Johnson Controls Inc JCI
Q3 2013 Earnings Call Transcript
Transcript Call Date 07/18/2013

Operator: Welcome and thank you for standing by. At this time, all participants are in listen-only mode. After the presentation we will have a question-and-answer session. This call is being recorded. If you have any objections you may disconnect at this point.

Now, I'll turn the call over to Mr. Glen Ponczak. Sir, you may begin.

Glen Ponczak - VP, IR: Thanks, Phil and thanks everybody for participating this morning. Before we start, I just want to remind you of our forward-looking statement. That Johnson Controls will make 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 facts, 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 generally 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 I 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 these 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 presentation.

As always I'm joined this morning by Steve Roell, our Chairman and Chief Executive Officer, who will provide an overview of our third quarter results, followed by Alex Molinaroli, our Vice Chairman, who will review the Power Solutions and Building Efficiency business results, then Bruce McDonald, Executive Vice President and Chief Financial Officer, who will review the Automotive business, as well as the financial review of the overall quarter, followed by question and answer and we will end the call promptly at the top of the hour.

With that, I'll turn it over to Steve.

Stephen A. Roell - Chairman, President and CEO: Okay. Well, thank you, Glen, and good morning. Let me begin by saying that we're very pleased with the results of our fiscal third quarter. The strong earnings and cash flow are consistent. In fact, they're actually higher than the guidance we've provided to you in last quarters call. We achieved those results despite the fact that business conditions remain challenging across our industries.

The most notable exception to that is the North American automotive industry, which as you're well aware of remained strong as evidenced by the high retail activity in the month of June. In the quarter, automotive production on the Continent was up 6% from a year ago. Dealer inventories are in fairly good shape and that bodes well for this quarter's production. We're currently anticipating the North American production will approximate 4 million units in the quarter ending in September, which would equate to about 4% increase over last year's comparable period.

Despite everything you read about a slowdown in China, automotive sales and production remained strong. In the quarter just ended production will be up 10%, and we expect that in the upcoming quarter that we could see an increase of production of roughly 7% year-over-year. In Europe, production levels were slightly lower and recent industry forecast are projecting that future periods will begin to show growth. We're still expecting that in the quarter that we're entering right – that we're in right now that production will be slightly lower than it was in a couple of period a year ago.

Turning to Building Efficiency, our non-residential construction demand is softer than we expected. However, we are seeing improvements in a number of markets, most notably the solutions business where our pipeline to bidding activity has increased. We continue to see strong coating activity and continued strength in the federal and state government markets and Asia continues to be a point of strength for us.

We expect our backlog at September end to be just slightly below the level of the prior year, as based on some of the large jobs that we anticipate being awarded in the quarter. Battery demand in the after-market North America and Europe was weaker than expected again. A point of sale tracking that we have with several retailers reflects continued soft demand. However, our shipments to OEs were up 14% in North America and Europe and that helps offset some of the weakness on the aftermarket that I just referred to.

So, there are some positive signs, but as I mentioned in our last call, our results in the second half of this year were not dependent upon near-term recoveries of our markets. In April, we indicated that we were at a point of inflection, I think that was Bruce's term and the third quarter was just that. Let's just look at the numbers now and flip to the next slide.

Sales of $10.8 billion were up 2% with Power Solutions providing that growth. Segment income of $764 million was 20% higher, with all three business units contributing double-digit increases. Net income of $535 million was up 18%, and yielded earnings per share of $0.78 compared to $0.66 per share and it's of course taking out the one-time items.

Just a couple of other general comments, with the lower top line growth, we were dependent upon margin expansion and we were pleased with 110 basis point increase in our segment income. We're particularly impressed by the improvement that we saw in both Building Efficiency and Automotive in terms basis point increase in their margins.

Our European automotive business turned profitable. That was a highlight again for the quarter. Building Efficiency orders were higher than last year, reversing last quarter's trend. Power Solutions has been awarded new business and we're in discussion with many other potential customers. We'll probably provide you with the full recap of all of our new businesses in our fourth fiscal quarter results. Bruce is going to cover two things with you specifically, one was the strong cash flow in the period and also the definitive agreement that we reached to divest of our HomeLink product line that was announced in our press release today.

In terms of future earnings per share guidance, we increased our EPS outlook for our fourth fiscal quarter to the range of $0.93 to $0.95 per share. It's a 20% increase over last year roughly. We expect all three businesses to contribute significantly in the quarter. Last January I talked about the factors that would help drive our second half results and if you recall, there were five key elements I just want to review those with you.

The first was the fact that we would benefit from restructuring actions that we took in late fiscal 2012, and clearly that's going to factor in our improved results and our momentum in the second half. We did take some additional restructuring actions this quarter in our announcement. Those benefits will primarily flow into fiscal 2014. Last year, if you recall, we encountered high core costs in our Power Solutions business and while those costs have remained high, we were able to initiate pricing actions to offset those costs.

In addition, we managed our inventory, of course, more effectively this year, while still ramping up for our Florence, South Carolina smelter. The other factor was our margin expansion of BE associated with their pricing initiatives and cost containment. We saw 120 basis points improvement in Q3 in that business unit. We also were counting on improvements in our metals in South American operations in Automotive Seating, and those clearly met our expectation.

And the one item that we did realign in terms of exterior or outside performance was the North American production increase to North America and I had mentioned that earlier that we had – that it was a strong quarter in North America and it continues to be so in our fourth fiscal quarter.

So, with that now I'd like to turn the call over to Alex, who will comment on Power Solutions and Building Efficiency. Alex?

Alex A. Molinaroli - Vice Chairman: Good morning, everyone. First I'll start with Power Solutions that's on Slide 7. As you can see, sales were up to $1.4 billion, just 8%, and if you adjust for FX and for lead, our sales were up 11%. OE volumes were the driver of that, 16% growth, and aftermarket volumes were down at 4%. We didn't lose any share, but what happened is we still haven't seen the types of volumes that we're expecting due to weather. Good news we're seeing some weather now, so we'll hopefully be able to update that into the fourth quarter.

For the overall shipments what you will see is that we had overall shipments up 2%, Americas was flat and that has to do with the mix of our business, Asia up 1% and Europe up 7%. It shows that where our mix for our OE business is. Our results were favorably impacted by some very strong operational performance and a lot of that driven by the ramp up and now full operation of our smelters.

Our in-house lead recycling is now at the levels that we expected. Our segment income was up to $171 million, that's 12% up from last year at this time. One of the things that I think the team has done a good job is even though lead price cost for scrap has moderated some, it's still at very high levels and we've been able to go out and get commercial arrangement with our OE customers to offset some of the lead cost. The last thing I'd like to talk about is that there is a 3% to 4% price increase effective this quarter, this coming quarter, fourth quarter and we should expect to start seeing the benefits of that immediately.

If we move to Building Efficiency in the next slide, you can see that Building Efficiency continues to struggle in the top line and we've talked about their backlog, but we're very proud of what they've accomplished on their bottom line and they continue to not only get cost efficiencies, but also to be successful in a lot of their pricing initiatives. So, for the quarter they're down 3.7% and the revenue growth, if you want to look at it by region, is up in Asia 3%, but it was offset by softness in the more mature markets.

Overall, our quarter, we have a backlog of $5.1 billion and that's down 5% from a year ago. If you want to look at that by region where we're seeing the softness is in Europe, Asia, North America and both in service and system. So the mature markets and it's pretty broad across the board where our backlog is light. As you know, we don't keep backlog information on our UPG business residential, so that would be a little bit different and not included in these numbers.

For the first time, and this is really good news, that we started to see orders pick up. So, I don't know that we can consider it a trend yet, but we're hopeful. We had very, very strong orders in the month of June. I believe in June, they're up 12% year-over-year, and over the quarter it was up 2%, and that's the first time we've seen that in quite some time.

Let me give you some statistics of where that came from; 4% in Europe, which is a real surprise; 27% in Latin America, a lot of that driven by a lot of the infrastructure that's being built in Latin America for the Olympics and the World Cup; 1% in Asia; 1% in North America; and then we saw some softness in Middle East, down 18%, but if you recall, that part of the world is driven by very, very large projects, and so if you look at it on a year-on-year basis, it's sometimes very difficult.

But we’re very happy with the fact that our orders are trending up, and not only that, I would tell you that we're starting to see our pipelines become stronger and stronger particularly where we've had the most softness in our solutions business. So, we're hopeful. Segment income up to $314 million, 14% higher than 2012, and I think we're all very proud to see the sustained margin increase within Building Efficiency. It's been a strong story and it continues.

Steve talked earlier about the market conditions improving, I think that specifically around the federal government and the state and local governments, we're still seeing some softness in some of the institutional markets otherwise, but things have hopefully hit their bottom and we'll look to see if we start to see an improvements at the end of the year. So, I'm -- hopefully if we're going to use terms that Bruce used last time for this business at least on the top line, maybe we were going to be better than inflection point ourselves. But we're not counting on that because they continue to work on operational improvements.

If you go to the next slide that speaks to that I want to talk about a couple of things that are going on within the Building Efficiency business and lot of these margin increases have had to do with pricing opportunities and some overall SG&A management. One of the things that we want to talk about as there are some structural changes that we're also doing within the Building Efficiency business that will allow them to become more effective.

You may or may not know, but within our North American business, we have multiple businesses that serve the market. We have a security business. We have a systems business, which serves the construction market. We have our solutions business which is performance contracting. And we have our service business. We're going through an initiative now in order to combine with operations from a management prospective, from a customer prospective, so that we could be more effective serving our customers, while keeping the operational excellence that we have within each one of those businesses.

This will streamline our sales efforts. This will lower our cost to serve and I think our customers have given us feedback that they're looking forward to this opportunity. So, this is a major change initiative. It's a big part of business and we have high expectations that will drive margins, cost reductions, productivity in the near-term and growth in the long-term.

Another change that we're making and as it relates directly to the fact that we want to continue to invest in Building Efficiency is that we've separated our Global WorkPlace Solutions business, which will be a standalone business and report directly to me. We'll continue to have the synergies and pull through, as we have had in the past, but what we see is that we don't need the Building Efficiency business with all that's on their plate and the great things that they have going and the great opportunities we have in front of us, focused on this business, we're going to allow the World Services business, for those who have been following us for a long time, was a separate business at one point, to focus on the things that it needs to do in order to become more successful, and we have success in that business will be driving margin improvement.

So, we'll talk more in the future about that, but we're very bullish on the opportunity we have to get the margins up to a level of internal to talk from the EBIT perspective of around 5%. So, I'm excited about both opportunities and the team at Building Efficiency, in both, GWS is pretty excited, so more to come on that.

With that, I'll turn it over to Bruce.

R. Bruce McDonald - EVP and CFO: Okay. Thanks, Alex, and good morning everyone. So, I'll start here on Slide number 10 for automotive experience. So, you can see here a good quarter for Automotive from a top line perspective we were up 4%, if you back out exchange we're actually up about 5%. If you look at the individual segments, Seating sales were up 6%, excluding foreign exchange, Interior sales were flat and electronic sales were up 2% again all those numbers exclude foreign exchange. Geographically, and we always like to look at our geographic numbers in the context of the production environment and pleased to say that all regions we outperformed the markets.

If you look at North America, talk about our sales being up 11% and that compares to the market being up 6%. In Europe, we are up 4% and in the down market where it's down 1% as Steve talked about earlier. In China, we continue to see very strong momentum but there we continue to share primarily from some of the Chinese plants and the sort of market shift towards the quality and our customers putting more dollars in Interiors. So, sales for us in the quarter were up 23% to $1.4 billion, again that includes our non-consolidated businesses, and that compares very favorably to the 23% to the 10% increase in auto production in the quarter in China. So good results geographically.

If we look at our bottom line, great results here, we're starting to see the benefit of our restructuring and cost actions, here, so you can see our profitability was up 34%, $279 million. We benefited from the higher revenues in North America, operational improvements in all sort of our theaters of operations, but most notably in metals, our European business and in our Interiors business in Europe specifically. In Europe, as Steve reported earlier, we made a profit of $11 million in the quarter, which was significantly better than the $30 million and $35 million loss that we had guided to in our Q2 call.

If you really think through what drove that improvement, when we gave our guidance, we talked about Europe production being down 3and the numbers came in at only down 1%. So, we definitely got a lift in terms of the market requirement. But the most of the improvement was just the pace of our generating the improvements in our businesses in Europe and again metals, our seating business and our tiers business all equally contributed to the favorable performance here.

In the quarter, also note engineering costs were about $20 million higher year-over-year, when I talk through our SG&A levels later on that's really the driver for the higher SG&A on a quarter-over-quarter basis. Margins in automotive came in at real nice 4.9%, the 100 basis point improvement versus last year.

Again, geographically if you look at the results North America 7.1%, in Asia where it's 15.3% and as we -- just one point of clarification here, we did note in our press release and we have it here on the slide, we did have a gain on the sale of some assets in Automotive that was about $29 million, you can see that in our cash flow statement. I believe that was something that we had expected within our guidance, as well I can tell you that most of the benefit was offset by litigation charges and other costs related to the downsizing of our business in South America.

Flipping to Slide 11 and may be just a few comments on the divestiture that we announced this morning. So, earlier today we announced we'd find a definitive agreement to sell the HomeLink product line to Gentex Corporation for $700 million in cash. As many of you know, Gentex is the largest customer of this product line and very early in the divestiture process here, Gentex approached us with an offer to buy the business the HomeLink product line and this is a fairly easy business for us to separate very straightforward in conjunction with discussions we had with our financial advisors. We decided to pursue basically a two-step divestiture process to go with the divestiture of this product line to Gentex and market the remaining business to other strategic buyers. We believe that following that strategy, we generate more value for our shareholders.

The Gentex transaction is subject to the normal regulatory approvals. We don't expect there to be any difficulties and our expectation is the transaction should close on or about September 30, which is our fiscal year-end. Regarding the remaining Electronics business, I guess I would just say that the process we were at, where we thought we would be we're in discussions with several strategic purchasers, and right now, we're targeting to have an announcement in terms of the sale of that business on or before fourth quarter earnings call. So, things are going as we expected and we're pleased to have brought the HomeLink sale to conclusion with Gentex this morning.

Turning to the financials and maybe just before I get into the details you will note that in our press release we did have two non-operational items, which resulted in a net benefit of $0.05 in the quarter and those were from additional restructuring charges, primarily around our automotive experience business and Building Efficiency business. Those charges, I would say are primarily around our downsizing our footprint in Europe and with regard to Building Efficiency its implementing some of the organizational changes that Alex referred to in his slide.

So, if we just look at the numbers here in the quarter. You can see our revenues were up 2% at $10.8 billion, again, if you would back out exchange that would actually been up about 3%. We're pleased to see strong gross profit improvement and we're up 90 basis points to 15.5%. The drivers in terms of four margin improvements were Interiors, Metals and the Building Efficiency improvements that Alex referred to in his comments. It terms of SG&A as a percentage of sales, flat at about 9.1%. The benefits that we saw from our restructuring actions were largely offset by increased investments in some of our emerging market infrastructure and the higher engineering spend that I referred to in automotive. Equity income ticked up a little bit about $5 million higher than a year ago, and you can see our segment margins up 110 basis points to 7.1% in the quarter

Flipping to Slide 13, you see financing charges were up about $8 million versus last year. That's really just higher average levels of debt as we get into the fourth quarter, you're going to start to see as our financing costs go down as we start to see the benefit of the strong free cash flow generation that's coming through here.

If you look at the tax rate in the quarter at 20%, it's consistent with our guidance and you'll see that's up from the 17% that we had last quarter. So even though, our earnings per share were up 18%, you see we did have a little bit of a headwind here in terms of the tax line.

Slipping over to Slide 14, I'll just make a few comments in terms of our cash flow and balance sheet. So we saw a very strong cash performance. We talked about this in our last call, $1 billion of operating cash flow in the third quarter. That enabled us to reduce our net debt by about $556 million in the quarter and lowered our debt to total capitalization to 31.7% and that's about a 270 basis point improvement in the quarter.

In terms of working capital, where again we saw some good performance here. Trade working capital, which we define as payables, receivables and inventory came down to 6.5% of sales, which is about 20 basis points year-to-date improvement. In terms of working capital, we are pleased to see we were actually ahead of source, and the number on the slide is actually incorrect, that's the one – it was actually $272 million that's the one number I put together in the slide, but I made a mistake there.

But $272 million is a good source of cash from working capital in the quarter and we expect to see some more cash from working capital come through here in the fourth quarter. In terms of CapEx, $265 million, if you can see that's coming down. Our full year outlook we're maintaining at about $1.2 billion, that's where we see the full year CapEx coming in line here.

In terms of the fourth quarter, our expectation is we're going to see net debt reduction, again excluding the divestiture proceeds of about $600 million and $650 million. So, what we're really seeing here is that on our Q2 call, we talked about net debt coming down about $1 billion in the second half, right now we see that coming down at about $1.15 billion to $1.2 billion over the back end of the year. About $150 million to $200 million better than we told you at our Q2 call.

We do have some debt maturities that are coming up as we've noted here on the slide, so we're going to fund $300 million of debt maturities with cash from operations here in the fourth quarter and as we get into calendar '14 we have $800 million of debt that comes due in our second fiscal quarter. Our thinking right now is we will apply the proceeds that we get from the Electronics divestment to fund out those maturities.

And lastly, just a few concluding comments before we open it up to M&A. So, again, Q3 really was inflection point for us and with our earnings here being up 18% on a year-over-year basis. I know that over the last quarter either Alex, Glen, Dave or myself, I think we've met with many of the other analyst and a lot of our investors. We know that we've not lived up to our shareholders expectations here and we believe that our third quarter results are an important step – another important step I guess I should say and rebuilding the confidence that we've had that the investment communities had with the management team.

So, as we look at in the fourth quarter, we're very confident in the guidance that we're providing this morning we're tightening the range in terms of our full year to be 264 to 266. Our confidence is really driven by the same thing that we were talked about in Q3 same factors as many of which are completely under our control. We continue to see good – and we continue to expect good sequential improvement in our auto business in Europe and South America.

In Building Efficiency, if you're look at our pipeline, it supports a further improvement in Q4 orders and for the fourth quarter, we do expect Building Efficiency to show top line growth. So, we've had several quarters of down revenue in Building Efficiency. We expect that to reverse itself here in the fourth quarter and we expect that strong momentum that we've had in terms of the margins to continue.

From our restructuring perspective, our initiatives are on track and gaining momentum, and they will deliver additional benefits here in the fourth quarter. In terms of our EPS outlook for Q4, we're introducing guidance here little bit ahead of expectations $0.93 and $0.95 excluding any items and that represents about a 21% to 23% year-over-year improvement. Just one point of clarification, in the fourth quarter we may elect to treat our Auto Electronics business as a discontinued operation and so the guidance that we're providing here, the $0.93 to $0.95 is inclusive of the operating results of Electronics. So if we decide to reclassify Auto Electronics as a discontinued operation, the guidance is really going to be our income from both continuing and discontinuing businesses. So, I just want to make that clear to be to everybody so we're not dancing that around in our fourth quarter call.

So with that, I'm going to turn it back over to Glen and I think we're going to open up for Q&A.

Glen Ponczak - VP, IR: Thanks Bruce, and so I guess, we're ready to start taking questions. I think just based on the number of calls, we've got logged in here we probably have a lot of folks in the queue for questions and answers. So, as we've done in the last couple of calls, if you could limit your questions to one good question and one follow-up and if you've got more just get back in the queue again and hopefully we can get to you.

With that Phil, we'll turn it over to you for question and answers queuing.

Transcript Call Date 07/18/2013

Operator: Ravi Shanker, Morgan Stanley.

Ravi Shanker - Morgan Stanley: So I had a question regarding the re-segmenting within BE. You did a similar line of business type reporting structure in Auto three or four quarters ago, and then you announced the Electronics business up for sale. Any read across to what's going on in BE and GWS being classified as separate business?

Alex A. Molinaroli - Vice Chairman: This is Alex, Ravi. We expected this question. The reason we did this is exactly for what we stated. We think that both of those businesses are important to us and we think that there's opportunity, and in order for us to capitalize not only on the GWS opportunity, but as important the BE opportunity is really to separate the two. So, I wouldn't draw the analogy between the two. It's an obvious analogy, but I think as we start changing the way we manage our business, we're not trying to signal one thing or another. But we do expect GWS to improve its performance and they know that there are some high expectations and we need to make sure that we have a business that can compete and win.

Stephen A. Roell - Chairman, President and CEO: Ravi, this is Steve. Just two other comments, I guess. When we actually did the separation with Automotive, it was not our intent. We did the separation to divest Electronics at that time. So, that wasn't part of the premise of what we did there. The other thing I guess I would add would be, if you remember what Alex talked about, Dave's got a fair amount on his plate relative to the focus on this reorganization. We also want to look for ways to grow BE and look for different growth platforms. So that combination is really why we're trying to take some pressure off him and get the focus on that business, while we're also growing and improving the GWS business. John Murphy is going to be heading up that group for us. He is one of our strong managers. He is coming over and had been involved – had been part of this business before, having managing the service business – or the systems business in North America most recently along with Middle East. So, John is coming over to head that up. He will be named an officer of the corporation next week. So we are putting some of our best talent at GWS as well.

Alex A. Molinaroli - Vice Chairman: The last thing I’ll leave you with, Ravi, is don't try to read things into anything, but we have been pretty clear that we are looking at our portfolio to make sure that it all makes sense. So, just don't over read anything, but it hasn't changed our message that capital allocation is important, making sure that we have businesses that can be successful is important, but I wouldn't over pivot on this.

Ravi Shanker - Morgan Stanley: Understood, thanks for the detail. In Glen's words, that was my good question. My follow-up is, can you give us any additional detail or numbers behind the additional restructuring actions that you put in place in the third quarter?

Stephen A. Roell - Chairman, President and CEO: Let's go through that. We'll take that as a follow-up with you Ravi. I mean, I kind of touched on where they were and focused. It's really focused on downsizing in Europe and we've talked in the last quarter about, as we have changed our outlook in terms of the pace that we see that business, that market improving, we are deemphasizing that from a capital allocation point of view. We've got heavy restructuring demands to turn around our Interiors business. So, that's where the money's gone in terms of Auto. If you think about Building Efficiency is the other piece and there it's really been we took a charge to get it started integrating the North American businesses. So, we have three or four separate businesses. We're going to be combining the branches. We've got management changes and things like that. So, we've taken a charge to get started with that.

Operator: Rich Kwas, Wells Fargo.

Richard Kwas - Wells Fargo: On the Power margins, they were a little bit lighter than we were looking for and I think you explained about the lead cores and whatnot, and you're increasing pricing. But as you think about the fiscal fourth quarter, should we get a pretty steady uptick on a year-over-year basis when you're looking at the segment margin?

R. Bruce McDonald - EVP and CFO: I think the margins will continue to uptick. What I would tell you is that we're positioned for volume, and since the volume didn't happen, it's a capital intensive business and high fixed costs, and so even without the volume, we got some margin improvement. If and when the volume does come through, because we haven't lost any share, what we'll see is those margins – not only the cost part of the margins, but we'll get the absorption that we haven't seen yet.

Stephen A. Roell - Chairman, President and CEO: (Also talk about the) price increase, Alex, okay, on the aftermarket…

Alex A. Molinaroli - Vice Chairman: We had a price increase, and the other thing just to note, I was looking at my notes earlier that our AGM volumes were up 40% in the quarter. So, we'll continue to see that grow. So it's all tailwinds, volume would be our best friend that we could have right now.

R. Bruce McDonald - EVP and CFO: I would just comment, Rich, I saw your note in terms of where you were at versus us. If you look at the quarter, we were down a couple of million units versus what we thought from the aftermarket in the quarter, and if you look and sort of did the math in terms of the contribution that we make, the high fixed costs capital cost as Alex talked about, that's really the reconciling item.

Richard Kwas - Wells Fargo: Then just a follow up on BE with pricing, you said that is a driver of the margin performance this quarter and I know that had some increasing benefit, is there a timeframe where you start to comp that or should pricing initiative continue to have benefits on the BE margins as you into 14?

R. Bruce McDonald - EVP and CFO: I think we're going to continue see benefits. The pricing opportunities – there's different kinds of opportunity. One is as it relates to very broad based recovery and then the other is understanding the elasticity of some of our products and how they're going to market. So I think we found plenty of opportunities, plus I would tell you – there's just things like this initiative, the North America initiative, that's going to uncover, not only – not as much as pricing opportunities, but we're going to get a lot more leverage opportunities and the customer -- share of wallet with the customer and that's going to give us a lower cost to serve. So, that would give you – that will also show up in the margin line.

R. Bruce McDonald - EVP and CFO: The other thing I can mention that Alex is the – lot of the pricing actions are in our solutions business and that's just flowing into our backlog right now. So, that will flow into revenues later, okay into '14.

Operator: Emmanuel Rosner, CLSA.

Emmanuel Rosner - CLSA: My question is around capital allocation, you guys obviously starting to generate some more meaningful free cash flow and then there is obviously some potential proceeds from divestitures. And so it looks like the proceeds from this particular divestitures are earmarked towards debt repayments, but I think I would like to ask you more generally and looking forward as you're starting to generate more free cash, what are your priorities in terms of debt pay down versus returning some of it to shareholders maybe in terms of buyback? And I think you've also more recently been much more open up about the idea that looking forward you will be interested in some more potential acquisitions, where does that come in terms of priority for cash use?

Stephen A. Roell - Chairman, President and CEO: Well, I think the reason why we pointed to, when Bruce talked about his use of proceeds, that's sort of our near-term use of what we would use with proceeds from HomeLink is to pay down the cash and the debt that's terming. But what we're really doing is if you think about it, we're deleveraging our balance sheet. We want to protect our rating, that's one of our criteria. I think from the standpoint of share buyback, I think we still can find opportunities in our business to grow with growth platforms. So, I wouldn't tell you that our share buybacks are really there to protect our dilutive nature of some of our options, exercises. So, share buybacks are not high in our priority list, but I do think that we're looking at different ways to allocate our capital and I think in terms of M&A. We've talked about in the past that our priorities would be in Building Efficiency, and that's really what we're working on right now. That's how we can do a better job refining new growth platforms to complement our BE business.

Emmanuel Rosner - CLSA: I guess as a follow-up in term of the sustainability of the free cash flow, obviously, your CapEx went from $1.8 billion last year to $1.2 billion. You view that as a new sustainable rate and even possibly lower obviously if there's some divestitures going forward, or do you think that it was sort of like more of a one-time effort where you're trying to sort of refocus capital allocation back to $1.2 billion might be too low for on an ongoing basis?

Alex A. Molinaroli - Vice Chairman: Let me help you out. This is Alex and then Bruce can give some more specifics. In December, we're going to talk more about this, but our businesses are changing. The automotive business is more mature than it was in this growth period, and we've become more selective and then as we talk about becoming more selective that means that that we're going to have a different level of capital expectations within that business. It's not that there's not opportunities there. They're just not always attractive to us. So, we're clearly making a conscious decision in automotive about how much to fund that business, and so it'll have an impact on the growth of that business. So that's debt free cash flow that we generate. In Power, I think you'll start seeing that creep back up over time because those opportunities are there, just right now, where we are is in a position that we're utilizing the capital that we've already spent, but the plans are still in place to continue to spend in Power. So, I don't know that will stay at the exact levels that we're at right now, I think this next year will be a low again, but over time it will continue to come back, but what I would expect is when you see this free cash flow is, the opportunity to invest in BE, which is not capital intensive, which may show up in different ways, and that's where we talk about things like some significant growth platforms around acquisitions. The future, is a ways out but I would just tell you that's the way we're thinking today and Bruce, you've got something to add to that?

R. Bruce McDonald - EVP and CFO: Brian, you covered it well.

Brian Kesseler - VP and President, Power Solutions: Did I?

Stephen A. Roell - Chairman, President and CEO: The only place where you could comment would be in the reinvestment ratios or the rate that we're looking at right now and targeting.

R. Bruce McDonald - EVP and CFO: Yeah, I think what you're really going to see here is, first of all I guess maybe the 1.8 was extraordinarily high. If you were to go back and look at our historic level of investment, and you back out the last two or three years you'd find our average was less than a billion. So I wouldn't use the 1.8 as benchmark, that was a peak. It peaked out in Auto and Alex has already talked about the fact that we're going to deemphasize that. As we get into 2014, we can take a little bit of a breather in Power Solutions, because we've got a little bit, we've kind of invested ahead of the curve in lithium ion, in China and AGM, so we don't need to restock those capacities next year, and those are the ones as the market develops, those are the three things where you'd see CapEx creep up. Then on the balance sheet side, maybe just your first question, our target debt to equity, our debt to total cap ratio is in that 30% to 35%, so Steve touched on the fact what we're going to do with the money when we get it, but our target leverage is in that 30% to 35% range, and so we're focused on improving our operations here, we know as I talked about in my comments that we got to re-earn our investors trust and we think we're on the right track to do that. So, we're not going to anything large here in the next few quarters, but we are going to start to put more emphasis on finding some M&A platforms to accelerate some growth in largely Building Efficiency business.

Operator: Rod Lache, Deutsche Bank.

Rod Lache - Deutsche Bank: Couple of things. First in Building Efficiency, could you talk a little bit more about what the drivers were of that $50 million increase in earnings by business line? In other words, what are you seeing in terms of service systems GWS and how does that look going forward?

Alex A. Molinaroli - Vice Chairman: Sure. Hang on one second. What I would tell you is services has been strong, and it continues to be strong. Even though we're not seeing some of the top line that we've been hoping for and maybe with some of this weather will help out. But services been incredibly strong. Systems continue to just hang in there, but it's not having the kind of growth that it's had in the past. GWS is actually growing and continues to grow and in Asia I think those were the places. And on the year-over-year basis, we're seeing seen some benefit in Europe, but it's from a pretty slow – very small base. But it's kind of across the board. I would tell you that we're just seeing the kinds of programs we've put in place mostly around the margins and cost improvements benefit everywhere. Service being one that's getting the high productivity in the field.

Rod Lache - Deutsche Bank: So, from an earnings perspective, you're saying that service and the improvement in the GWS were the biggest driver of the $50 million year-over-year increase, is that right?

Alex A. Molinaroli - Vice Chairman: Two of the biggest, yes.

Rod Lache - Deutsche Bank: Yeah.

R. Bruce McDonald - EVP and CFO: If you look at the fourth quarter I think I can give you a little bit of color Rod. Alex just pointed it's going to continue to be service. Asia we're counting in the fourth quarter and to some extent the Middle East we've got some closing some jobs there. But I guess I will just tell you as I look at each of these sub segments here every part of our BE is positive increase year-over-year.

Alex A. Molinaroli - Vice Chairman: Rod, I mean It's actually about $40 million and just to help, yeah, so service was up $17 million, GWS up $9 million, Asia was up $5 million and other was up $7 million and I think you were to look behind that where you see, that's where the residential strength came from.

Rod Lache - Deutsche Bank: Then two housekeeping thing. One is what's the revenue in EBITDA specifically associated with the HomeLink business just that we can understand what's left, and point of clarification that 3% to 4% increase in price that you have in Power Solutions how does that actually roll out, I understand there is contractual limitations and maybe your contracts with OE versus aftermarket might be little bit different?

Alex A. Molinaroli - Vice Chairman: So, let me take that pricing one versus, Alex and then I'll let Bruce comment on HomeLink. I think our announcement is in arrears of where we've already made the movements in the marketplace. So for the most part we're in pretty much control. So, I would expect that all this will be in place within the quarter, and hopefully most of it the first part of the quarter. I don't think there is going to be a whole lot of lag on this. Where we had the biggest lag on any pricing done recently was when we introduced the new premiums for lead that was something that we did to go back to the OEs and renegotiate. In this particular case, I don't really see much of a lag.

R. Bruce McDonald - EVP and CFO: Last year, just as a comment, Alex like maybe comment last year, we it moved up so quickly honestly we had a hard time.

Rod Lache - Deutsche Bank: Alex, that's global or is that just North America the price increase?

Alex A. Molinaroli - Vice Chairman: Well, that's the primarily North America and the rest of the world we'll announce price increases, but for them, it's a little less across the board the way that we manage the North American business is unique. So I would consider that North American.

R. Bruce McDonald - EVP and CFO: Your question in terms of Gentex, As part of our discussions and our agreement with Gentex, we've agreed jointly what we're each going to say and we can't really say anymore, I'd refer you to them to get the answer of that question.

Rod Lache - Deutsche Bank: Any color on whether it's half-year electronics or it's close to, just general flavor for what you still have left?

R. Bruce McDonald - EVP and CFO: I can't comment.

Stephen A. Roell - Chairman, President and CEO: What we typically do, right after we – we have a transaction like this, we typically when we closely we provide you more detail regarding what the gain is, what the book gain is, what the after-tax proceeds are et cetera. So, we typically do that at the time we close, right.

Rod Lache - Deutsche Bank: Right.

R. Bruce McDonald - EVP and CFO: The only thing that I can tell you on there is, we expect very minimal tax leakage. So pre-tax, it is largely – it'll be a minimal tax charge – cash taxes.

Brian Kesseler - VP and President, Power Solutions: I'll just make a side comment, because everybody else is too polite not to say it is that just, a lot of the noise has been out there in the media. It hasn't been helpful and it hasn't been true. So I guess everything on the Internet is not true.

Stephen A. Roell - Chairman, President and CEO: We're referring to the general press.

Operator: David Leiker, Baird.

David Leiker - Robert W. Baird: I wanted to try and dig to this battery base, particularly here in North America, that – we've got several quarters in a row of weak demand, and in my mind there is three buckets behind it. If you could help clarify where we stand on this; one, market demand and number of vehicles on the road in the U.S. hasn't grown for a while. The weather has been an issue, and then is there an issue here with the batteries lasting longer than what – I mean, clearly they're lasting longer than what's your warranted period, but is that an overbuilding issue that presents a margin opportunity for you? Just kind of fill in some color along those issues.

Alex A. Molinaroli - Vice Chairman: I'm not sure I understood the last. Could you clarify the overbuilding part of that question?

David Leiker - Robert W. Baird: I mean, if you build a 48-month battery and it lasts 60 months, you've put too much lead in it?

Alex A. Molinaroli - Vice Chairman: No. No, no, no. Well, we've never been guilty of putting too much lead in the battery.

David Leiker - Robert W. Baird: Okay.

Alex A. Molinaroli - Vice Chairman: I still think it's been a weather related phenomenon. Now, clearly batteries have become better and better and the systems in the vehicles have become better and better, as it relates to their own systems and the wear and tear that they have on batteries. That is all true, but what we're seeing here is a phenomenon that correlates directly to weather. That doesn't mean that there's not other factors. So, eventually this will catch up. Now there is some lag. If you go back in time when we had the downturn of the OE – the OE downturn, there will be –a bubble that we see, and car registrations have been reasonably consistent, not growing like we see in the past. But all of our models would say that we have pent up demand. So, I do still think it's just a matter of when, not if. We haven't lost any share, and even if battery demand was being put off, eventually we catch up to that. So, it's frustrating, and it's frustrating for you, but it's even more frustrating for us. Unfortunately we've been able to offset that. We've grown our OE business, and that will be even more to come. We've secured a whole bunch of customers here recently and we're starting to secure some customers in North America and some larger retails. We're not ready to talk about that yet. So, we're also gaining share. So, I think, well, if it continues, we'll be able to compensate a bit for with new customers. But we're still planning for this volume to come.

David Leiker - Robert W. Baird: Then just to follow-up on the battery. Thanks for the number on the AGM. What portion of your shipment are AGM today and has that shift happened enough to start to also become a margin driver?

Alex A. Molinaroli - Vice Chairman: In Europe it's a margin driver, overall it's not, because still predominately that's a European number, and I guess – I don't have those numbers in front of me, so I'd be able to guess. Let's get back to you. But it's become a reasonably significant number in Europe in the OE business, but otherwise it's still on the margin. But it's moving the numbers. Our European business is very healthy and has driven a lot by the AGM business, but I don't have those numbers right here.

Operator: Brett Hoselton, KeyBanc.

Brett Hoselton - KeyBanc: I was hoping you could just briefly talk about the European automotive business; two things. One, production outlook, particularly curtailments or extensions of summer shutdowns in Europe. Then secondly, margin progression as we kind of move through the next year or two, what are your thoughts there?

Alex A. Molinaroli - Vice Chairman: Well, I can tell you for the fourth quarter, we don't – and we would know by now, but we don't see any significant production interruptions as around people really moving things around summer shutdown. So, there is no risk there. We would already have that announced and planned for. Obviously, as you know, in North America it's kind of the opposite. There's been several production increases, but those have been out for a while now. So I would say, like there always is breadth, there's very little revenue risk, quarter out, in terms of our industry, so we're not too worried about it. Then in terms of your question around the Auto margin guidance, I guess, I prefer to wait on that one. That's typically something that we share in our December timeframe. But we are on record saying that we – we have given sort of trend line guidance in terms of the types of margins, the glide paths that we expect, and right now I wouldn't expect it’s going to be materially different.

Operator: Brian Johnson, Barclays.

Brian Johnson - Barclays: Alex made a comment that I want to go back to with my main question that GWS stand-alone, the target is 5% margins. Want to get a sense when we think about the operating income, can we expect that similar kind of inflection, or is in part you get the 5% by restructuring some of the pass-through revenues?

R. Bruce McDonald - EVP and CFO: Yeah. I'm sorry, firstly the question, if you the question that you had was whether or not we get through restructuring some of the revenues. That's not what we're doing.

Alex A. Molinaroli - Vice Chairman: No, no, no this is operational. Okay, you're talking about pass-through versus – no, no – well, the first thing as Bruce pointed, and I did say EBIT, in segment income it's probably 4%.

R. Bruce McDonald - EVP and CFO: But then we allocate all the costs…

Alex A. Molinaroli - Vice Chairman: Pay for all of us, but so at 4% it's still significant improvement of what we've got and it changes the entire complexion of the business, but that has nothing to do with changing how we report the numbers. It has everything to do with how we drive our operations, and so it's very much a change program from an operational viewpoint to leverage the scale that we have, that in the past we've not been able to take advantage of. Scale meaning, people and truck density and people density at our sites. So, we'll have more information about that strategy probably in December, but it's something that's been well thought out. We understand what we need to do and the team's already working that problem. So, I think we'll start to see that stuff and we're talking over a two year period to get that. So, we'll start see the improvements over the next year.

Stephen A. Roell - Chairman, President and CEO: We've made several references today to December. Let me explain to you what we're thinking. Right now, our intention would be with our calendar year-end earnings call in October will provide you with guidance relative to the first fiscal quarter of 2014, and then in December, as we did last year it's our intention not to repeat what we did last year, which is to hold an Analyst Day in the December timeframe. So, that's when Alex and I – and Bruce and I referred to December. That's why we were referring to that date, okay.

Brian Johnson - Barclays: That's probably the answer to my follow-up question, which is similarly on the – what kind of SG&A say should we be thinking about from the consolidation within the North American three lines of businesses?

Alex A. Molinaroli - Vice Chairman: I don't think we really have a number for that. I mean, obviously, we've got – we set aside restructuring to help us streamline that business, but we'll provide more color on that as we move forward.

Stephen A. Roell - Chairman, President and CEO: But it's the right question Brian.

Operator: Colin Langan, UBS.

Colin Langan - UBS: Can you just -- you touched on that a couple of questions earlier, but on the Auto Experience, can you talk about the margin progression sequentially from Q3 to Q4, I mean you took some restructuring action this quarter. Should we still see acceleration, because you commented I think on the general trend over time hasn't changed but should we see some improvement again next quarter or is this sort of restructuring is kind of down…?

Stephen A. Roell - Chairman, President and CEO: Colin, I know there is a huge improvement on a year-over-year basis. Q4 is typically a good quarter for us, even though we do have some business shutdown impact in Europe. So, I don't have on the top of my head, I don't have the margins for Auto in Q4. I know they're up, but I don't know it's up as much as we have it here in this quarter.

Colin Langan - UBS: And any color on the restructuring benefit I mean is most of it done in Q3, I mean you took some more this quarter, so that would be really seeing into next year's results?

Stephen A. Roell - Chairman, President and CEO: Yeah, yeah, the things that we took this quarter are definitely not 2013 items and but as I said in my comments, we're still gaining momentum in terms of restructuring. So, there is more tailwind in Q4 than there was in Q3.

Colin Langan - UBS: And can you provide a little color on, you said they were some other charges in Auto Experience that sort of off that gain, I mean any numbers around that would be helpful?

Stephen A. Roell - Chairman, President and CEO: Yeah, it was like $20 million. So then that is the two items like $9 million, say $0.01 of share of that equates to and like I said, the charges related to litigation reserves and what we've seen there is an uptick in product liability losses and it really has to do with the period of which the ROE customers were bankrupt. So pre-bankruptcy cases – I think and we're not unique here is what you're going to see is, suppliers and the OEs were generally standing shoulder to shoulder, and when we had a product liability case, we generally paid a significantly lower amount than the OE. So we contributed to the settlement. Now you've got cases where the OE is standing beside us and we're seeing sympathetic juries awarding large sums of money and we're standing by ourself, so I think you're going to see in the industry that trend sort of pick up, so we had some losses on that, that were not normal and then the other item that I talked about was just related to cost associated with our downsizing in South America. So in South America, we've talked about going from like 11 plans to 3 or 4 and so there's just changes related to that downsizing.

Colin Langan - UBS: And the litigation reserve, that's in your North America margin still, even though it's 7%?

R. Bruce McDonald - EVP and CFO: Yup.

Glen Ponczak - VP, IR: Thanks everybody for calling. Dave Urban and I are available of course through the rest of the day for your follow-up questions, and I'll turn it over to Steve for some concluding comments.

Stephen A. Roell - Chairman, President and CEO: Yeah. Just real quick. I think we were very pleased of quarter as Bruce mentioned, I think we gained credibility back. but we understand we've got ways to go here. We got great momentum in our businesses, and I think the fact that we expect strong earnings across all three of our reported businesses, but really as we talked to – responded to questions, it goes beyond that. We've got good growth and good prospects into the subsets of all three. So we feel very good, because it is on awful lot of our legs and thank you much for coming on and we look forward to the call at the end of Q4, and having a record year. Thank you very much.

Glen Ponczak - VP, IR: Thank you.

Operator: Thank you. This concludes the conference. Thank you all for participating. You may now disconnect.