Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Glen Ponczak - Director of IR

Steve Roell - Chairman & CEO

Keith Wandell - President & COO

Bruce McDonald - EVP & CFO

Analysts

Himanshu Patel - JPMorgan

Rod Lache - Deutsche Bank

Brian Johnson - Barclays Capital

Chris Ceraso - Credit Suisse

Brett Hoselton - KeyBanc

Johnson Controls, Inc. (JCI) F4Q08 (Qtr End 09/30/08) Earnings Call Transcript October 23, 2008 11:00 PM ET

Operator

Welcome, and thank you for standing by. All participants will be on listen only until the question-and-answer session of today's conference. I would also like to remind participants that the conference is being recorded. If you have any objections you may disconnect at this time.

I’d now like to turn the call over to our speaker, .Mr. Glen Ponczak. Sir, you may begin.

Glen Ponczak

Thank you, Tanya. Good morning, everyone, and thanks for joining us. We'll start today by reminding you that Johnson Controls has made forward-looking statements in this presentation pertaining to its financial results for fiscal 2009 and beyond that area based on preliminary data and are subject to risks and uncertainties.

All statements other than statements of historical fact are statements that are or could be deemed forward-looking statements and include terms such as outlook, expectations, estimates or forecasts.

For those statements the Company cautions that numerous important factors, such as; automotive vehicle production levels, mix and schedules, financial distress of key customers, energy prices; the strength of the US or other economies. Currency exchange rates, cancellation of or changes to commercial contracts. Liquidity; the ability to execute on restructuring actions according to anticipated timelines and cost; as well as other factors discussed in item 1A of part two of the Company's most recent Form 10-Q filing, which was filed August 8, 2008, could affect the Company's actual results and could cause actual consolidated results to differ materially from those expressed in any forward-looking statement made by or on behalf of the company.

I'm pleased to be joined this morning by Steve Roell, our Chairman and Chief Executive Officer. Steve in a minute or so will have some opening remarks and an overview of the quarter, then Keith Wandell, our President and Chief Operating Officer, will give us details of the performances of each of the businesses in the quarter, and then Bruce McDonald, Executive Vice President and Chief Financial Officer, will provide a financial review. That, of course, will be followed by questions and answers.

And with that I'll turn it over to Steve.

Steve Roell

Okay. Well, thank you, Glen. Well, good morning. I know we've got a smaller number of participants this morning than normal. I assume that's due to the fact we were just in New York and spoke to many of you.

If you'll allow me I'm going to go through just very quickly our fiscal 2008 results. As you know from our press release, and as we guided, our sales were up 10% to $38.1 billion, up from $34.6 billion in fiscal 2007. Our earnings per share from continuing operations were up 11%, $2.33 in '08 versus the $2.10 in 2007.

I think again in 2008, we were very pleased with how we ended the year in terms of our market share gains. We highlighted the fact when we were in New York about our backlogs, particularly the Automotive Experience backlog, which is at $4.5 billion for the period of 2009-2011. That's again net new business that we will launch during that period of time due to the fact that our Building Efficiency group the backlog was up 12% to $4.7 billion. That's a record level for us entering fiscal 2009.

Focusing just on the fourth quarter and again, I think that the results were very much consistent with not only what we shared with you at the third quarter call. But obviously what we shared with you in New York last week.

Our sales at $9.3 billion were up 3%, our earnings per share at $0.73 were down 6%. That's consistent with how we guided and as you'll recall, back in the third quarter, we highlighted the fact that higher commodity costs, primarily a one time item in our Building Efficiency, and our Power Solutions group, as well as costs associated with the Plastech acquisition, a $0.03 impact, but those are the two factors that really drove our earnings below the prior year level.

Before I go to the accomplishments I'd like to, just again, thank all of our employees that are listening and the leadership team for their efforts in this very difficult time. If we just then focus on 2008, again some of the accomplishments that we've highlighted, Building Efficiency, very proud of the fact we had double digit top line growth.

We continue to expand our energy efficiency capabilities. We highlight in this slide just a few of the recent smaller transactions and acquisitions, but they're consistent with the type of work that we're looking at, both Gridlogix and PWI. Gridlogix was just announced I believe last week.

Both of those have to do with providing additional energy and greenhouse gas management advisory services, or in the case of Gridlogix it's really software middleware that allows our customers to aggregate their energy and greenhouse gas data across systems and their enterprise wide IT systems.

As I mentioned our record backlog at $4.7 billion 9-30 of '08 up 12%, and I'm very proud of the fact we launched a number of new products in fiscal 2008. As an example a 33 inch furnace, the highest efficiency rated furnace on the market. That came out late in fiscal 2008 and we had a number of different enhancements to our Medacis products, as well.

In Power Solutions, we increased market share, I'll highlight the fact that we now have Ford's -- 100% of Ford's OE business, and that's in a multiyear contract. We continue to win a number of contracts with major wholesalers and retailers, as well, in the US, as well as in Europe.

We do have some additional hybrid development contracts. We're not going to go into a lot of detail on that. But again, in fiscal 2008, we did receive an $8 million development contract from USABC, which is basically a consortium of OE's and the DOE. On the Automotive Experience side we launched over $750 million of new business in fiscal 2008. I've already mentioned the record backlog. Higher sales in Europe and Asia, we continue to penetrate and diversify from a geographic standpoint. We had a nice rebound in the North American margin in that period. And our significant segment income improvements taking place in Asia.

We've talked about the environment, but I'll highlight that a little bit again, starting with the fact that on the positive side we see strong global demand for efficiency and sustainability. You'll hear from Keith in terms of our growth in our Power Solutions business.

We still continue to see good institutional building construction taking place and demand in the retrofit markets. On the negative side, we're all well aware of the fact that we're seeing softness and declines in the North American Auto and a rapid deterioration in the European Auto production build, which we highlighted and discussed in detail in New York.

Just to highlight the fact, our merging markets are slowing but are very -- still strong markets for us. We had roughly $6.5 billion in sales in the emerging markets. You have to recognize that there is unprecedented uncertainties. We continue to see fluctuating commodities and currencies, and that will continue to be something we'll have to update in our forward-looking forecast.

From our standpoint, looking at the environment we're in, we ended the year with record backlogs in two of our businesses. We continue to diversify from a geographic standpoint. We have a number of businesses, which we believe are very low cyclical. Certainly our service business, whether it be our truck base or our facilities management in lumpy efficiency, as well as our battery after market business are very good stable businesses and anchors for us.

As I've indicated, we continue to invest in the future, and that's really the key theme of how we're approaching this economic cycle. We are taking aggressive actions to improve our cost structure. And maybe more importantly, we continue to be well positioned relative to our capital and balance sheet where we're leveraged. We just met with the ratings agencies and we feel good about our credit ratings and we feel we have great access to capital.

Just a few comments about how we manage through the cycle. In this environment, I think we are extremely well positioned, certainly in our markets, to improve our competitive position and enhance our market share. We will continue to focus on executing our growth strategies.

We want to stay close to our customers and make sure that we can react to the changing markets and their needs. We'll never sacrifice our long-term to chase short term performance. I've indicated in the past that we've got a good financial strength and we'll continue to invest in the future.

What our shareholders should expect from us is that we execute in our growth strategies that we stay focused on the long term and we manage the short term in that context. And then the last point, if you recall Keith's presentation in New York, and we'll talk more about it today. But in this environment being able to improve our cost structure, both from the standpoint of our restructuring activities, as well as our focus on improvement, is just critical to how we'll adopt and respond to the ongoing uncertainty we see in our marketplace.

So, with that I'm going to turn it over to Keith and he'll walk through each of the three businesses. Keith?

Keith Wandell

Thank you, Steve, and good morning to everyone on the call today. I thought I'd give you a little more context around each of the three businesses.

We'll start with Building Efficiency, net sales in our Building Efficiency business were up 8%, from $3.6 billion to $3.9 billion quarter-to-quarter, and we saw a double-digit increases in Asia and the Middle East for both our systems and services. We had higher global chiller unit volumes, particularly strong increases in Latin America, the Middle East and Asia.

We had strong solutions growth, which was really driven by our energy efficiency driven solutions offerings, which we continue to see strengthen and I'll comment on that again in a few minutes. And our global workplace solutions business was up 21%, based on both new contract wins, as well as expansion with some of our current customers.

Segment income quarter-to-quarter was flat at $316 million. We had higher European and international margins, really driven by our operational improvements. But we did have lower global workplace solutions profitabilities really due to the new contract launch costs that we incurred, as well as a non-recurring benefit in Q4 of last year.

And we also had lower systems margins that were really driven by just a temporary lag in recovering the commodity costs, I think we feel like we've caught up with that now -- as well as some investments that we made in both our systems sales force and some of our growth initiatives.

Our commercial backlog is up 12%, as Steve mentioned to $4.7 billion, where we've seen double digit increases in North America, driven mostly in the Federal Government sector, as well as higher education, and in Europe and the rest of the world, as well. And our orders also were up double digits, North America 23% and as I mentioned earlier, the solutions part of our business in North America is up 41%. And again, that's really driven by the high demand for our energy efficiency solutions. Europe is up 10% in orders.

Moving to our Power Solutions business, net sales were up 7% quarter-to-quarter from $1.25 billion to $1.34 billion. And really we had some slightly lower unit shipments driven mainly by the lower OE production volumes. We had basically steady after market demand and that was really offset by higher unit selling prices.

Our segment income was off 12% from $161 million to $142 million. And again, that was particularly due to the lead volatility that we saw in the Q4 quarter, as well as a temporary lag in recovering the non-lead commodity increases of resin, sulfuric acid and diesel fuel. As you can imagine, transportation costs in the battery business are a very significant cost component of our business.

And so, again I think we've caught up with those cost increases and it shows in the higher unit selling prices going forward. Again, I would just remind you that our basically globally our 2008 sales breakdown was roughly 25%, original equipment and 75% after market.

And as Steve mentioned, we did win new business in Q4, both in the wholesale part of the market in North America, as well as a piece of a major retailers business.

In the Automotive Experience side of the business, our net sales were off 2%. They went from $4.2 billion in Q4, 2007 to $4.1 billion. And in North America, our revenues were down 12% while the industry was down 17%. And the way that we made up some of that revenue was really by the incremental revenue from the Plastech acquisition in Q4.

Europe was up 4%, but excluding foreign exchange was down 6%. And our revenues in China on a non-consolidated basis continue to grow in Q4 and they are up 26% for the full year in 2008. Segment income was off 20% from $183 million to $147 million, and really we incurred a slight loss in North America due to all the -- well, first of all, the expense that we took for the Plastech integration, as well as the volume drops. We took a small loss of $3 million and that was down from $73 million positive 2007. and we were able to close that gap by improved European margin improvement, driven mostly by our cost improvement initiatives, as well as significantly higher profitability in China.

We do see improved operational performance of our joint ventures. You might remember last year we were continuing to invest heavily in our joint ventures in China and that's paying dividends. As a matter of fact, our segment income margin improved from 1.3% in Q4 '07 to 5.8% in Q4 '08 in China. So we feel really good about that, as well.

And so those are my comments on the three businesses and with that I'd like to turn it over to Bruce McDonald.

Bruce McDonald

Thanks, Keith. So just looking at our numbers for the fourth quarter you'll see that sales were up to a record $9.3 billion, which is a 3% increase from the prior year. However, if we back up the favorable impact of foreign exchange our overall revenues were down about 1%.

In terms of Building Efficiency, we grew our sales in the fourth quarter 8%, really reflecting our exposure to some high growth international markets the growth in global workplace solutions business.

As Keith indicated, our sales in the Power Solutions were up 7%, and for the first time -- in quite some time lead was actually a year-over-year negative factor for us. And depressed our growth right rate by about 200 basis points. In Automotive we were down 2% if you take out foreign exchange, an aggregate our sales were down 7%, reflecting the lower levels of production.

You see our gross profit at 15.3% was down from 15.8% in the prior year. This was primarily due to short term unrecovered material economics in both Power Solutions and Building Efficiencies, which we don't expect to continue into Q1, and also the depressive impact of the Plastech acquisition.

We’re -- If we exclude those two items our underlying margins were up both 20 basis points. The SG&A at $850 million was up 8% versus the prior year. That increase is all attributable to foreign exchange and the addition of Plastech joint ventures into our numbers here.

Equity income at $31 million up nearly 50% from the prior year. This really reflects the benefit of our automotive investments in Asia, and also improved business performance in most of our overseas joint ventures investments in the Power Solutions segment. And as we talked about last quarter, we expect to continue to show favorable year-over-year comparisons in equity income as we enter into 2009.

On slide 11, let me comment here on our numbers, excluding the restructuring -- the $495 million restructuring charge that we've talked about a few times before, which as you can see, impacted both our minority interest line and our income tax line.

Net financing charges of $54 million you can see are $14 million dollars lower than the prior year. We benefited in the quarter from lower debt levels, lower interest rates and the favorable impact, settlement of some of our spots.

With the widening of credit spreads that we've seen recently, we don't anticipate that our Q4 year-over-year improvements are going to be this large as we go into 2009. And as we talked about in New York, on a full year basis we're forecasting that net financing costs are going to be about $10 million lower on a year-over-year basis, but you won't see this level of improvement as we go into 2009.

For the quarter our underlying tax rate was 21%, which is consistent with both our guidance and year ago levels. And just to comment on our restructuring charge we actually recorded the tax benefit of only 13% on our charge, as some of the -- as a good proportion of the charges are going to be incurred in jurisdictions where we have unbenefited tax loss carry forwards.

Excluding the impact of restructuring you'll see that minority interest loses increased by about $3 million and this is attributable to our North American automotive joint venture and the minority share losses in our Plastech joint venture, most notably.

From bottom line perspective $0.73 earnings per share, down versus the $0.78 last year, we did note that there's $0.09 of unrecovered commodity economics and the $0.03 negative impact of Plastech, so an aggregate it was the $0.09 that impacted us negatively in the fourth quarter here.

Just talking a little bit about 2009 outlook, our earnings guidance of $1.95 is unchanged from the -- from our call for our meeting in New York last week. But we are introducing here our Q1 guidance, and I talked a week ago about Q1 being down significantly more than the full year impact.

So we're forecasting earnings per share of $0.22 to $0.24 in the fourth quarter -- in the first quarter, I'm sorry. We're anticipating strong year-over-year improvements in Building Efficiency, primarily driven by top line performance, as we execute our backlog.

Despite some of the signs that we're seeing of the softness in the commercial construction leading indicators, we continue to see good growth in our key international markets, our facilities management business and our energy solutions business most notably.

Power Solutions, we anticipate Power Solutions getting off to a good start here in 2009, though I would caution you that we're seeing some unprecedented volatility in lead pricing and that's going to be a challenge for us to manage through here the first quarter. We don't anticipate that being a long-term issue, but the volatility here, that could present some challenges for us in Q1.

Overall, we expect to record a loss in our Auto business in Q1, as production levels are going to be significantly lower than the already depressed 2007 levels. In terms of our guidance, we're anticipating North American production down 18% versus prior year, and Europe being down somewhere in the 13% to 14% range.

Our businesses are, I would say are aggressively implementing our restructuring initiatives. But for the first quarter this actually results in a net cost to us. We expect that our restructuring's going to be neutral to our Q2 numbers and it's going to provide an accelerating benefit beginning in Q3.

And as I talked about in New York, we expect the net benefit of our restructuring program to provide an earnings benefit of somewhere between $0.20 to $0.25 cents per share in 2010. So we start to start to see that benefit as we walk through a successful quarter here.

Then lastly, I'll just turn it over to talk about our balance sheet and cash flow position for the year. We generated $1.9 billion cash flow operations, which was up marginally from the level 2007.

Our net debt-to-total capitalization was about 27.5% and for the year we were more or less working capital neutral if you exclude the impact of the restructuring charge, despite the fact that our sales grew 10%. If you look at our sort of trade working capital, which is -- we define as payables, receivables and inventory, with these declines are 7.7% of sales versus 8.2% in 2007, and not really reflecting our strong focus on the operational part of our working capital.

In terms of capital expenditures, we spent on a net basis about $755 million. This was consistent with our guidance and comparable to 2007. And then as we previously announced we formed our majority joint venture Plastech in the fourth quarter. This resulted in a net cash outflow in Q4, see that on the acquisitions line of about $169 million.

So as we exit 2008, our balance sheet in strong position. Overall our liquidity is in -- we have access to capital. And it is our expectation that in this difficult economic environment there's going to be opportunities that are presented to us, we're pleased to have the financial flexibility to take advantage of.

With that I'll turn it back over to Glen for --

Glen Ponczak

Okay, we're ready to take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question, Ryan Brinkman of JPMorgan, your line is open.

Himanshu Patel - JPMorgan

Hi, it's Himanshu Patel of JPMorgan.

Steve Roell

Hi, Himanshu. We can hear you, we're getting a little bit of an echo, but go ahead.

Himanshu Patel - JPMorgan

Two questions. First, on the services business, what percentage of that would you say is discretionary?

Steve Roell

How much of it's discretionary? I don't know how to answer that question. I guess -- there's two -- maybe me try to -- let me breakout the service, okay? If you were to think about issues like retro -- the retrofit side, do you want to go all the way to that definition of service or a finer definition, Himanshu?

Himanshu Patel - JPMorgan

The retrofit side broadly speaking.

Steve Roell

Okay. The retrofit is a -- it would certainly be discretionary. That's really where we do a lot of our work, that and what we call performance contracting would be work that we do directly with owners. We also have what's called prime. Those would be the categories that I guess I would describe to you, are truly discretionary. The service side is -- there's two elements there or three elements, really. There's truck based, which is some of that is under contract. Some of that which is basically we charge a labor material on a call basis, as you can imagine.

And then we have what's called facilities management. I'm not sure -- I guess the part that you might consider to be discretionary is probably the strongest part of our backlog right now in our pipeline, and that's the acuity we're seeing in prime retrofit with our building owners, as well as performance contracting. Keith talked about the fact that we're seeing good demand in our backlog. We're seeing it in what we call our pipeline, as well.

Himanshu Patel - JPMorgan

The prime retrofit, that would show up in the systems division, right? That's not part of service, right?

Steve Roell

No, no, prime is our definition of where we have retrofit activity, which is direct with the owner retrofit, it’s not new construction.

Himanshu Patel - JPMorgan

Got it, okay.

Steve Roell

That's probably our strongest element right now.

Himanshu Patel - JPMorgan

Okay. And then secondly, I know you mentioned revenues in North American systems were down, I mean were up 4%, I think. Did you guys talk about -- you mentioned profits were down, any -- and could you give us some rough numbers on in sort of how much they were down?

Steve Roell

we'll go to the sub-segment.

Bruce McDonald

Yes. Well, for the -- if we just look at North American -- you said systems or service? I'm sorry.

Himanshu Patel - JPMorgan

Systems.

Bruce McDonald

Systems. So, we were -- on a year-over-year basis we were down about $17 million. So we went from $80 million in the prior year to $64 million. And the sort of factors that negatively impacted our performance were -- that's where our commodity exposure flows through, and we had some warranty charges in our equipment business. Those to be the two prime factors for the decline.

Himanshu Patel - JPMorgan

Okay. And then the commodities side, would that largely take care of itself with the future price increases in the following quarter, or does that take a couple more quarters to work itself through?

Bruce McDonald

It's largely behind us. It's a little bit of a headwind for us in Q1. But the price increase that we've already implemented, we're just waiting for those to work their way through to backlog.

Steve Roell

Yes, I guess going back and if you think about it, Himanshu, most of those price increases were introduced back in May. So what we're talking about our contracts that we aware prior to that period of time which we're executing now. Okay.

Himanshu Patel - JPMorgan

And then last question for Bruce. The tax rate, it's been pretty nice in terms of being low for a while now. But with European economies weakening, European car sales going down, we'll see, I guess, what happens on Building Efficiency in Europe. I mean does the effective tax rate potentially going to start moving higher now?

Bruce McDonald

Well, I think at the level, we're at right now we're petty comfortable that 21% is still a good number for '09.

Himanshu Patel - JPMorgan

But, why wouldn't that start going higher if your lower tax jurisdiction earnings start moving downward. Is that just because North -- US earnings are going down, as well, at the same time --

Bruce McDonald

Exactly.

Himanshu Patel - JPMorgan

And it's a mix the same.

Bruce McDonald

Yes, that's exactly the point.

Steve Roell

No, I wish I could grow from the other parts of our business in around the rest of the world.

Bruce McDonald

So China, for instance, Middle East, those are low cost jurisdictions, so when you look at the overall net balance, you're right, Auto North -- Auto Europe is declining, but international Building Efficiency and Power Solutions are more than offsetting that. So our mix is comparable.

Himanshu Patel - JPMorgan

Understood. Thank you.

Operator

Rod Lache of Deutsche Bank, your line is open.

Rod Lache - Deutsche Bank

Good morning, everyone.

Steve Roell

Hi, Rod.

Rod Lache - Deutsche Bank

On the question of -- that Himanshu asked about the discretionary, I think we're hoping for some kind of quantification. Can you give us just a sense of the percentage of that service business as prime retrofit or can you somehow just parse out for us the things that are very more or less stable like GWS and non-discretionary repair?

Steve Roell

The certainly GWS, those are multiyear contracts for scope of services, Rod --

Rod Lache - Deutsche Bank

Yes.

Steve Roell

-- and also, when you look at even the truck based services?

Rod Lache - Deutsche Bank

Yes.

Steve Roell

The things that are contracted, the service agreements and such, I mean those are all things that continue along. The analogy would be when you get your oil changed in your car and then come back and say, well, you should change your filter and you say, well, we'll do that a little later. I mean that's the sort of thing we're talking about when we're talking about discretionary. You still have to do the core service in order to make sure that the equipment is running well, if using the least amount of energy, that it's dependable, all those sorts of things. So the core parts of that service business are still stable and that's just really sort of those add ons that become deferred maintenance that they'll have to do at some later point.

Rod Lache - Deutsche Bank

Well, how big was GWS last year, roughly?

Steve Roell

GWS last year was $3.2 billion.

Rod Lache - Deutsche Bank

Okay. And you're saying the majority of the rest of service was non-discretionary. There might be, what a single digit percentage of that that would be some kind of prime retrofit?

Steve Roell

We're going into an awful lot of detail here. okay? I guess I would just tell you, if you think about the prime retrofit and the owners most of that work -- and I don't know why we're using the word discretionary and non-discretionary. I think what you're saying is how much of it is secure.

Let me try to address that piece. Most of the work that we're doing with an owner is either -- is already an expansion of existing facility, okay, that's what that represents, and it's -- a lot of the performance contracting piece, which is the larger piece, is tied to an energy savings opportunity, okay?

And so saying it differently -- let me try different. We have not seen, I can't think of any cancellations in our backlog.

Rod Lache - Deutsche Bank

Right.

Steve Roell

I mean, that's probably a better way to phrase that. The only softness that we saw that Keith is referring to is probably $3 million worth of business, or something in that neighborhood, that moved away in our scheduled work at retailers. It was very specific, okay, in that sector and no other sector.

Keith Wandell

Into weather.

Steve Roell

So, Rod, and the weather was the other side of it, which that is just a function of you either get a lot of calls on labor and material. And we saw probably the lowest level of labor and material we've ever seen. But going back to your concern over discretionary and nondiscretionary, I would just tell you, that when we've seen economic slowdowns in '90, '91 or in the '80s, we didn't see a pull back in those areas at all.

Rod Lache - Deutsche Bank

Understood.

Steve Roell

Okay.

Rod Lache - Deutsche Bank

Can you tell us what the organic growth exchange would have been in Building Efficiency this quarter?

Bruce McDonald

It was --

Keith Wandell

5%. Is that right?

Steve Roell

Yes, 5%.

Rod Lache - Deutsche Bank

Okay. And just another -- just a question about your ability to sort of flex to whatever economic environment you see in Automotive or Building Efficiency. Could you just give us any color on your ability to kind of move the SG&A up or down for various planning scenarios to the downside?

Steve Roell

Let me try one. On Automotive, and Keith, you can chime in here, too, I guess I would say that our SG&A that's tied to new program launches for our customers, clearly we'll make that happen, okay. Beyond that we're already taking through our restructuring we've already got -- we already have a fairly significant reduction taking place in our SG&A. Both in Europe and North America that's what we really announced.

Rod Lache - Deutsche Bank

Right.

Steve Roell

In terms of further flex there may be some but not a great deal.

Rod Lache - Deutsche Bank

Okay. And then on the --

Steve Roell

On the Building side, though, that I wanted to mention to you, that is a labor intensive business, there is a tremendous amount of flex there. So if volume were to decline there our ability to move on the SG&A is fairly quick.

Rod Lache - Deutsche Bank

Just one last one and I'll get off. But it seems like you're positioning yourselves for opportunities, you reiterated that again on the call the balance sheet is strong. It would seem like most of the distress and these kinds of major opportunities would probably occur in the automotive side of the business.

Would you agree with that and is that something that you're looking at potentially participating in? Would you expect more consolidation on that side of the business?

Keith Wandell

Well, I wouldn’t necessarily conclude it's mostly going to be on the auto side, Rod. I think if you look at -- if you think about some of the strategies we've talked about like growing our service business and doing tuck under acquisitions or adding sort of additional products to our mid market offering within Building Efficiency I think both of those sectors I would expect that if credit continues to tighten here, we’ll present some opportunities for us as people struggle to get financing. So I also think you're going to see just the distress of our -- the financial distress of our -- some of our competition in Power Solutions presents some opportunities and as lead weakens and some of the profits I think those competitors earn on their smelting operations falls away.

And clearly we're going to see opportunities in Automotive that's probably which one's going to happen first though.

Steve Roell

I guess, I'd even tell you in the Building Efficiency side there are a number of large competitors who are pulling back with some of the systems work right now. And so I think that there's going to be opportunity for us there and that's why we're adding sales force.

Going back to the discussion about discretionary and investments, when we talk about investing in the future we're growing our sales forces. We're adding a significant number of players to our solutions business that Keith talked about because of the opportunity around the energy story, okay? So when you see our SG&A, part of that story, and certainly in the BE side is trying to take advantage of the market opportunities that we see from the mega trend. But also the fact that we do see some of the competition by pulling back.

Rod Lache - Deutsche Bank

Okay, thank you.

Operator

Brian Johnson of Barclays Capital, your line is open.

Brian Johnson - Barclays Capital

Good morning. Moving over to the Automotive, reflecting that it seems to be somewhat back-end loaded, and with respect and I certainly understand part of that is the restructuring impact is back-end loaded, as well. Nevertheless, did you see -- have you materially shifted down your expectation of global production for your fiscal 1Q, everyone else's calendar 4Q, especially in Europe?

Bruce McDonald

No, I mean, the numbers that we're talking about here in Q1 are consistent with our assumption that we're going to see 10% decline in Western Europe and 12% in North America.

Brian Johnson - Barclays Capital

So you haven't moved that front loaded?

Bruce McDonald

No, I -- we just anticipate Q1 can be down more than the full-year average at this point in time.

Brian Johnson - Barclays Capital

Okay. Does the AC Delco sale by GM affected in anyway your battery business that you picked up from Delphi?

Keith Wandell

No, this is Keith. That was -- the Delphi business we picked up they retained the AC Delco brand and so nothing really changes there, and I'm not even certain that -- for us that that's even a blip on our radar screen.

Brian Johnson - Barclays Capital

And in terms of lithium ion batteries, any kind of -- what are your expectations vis-a-vis when we can see the lithium ion battery? I know you talked a bit about this in New York, but any update on when the first production ones going to be on the street.

Keith Wandell

I think the latest we heard is probably summerish next year, in 2009.

Brian Johnson - Barclays Capital

And is that battery fully passed all of its internal hurdles, technical milestones?

Keith Wandell

We're ramping up for production, Brian, so yes.

Brian Johnson - Barclays Capital

Okay, thanks.

Steve Roell

Thanks, Brian.

Operator

Chris Ceraso of Credit Suisse, your line is open.

Chris Ceraso - Credit Suisse

Thanks, good morning.

Steve Roell

Hi, Chris.

Chris Ceraso - Credit Suisse

Can we talk for a second about the sensitivity to volume levels in the Automotive business in the US versus Europe. Specifically the contribution margin on a lost dollar of sales, if it's typically I don’t know if 20% that we're used to seeing maybe less than that in the US, is it different, is it better, is it worse in Europe?

Steve Roell

It's a hard question to answer on a phone call here, but I guess what I would tell you as we -- our ability to flex down in Europe is limited because of our backlog position. I mean, I guess if you were taking a very short term view you would say having a -- it's a bad thing having incremental growth. Because we just can't take out a lot of our launch teams and some of our engineering resources. So the downside hit that we're going to take with volumes dropping away here in 2009 is going to be higher than you would probably expect and I think I'll just leave it at that.

Chris Ceraso - Credit Suisse

So, then as it relates to the guidance for Q1, you're talking about a loss in Automotive, are you going to lose money in Europe, too, or just North America?

Steve Roell

No, we're not going to lose money in Europe, but the profitability of decline is large.

Chris Ceraso - Credit Suisse

Okay.

Steve Roell

In Europe.

Chris Ceraso - Credit Suisse

And then lastly, I don't think we spent too much time on this in New York and the details were limited when you first announced it. But can we dig in a little more on the restructuring, what specific actions in which regions and which businesses, any specific plants that you can highlight?

Steve Roell

Well, some of them we've announced, but some plants still aren't announced, and until we've made all the employee communications then it just wouldn't be appropriate.

Keith Wandell

Chris, we did go through some detail on that when we did make the announcement, so the slide deck is on the website and I'd be happy to -- that's why I'm here. I'm happy to talk you through that afterwards, if you'd like. But we do have some granularity there. Not to the level of plant numbers and things like that but the overall theme.

Chris Ceraso - Credit Suisse

Thank you.

Operator

[Operator Instructions]. Brett Hoselton of KeyBanc, your line is now open.

Brett Hoselton - KeyBanc

Good morning.

Steve Roell

Hi, Brett.

Brett Hoselton - KeyBanc

Let see, starting with the restructuring, Bruce, can you give me an estimate of what the non-qualified costs -- not including your restructuring charge, what they might be for 2009 and are there any non-qualifying costs in 2010?

Bruce McDonald

Very little in 2010, we talked about at the time we made our announcement that we thought the non-qualifying costs in '09 would be in the $40 million to $50 million range and that's increased. So it's probably more like $60 million to $70 million would be our best guess at this point in time.

Brett Hoselton - KeyBanc

Okay.

Bruce McDonald

So, $60 to $70 in '09 then and very little in '10.

Brett Hoselton - KeyBanc

Okay. And then on the commodities front and I apologize if you made this comment during the Analyst Meeting. But you talked about $50 million to $75 million of incremental commodities costs in 2009 said that you're about 80% complete with your discussions and so forth. But you also suggested that that number could come down. The question is simply, do you have any guess of what the potential decline in that number might -- could it be cut in half or is it more like $1 million or $2 million or $3 million or $5 million?

Bruce McDonald

We, all I would tell you is the way you should think about it is if the industry, the economy softens more than our assumptions then I would say we have a -- and then commodities should weaken more than we anticipated. And so it would partially offset the lower revenue.

Brett Hoselton - KeyBanc

Okay. And then finally, just so I understand the lead volatility in the first quarter, it sounds like it, I mean, I guess it's an aftermarket pricing issue, and possibly a delay in the price increasing if lead goes up?

Bruce McDonald

Yes, it's that plus it's also a fact that we're really seeing some huge cuts in OE and OES demand. So, when you think about in the aftermarket side we're much better protected because we're getting the used battery back. In OE and OES side, we have fixed, we have a hedge position that we enter in on a rolling 12 month basis and the amount that we hedge increases the shorter we get to production. And what we've seen is OE and OES volumes drop quite significantly here in the first quarter. And so we're in a position where we've got hour to the money hedges greater than our production requirements on the OE side. So it's more on that side than the aftermarket side.

Brett Hoselton - KeyBanc

Okay. Thank you very much, Bruce, gentleman.

Operator

Our next question Ryan Brinkman of JP Morgan, your line is open.

Himanshu Patel - JPMorgan

Hi, it's Himanshu Patel.

Steve Roell

Hi, Himanshu.

Himanshu Patel - JPMorgan

Can you hear me?

Steve Roell

Sure, we can hear you, Himanshu.

Himanshu Patel - JPMorgan

Hi, I'm sorry, I just have two follow ups. Bruce, your comment on European Autos was interesting. So is it sound like the issue is that you just don't want to take out that much capacity in terms of bricks and mortar in 2009 in Europe simply because you've a steep revenue increase coming in '10?

Bruce McDonald

No, it's more of the engineering and our launch people not so much bricks and mortar.

Steve Roell

No. I think, Himanshu, when you see the restructuring detail you'll see a lot of brick and mortar coming out of Europe.

Himanshu Patel - JPMorgan

Okay, so it's personnel. And then I guess sort of separate question for any one of you guys. When you look at Building Efficiency or European Autos or sort of North American Autos and you look at your forecast for full year '09. Can you give us a sense in which one of those areas represents sort of the most amount of uncertainties for you right now from a forecasting perspective?

Steve Roell

Yes, let -- Himanshu, this is Steve, I'll take a shot at that. I think the way to think about that in my mind is if I look at Building Efficiency I feel pretty good about that forecast for the context of the service component, the recurring revenues, the underlying energy demand that that creates and just the fact that I've got real good visibility of our backlog and pipeline. On the Auto side, the part we don't know, I think that's the part that everybody's trying to guess -- is just what's the resiliency of the consumer here, okay, and I don't care whether it's in North America or Europe. I think the wildcard we don't know is how the consumer's being impacted by not so much liquidity. But just from the standpoint of their wealth and job security and a number of other things. So I think that it's duration in depth of a North American recession and a consumer confidence that's causing us to try to sit here and guess what that could mean. So, that's the one I think -- probably on everybody's mind, where's the consumer going to be here for the next year.

Himanshu Patel - JPMorgan

Okay, great, thank you very much.

Operator

There are no further questions at this time.

Glen Ponczak - Johnson Controls - Director of IR

Good Tanya, thank you. Thanks everybody for your participation. This is Glen, I'll be around all day, of course, if you have any follow ups, and Steve has got some concluding comments.

Steve Roell

Yes, sure, if I could. Just to put a couple, first, again, thanks for your questions and participating today.

As we look at 2009 and beyond a couple comments. You can tell we're confident that we're well positioned to succeed in the long term, I think in context of our backlog, our market positions and leadership, our innovation and our focus on costs we feel very good about our long term outlook here.

I think my earlier comments the one I'd like to leave you with, which is the fact that from a shareholders standpoint we'll run this business for the -- consistent with our growth strategies. We'll run it to create long term value, and that's what really you should expect from us. So we'll run near term costs, we'll get our costs out where we can and we'll make investments where we feel are appropriate to really drive toward sustained market growth, enhance our competitive position and we'll be really well positioned when this economy turns around to generate some great profitability.

So, we feel good about our profitability outlook for 2009. We think it'll be solid despite the difficult environment, and we appreciate the fact that there's so much interest in understanding what our story is. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Johnson Controls, Inc. F4Q08 (Qtr End 09/30/08) Earnings Call Transcript
This Transcript
All Transcripts