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Executives

Glen Ponczak - Director of IR

Stephen Roell - Chairman of the Board, Chief Executive Officer, President and Chairman of Executive Committee

R. McDonald - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Richard Kwas - Wells Fargo Securities, LLC

Rod Lache - Deutsche Bank AG

Patrick Archambault - Goldman Sachs Group Inc.

Colin Rusch - ThinkEquity LLC

Brian Johnson - Barclays Capital

Timothy Denoyer

Christopher Ceraso - Crédit Suisse AG

Ravi Shanker - Morgan Stanley

Himanshu Patel - JP Morgan Chase & Co

Michael Coleman - Sterne Agee & Leach Inc.

Johnson Controls (JCI) Q4 2010 Earnings Call October 26, 2010 11:00 AM ET

Operator

Welcome, and thank you for standing by. [Operator Instructions] Now I will turn the meeting over to Mr. Glen Ponczak. Sir, you may begin.

Glen Ponczak

Good morning, everybody. Thank you for joining us. before we start here this morning, I want to remind you of our forward-looking statement. Johnson Controls incorporated will make forward-looking statements in this presentation pertaining to its financial results for fiscal 2011 and beyond that are 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, energy and commodity prices, the strength of the U.S. or other economies, currency exchange rates, cancellation of or changes to commercial contracts, changes in the levels or timing of investments in commercial buildings, as well as other factors discussed in Item 1A of Part 1 of the company's most recent Form 10-K filing, which was filed November 24, 2009, could affect the company's actual results and could cause its actual consolidated results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the company.

This morning, we'll start with Steve Roell, Chairman and Chief Executive Officer of Johnson Controls giving an overview of the quarter and of fiscal 2010 results. After that, Chris McDonald, Executive Vice President and Chief Financial Officer, will review the business individually and give a financial review. That will be followed by questions and answers. And with that, I'll turn it over to Steve.

Stephen Roell

Thanks, Glen. Well, good morning, everyone. Before discussing the results, just a reminder that two weeks ago, the management team was in New York. We had our Analyst Day on October 12 where we provided our outlook for fiscal 2011. The slides, the transcript and the audio of those presentations are available to you on the Investors section of johnsoncontrols.com. If you didn't have a chance to join us, if you'd like to refer to that data.

Turning to the quarter itself. We're very pleased with our fiscal fourth quarter results, slightly ahead of the guidance that we have provided to you. Our sales at $9 billion versus $79 billion in 2009 were up 15%. Excluding foreign exchange, they were up 18%, and we were pleased to note that all three of our businesses reported double-digit growth in the quarter year-over-year.

Segment income of $586 million was up 14% over fiscal 2009's similar quarter. Our net income grew 21% from $339 million to $409 million in the fiscal quarter. Earnings per share of $0.60 per diluted share versus $0.52 of Q4 '09. I know the GAAP data was actually an increase from $0.47 to $0.66, but we've adjusted for all the onetime and we think it's more appropriate when you look at it going from $0.52 to $0.60. From a balance sheet standpoint, good cash flow. Our net debt-to-total capitalization, as you may notice, is down to 21.9%. And that was after a voluntary pension contribution of approximately $440 million, which was made in the quarter. We'll talk about that more further as Bruce gets into his balance sheet detail.

For a full year standpoint, I'm not going to spend a great deal of time comparing '09. I would just note that our fiscal 2010 results was the second strongest profitable year in the history of the company despite the fact that, as most of you know, the industry data and industry background was far below what it had been for sometime. We outperformed, we believe, our underlying markets. We have market share gains, we believe, across all three of our businesses as evidenced by our sales growth and the backlogs that we have coming into 2011.

We benefited earlier in the year from the cost reductions initiatives that we took in both 2008 and 2009, and those gave us some year-over-year comparisons earlier in the year. As I've mentioned, we had good cash flow generation that resulted in a strong liquidity position. And as we noted when we were in New York, we have accelerated our investments. We did sell -- starting in mid-2010, our capital spending was $777 million. That was up from $647 million a year ago. We noted that we continue to add sales force capacity and we began to do that again in mid-2010.

Turning to the 2011. As we indicated to you, we have good momentum coming into the year. We had solid growth in our backlog as evidenced by those market share gains. Automotive backlog, again this is a three-year outlook. Last year, when we looked at 2010 through '12, we had $2.5 billion of new business that we were to launch in that timeframe. It should be noted that in the forward-looking three years, 2011 through 2013, that backlog had grown to $4 billion.

Building Efficiency was up 10% at the end of 2010. We noted very strong fourth quarter orders. Orders were up 32% excluding currency. Those were driven by a combination of strength in our North American what we call energy solutions, we've referred to them previously as performance contracts, and also strong growth in the international markets with the exception of Europe. And something we didn't really talk a lot about was we did have some significant new Global Workplace Solution contract wins in the quarter. Those numbers are not in our backlog. We would just highlight three as an example: Verizon, Eli Lilly and Bristol-Myers, all of which are North American contracts. Those contract values on an annual basis are roughly $268 million, and those will begin to revenue in the next year.

In addition, we've got an accelerating demand in SOY [ph] (20:06) and AGM batteries. We highlighted the fact that we're having a difficult time keeping up with the AGM demand. I highlighted that we had discussed with our Board adding capacity both in our July and September meetings, and we currently are continuing to lag the demand markets has from the standpoint of our European customers in terms of AGM Start-Stop applications.

And we continue to invest in geographic and capacity expansions in the emerging markets, most prominently in China where we've highlighted our intent to continue to expand and add capacity in the China market for batteries. And we continue to add sales force and infrastructure to support both our automotive and our Building Efficiency businesses.

So with that, I'm going to turn over to Bruce who will walk through the three businesses and the financial comments. Bruce?

R. McDonald

Thanks, Steve. So starting here on Slide 6 on automotive experience. So for the -- we've had another good quarter here, a real solid quarter. We have all geographic regions participating. Look at our sales here, $4.1 billion, up 18%. On a constant currency basis, the sales were actually up 23%. Now a thing that we really looked to is how we perform versus the underlying markets, and we outperformed in all regions. In North America, our sales were up about 32% versus the production increase of 27%. If you back out currency, our sales in Europe were up below 8% versus the flat production environment. And in Asia, predominantly in Japan and Korea, from a consolidated point of view, our sales were up 74%, reflecting a number of new vehicle launches.

And then in China, as you noted, mostly we participate there through nonconsolidated joint ventures. You can see our sales here were up 41% to $875 million, and that compares against what we believe -- estimated passenger car sales were up about 21%. Our top line growth in China continues to be -- really you'll see the balance sheet impact of that flowing through in higher equity income when we look at the face of the income statement. And we expect to see that trend to continue into 2011.

Looking at the segment income here, you can see we're up about 68% to $129 million versus $77 million in 2009. We continue to see good profit conversion rate on incremental sales, mainly reflecting the benefit of our restructuring initiatives in some of our -- and higher levels of capacity utilization in our plants. Partially offsetting this within the quarter actually was higher net engineering costs of about $50 million on a year-over-year basis. This is primarily attributable to the timing of engineering recoveries primarily in Europe. So in Europe in the quarter, significantly lower engineering recoveries in the prior year, and that's really what drives the year-over-year performance in our European business.

Looking at our margins on a geographic basis in the quarter. North America was at 5.3%. Asia was at 7.1%. In Europe, we had a small loss of $5 million, so our margin was negative 0.3%. If we take our European margins adjusted for the higher engineering costs that I talked about and also the adverse impact of foreign exchange, then our margins in the quarter would have been about 3.1%. And that's up about 140 basis points versus the comparable quarter last year. We feel good about how Europe is doing. Those engineering recovery issues are non sort of reoccurring. They're just lumpy in terms of when they flow through. And we remain very confident in terms of the substantial pickup in our margins that we expect in Europe next year.

Obviously in Asia, our margins benefited from the higher level of equity income from our joint ventures. If you look at the box here on the chart, we gave a little bit more color on our three-year backlog, which, as Steve indicated, was up about 60% to $4 billion. And you can see here we sort of show how it flows by year, at over $1 billion each of the three years. And we also give the geographic and nonconsolidated versus consolidated information.

Turning to Building Efficiencies, we are pleased to see Building Efficiency show a double-digit increase in sales to 10%. Again, on a -- currency wasn't really a big factor here, but if you strip out the impact of currency, sales were actually up about 11%. On our businesses that don't flow through our backlog, which is Global WorkPlace Solutions and North America Residential businesses, sales in those two units were up about 20% and 2%, respectively. And you can see here in North America we saw Systems business was up 7%, services double-digit increase to 11% and the rest of the world, which for us is really Latin America, the Middle East and Asia, sales were up 19%. In Europe, if you back out the impact of exchange, revenues were still down 4%. Probably a more -- better indicator of how our markets are performing is really look at our order activity, which is in the box here. And you can see in the quarter that our orders were up about 32% on a constant currency basis. Now geographically, you can see the strong growth in the emerging markets, up 57% on a year-over-year basis. North America, you can see up 31%. And finally, we've seen a pickup at our, I guess, let's say, a turnaround in Europe where our orders on a currency adjusted basis were up 6%.

In terms of our North American orders, we continue to track ARRA order activity in the quarter. We booked about $183 million, which is about 3% higher than the amount that they booked in Q3. And on a year-to-date basis, our total of orders in terms of The American Recovery and Reinvestment Act were about $612 million of our backlog. Most of that is still sitting in there.

In terms of segment income for Building Efficiency, at $275 million, up 13%. So we did see some margin expansion here, about 30 basis points on a year-over-year basis. And that came despite these steps in investment from some of our key growth areas, which is incremental sales force, product development and the emerging market infrastructure to support the type of growth that we're seeing in our orders here.

If you look at our individual segments within Building Efficiency, and you'll see those when we file our 10-K, there is a number of charges and adjustments, credit issues and things like that, plusses and minuses which in aggregate aren't material. So really, not material for the overall business, Building Efficiency segment. When you see the K, you'll see some swings in some of the -- some pieces here.

And you can see here that our backlog at $4.7 billion. That's the highest backlog, and I think one other quarter, we had a backlog of $4.7 billion. But we're up 10% year-over-year, and that's the first time that we've shown double-digit increase in our backlog since '08.

Turning now to Power Solutions. We had another very good quarter here. In terms of sales, we're up 19%. Unit volumes were up 13%. In terms of the aftermarket side of things, we saw an increase of 12%. That number does include some of the incremental volumes associated with the Wal-Mart launch. That really gathered some momentum here in Q1 when the last of the business that we've won swings over to Johnson Controls. You can see here in the OE side of the business up about 19%, reflecting generally speaking higher global production levels and some market share wins that we had.

In terms of -- if you look at our Asian business, our volumes in Asia were actually up more than 100%, 111%. That reflects both the acquisition of Delkor, so that's the Korean joint venture that we did in the fourth quarter, as well as continued growth in China. In China, our business, our operations there continue to perform well, and we're on track with the opening of our second manufacturing facility here late in this quarter, early Q2. In terms of our segment income, you can see we're down about 6%, $182 million or $12 million in reduction versus '09. I just note that our Power Solutions business is -- we're actually on the LIFO method of the inventory accounting here, and our profitability tends to be negatively impacted at a time when inventory levels are rising. And then, sort of think back to Q4 of last year, we had a surge in demand and kind of drew our inventories down. In this quarter, we didn't have -- we actually had an inventory build as we stocked up on supply of junk batteries to support the smelter opening here in the first quarter. So that's -- the timing of lead purchases and the magnitude of them is really what fluctuates the year-over-year earnings here.

If we maybe now turning over to the financial highlights here on Slide 9. Before I get to the individual line item detail, let me just comment on some of the nonrecurring items. We could flip those on, kind of, behind this and focus on the underlying operational performance of the business. So in the quarter of 2010, we had three things that really hit us. We had a gain on the purchase of the controlling interest in the Power Solutions joint venture with Korea of about $37 million. And that actually shows up as a $47 million gain within equity income and a $10 million charge within SG&A. And that charge represents purchase accounting adjustments of transaction costs. We also had an impairment charge in our Auto business in Japan of $11 million, that flows through gross margin, and an $8 million loss from the sale of a joint venture, which flows through equity income. So those are the adjustments that we've made if you go from the reported to the X Items column here.

In 2009, in the comparable quarter, we had $105 million warranty charge that flowed through gross margin in our North American Residential Air-Conditioning business and $111 million financing charge associated with the cost of the exchange offer. We converted some of our, recalled both our convertible and our mandatory convertible units, in an early exchange on equity in the quarter. And then in both years, we had tax benefit. And so in here, we're sort of dropping back to the guidance rates that we had in each quarter.

So if you sort of look at the sales line here, you can see, with each of our three businesses growing at more than double-digit percent rates, our sales were up 15%, just a shade over $9 billion. If you take out the impact of exchange, our sales were actually up 18% in the quarter. The increase is really driven by higher volumes in both automotive and our battery markets, as well as market share gains in each of these businesses. And then in Building Efficiency, as we talked about earlier, we're starting to see the benefit of our late cycle business starting to gather momentum here. And we are real pleased to see that business at double-digit growth.

In terms of our gross profit, you can see it, 16.6%, a 70 basis point improvement versus last year. And that really reflects both better capacity utilization but also the benefit of our restructuring initiatives that we did and really focused in 2009. On a year-over-year basis, you can see our SG&A as a percentage of sales increased by about 110 basis points, which is 10.8%. Here you're seeing both the impact of the higher engineering levels that I've talked about, higher levels of incentive compensation costs because there were more in '10 than [ph] (32:38) in '09 and as well as the impact of the investments that we're making in our growth initiatives that we talked about building efficiencies.

You can see equity income more than doubled here to $59 million versus $27 million last year. Here we're starting to -- you continue to see this exceptional strength of both our automotive joint ventures, but also improved results in our Power Solutions joint ventures in other parts of the world.

Flipping to the next slide here. In terms of financing charges, you can see $53 million and we're down 19% versus last year because the last year's number obviously includes the interest, the high interest costs associated with the convertible debt instruments that were outstanding in the quarter. In terms of the tax rate, as I said before, we had about $22 million of nonrecurring items. We've adjusted it here to the 18% rate that we guided to to come up with the $0.60 a share EPS.

In terms of income from attributable noncontrolling interest or, formally, minority interest, here you can see a charge of $20 million versus $3 million last year. This really reflects the fact that our consolidated joint ventures in both Power Solutions and Automotive were significantly more profitable than in the prior year. And lastly, in terms of diluted earnings per share, $0.60, the 15% year-over-year improvement.

Then lastly, before we open up to Q&A, I just want to spend a little bit of time talking about our balance sheet and our financial position. We continue to have a very strong liquidity position and that you see on the slide here we've noted our cushion is in excess of $3.3 billion. That really represents the net amount of unused borrowing capacity that we have over and above the peak level at any one point or month. In terms of our revolver, we've noted here that our $2 billion -- our revolver, this $2.05 billion, expires in 2011, and we expect to have a -- to complete the renewal of an upsized, multiyear bank deal in the second quarter of our fiscal 2011.

In terms of the debt-to-total capitalization, Steve already mentioned 21.9% inclusive of the $440 million pension contribution. For the year, we made pension contributions, $665 million. If you look at our overall pension position in the U.S., despite the fact that we reduced our discount by 75 basis points to 5.5%, our plans are about 91% funded, and we'd expect to be fully funded by the end of 2011 with the contributions that we intend to make here.

In terms of working capital, I guess we continue to make good progress managing our level of working capital here. We really try and pull out the impact of some of the non-operation items that flow through here like pension contributions, accruals and income tax payments and things like that, really focus on trade working capital, which is, for us, we define as inventory payables and receivables. And if you look at those, we declined from 8.1% of sales last year, 5.8% of sales this year. And that's really the operational improvements that our businesses are driving here.

In terms of at the Analyst Meeting, we talked about our intent to significantly increase our level of capital expenditures in 2011 to $1.2 billion. And you can see here in the fourth quarter, we're sort of on an upward trend here with CapEx more than doubling to just a shade over $250 million. If you sort of look at our balance sheet at the end of the year, we have about $560 million of cash on hand and we had no outstanding borrowings on our commercial paper program. Our balance sheet continues to be in great shape. And as we talked about at our Analyst Meeting, we're very well positioned to accelerate our growth here by making M&A acquisitions. In the first quarter of this year, the three acquisitions that we talked about at the Analyst Meeting we expect to close for an outflow of about $225 million.

And so with that, I think we'll open it back up the call to questions. Glen?

Glen Ponczak

Yes, Vicky, we set to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Chris Ceraso of Credit Suisse.

Christopher Ceraso - Crédit Suisse AG

Just a couple of follow-ups really left over from the Analyst Meeting a couple of weeks ago. Maybe you can comment briefly on the competitive landscape in the Battery business in China. It seemed to be an area of interest for investors as we talked to people post the meeting. So I know you said that it was fragmented, but what's your expectation in terms of rolling that business up and your expected market share in that region over the next few years?

R. McDonald

I'll start with that, Chris. Bruce here. And it sort of -- just on a high-level basis here, right now, we're number four. And If you look at our market share in China, and we've grown very quickly. Our sort of main areas of growth that we're sort of focusing on is really twofold. One is, we're trying to develop our aftermarket presence. The whole industry tends to be more OE focused than the markets in Western Europe and North America. And so we're trying to make investments to develop that channel for us because long term, that's going to be where what industry migrates to. The second area of focus is the market is moving from maintenance batteries to maintenance-free batteries. And so for those of us that are a little bit older, you may recall batteries, we used to unscrew the top and pour water into them and keep them going whereas today's batteries are completely filled. The market is shifting toward maintenance-free product. And if you were to sort of segment our share in that market, we're number one. So as the market shifts towards their technology, we feel good about our growth prospects. And lastly, we clearly are the low-cost, high-quality provider in terms of automotive batteries. We're number one in every region of the world with the exception of China. We're putting our latest technology in that region. We're very confident that as a result of those strategies and the investments and our know-how, that we're going to be the long-term winner there'

Stephen Roell

The only thing I can add, Chris, to the market share side, if you recall, we announced probably mid-summer that we were going to be putting a capacity of roughly 30 million batteries between now and 2015. So you can probably come up with a fairly good market share number from that. We really don't have any competitors who really compete on a national basis. They're more regionally based. As we indicated in our meeting, our next site is going to be to the West. And then I would tell you that after that, we'll be looking to the northern region of China for our next plan after that. So that will give you some sense.

Christopher Ceraso - Crédit Suisse AG

And then a second question relates to the AGM batteries in Europe. To what extent is your forecast of, I think, you said 80% to 90% penetration by the end of the decade. How much is that informed by discussions with OEMs as opposed to your own forecast or the forecast of third parties?

Stephen Roell

I would say it's heavily influenced by what we're hearing from our customers and the demand that they're asking us to run to. I don't think it'll be by the end of the decade. I think it'll be before that. But we're responding to what we're hearing from BMW and Volkswagen in particular who are talking to us about the demand and expectation, what they're going to do with their fleets. So that's more of a customer and, I would say, third-party. We're just acknowledging what we think that demand looks like now.

Operator

Our next question comes from Brian Johnson, Barclays Capital.

Brian Johnson - Barclays Capital

I just want to understand the, like, the progression of European margins through next year. You talked about overall about 450 to 470 basis points in Automotive Experience. Obviously, we're not there with the onetime charges, but how do you see that evolving particularly in Europe for 2011?

R. McDonald

Well, I think what we talked about, Brian, is I think we said from an 80 perspective overall, that we expect about 90 basis points of margin expansion next year. And if you look at kind of what the main drivers are there, the main contributor to that is Europe. It's hard to say hard for me to say here's what's going to happen in Q1, 2, 3 and 4. And I'll now sort of reiterate my comments on some of the engineering timing, but we expect that our margins are going to be up quarter-over-quarter. I really just can't comment on the magnitude in each individual quarter.

Brian Johnson - Barclays Capital

And overall, you're still comfortable with European margins in the midterm? Do you think when you're 6% to 7%, Europe will be at that or still somewhat below that?

R. McDonald

Well, we haven't given individual guidance for each piece next year, but a big driver of the improvement is going to be Europe. And the key thing to remember, Brian, is we've talked about next year our forecast is flat production in Europe where we've talked about the fact that we've sized [ph] (42:53) both of our North American and European businesses have breakeven at 8.3 in North America and 14.3 in Europe. And if you look at the European production, we're only about 10% or 12% off the bottom, whereas in North America, we're up, say, 40% or 50% off the bottom. So I would tell you that we need, and I've always been pretty clear about this in the past. For our European business to get to the target level and we do need the production levels to bounce up stronger than they are right now.

Brian Johnson - Barclays Capital

And the whole issue of launch cost in engineering, launch costs, is that largely -- was that, A, largely European issue; and B, is that getting -- at what point during the year does that get behind you?

R. McDonald

Well, we didn't talk about launch costs because on year-over-year and a quarter, they weren't significantly higher. The issue for us was the timing of engineering recoveries in the quarter, which when I talked about our net engineering beyond $50 million, about $40 million of that was in Europe.

Stephen Roell

And launch costs, though, if you go to -- for the full year, it was a real significant number for us, But I think what we indicated at the meeting, too, Brian, was that, and I'm sure you heard that, was that we don't expect the same complexity that we experienced in this past year. So that's why we have some confidence that our launch costs will not be as severe, okay?

Operator

Our next question comes from Rod Lache, Deutsche Bank.

Rod Lache - Deutsche Bank AG

Just first, I wanted to get a clarification. Can you repeat what you said was the status of the pension fund at the end of your fiscal year?

R. McDonald

Yes, our U.S. plan, Rod, was about 91% funded.

Rod Lache - Deutsche Bank AG

And you're saying you're going to get fully funded by the end of this year on the same basis with this low discount rate?

R. McDonald

No. That shortfall, roughly about $240 million, okay? And we've talked about what level of discretionary expense contributions we tend to make next year.

Rod Lache - Deutsche Bank AG

And can you just help us sort of parse out what's happening within Power Solutions in terms of average transaction prices, excluding the lead fluctuation and recovery? Is there evidence -- we know that the volumes were up about 10%, but is there evidence of average transaction prices moving higher because of this positive mix shift towards AGM and maintenance-free batteries?

R. McDonald

It will over time, Rod, but I think, I mean, maybe just to answer your question on a very macro basis, if you look at the quarter and the impact of lead on our revenues of about $90 million, so if you sort of strip that out of our top line growth, you're going to have -- sales growth is comparable to unit growth. And a little bit -- and I guess that's a little bit softer. And that would really be because of the lower average selling price in Asia.

Stephen Roell

I think that over time, two things will happen. First of all, we would expect to see the AGM will impact our margins and average price dramatically. Secondly, I guess I would tell you in terms of the mix, Rod, the mix will help us. We're surprised at this stage that the mix has moved to the higher end. And that's just indicates that our customers have been very successful with their point of sale. And that would continue. We are seeing lead, by the way, move up higher than what we assume when we did our plan. I think the plan was on the basis of about $2,200 per metric ton. Now whereas talking today, it's almost $2,500. But in terms of the pricing environment beyond that, which may have been your base question, I don't see a lot of change in the base pricing environment, okay?

R. McDonald

And Ron, just to help you out, I mean, the AGM, our capacity now is about 3 million units on an annual basis. Our quarterly volume in battery is over 30 million. So it's going to take a little bit of time before that's get up to 5 million to 7 million before it starts to move to bigger number.

Rod Lache - Deutsche Bank AG

And in the Automotive Experience business, can you just give us a little bit of help with how we should be thinking about the trajectory of earnings? Is it sort of a linear improvement or do you go through phases where you have to increase investment and you get a little bit of volatility there?

R. McDonald

Are you talking on an annual basis here, Rod?

Rod Lache - Deutsche Bank AG

Well, I guess annually and if there's anything that you want to highlight to us in terms of even quarterly just to sort of just take into account we're only seeing the bottom line here. And will there be any kind of volatility in terms of the margins?

Stephen Roell

I would say, Ron, I'd look at production volume. And, I mean, we know we're going to -- the first quarter is going to be what? Only a 3% growth year-over-year?

Rod Lache - Deutsche Bank AG

Yes.

Stephen Roell

North America as an example. So I would simply say that it'll be more driven by that. But we can tell you it's going to be engineering or start-up related. I would simply say if there's any seasonal or quarterly pattern, let me tell you that year-over-year volume increases in the industry, okay?

Rod Lache - Deutsche Bank AG

And my last question is just the ARRA revenue. Can you remind us what the number was for the full year and what your expectation is for 2011?

R. McDonald

Yes, I've talked about our total orders were about $612 million. I don't have the revenue off the top of my head, but I would say, I'll hazard a guess that it wouldn't be more than $100 million.

Stephen Roell

I think that's right, yes. I think, Rod, I'm not sure that, that ARRA reference is probably worthwhile highlighting for the future. I think we're seeing strong demand in the Federal Government, state, local...

R. McDonald

Education.

Stephen Roell

...education. And it's not ARRA funded right now.

Rod Lache - Deutsche Bank AG

Right, So you're basically saying that the 8% to 10% growth that you're expecting, it wouldn't be materially different without that?

Stephen Roell

That's correct.

Operator

Our next question comes from Colin Rusch, ThinkEquity.

Colin Rusch - ThinkEquity LLC

Can you talk a little bit about the opportunity to drive markets towards higher or drive Building Efficiency markets towards higher margin business with essentially software-as-a-service opportunities, realtime pricing controls? Are you seeing any interest from your customers yet on that front?

Stephen Roell

Well, it's a long ways coming, Colin, okay? I think that we currently have a fairly good advisory service regarding helping people manage their demand. Really, our real focus, though, on the demand side as opposed to the generation side, as realtime comes in, they may need more sophisticated controls, and that's really where we benefit and we can help our customers. But I don't -- I wouldn't tell you that's driving our markets today. It's premature, but it's there certainly over next five years.

Colin Rusch - ThinkEquity LLC

And then with the agreement with Hitachi, can you talk about the implications of that for the JV with Saft and what you're seeing as their limitations for the current technology and the IP that you have in-house right now and whether you're seeing a need for something a little bit more robust and potentially cheaper going forward?

Glen Ponczak

So I don't know that, that's how we classify it. It's Glen here, Colin. The announcement that we made with Hitachi memorandum of understanding, very preliminary, an opportunity to talk with Hitachi to figure out where exactly we might go, when we might partner and collaborate. But the JV partnership with Saft, no impact on that. That's the mechanism by which we're supplying vehicles on the road today and will continue to do so. The sales that we've got in that business doesn't change by virtue of this. This is really an expansion, a way to look maybe more broadly at different opportunities, perhaps different sort of chemistries and things. But it really is too soon to tell that. We'll know that over the course of the next couple of months.

Stephen Roell

I think that's fair. I think, Colin, maybe it would take us more -- maybe in the three- to six-month timeframe. But we'll be able to try to get more about that and what it means for the joint venture with Saft and technology going forward, okay?

Colin Rusch - ThinkEquity LLC

And one last question about the Battery business. Are you seeing any really meaningful activity on the charging side to really get the top [indiscernible] (51:32) batteries well defined as the first models start to roll out for electric vehicles later this year?

Stephen Roell

Well, we're not heavily involved in electric vehicles and certainly not on the recharging side. I mean, I've read probably articles like you have regarding investments are being made and companies are making those investments, but that's not really where our focus is.

Operator

Our next question comes from Himanshu Patel, JP Morgan.

Himanshu Patel - JP Morgan Chase & Co

A couple of questions, guys. On the European Automotive Experience, I think you said your revenues were up 8% excluding FX. Do you know what that revenue growth would have been excluding any new backlogs you would have onboarded in the quarter just so we can get a sense of how much you may be benefiting from European mix improvements?

R. McDonald

We don't, I mean, maybe, well, we can maybe take a shot at trying to calculate that, but I don't have that.

Stephen Roell

Why don't we say we do something? We'll have Glen get back to you, Himanshu. We don't have that at our fingertips.

Himanshu Patel - JP Morgan Chase & Co

And then, Bruce, the $50 million engineering cost issue in here, I'm sorry, could you just clarify that? Was that a year-over-year nonrepeat of a year-ago issue or was that something that showed up this quarter?

R. McDonald

Well, it was basically lower engineering recoveries in the quarter versus last year, okay?

Himanshu Patel - JP Morgan Chase & Co

So I guess I don't understand why is it considered a timing issue in terms of if you just think through sequentially, why would this be less painful, I guess, next quarter is the way I'm trying to think about it?

R. McDonald

Well, they tend to be fairly lumpy. So I think if you look at our overall engineering, roughly speaking we get about 60% of whatever we spend on engineering, in fact, through engineering recoveries. In any one quarter, however, that number could fluctuate, we'll say, 40 and 80. So what we have is just looking at it -- from a year-over-year basis, we had a quarter where very low recoveries in this quarter and more normative levels than the prior year quarter.

Himanshu Patel - JP Morgan Chase & Co

So the year ago was normal? It was just depressed this quarter? Is that fair [ph] (54:01)?

R. McDonald

Yes.

Himanshu Patel - JP Morgan Chase & Co

And then your backlog across all three businesses, clearly, the Asia side is ticking up a lot and the margin profile there has historically been a lot higher. What do you kind of think about the margins of the Asian business for building battery and for automotive over the next two, three years? Should we expect that to kind of have the spread that it has right now with each division's global average or is there some compression that would come over time?

R. McDonald

Well, I mean, I'll take each one separately. I would say our auto margins in Asia are higher than our segment average. They tend to be robust. And even if you sort of look at the margins of our nonconsolidated businesses, as mentioned [ph] (54:50), our ROIs, of course, is both 8% or 9%. And that's our overall average. And obviously, if only take an equity income from the Chinese pieces, you'll actually going to drive that significantly higher as we go forward. If you look at how Power Solutions right now, margins are below segment average, and that really reflects the fact that we're kind of importing batteries at a loss just to support -- to get sort of ahead of the growth. So our sales are running ahead of our installed capacity. That will go away. It'll be a headwind for us because we'll still be importing batteries in 2011. But by 2012, our Chinese margin should get up to segment average.

Stephen Roell

On the Building side, I would tell you right now the margins on our Buildings side are higher than our norm from a global regional standpoint. And I think they'll continue to expand over time, Himanshu, as we develop a service base. But right now, I feel very good about our ability to not only grow the Asian market, but also to get further margin expansion.

Himanshu Patel - JP Morgan Chase & Co

And then, Steve, I saw the Service business in BE this quarter saw a nice 11% uptick. Can you just give a little bit more color on that? Are you seeing a lot of the commercial servicing stuff that was deferred last year? is that stuff starting to come back and does this sort of start accelerating going forward?

R. McDonald

Yes, that Service business, that ticked up, Himanshu. It was really more related to the performance contracting and just the Building market of the truck base. And that's what was exceptionally strong both in the context of orders as well as revenue recognition in the quarter, okay? That's where the growth is. We're expecting to see some improvement in our Service business. We're seeing more bidding activity around what we call prime, which is direct, smaller type work that we do in conjunction through our service organization. That has not been the case. What we saw began in the last quarter has continued into this quarter. So that's the good sign there.

Operator

Our next question comes from Ravi Shanker of Morgan Stanley.

Ravi Shanker - Morgan Stanley

I just had another question or follow-up on the auto margins, if you will. Bruce, you said earlier that the production levels in North America are about 30% to 40% of trend levels, which I would agree with. But why should we not expect margins there to significantly improve in 2011 as we get those volumes? Is it something to do with utilization and variable costs or is there something going on there?

R. McDonald

Well, Ravi, I mean, as you know, you and I have different view in terms of the outlook for North America next year. Our guidance is based on only 5%, I think that's 5% production growth next year. And in that environment, we're not looking for a big tick up in our margins. We do believe -- I guess we have the same view, though, is we're committed to delivering sort of 15% to 20% incremental profit pull-through on the industry-related growth here. And so to the extent -- you're right. Yes, I believe we'll agree with your thesis that the margin should be a lot better.

Ravi Shanker - Morgan Stanley

So whenever you get to that point, you think the margins would be higher, right?

R. McDonald

Yes.

Ravi Shanker - Morgan Stanley

And then on the European side, not to beat the dead horse on the engineering recovery here, but can we expect some kind of a tailwind now that you had a quarter here with a lot of your engineering costs that come in, in one quarter?

R. McDonald

Well, it definitely is a factor helping us to get to the -- when we talk about Europe margins next year being a significant improvement, that's going to be one of our factors.

Ravi Shanker - Morgan Stanley

And the 3% number, if I heard you right, which was the normalized European margin this quarter, can we assume that like a trend level of margins for Europe going forward?

R. McDonald

Yes, that's probably a fair number for next year.

Ravi Shanker - Morgan Stanley

And finally, when do we get an update on the dividend?

Stephen Roell

At the November meeting, what happens, Ravi, in that meeting is our Board of Directors looks at the recommendation of management. And so that meeting is scheduled, Bruce, what? The 18th?

R. McDonald

17th.

Stephen Roell

But it's in that timeframe. So you should be hearing in November. You should be hearing something coming right out of that meeting, okay?

Operator

Our next question comes from Rich Kwas of Wells Fargo Securities.

Richard Kwas - Wells Fargo Securities, LLC

On Europe, orders up 6%. That's pretty encouraging. I think either Steve or Bruce can comment on what you're seeing there? Is that just easy comps or are you actually seeing some improvement in demand?

Stephen Roell

I'd say, Rich, we can still see that as a very challenging market for us, okay? If I had to look all the markets around the world, that's the one that still concerned us regarding just its -- it has a high dependency right now. Well, the markets that ever recovered from a construction standpoint, the existing building markets just aren't there. So I would tell you that we would hope to see growth continue like that in Europe, but I think we're going to get our growth next year from other markets beyond Europe.

R. McDonald

Yes, I'll maybe add to that, Richard. Think about our Equipment business is more heavily skewed towards Southern Europe, whereas the growth rates are still fairly lower than, say, Germany.

Richard Kwas - Wells Fargo Securities, LLC

And then on the overall order growth of 30-plus percent, how much of that is a turn in demand in all your markets versus comparisons that are pretty favorable? And should we expect that to come down over the next couple of quarters?

Stephen Roell

I don't know if we can maintain 30%. That would be asking for a lot. But I do think that what you would -- there's two things you should take away from that one, Rich. One is the fact that we saw significant demand in booking relative to performance contracting, and the pipeline continues strong. So if I look at our pipeline, and this is a North American comment, we're still seeing good opportunities in higher end and the Federal Government. And we are also seeing strong demand for equipment. The other thing, I guess, I would tell you is that you should expect to see good demand out of the emerging markets. China and the Middle East will continue to represent strong growth markets for 2011.

Richard Kwas - Wells Fargo Securities, LLC

And then quick last question, just big picture on M&A. You made a lighting controls acquisition earlier in the year. Are there similar-type opportunities out there where you can consolidate and do kind of a rollup?

Stephen Roell

Well, again, we don't want to do a rollup. The lighting transaction was interesting because we think it's an integral part of what we need to do and what we offer to our customers in terms of performance contracting. And what we did was we made an acquisition to get a core competency and a product, I'll call it a product, that's really more of a...

R. McDonald

Capability.

Stephen Roell

... capability. And then we're trying to take that capability, which is located [ph] (1:02:06) up East and grow that into the Midwest. So really not a rollup, Rich. We don't really want to do that. But we do look for some capabilities that would broaden our capabilities and performance contracts specifically.

Richard Kwas - Wells Fargo Securities, LLC

So you'll take that platform and grow it around across the country?

Stephen Roell

Yes, that's right.

Operator

Patrick Archambault of Goldman Sachs.

Patrick Archambault - Goldman Sachs Group Inc.

Just also following up on a couple of items from your Analyst Day. You talked about indexing your new contracts that was one of the benefits that you had sort of versus historical periods. But I think that you had also mentioned, I want to say, that the indexing was mostly with respect to steel, maybe not as much things like polypropylene or stuff that could be sort of on the plastic side. Can you tell us a little bit -- first of all, is that correct? And B, should you see an increase in natural gas and oil and have to deal with some of these costs and seeding? What's the strategy for mitigating that impact on your earning?

Stephen Roell

Patrick, first, let me just start. The indexing we have is broader than steel, okay? Maybe what I should be thinking of steel is that on steel, we actually we actually wanted to buy one of the OEs. So that takes away all of that risk, okay? But our indexing goes much beyond that. It goes into some of the other commodities you described. So again, with the exception of one OE which we're talking with, we feel we've got strong coverage of almost 90% on our major components of resin and poly and steel.

Patrick Archambault - Goldman Sachs Group Inc.

My other follow-up was you had mentioned that either there was some -- legislation was kind of a growth driver within Building Efficiency with, I guess, stricter building rules helping increase your content. Can you just give us a little bit of a description of sort of what those regulatory timelines look like and sort of where are there most prevalent as kind of a growth driver, like in what region?

Glen Ponczak

Well, Patrick, I'll tell you what. Those sort of drivers are always helpful. But, of course, the business grows for other reasons, right, because it comes with paybacks, because it helps with sustainability. Certainly, legislation is a driver or can be a driver. There was a lot of talk certainly over the summer with the increased building standards for energy efficiency. Certainly, the specter of cap and trade kind of comes and goes. It'll be interesting to see what happens after November. I mean, that may change entirely. And I guess what I'll tell you is one of the things that I want to do is after the Election actually do an update on the legislative issue for everybody. So I think whatever I say today probably is different next week potentially. So I guess stay tuned, I guess, is the best thing that I could tell you at this point.

Stephen Roell

We can get something, too. I mean, there is legislation with -- the cap and trade, despite the fact that it stalled in the U.S., legislations move forward in Japan, Australia, the U.K. So let me see if I can go back, Patrick. I know Dave had a slide in his deck at the meeting that talk about some of those initiatives. Let me see if we could give you a little more detail, okay?

Operator

Tim Denoyer of Wolfe Trahan.

Timothy Denoyer

A question on sort of combining a couple of batteries topic. Are you talking to any OEMs in China at this point about AGM? There had been some talk about some draft legislation on Start-Stop hybrids in China.

Glen Ponczak

Tim, so it's Glen here. Yes, I mean, there was some publicity around the Chinese plan that all Start-Stop vehicles for all new production by late 2012 or 2013. It's probably unlikely they can sort of achieve that timeframe. But that has been around for a while actually. But the way that, that is structured is the OEs are going to decide what flavor of AGM or, sorry, what flavor of Start-Stop might be. And some of that will likely be AGM because it has some advantages. But I guess at this point, it's really more in a wait-and-see mode. I mean, we've got contact certainly with the OEs where we provide batteries to them. But really, it's sort of too soon to call here at this point.

Stephen Roell

I think the only thing we have to watch, Tim, is the fact that some of those customers I mentioned to you earlier, the European OEs, are going to want to bring AGM into that marketplace for products that produce them. So we're anticipating we're going to have to provide AGM Start-Stop applications, if nothing else, for those customers.

Timothy Denoyer

And so that would be part of the capacity expansion on AGM that's going on in Europe? Is that 7 million units of capacity that you said you're talking at some point this year?

Stephen Roell

Yes, that's right.

Timothy Denoyer

And can you give us a sense of when do you expect that capacity to come online?

R. McDonald

Yes, just to be clear. Of the amount of capacity that we authorized in our going forward , it does not all come online this year. We can get back to you with that flow chart, I think, how that's sort of flows, Tim. I believe we don't get to that run rate until late 2012.

Timothy Denoyer

And then one follow-up on European production trends just the last couple of months. Certainly, the sales have pulled back a little bit. The Euro strengthened. Exports have been a real driver there. Have you seen any pullback in European production? You said you expect it to go up through the year and be flattish for the full year. Can you give us a sense of how those things have been going just in recent weeks?

R. McDonald

I would say we're seeing the things that you just said. Export volumes are high. I would say probably unique to us is just because we've had so much launch activity over in Europe, if you look at the mix of our business that's new vehicles in the marketplace, our platforms are tending to gain share. So I think that's part of the drivers as to why we're outperforming the market here. But generally speaking, as we look into this quarter, our schedules are holding up pretty good and we feel good about both North American and the European outlook here and certainly as we get into our first fiscal quarter.

Operator

Our last question comes from Michael Coleman, Sterne Agee.

Michael Coleman - Sterne Agee & Leach Inc.

You've touched on this a little bit. But I was wondering if we could quantify the breakdown in global orders up 32% between equipment and services. And then kind of looking at just North America up 31%, if you could maybe break that down between technical services, energy solutions, et cetera?

Stephen Roell

Mike, we've just never provided that level of detail, nor do our competitors. So we're a little concerned about that. I think we just try to give you directionally where things are headed. I will tell you that what did really strike us in the quarter that we haven't talked about is the strong demand for equipment, small and large chillers. Our demand globally was up 20% in the quarter. That was unusual because if you look at it on a year-to-date basis, that's not the case. So I would just tell you that from an equipment standpoint, we saw exceptional demand out of all markets, including Europe, on small and large chillers in the quarter, okay? I'd give you that piece. But again, the other primary driver, though, that really was strong was the premise contracting, what we call energy service work. That's really where a lot of the growth year-over-year on orders came through, okay?

Michael Coleman - Sterne Agee & Leach Inc.

In the situation where you've seen a fair amount of deferral work over the last year, is that starting to change then?

Stephen Roell

Well, the way we see that is what we call prime contracts. It's really where our Service business actually gets an opportunity to bid on small retrofit projects on their clients. And that's been ticking up for about the last four months. That's the area that really we noticed where deferral was taking place on small, what we call retrofit or repair-type work. Maintenance, we saw maintenance usually flows with weather. So we saw a pickup in demand on truck base work in the warm August period. But that didn't continue into September.

Stephen Roell

So with that, let me go ahead and close the meeting real quickly here. Just a couple of comments. We feel good about our momentum again heading into 2011. As I indicated at the Analyst Meeting in New York, this is the time when we're accelerating our investments both from the standpoint of our capital investment as well as our capacity in terms of our sales force and our product development. We're doing that ahead of the growth in our markets. We think that we could take advantage of those opportunities and gain share. So our investment strategy is really geared at what we do in the next four to five years. We think we're well positioned to deliver record earnings in 2011 and more importantly to sustain profitable growth over the longer term. And with that, thank you very much for participating and the questions which you brought to us today. Take care.

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