JCI
#Thanks, <UNK>, and good morning
Let’s start with our new segment structure within Building Technologies & Solutions on Slide 10. As you can see, Buildings has two main components: Building Solutions and Global products
Building Solutions, which has annual revenue of about $15 billion, is our field business and direct channel
We operate in a regional structure and report 3 segments: North America, EMEA/LA and Asia Pacific
Global products has $8 billion of annual revenue and will be reported as our fourth segment within Buildings
This is our indirect channel with its sales through distribution and storefronts
I will speak to the new segments as I go through the results for Buildings
Now let’s get into the details of the quarter on Slide 11. Total building sales in the quarter of $6 billion declined 1% year-over-year on a reported basis
However, excluding the impacts from FX and divestitures, sales grew 1% organically
The impact of the hurricanes, the earthquake in Mexico and some final sales-related purchase accounting adjustments impacted sales growth by approximately 60 basis points in the quarter
So let’s start by unpacking the 1% organic decline in Building Solutions, which again represents our project and service-based field business
In North America, our largest region, sales declined low single digits
Our fire and security field business, which comprises about half of the revenue in North America, is relatively flat year-over-year
HVAC and controls installation and service activity, which typically accounts for about 35% to 40% of sales in North America, grew low single digits
However, this growth was more than offset by a decline in large projects within our solutions business, which declined low double digits in the quarter
And I’d just point out that about half of that decline was driven by weaker sales to the U.S
federal government
Turning to EMEA/LA, we saw low single-digit growth in the quarter
Growth in Europe was led by solid project activity in fire and security
In the Middle East, sales inflected to positive growth in the quarter driven by HVAC
Latin America also grew low single digits with balanced growth across fire and security, HVAC and controls
In Asia Pacific, organic growth was flat in the quarter as strong growth in service was offset by lower project installation spend year-over-year, particularly in China
Turning to global products
Sales increased 3% organically year-over-year with growth across building management, HVAC and refrigeration equipment and specialty products
Building management, which is about 15% of global products revenue, includes controls, security and fire detection, and we saw a nice growth across all 3 of these product lines
HVAC and refrigeration products, which comprises about 65% of global products revenue, includes unitary and applied HVAC equipment and products, our Hitachi joint venture products, as well as industrial refrigeration and marine equipment
Within these businesses, resi and light commercial HVAC grew low single digits where a low single-digit decline in resi HVAC was more than offset by low teens growth in light commercial where we saw a significant growth in our national accounts business
I would point out that the resi HVAC decline was impacted by a tough prior year comparison with fiscal ‘16 Q4 growth north of 20% as well as lower cooling degree days
For the full year, our resi HVAC business grew high single digits organically, benefiting from new product launches in the spring of 2016. Our applied business grew in the mid-single digits range in the quarter with strong performance from North America and larger projects in the Middle East
Finally, we continue to see solid growth in our Hitachi joint venture as well as a pickup in our industrial refrigeration businesses led by the improving natural gas and food and beverage markets
The remaining 20% of revenue in global products is specialty products, which includes fire suppression and Scott Safety
This platform saw low single-digit growth in the quarter and, as you know, Scott Safety was sold to 3M in early October
So let’s turn to EBITA
Buildings grew 5% year-over-year in both the reported and adjusted basis to $904 million with margins expanding 80 basis points year-over-year to 15.1%
This growth was led by cost synergies and productivity savings, partially offset by price cost pressure as well as continued investments we’re making in new products in our channels
Over the course of 2017, we launched 14 new chiller products globally and expanded our factory direct distribution business by adding 17 new storefronts across North America
And I just point out that for the full year, Buildings EBITA margin expanded 50 basis points
So let’s turn to Slide 12. Orders grew 2% organically year-over-year, led by the 5% growth in our products business
Field orders were flat as high single-digit growth in Asia Pacific was offset by a low single-digit decline in North America and EMEA/LA
Backlog of 8.5 billion at year-end grew 4% year-over-year on an organic basis
So let’s move to Power Solutions
Sales of 2.1 billion increased 18% year-over-year on a reported basis, but this includes a significant tailwind from lead pass-through
Excluding lead and FX, sales grew 9% organically, led by strong shipments to the aftermarket channels across all regions
Global battery shipments increased 5% year-over-year with aftermarket unit growth of 8%, partially offset by a 5% decline in our lease shipments, which is consistent with the lower auto production in our two biggest markets, the U.S
China rebounded nicely versus last quarter with total shipment growth of nearly 40% with strength across both OE and aftermarket
Global shipments of Start-Stop units increased 30% led by strong growth in China and the Americas
EMEA Start-Stop units increased 7% due primarily to strong aftermarket growth, which is more than offset by a low single-digit decline in OE
Segment EBITA of 431 million increased 4% on a reported basis or 5% excluding the impact of FX and lead
Power’s margins declined 260 basis points year-over-year to 20.2% on a reported basis, but this includes 170 basis point headwind from lead
Excluding the impact of FX and lead, Power’s margins declined 80 basis points
In the quarter, leverage and higher volumes, favorable mix and productivity savings were more than offset by ongoing product investments, start-up and launch costs and increased logistics and distribution costs, including the disruptions related to the hurricane
For the full year, Power’s margin declined by 60 basis points to 19.5% on a reported basis, but this includes 150 basis point headwind for lead
Excluding the impact of lead and FX, Power’s margins expanded a strong 100 basis points for the year
Moving to Slide 14. Corporate expense was down 25% year-over-year to 107 million, benefiting from continued synergy and productivity savings as well as a lower compensation expense versus the prior year
For the full year, corporate expense was 465 million on an adjusted basis, better than the 480 million to 500 million guidance range we provided last December
I am pleased with the progress in reducing our overall corporate expense, and we expect to see continued improvement in fiscal ‘18. Now let’s turn to free cash flow on Slide 15. In the quarter, we generated $1 billion in reported cash flow
Excluding 100 million of transaction and integration costs in the quarter, adjusted free cash flow was 1.1 billion
This out-performance versus the 900 million Q4 target we provided in July resulted primarily from the strong Q4 volume growth in Power Solutions, which allowed us to work through a portion of the inventory build from the end of the third quarter, and we also saw a reduction in receivables across our businesses
As <UNK> mentioned, we are in the process of establishing internal cash management office
This team will be dedicated to improving our overall cash management and forecasting process and will report directly to me
This team will be comprised of individuals from corporate, treasury, our shared service center groups and the business units
This area is one of our top priorities for fiscal ‘18, and we remain committed to delivering adjusted free cash flow conversion of 80-plus percent, which excludes net onetime cash outflows of $800 million to $900 million related primarily to integration, restructuring and income tax payments
Let me stop there just for a second and give you the components of the onetime items
We’ve got restructuring and integration costs of roughly $500 million, which is probably $100 million higher as a result of us accelerating or pulling forward some of these actions to Q4 of ‘18 versus fiscal ‘19. Secondly, we’ve got about $100 million of executive severance and the [Indiscernible] unfavorable arbitration award that occurred in the fourth quarter
We’ve got the $50 million worth of Scott Safety tax payments
And then we’ve got about $350 million, which is broken into two buckets in the tax area
One would be $200 million outflow related to a Mexican tax law change regarding they’ll no longer accept consolidated filings in Mexico
There’s a deconsolidation that’s required, that will cause $200 million of cash outflows in the first quarter of fiscal ‘18, and there were some specific tax planning in the U.S which was $150 million outflow
So in aggregate, that’s about $1 billion
And as you may recall, 200 ---+ originally, we thought $300 million was going to be the tax refund in the first quarter of fiscal ‘18. That number is now $200 million, but the $600 million that we expected in 2019 has now increased to $700 million
So essentially, where we are now is we’ve got about $1 billion worth of cash outflows and $200 million related to the tax refund in the first quarter, which gets you that $800 million number
And again, I just point out that as we move into ‘19, we now expect $700 million of tax refunds related to the Adient tax that was paid in the first quarter of ‘17. Similar to recent years, we expect our adjusted free cash flow to be much more weighted to the second half of the year with an outflow in Q1 and our largest inflow in Q4. Moving to Slide 16. We ended the year with a net debt-to-cap of 39.3% versus 41.2% at June 30. During the quarter, we again took advantage of the low interest rate foreign debt environment and issued $310 million of yen-denominated five year notes and $175 million euro-denominated one year note
During the quarter, we used the strong cash flow generation as well as the debt issuances to repay $1 billion in commercial paper and $150 million bond maturity
Additionally, we repaid $165 million in TSARL debt with Tyco-related cash flows
As everyone knows, the Scott Safety sale to 3M closed in early October, and we repaid $1.9 billion of TSARL debt with the net proceeds from this transaction
These payments, along with the proceeds of the ADT South Africa sale in the second quarter of this year, reduced our original $4 billion in TSARL debt to a current balance of $1.8 billion
During the quarter, we repurchased $225 million in stock or about 5.5 million shares
For the year, we repurchased just under 16 million shares for $650 million
I’d also mention that we completed another $150 million of buybacks during the month of October
And as we move through fiscal ‘18, we will, at a minimum, buy back stock to offset the impact of option dilution
On Slide 17, we provided details in the appendix related to the Q4 special items, all of which have been excluded from our adjusted results
And as I mentioned earlier, the building segment change was effective in the fourth quarter, and we ---+ and the revised fiscal ‘17 quarters are provided in the appendix as well
And just finally, the House U.S
tax reform proposal was released last week, and the Senate proposal is expected shortly
Interest deductibility and repatriation taxes on foreign earnings will be headwinds for us, but we are in the early stages of reviewing the overall pluses and minuses [to Johnson Controls] as well as other available tax planning opportunities
So with that, let me turn the call back over to <UNK> to review our fiscal ‘18 guidance
So let me start with U.S
And I think the two areas that I commented on providing the most headwind are probably the limitations on interest deductibility as well as the repatriation taxes on foreign earnings
And we are in the early stages, Jeff, of taking a look at the implications of the proposal, and we’ll see what comes out from the Senate as well
But those two items certainly do put pressure on our effective rate in the mid-teens where it is today
But I’d also say that until we really sit back and study all the provisions of it, we really aren’t in a position today to comment on what the ultimate effect will be because I’m sure there’ll be tax planning opportunities that we’ll have in front of us as well
So I think this is one we’re going to probably just have to keep front and center with you and everyone on the call
And the more information we get and as ultimately the regulations come out, we’ll address it at that time
As far as your comment on Mexico, the calculations that were completed on the specifics around deconsolidation of Mexican returns, I mean the tax law changed, just to give you a little bit of color here, was that in Mexico, no longer can you file a consolidated return and get group tax relief, but you’ve got to file individual returns
And that payment is required to be made for us in our first quarter of fiscal ‘18, and we didn’t finish the calculations on what that net payment was going to be after unpacking all of these individual returns until just recently
And so the one thing I would point out there is that the payment that we’re going to make of $200 million, the way these regulations are working in Mexico, we will recoup that payment over a period of time of up to seven years
So it’s something we’ll get back over time, but it was a onetime payment that’s large enough that we called out in our commentary here
I would just comment on Buildings, that’s correct, <UNK>
And then when you look at Power Solutions given the spike up that we have seen in lead over the last few months here, there’s probably a bit of headwind as we look at just Q1 impact
But as we’ve kind of commented on before, when it spikes like that, we can have an individual quarter impact based upon the arrangements we’ve got with our customers to pass on those lead increases over the course of the year that tends to normalize, and we wouldn’t expect that to be a big number for the year
But there could be a little bit of an impact in Q1 from the spike in lead prices as well, Steve
On the AIPP side, that’s correct
On the long-term side, it could have some impact
But the short-term bonus here, it would be 1/3 on EBIT growth, 1/3 on organic revenue growth and 1/3 on free cash flow conversion
And then there could be some modifiers that might also address things like EBIT margin improvement to ensure that we aren’t just chasing revenue dollars, that we’re chasing profitable growth
Correct
So CapEx is going to be still in the range of about $1.3 billion ---+ up to $1.3 billion
The way to think about that is if you look at where we are this year and adjust for the items that we talked about in the third quarter, what happened in the fourth quarter here, we were able to flush through about $100 million or so of the inventory build that we saw at the end of the third quarter in Power Solutions, and we also saw about $100 million reduction in receivables
So if you recall at the end of the third quarter, we talked in terms of a couple of hundred million dollars in inventory we thought we could take out and $100 million worth of receivables
So $200 million to $300 million, we were able to take out in the fourth quarter here
So there’s really $100 million more that we expect in the inventory side
And then I would tell you that would get you up to that 80% plus range
And beyond that, it would be the additional effort that our cash management office team is going to put in place to continue to drive trade working capital improvements and look at payment terms and billing terms to our customers
So right now, we’re looking at around 80% plus
And I would just comment, I would just add to that, that we’ve got ---+ there is a lot of momentum that we’ve got in the back half of this year
So we aren’t seeing benefit in ‘17 from the revenue pull-through
But given the third and fourth quarter activity, we’ll get some benefit on the top line in ‘18.
So for Power Solutions next year, we’ve got 500 million in the plan, and that would include the construction of the facility that will be part of our Bohai Piston joint venture
The other facility that we’ve talked about in China will be starting late in ‘18, maybe even into ‘19. So the second facility in China will probably not have a big impact on the cash flows in fiscal ‘18.
No, I would say this is the peak
I mean, I could see depending upon levels of the Buildings investments, I would say that we’re probably looking at the 1.3 billion being a peak
I mean, it would have to be something very opportunistic for us to not have a peak at the 1.3 billion
Even at that level, we end up with the reinvestment ratio that’s 1.4, 1.5, something like that
So we’re working to get that down into the more 1.1, 1.2 range
I’d say we guided 250 million to 300 million last year
We ended up at the high end
I would tell you the 250 million is a number that’s pretty much what we’ve got road map for fiscal ‘18. I mean as we go through the year, could there be some upside? Maybe
But right now, we’ve got the teams focused on the 250 million, which is exactly what we’ve got in our trackers, and we’re working toward delivering that
So I think that’s where we are, Rich
2,100.
<UNK>, so on cash flow for ‘19, I mean it’s a bit early to talk about ‘19, but I guess I’ll give you my thoughts as we sit here today
That $600 million refund from the Adient tax payment is now $700 million that we’re going to get in ‘19. And I think we’ve talked in the past, we hope to get that in fiscal ‘19. Whether it’s fiscal ‘19 or calendar ‘19 really depends upon how quickly we can get it through a joint committee because, given the size of the refund, it’s got to go to joint committee
But obviously, we’re targeting to get it in fiscal ‘19. So that $700 million, when we look at the other onetime items that could be out there, it’d be restructuring and integration, and I would expect those to be well below that $700 million number as we move into fiscal ‘19, there’s probably a bit of a wildcard, right? Relative to tax reform and what that might mean
I guess we just need to sort through that
But I guess the short response is I would expect adjusted free cash flow or reported cash flow to exceed adjusted free cash flow in fiscal ‘19.
I don’t think that’s going to impact it in a big way
I guess the way to think about this right now is we’re looking at the Buildings business globally
Target’s about 85% free cash flow, and Power Solutions is around 70% today with the growth investments we’re making
I think as we work through some of the growth investments that we’ve talked about on this call at Power, I think moving toward the 90% target we’ve got in 2020, that’s still where we’re headed
But I don’t think the mix that you’re referring ---+ the geographic mix you’re referring to is going to be a ---+ is going to impact that in any significant way
