in the channel.

We’re just talking really about lawn and garden, so that will all recover itself here as the spring unfolds in the quarter, okay.

Eventually that will happen.

Yeah. Timothy Denoyer - Wolfe Trahan & Co.: Okay. All right. Thanks.

Thank you. Next question is from Rich Kwas of Wells Fargo Securities. Your line is open.

Hi. Good morning, everyone.

Hi. Good morning, Rich.

Switching gears on to Building Efficiency, so orders down pretty much across the board regionally speaking and somewhat similar to last quarter. I noticed the seasonal pickup in the second half, but doesn't this kind of indicate that the growth rate is going to come in a bit as we move through the next few quarters and I know you’re going to give your ’14 outlook six months from now or there about, but what do you – in terms of growth rate for ’14 it just seemed like its going to have to be more modest, so I’m just curious on your thoughts here given the order rates of the decline for two quarters in a row?

Yeah, my guess is what we will see, Rich if I had to play out the quarters, I think you will see a backlog recover here in between now and the end of the year. And that will be driven though as I mentioned by what we see in the pipeline. And so that will come primarily from two areas. It will come from systems work in North America, it will come from Asia and to a greater extend maybe even the Solutions Business that we see the pipeline picking up. So I think our volume issue is really one right now that we’ve got to address in terms of our cost containment for the remainder of this fiscal year. Then I think we need to check back and see where our backlog ends up at the end of this calendar – this fiscal year relative to 2014 and that will dictate it. But I do think what Steve and Alex are working on is making sure that we go in with a fairly conservative view of our cost structure into '14 until we get a better view of that. But what we do like is the fact that and I can just tell you our systems pipeline's up about 10% and our solution's up 20%. And we're seeing good growth across a lot of verticals. So that makes us feel good. We're doing good things in Asia. We don't expect much from Europe. So that's sort of how we see the [lamp]. But I would say that '14 will be based on what kind of orders and backlog we have at the end of the next few quarters.

And just a quick follow-up on the federal government state governing, what are you seeing early read on sequester and impact on the business at all?

That's good questions, Alex. So first I'll reinforce what Steve said. I think the business has done a great job of managing costs and they have to continue that because we're at the – what I think is going to be the low point of our backlog. We'll see if I'm right, but the order intake should pick up as the pipeline in some of our segments has historically high levels but the backlog is under a lot of stress. So hopefully that picks up over the next few months. But one caveat and I'm glad you're asking is we're not sure what the sequester might mean as it relates to funding. We haven't seen anything yet, but that will show up probably late in our fiscal year to find out if there is any ramifications. Our customers aren't telling us that there are, but we're trying to make sure we understand that. So that's a good question. Right now, we don't see an impact.

As we've said that the federal backlog is one of our strongest movers right now.

Yeah, the federal and state actually.

Okay, thanks. I'll pass it on. Thanks.

Thank you. Next question is from Joe Spak of RBC Capital Markets. Your line is open, sir.

Hi, good morning. Thanks for taking my questions. I just want to get back to the statement made about comfortable with third quarter estimates and really the reiteration of the full year guidance. Is there any shift internally between the segments and the reason I ask is if you look at auto or seating per se, seating more specifically, you did about 2.3% margins in the first half and to hit the full year number that you initially got it to, it seems like something over 6% in the back half which even if you add up all the factors, you mentioned it seems a little bit aggressive. So I'm wondering if you guys internally have shifted expectations between the segments for the year?

Not really. I'm not sure I'd agree with that mass, so maybe we have to take that offline. But I think if you look at – just talk about going from Q2 to 3, I think we have a significant step up in building efficiency. That is very much in line with our historical pattern in terms of the seasonality. It's sort of high margin as our service business starts t pick up when people initially turn their [air-conditioning on]. We see a big ramp up of Q2 to Q3 in terms of building efficiency. I touched on some of the issues earlier in terms of pickup that we expect to see in auto and Europe in particular. And we also expect, like I said to see margins pick up strongly in power solutions here in the third quarter.

I can't add much more. I guess I would tell you if you had to look at business and say where are we dependant in terms of improvement, clearly it's -- year-over-year it's automotive. I think that we should say BE, we expect improvement, but that – we also had the seasonal factor that comes in the BE. It's just a bigger contributor in the second half of the year.

I guess our residential business too picks up.

…picks up too, yeah. I guess those are the two factors, but that's probably the only color I can provide you.

All right. And then just quickly on the quarter, you mentioned Asia margins 10%. I think under the old report, if you look back at the old reporting structure, that's down about 300 basis points from last year. Is there anything specific in the quarter out of Asia?

No, it's really just the – we are down about 300 basis points in the quarter. It's just – as you know, that's where our equity income flows through and it's just timing of investments. Right now, if you look at kind of – a couple of our biggest joint ventures that are opening up several new plants in the west and so it's just sort of start-up costs of new facilities to come underneath the growth.

Okay, thanks guys.

Thank you. Our next question is from Pat Archambault of Goldman Sachs. Your line is open.

Yeah, thank you very much. My main question is more I guess, just on the industry side, and forgive me if you’ve said this, but you kind of have a constructive tone on the European market stabilizing. You had obviously the retail auto sales numbers have been pretty weak. Can you just tell us a little bit more about what you’re seeing in terms of near term production schedules at some of your big customers there and I’d be also particularly interested in your views of inventory, because if it's coming in better but the demand is worse, one would think that there might be some de-stocking to deal with into the back half sometimes, so just your views on that would be great.

Yeah, I’ll take this one, it's Bruce. I think we don’t have as reliable information in terms of what sort of in the dealer inventories and things like that in Europe as we also do here in North America, but I think -- I’ve seen a couple of research reports that would suggest a fairly significant amount of inventory that’s come out of the channel, it's hard to say. But I think we feel pretty comfortable that with once you look at our schedules which generally are pretty firm for like the next four to six weeks, so we could say half, but we’re sort of already a month into the quarter and we have pretty good visibility in the next four to six weeks. I would tell you right now we see very little downside to the quarter. I think if you look at how the OEs have tended to flex and if sort of things weaken up it would be around taking some more time out around the shutdowns which would be kind of into our fourth quarter. So I think when we -- again to our confidence here in the third quarter month of it early in the bag and we got pretty good visibility here, so we don’t see a lot of downside risk for the current quarter and we’re just happening to keep our eye on whether any of our customers extend some of the shutdown timeframes. And that’s in Europe, I guess I would flip that and say on the other hand in North America our customers are asking us -- some of our customers are asking the supply base about shortening the summer shutdown. So, I think we maybe talked about some of the risk in Europe but I think in North America there is some offsets.

Maybe (indiscernible) and I mentioned the fact that the Q2 lower level from the first quarter is, going from a 8% decline to about a 3% decline, but the absolute production levels were about 4.8 million units for both periods, so we’re not anticipating any significant recovery. And then of course in Q3 we had the shutdown period. So we’re only projecting about 4.2 and that’s consistent with our (indiscernible). As Bruce mentioned, we’re well into this queue with our build, so we feel comfortable that those numbers are reasonable.

Okay, that’s very helpful. If I could just one housekeeping one on building efficiency. Can you just remind us in terms of the timeframe that both orders and backlog typically get translated into revenue?

Okay. Well, I would say that backlog today, about 40% to 50% of that will flow this year. So when you talk about our backlog, when you look and it's skewed depending on what your solutions backlog they’re larger projects. So if you look at what we have to work with for the remainder of the year, for the most part we can see it. We will be determined to get some orders here in the third quarter in order to finish the year out, so the orders in the third quarter are important for the rest of the fiscal year. And then if you look going into next year I think when Steve talked about going into next year as the sales increase in our fourth quarter it will put a little bit of pressure in the first half of the year, but those -- because those orders will flow second and third quarter next year.

Okay, guys. Thank you very much. I'll turn it over.

Thank you. Our next question is from Brian Sponheimer of Gabelli & Company. Your line is open. Brian Sponheimer - Gabelli & Company, Inc.: Hi, good morning. Thank you for taking my call. Just want to spend a second on the balance sheet looking at around 6.2 billion in that debt right now targeting 5.2 towards the back half – at September 30. Obviously CapEx is about 200 million of that. Talk about some of the levers that you can pull and where you expect that incremental $800 million to come from?

Yeah, I think if you sort of want to do a high level bridge there, I think our earnings in the second half versus the first half is a big chunk. It's probably 40% of it. If you look at our net working capital outflow on a year-to-date basis, I think it's around – nearly 400 million. And within that what you would see if we typically have an outflow in the first half of the year associated with a lot of setup compensation and sales commission plans as well as some contributions to like our defined contribution employee plans. So those flipped from being uses of cash in Q1 to sources in the second half of the year. And then we've probably got, I'd say about $100 million of receivables that we didn't collect in the second quarter. That would be to name two specific issues, one was Good Friday was the last sort of day of the quarter, so we had a couple of customers that we were expecting the payment and we didn't get [receipted] and we had a few of our Japanese customers which have a March 31 year end kind of withheld payments from us. And then I guess the last thing would be we've got a couple $100 million and we've talked about this before of overdue VAT receivables, some indirect taxes that we're starting to make some good progress and I think we can bring most of that in, in the second half. So those would be sort of the main drivers. Brian Sponheimer - Gabelli & Company, Inc.: Okay, great. And then just switching gears real quick. If I'm thinking about energy prices and how it relates to building efficiency, if we start to see oil come down a little bit more here, would that be a net benefit for you with some of your customers becoming a little more cash flow positive or should we think about the other way that high energy prices means that Johnson Controls becomes more valuable as a solutions provider?

Just to make sure we're talking about electricity, not gasoline prices, okay.

Look, if you're talking energy prices, I think that it's – if you believe that energy prices are going to continue on the long haul to increase, I think that's the way our customers view the world. Most of our customers are looking at assets that are long life assets and a lot of the paybacks are also for deferred maintenance programs. So I'm not sure it will have a meaningful effect. I'd be more concerned about interest rates. Brian Sponheimer - Gabelli & Company, Inc.: All right, thank you very much.

Thank you. Our next question is from Matthew Stover of Guggenheim. Your line is open.

Thanks for taking my question. I wanted to see if you can give us a little bit more color about what it is that you see driving the margin outlook for power systems in the second half, there's significant volume reduction, there's mix, there's some price and there's some core cost impact, but if you can kind of scope some of those things, it'd be helpful? Thank you.

So I don't know if I can give you the dollar versions, but what I'll do is give you the things to be looking for. First off, we're going to see the benefits of the Florence Recycling Center. It's been something that we – as we ramp up, we're getting some benefits but we'll also have start up cost that we've had in the first part of the year. The second thing that's going to be very important is a year ago, we put some pricing in place, we're going to see that benefit of the pricing over the summer and we also have more pricing that's going to go in play in July. We've notified our customers about a 3% to 4% pricing increase across North America. So those things are significant. Our operational improvements have continued, our China operation is also getting up to scale in operations. So all these things added together along with more and more AGM coverage in Europe add up to the numbers. So the volumes – if the volumes happen, I feel pretty comfortable about our forecast.

The only thing I can add to that is the core – last year we had the core imbalance that we had and…

Yeah, so the core costs are still high but one of the problems we had is that we were out of balance ourselves as it relates to our core inventories and we've been able to get that more in line with normal – that was a cost that we had last year that we hadn't incurred in the past.

Thanks very much.

Thank you. Our next question is from David Leiker of Baird. Your line is open. Joe Vruwink - Robert W. Baird & Co: Hi. Good morning. This is Joe on the line for David.

Hi Joe. Joe Vruwink - Robert W. Baird & Co: May be just a little more generally or broadly looking at Building Efficiency, you’ve really seen you go out and say we’re going to not do these things to improve margin, its follow through what’s the margin improvement Building has been able to post. Where are you may be in terms of like a baseball now, since we are in that season and in terms of innings into ticketing the improvement or is it the type of thing were you the pricing gains, the cost reductions carry through year-end and then you’re sort of more at a normalized level for that business?

Great question. I think that this was – so let's just say that this is a baseball game and maybe the first game is over but this is a double-header. And I think we have more opportunity. So, there is a lot of programs that BE group has been looking at both in North America and across the world, some of them are structural and some of them are pricing. I think we're going to see more and more of that. We have opportunities, it will come in small chunks, and little chunks, but I think that we're pretty excited about the opportunities we have in front of us in different ways in order to solve some of the current problems or the problems that we have with our customers that have had over the last few years. So I'm pretty confident that we're going to find more opportunities. I think we have more opportunities than we have heartbeats to go get them.

I think the other thing we got to mention with Joe is also we’ve got opportunities to invest in areas that we want to really drive future value with our customers in terms of product technology. So that’s the tradeoff that we’ve got is making sure we can sustain those investments and at the same time, continue to ratchet down our cost structure, but we’ve still got – as Alex mentioned, we got lots of room.

Yeah, and I actually think they go hand in hand. So there's good opportunity there. Joe Vruwink - Robert W. Baird & Co: And if I can ask a quick follow-up, you’ve always talked about that business being 8.5% margin business, is the pricing sticking or any of these things maybe coming in faster than you were expected? I know the 8.5% kind of has allusive end date associated with that.

Well, I don’t know that – I don’t know there is an end date. I think that there is plenty of opportunity, a lot of that has to do with the mix of our business and how the – and how that’s going to -- how we’re going to make investments in the future, but I think that all of the targets we put in place are realistic.

And Joe, just to clarify, our objective in this business is to get to a 10% without GWS. It's the way we've always phrased it, okay? That’s just to clarify that. And I think to Alex’s point, part of this cost structure a lot of it just growth and pricing, I mean I think we’ve got opportunities in the service area to grow. We know we’ve got some opportunities in our cost structure. So the margin improvements that you should see in the second half or it should be dramatic and help drive another step towards that improvement longer term, okay. Joe Vruwink - Robert W. Baird & Co.: Great. Thank you.

And we have time for one more.

Okay, thank you. Our next question is from Ryan Brinkman of JP Morgan. Your line is open.

Hi, great. Thanks for squeezing me in.

Hi, Ryan.

You’ve touched on Europe a few times already, just throughout the Q&A here, but I am curious if there’s a level of European light vehicle production that you’re preparing the European business for through your restructuring program. Do you have a sense of what the threshold of production is necessary now for the automotive business to breakeven in Europe, and what might that threshold become after the restructuring program?

Yeah, Ryan I would say that -- I would tell you that our business is sized to be profitable at the current level. Our issue is really the internal challenges that we talked about before. It's a lot of things that we’re doing to drive the improvements in the metals operation that Steve talked about. Our challenge that we have in interiors isn’t really so much around volume, it's around -- we’re overly exposed to Western European for manufacturing perspective rather than Eastern Europe in where some of our competitors are and that sort of set the market price. So, I wouldn’t really look at it like, we have a footprint that’s sized to breakeven at a level that’s higher than a market. I think most of the issues are around our operational performance, some product lines that we’re looking to exit and things like that.

Okay.

I think Bruce made a comment earlier to – if you go back – kind of the fact that we're already at 20-year lows here, okay. And so I think we recognize that we'll take steps as our customers take steps and we know that some of those are coming, but I don't think there's a big structural issue here that we have to deal with relative to the fact that we need the plan for the production going much lower. I mean right now, we've got our Western Europe production and on a calendar year – on the calendar year, it's 20 million units. And that's still below 12.6 last year. So I think to Bruce's comment, I think we have hit bottom, I think we can plan for whole lot lower. I don't think that's not a sustained level that we'll see Europe drop to, okay?

It wouldn't be like – like you sort of read the industry comments about capacity utilization in Europe for the industry at the OE level being at the 50% or 60%. We wouldn't be like that at all.

Yeah. I appreciate the color. Thanks a lot.

Great. Thanks a lot. Folks we'll be – Dave and I will be available through the balance of the day. Thanks for calling. Steve, is there any concluding comments?

No, I think that's – I think the way to view this quarter is Bruce used and stayed with and talked about the fact that I do think we have a point of reflection here and I do believe that we feel that internally, and I think that a lot of it is within our control as he also mentioned. So I think that this is just a function of our execution in the second half and hopefully by the time we meet at the end of the quarter, we'll be talking about our improved backlogs in BE and the fact that we'll start seeing some recovery in our end markets, okay.

Thanks everybody.

Thank you.

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