Johnson Controls Inc. - Analyst/Investor Day

Oct.12.11 | About: Johnson Controls, (JCI)

Johnson Controls, Inc. (NYSE:JCI)

October 12, 2011 8:30 am ET

Executives

C. David Myers -

Beda-Helmut Bolzenius - Vice President and President of Automotive Experience Business

Alex Molinaroli - Vice President

R. Bruce McDonald - Chief Financial Officer and Executive Vice President

Unknown Executive -

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

Analysts

Brian Sponheimer - Gabelli & Company, Inc.

Ravi Shanker - Morgan Stanley, Research Division

Himanshu Patel - JP Morgan Chase & Co, Research Division

Itay Michaeli - Citigroup Inc, Research Division

Kelly A. Dougherty - Macquarie Research

John Murphy - BofA Merrill Lynch, Research Division

Brian Arthur Johnson - Barclays Capital, Research Division

Richard M. Kwas - Wells Fargo Securities, LLC, Research Division

Unknown Analyst -

Operator

Johnson Controls Incorporated will make forward-looking statements in today's presentation pertaining to its financial results for fiscal 2011. 2012 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 includes such terms 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, customer or supplier disruptions, energy and commodity prices, the strength of the U.S. or other economies, currency exchange rates, cancellation of or changes to commercial contracts, as well as other factors discussed in Item-1A of Part 1 of the company's most recent Form 10-K filing filed November 23, 2010, could affect the company's actual results and could cause its actual consolidated results to differ materially from those expressed in any forward-looking statements made by or on behalf of the company.

Stephen A. Roell

First of all, good morning. Thank you for joining us. Between the music and the lights, if feels like morning. Before I start today, I guess I'd like to begin by introducing the management team that's here with us today. Unfortunately, you got to turn around to see them, they're all in the back. Those that are going to be presenting to you, we'll start with our Chief Financial Officer, Bruce McDonald. Bruce, please stand up. And Beda Bolzenius, Beda is the President of our Automotive Experience Group; Alex Molinaroli, President of Power Solutions; and the last presenter is Dave Meyers, President of Building Efficiency.

Okay. We have a number of other management members that are with us. Let's start with Frank Voltolina, our Corporate Treasurer in the back. Steve Milke, our Assistant Treasurer; Jerry Okarma, Jerry is our General Counsel; Jacqueline Strayer, Jacqueline is our Vice President of Corporate Communications. Paul Mason, our Executive Director of Global Media Relations. Then most of you know Glen Ponczak in the back. Glen is our Vice President of Investor Relations. And someone who just joined us recently on Glen's team, Dave Urban, who's our Director of our Investor Relations. Dave? And so that's the group.

We're excited today to talk to you about 2011 results and 2012 outlook. I know some of you know our story very well. You've been covering us for up to 20, 25 years. We have a number of people in an audience I think who are new to the story, and we hopefully, we can catch you up and bring you up to speed on what we are and what we do.

I want to start with the fact that we represent 3 global businesses that are market leaders in their respective industries. Each has demonstrated for a long period of time the ability to grow significantly faster than the underlying markets, industry growth rates. And today, we're going to highlight to you why that's going to continue. We're very proud of our track record. We've had year-over-year revenue growth for 64 of the last 65 years. And our earnings growth, 20 of the last 21. It's a record we're very proud of. It speaks to our culture. We're a culture that comes every year to grow. Our planning, look into the future and our strategies are all built on continuing that growth well into the end of this decade.

We keep that focus by, in terms of the in long-term growth, by looking at the factors in the very bottom of this [ph] page on the right-hand side. We have what's called the 10-year marker and it just keeps us focused on, on the long term, the elements that are going to make us successful. The Executive Operating Committee, which is made up of the 3 presidents: Bruce, myself and 2 other members, we meet on a monthly basis. And that meeting on a monthly basis is dedicated only to the long-term growth. That's not an operations review. It's talking about these elements and how they're going to play into the future, and we believe these are the keys.

If I look at some the factors that help drive our sustainable, profitable growth, I always have talked for a long time about the importance of our diversification. I think the tendency is to think about the 3 businesses, but it goes much beyond that. We have a myriad of customers. We're in different vertical markets. We serve the aftermarket, as well as the original equipment market. We serve the construction industry, the service industry. And in addition, because of the nature of our businesses, we’re global. So we talk to you about China, the Middle East, Latin America. And so it's that diversification, which has been so critical to our long-term success. When one market or one business is underwater, suffering because of the environment in that particular industry, that particular market, we have other ways and places to go find growth. And that's really been our success for that long period of time.

We talk about global opportunities. It's becoming more and more important that you have a global footprint. Those of you that follow the auto industry realize that automobiles are being designed for global platforms. And so being able to have design centers throughout the globe, being able to execute a single platform in 6 different continents is what we're being asked to do today. We're positioned to do that, very few companies are. The same thing is true in our Building business, where again we have to be able to execute for our customers on a global basis. We believe we're aligned with the mega-trends that are impacting the globe, there would be energy and fuel efficiency, sustainability or emerging markets, we're well aligned to take advantage of all of those trends. We recognize the importance of innovation. You're going to hear a lot about that today in the presentations. We understand that innovation is the key to growth, satisfying our customers, being able to drive margins.

And finally, we have the ability to invest given the strength of our balance sheet. You're going to see heavy investments in 2011. You're going to see that continue in 2012. I’m going to reflect now, if I could, just on 2011. Our year end, obviously, was September 30. We'll be reporting those results here at the end of October. We're going to give you a preview of what those look like. Record sales, record earnings. All of our businesses will report double-digit earnings growth for the fiscal year 2011. All will show significant market share gains in their industries. We had tremendous opportunities to grow our markets in the emerging markets this year. We talk to you about China throughout the year. We'll talk to you about China and what we see in the marketplace going forward. And we talk about the Middle East, particularly as it pertains to our Building Efficiency business. We talked about investments. This was a year where we made significant investments more so than ever in the past. In terms of our capital investments, $1.4 billion in capital expenditures. We'd never spent more than $1 billion in capital. It supports our organic growth, and that's maybe the theme I want to -- one of the themes I want to leave with you today. When you look at our growth, and I want use 2012, we're projecting 9% top line growth. It's all organic. You might say, well, didn't you have some acquisitions? The answer is yes. But that's offset by our currency assumptions. And so, the story behind Johnson Controls is our ability to find new ways to grow year-in, year-out, and that's true in 2011 or 2012.

So we spent $1.4 billion in capital. I'll come back and talk to you about the importance of that as we talk about our earnings estimates. We made a number of acquisitions. Last year, when I spoke to you, I alluded to the fact that if you listen to the presentation closely, you'd be able to discern what exactly we're going to invest in. If you recall, Beda talked about the importance of technology as it pertained to components in metal. And I didn't want to bring any more light to it because to be honest, there was only maybe 3 global leaders in the world in terms of metal technology, and we acquired 2 of those. And so that's why I couldn't bring any more light to what we're going to be last year. I think, we did surprise the industry in acquiring 2. I think they were in a rapid succession. We've been negotiating with both those companies for probably 6 months before we were able to announce those transactions. But those are critical to us in terms of the technology they bring, and Beda is going to give you a pretty good overview of exactly how important those are to us going forward.

And finally, AGM [ph], you're going to hear about innovation today. Beda will talk to you about AGM technology that's used in the Start-Stop application globally. And you're going to hear something new from Dave as he talks about Panoptix, the new building automation systems and how we're going to be applying that.

If I then look at some of the highlights of the record year by business unit, this is what you'll hear. In Building Efficiency, double-digit top line growth in what we'd all would define as fairly slow growth market. We're going to enter 2012 with a record backlog. Strong emerging market growth, which is what we were counting on in China and Middle East. But I will tell you that backlog record at the end of fiscal year, every one of our reporting segments is up. There's not one of the geographies or subtests [ph] which is down year-over-year.

Automotive Experience. We secured $2.3 billion of new business, not replacement business but new business in fiscal 2011. Beda is going to discuss with you the 3-year backlog. Some of that $2.3 billion will extend beyond that 3-year backlog. And what I mean by that is some of that will actually launch in 2015. He'll be describing to you the backlog we'll execute in the period of 2012 through 2014.

One of the -- our handicaps in our fiscal year 2011 results was our underperformance in Europe for the first half. We struggled with our execution given the large volumes we had, some of the complexity. We've put a lot of containment cost in place to ensure that we could deliver the volumes and the quality that we promised our customers. As we go through 2012, we'll be shedding that containment cost. And as part of our year-over-year improvement in our earnings, there's going to be the shedding of that cost.

From Power Solution standpoint, we talked all year about the accelerated investments we're making for AGM capacity, first in Europe, largely sold out. And as we announced, we're actually continuing our expansion into the North America and putting plans in place to take it to China. Significant progress on vertical integration strategy. Alex will talk to you about our recycling plant in Mexico. It's up and running, has been for part of this year. And we're in the construction phase right now of our South Carolina plant. It's an important win from a margin perspective. We continue to see great opportunity in our China growth, and we'll address what you've been reading headline-wise about JCI in China. But you'll also get a sense that our investments in China will continue at a very rapid pace over the next 4 years.

The last point in this page refers to the advanced battery opportunity. As most of you know, we did complete the buyout of Saft at the end of September. We now own 100% of that advanced battery technology. It was important for us to gain control of that because we had a different idea of where we want to take that business from a direction standpoint. So we'll talk to you more about that. So those are the highlights for 2011.

If we look at the actual financials, this is what we expect to report later in October. And what we've indicated today is our consolidated net sales will go from $35 billion to $40.7 billion, an increase of 14% year-over-year. It's the first time we've ever exceeded the $40 billion figure. Our earnings per share last year were $1.99. In 2011, it'd be $2.43, up 22%. And what the pie at the far right-hand side refers to is the fact that, that segment income is pretty well balanced amongst our 3 businesses that you'll be hearing from today. I look at this as our track record, and I think it has some interesting points to look at if you look at the trajectory here.

If you look at revenues, you can sort of see the one year we fell off is 2009. I think we all know why that took place. We dropped down to $28.5 billion. You see how quickly we've come back to the $40.7 billion. In fact, if you look at that trend, you can see we're right back on track. I'm going to update this for '12 at the end of my presentation today.

And if you look at net income, you can see that in 2010, we almost got back to our record level of earnings in 2008. In 2011, we'll be at $1.7 billion. So that's the track record that we're proud of is the fact that we've been able to sustain that growth, recover very quickly in our marketplace.

So now let's shift to 2012. Had we presented back in July or early August, we probably would've had a little bit different story for you. We certainly would've had a higher EPS estimate, and I'm not going to apologize. Today, we're going to be showing you that even with the current economic environment, we expect to grow our earnings in 2012 by 20%. But the growth rate would've been even higher had we not had -- seen the revision in the global economic growth rates, had we not seen the reduction in some of the automobile build schedules, had we not see -- seen at that point in time the strengthening of the dollar versus the euro, had we not had to adjust our pension costs. So if we were -- had been here back in July, we would've had a different EPS growth, well above the 20%. Having said that, I would tell you that probably in the last 3 weeks as I've talked to people in our industries, I've gone to China, I’m actually feeling better. I think we're a little bit confused about the headlines we're reading in the book of orders that we see. I talked to somebody in the industrial sector yesterday, who said they just can't reconcile the demand that they're seeing with what they're reading in terms of the headlines. The same thing is true with our automotive customers. Many of them can't relate to what they're hearing in terms of the build schedules and the book of orders they're seeing.

So maybe it's early, but I actually feel better about our markets than I probably did a month ago. And from the headlines we were hearing about in terms of double-dip recession, the depressed industry conditions that we heard. And I think I'm going to share with you some of the reasons why I think we're going to do well.

If we look at the macro environment that we do recognize, that one of the issues we've been facing is the depressed consumer confidence levels throughout the globe. We still do believe that there will be good growth opportunities in the emerging markets. Auto production outlook for North America and Europe is flattish for Europe, up for North America. The build schedule right now in the current quarter that we're in, in fiscal quarter, is going to be up 18% in North America, with every OE producing double-digit levels higher than what they were a year ago at this time. We recognize, and it hasn't changed, that the European and North America building markets were going to be depressed. That's been in our assumptions all along. And that's not going to change, but again, we recognize that. Our growth this year was accomplished with that same environment. And our outlook for AGM hasn't changed. We're very bullish on AGM Start-Stop technology. The initial demand now starting to surface in the U.S. as well as in China.

If you look at the right-hand of this chart, these are the factors that I believe will drive our 20%. Number one, our investments. After investing the $1.4 billion in capital and the $1.4 billion in M&A, it's clear than those 2 levels of investment are going to yield significant payback starting in 2012. We ended the year with record backlogs in both our automotive and our building efficiency markets. We see tremendous strength underlying the battery industry in the markets. Inventories are in good shape, demand is strong. And to use a term that I've used before, and that is that we’ve left a lot on the table [indiscernible] our operation performance this past year. We know we can get after that. We know we can get improvement. So part of our improvement in 2012 versus 2011 is just getting corrected some of the processes that depressed that first half in Automotive, and we feel good about the momentum we have in that sector. So if you look at it, a lot of those are all within our control. The investments we've made, the backlogs we're coming into over [ph] the year and our ability to improve our operational results in Automotive.

We continue to see a lot of opportunities to continue to invest. And so one of our estimates for 2012 is that we're going to spend $1.7 billion in capital. I broke this out just to sort of help you understand exactly how that capital is segmented between those -- that portion of the investment, which is there to help drive growth and expansion of our business in that, which is there as a maintenance level. And you can see that of the $1.7 billion, 71%, or $1.2 billion, is there to support our growth.

If you look at the far left-hand side of this chart, you can see that it's made up of a number of items. First of all, increasing our battery manufacturing capability, not just for advanced battery chemistry but just for our basic SLI. Putting investments in place for AGM and hybrid; footprint expansions in our emerging markets particularly in China; supporting that level of growth that we see in our Automotive Experience backlog; our continued investment in vertically integrating; and our information technology. Those are the 5 key factors, and Bruce will go through that in a lot more detail in his financial section. But those are the key elements that are going to drive that $1.7 billion.

I know in the past we've talked about, and my concern about that $1.7 billion, those paybacks, I can touch. I know what they're going to be. I know if we can execute the launch of those facilities. I feel very good about the paybacks. They're short paybacks. There's very little risk in those investments. You're going to see Bruce talk about the fact that we're going to probably sustain a level close to that for the foreseeable future. So when you look at '13, '14, '15, the opportunities we see to invest internally to drive organic growth is a similar number. There's other areas of investment that don't hit the capital category. On the balance sheet, we're investing in engineering. Innovation, Building Efficiency continues to increase its sales force and service providers throughout their market places. So those are sort of the investments we're making to help drive our growth beyond 2012.

This is what I would tell you, you should listen to as we think through the future presentations here from each of the groups. So when talking about Building Efficiency, I would suggest this is what you should take away. First of all, there are 4 major growth platforms: systems and services, the emerging market opportunity that we see, energy solutions, and finally, technology innovation. Dave is going to spend a lot of time talking about the new software application called Panoptix. It was introduced just a week ago. It's already been reviewed by a lot of the different software houses. It's a very revolutionary tool that we have and to offer our customers. It's not going to drive our near-term profitability or sales. I do want to clarify that. But it does talk about our leadership and where we think the industry is going to be going to. You should also listen to Dave talk about market share gains, his margin expansion opportunities and how he’s going to differentiate and where his competitive advantage is going to come through new technology.

When Beda presents, I would suggest you listen to how we're going to build on our core strengths. He's going to spend a fair amount of time talking about the importance of those technology investments in metal. So listen to the vertical integration, listen to how important that is in terms of our future strength and growth. Component excellence is going to be critical to us. Also, if you recall about 2 years ago, Beda talked about how we're going to de-risk the business.

If you recall, we talked about the fact that in order to continue to invest in Automotive, we had to find ways to de-risk it by finding a way to share the economics, commodity exposure we have with the OEs to drive our engineering recoveries and to achieve a 25% return on our pretax, on the assets we deploy in that business in a good time. Above that in a good time, I should say, in 25 in a normal time. So Beda should address the fact that what are we doing to continue to de-risk the business and where are we in those returns.

When we get to Power Solutions, Alex will talk about the investments we're making round 3 of the primary growth platforms. He'll talk about the core. He'll talk about emerging markets and particularly about China, and finally, about technology. And that will both the AGM, as well as the hybrid opportunity with lithium ion. We'll talk about how we think we're competitively advantaged from the standpoint of our major -- the major elements. You can see that wheel. You may not be able to read it. You can see there's 8 elements where we think we have leadership and competitive advantage against our competitors.

When we look at 2012, our sales will be up in the 9%, as I indicated, up to $44 billion. Our earnings per share ranges from $2.85 to $3. That's up plus 20% over the current estimate of this year. I would just ask you to do the following. Please make sure you look at the -- listen to the assumptions. Bruce will go through the build schedules. He'll go through some of the underlying assumptions, which will help bring into focus that EPS.

This is clearly the first time we've given guidance regarding 2012. I know the estimates that are out there from the sell side, some individuals revise their estimates of for 2012 at the time that the auto builds were reduced. We have a number of buy-side analysts who opted not to adjust their estimates until they heard our conversation today. But I think that given what we see in terms of the environment, what we think we can do in terms of those 4 elements I described to you, we feel very confident about that ability to drive our earnings up 20% in 2012.

Our long-term growth objectives are really unchanged. We saw organic growth greater than twice the rate of the underlying industry. That's what I described to you in the very first slide. We know the margins are a major focus of the investment community. You need to hear that from each of our business units and what we're doing to drive that. In the last conference call that I had at the end of the quarter, I described the fact that our compensation plans for 2012 have been adjusted, and a key component of those is margin expansion in each of our 3 businesses. Our long-term growth continues to focus on double-digit earnings growth year-over-year, 10% to 15%, that's unchanged. And we look to drive to an after-tax return on invested capital, 15%. And all of the investments we've made, whether it be an acquisition or whether it be the capital spending that I described earlier, all of those are geared off of exceeding that 15% after-tax hurdle.

In terms of today's agenda, this is the way we've got it split out. So Dave Myers is going to follow my presentation and talk to you about Building Efficiency. He'll be followed by Beda, who'll go through the Automotive Experience outlook. We'll take a break at that point in time. Alex Molinaroli, our President of Power Solutions will present after that. Bruce McDonald will follow with an overview of the financials. And then what we'll do is we'll bring -- all of us will come back to the stage. We'll set up some chairs, and we'll do Q&A. So that's how the day plays out, very similar to what we've done in the past. I think we tried to simplify some of the presentations so that the key messages are understood. I think you'll learn some new things. I suspect very few of you probably know what Panoptix is. Hopefully, in a half hour from now you will know as Dave goes through that opportunity. Maybe one other comment. I think -- let me just shortchange this, I think there's a lot of questions about China. We're still bullish about China. There's no reason not to be. I visit there frequently. I know some of you do as well. I have to believe from a fiscal-policy perspective that while they're trying right now to address inflation, they also have to be concerned about balancing that with job growth. They have to grow jobs. And so once you understand that, I think you can accept the fact that their fiscal policy will continue to drive growth in their economy. And I truly believe that's going to be the underlying theme.

So with that, I'm going to turn it over to Dave Myers with Building Efficiency. Dave?

C. David Myers

Good morning, everyone. It's great to be here to talk a little bit about Building Efficiency this morning, and I'm glad we have a full house. As always, there's a few seats in the front here, Glen, if a few need to come up. What I'd like to do today is cover a profile of the business to give you some insight as to the dynamics and what we stand for at Building Efficiency. I want to give an overview of the market, both on the market itself and the conditions we see in various regions, as well as some of the key trends. I'm going to talk about some of that strategies and the investments we're making in the business, and then most importantly, wrap up with why that demonstrates growth for us both in 2012 and the future, as well as margin expansion.

Today, Building Efficiency is a business that operates in 125 countries around the world, supporting customers who are simply located in those locations. Our offerings focus on capabilities to help them operate buildings to support their business activities, their organizational activities and what takes place with the need to support the processes or comfort that's part of that building. We do things with paybacks. We believe we have an excellent story around how to make people energy-efficient, and do that with low operating costs for their overall activities. And we have a tremendous resource of people around the world to help make that happen. And some of the best, and I believe the best skills in the industry around the service profile that we have, the education and capabilities of our people. We now have more than 1,100 LEED-certified professionals within our organizations. You'll also see that more than 50% of our business now comes from outside of the U.S, and that will continue to grow over the next several years, and we'll touch on that in a little bit. Nearly 95% of BE's revenues today are in the commercial markets, nonresidential. And that continues to be a profile consistent with past years. And also, a very strong emphasis on aftermarket service and recurring business activities with modest amount tied directly to new construction.

When you look at Building Efficiency, just to try

and give you some insight into the capabilities that we deliver to clients. I thought this was an interesting way to do it, and if you look at this, it's clear that every day, we have more than 60,000 people out serving customers within their facilities and buildings. Every day, we have more than 20,000 GWS employees on-site working to support customers as part of their operations, managing more than 1.5 billion square feet of space. Every day, we have an additional 15,000 people directly working with customers to help them achieve their goals, whatever that may be, in relation to their building activities. Every day, we have 3,900 service requests that get solved by our technicians around the world. Every day, we deliver and install 2,100 HVAC products and components to our -- for our customers. And every day, we have more than 162 contracts with new relationships with customers that are signed. So very comprehensive, very active and overall, we have more than 1 million customers globally.

The next slide shows the profile of our coverage to support customers. One of the key things for us is that buildings are local. They are where they are. We need to have resources and support present in the markets for which they are located. This represents our direct capabilities through our branches, more than 650 today, as well as our manufacturing locations. If I move to the next slide, this shows the impact of the distributor resources that we have supporting us, again, very substantial coverage. And in the past, we've often focused on our direct capabilities. This has been a major emphasis over the last several years to bring more and more capability to us to help penetrate further into the markets that we already serve, and do that with partners that can help us. One other key dynamic here is a lot of this also provides us variable investment when we see market opportunities growing around leveraging more and more penetration in markets.

The next slide represents the physical locations where we have people present every day within our Global WorkPlace Solutions business. And today, that number exceeds 21,000 sites. So very significant presence in all 3 categories, in all the markets that we serve around the world. If we look at the emerging markets, this continues to be a major emphasis for us. As Steve mentioned earlier, we are seeing growth and that continues. And today, there's 400 billion of square feet in commercial real estate globally. Over the next 10 years, there's expected to be an additional 110 billion added to that. More than 80% will come in the emerging markets with the predominance of that occurring in China. We need to be leaders in these markets. We are present, and we continue to expect significant growth along with the investment to make sure that we win there.

On the right-hand side, I think this chart is also important because this demonstrates the value of the construction that's going to take place in the key markets during that 10-year timeframe. And as I highlighted, you can see the size and the importance of China, but also a key focus for us is the Middle East. And while it may not be the same scale of the number of buildings that you'll see in India and other markets, the value of these buildings is substantial because of the required capabilities with the operating conditions that they have, and the types of investments being put into them around redundancy, scale, building for the future, and it will be a key growth market for us to make sure that we serve that effectively as well.

This slide shows the impact of energy legislation. I'm not going to go through a lot of detailed examples, other than to say it remains a key driver of our businesses around the world. Legislation continues to move forward as far as new expectations on energy efficiency, new requirements with that. It's very dynamic. And in all cases, it's going to drive greater opportunity overall for the market, and it's going to include a widespread look at different technologies and different capabilities that comprehensively need to deliver overall efficiency.

Just a few examples within that, if you look in the U.S., even the recent discussion around the American Jobs Act includes a very significant reference to

school retrofits where more than 35,000 have been highlighted as a need to upgrade and invest. And one of the key drivers of that is the energy efficiency to support and help fund the infrastructure investments that need to take place. It will be very significant for us.

Better Buildings Challenge. The President came out early this spring with a Better Buildings Challenge to target commercial buildings, and to drive for 20% efficiency there. So while all the teeth aren’t there yet to require or incentive, it's coming and those expectations are being set. And just like many other factors we see regarding codes and legislation in the past, it is beginning to materialize and it will become requirements in time. The Executive Order starting in 2020, which requires federal buildings to be net-0 energy by 2030, that's fast approaching. And a lot of the investment discussions with organizations like the DoD and DOE are beginning to plan for what it's going to take to be successful to help them meet that goal over that timeframe.

Just one other example I'll point out, Steve mentioned China earlier, significant investment in infrastructure, significant investment in construction will continue and it's a big driver as we pointed out. But the 11th 5-year plan also has a strong emphasis on energy efficiency and what it takes to meet the standards that they're going to put in place over the next several years. They don't always do it with incentives and a carrot but it will be a requirement that's built in, and we'll see that tighten up in the next 5-year plan as well. So they'll be a continued investment not only in upgrading the energy efficiency of new construction, but a lot of the Chinese buildings are now entering a retrofit period, which are also going to be upgraded and retrofitted to meet the new expectations as well. So again, legislation continues to be a key driver and will well into the future.

If we look at the market overview by region now, this is a look at North America. And one of the things I wanted to point out that you're going to see on the next few slides is the change from the outlook of the construction recoveries from this time last year until today. And as Steve pointed out, most of this change has actually occurred in the last 4 or 5 months. So when you look at the collection of sources of the data we can see around construction spend, there is generally more pessimism regarding the ramp up or return of the level of markets that we saw in 2005, '06, '07 and '08. And it is going to be a relatively flat market for 2012 and into 2013, particularly in the nonresidential sector. We are seeing a major impacts in office and commercial construction, that will going to be continue on the lower end. Institutional and industrial will be a little stronger. And some of those areas are showing declines. But overall, investment remains pretty healthy. The key for us is we continue to gain share. In North American market, we grew again this year. We'll grow again next year. We have strong backlog entering that market. And one of the key is us further penetrating with the capabilities we have backed with the energy efficiency story and the capabilities we can deliver to customers. The market will be challenging. We will grow, and we have grown over the past several years.

Energy solutions forecast. This is the energy market focused on the comprehensive retrofits. The anticipation is that, that market remains pretty healthy. We had another strong year in 2011. As Steve mentioned, the pipeline is strong and we expect further growth in 2012. And overall, there continues to be an investment driven by the federal and institutional sector around energy retrofits, and that will continue as we see it there. We are also seeing expectations grow and projects begin to move forward in the Asian market particularly Australia, driven by favorable legislation; Singapore, which has a vision to be a very efficient and green market. And overall, some of the aspects I mentioned in China will begin to drive retrofit behaviors there. If we look at Asia, very similar impact around the outlook. As Steve mentioned, with the inflationary concerns, the credit policies that were put in place, one of the factors that were hit in Asia was the pace of construction. It didn't slow down here in the latter half of fiscal year 2011 for us. But the good news is, it's still going to be a strong growth market. We have high expectations for what will take place there. We'll play a leading role in that, and we continue to add more and more capabilities that we can further penetrate and grow our businesses to sustain a pace of growth that outstrips the robust market that we see in China. We also expect broader Southeast Asia, driven by New Zealand and Japan to see growth over the next few years, mainly tied to reconstruction and retrofit of impacts tied to the earthquakes that took place there. We also expect India to continue to grow at a modest pace. There is a much higher expectation for growth in India when you look in the 3, 5 and 7 years where we expect greater acceleration, and we'll be in position to win that as well. But overall, India will continue to grow and be a strong market.

For the rest of the world, a couple of key sides here talking about Europe, Latin America and Middle East. When we look at Europe, it'll be a relatively flat market and we have predicted that. There will be a focus on energy efficiency and the capabilities we can help deliver particularly around the retrofit market, but modest expectations for construction growth in the Western Europe region. If we look in Eastern Europe, with the oil prices rising and some of the economic stimulus taking place in Russia, there is more confidence we'll see further investment in there. But again, pretty modest levels compared to what we saw for the last few years. For Latin America and the Middle East, we are expecting growth, and we're seeing that. And it's driving what Steve highlighted in our backlog. Brazil is a healthy market and continues to invest heavily. In the Middle East, there's been a lot of different dynamics take place this year as you've known. And there's been challenges in economies in several countries. However, the major markets targeted for growth, we strongly expect to continue and it's where the strength of our businesses are. And that would include Turkey, Saudi Arabia, Qatar and the Emirates overall themselves. And there's a lot of project activity and expectation for growth, both in the short term and long term for those markets.

One of the key trends that continues is the integrated building solutions and connectivity. For those who have seen this presentation over the last few years, this is something that we talk about around key trends where the contracting chain is changing a little bit. There's a little more design build, a little more standardization being build in, tying systems together, services moving from an event to more of a maintenance and ongoing operational culture. And certainly, remote services and some of the technology-enabled services are a trend of the future, and we're going to come back to that in a few minutes in some of the growth discussions.

The customer base continues to change as well. A lot more interface with CIOs and CFOs, and it's pretty common part of the sale process now. That’s driven for a few reasons: one, certainly the financial returns and the impact of investments is at the focus of every organization from a financial perspective. But also, the convergence and interface with IT systems and the capabilities that are tied to building automation are clear and are becoming key parts of the sale process as we go forward. So integration overall of the systems and integration of the processes continues to be a major trend that we see across all of our markets. That's an important trend because we'll come back and talk about how we're addressing that in a few minutes.

Now I wanted to switch over to a subject talking about the value to our customers. Many times we talk about the HVAC equipment that we make, the BAS Systems, the services and the tools that we provide. But one of the keys is that we need to understand and demonstrate the value to our customers. We're fortunate that we have a more than 1 million today. The industry and the market is very fragmented from an end user perspective, and that provides great opportunity for us. And one of the keys is making sure that we're looking outside in around what value is to a customer. So what I'd like to do now is talk -- show you a video, talking about some of the key aspects of the views of what that is, and then come back and talk about how that's going to drive some of the strategic investments that we have. So we'll show the video now.

[Presentation]

C. David Myers

To me, that's a look that's a very important story because it puts in perspective what our customers expect from us. When we discuss with customers, we talk about what they need. We've really invested a lot to go out and learn a different point of view, not just the HVAC equipment, the BAS Systems or the components that go into a building. We're really focused on what they need to solve this part of their business. And as I mentioned earlier, we have more than 1 million today in a very fragmented market where there are millions more. And when you sit down and discuss it with them, they aren’t in the business of focusing on how they're building operates and what kind of condition is in place. They're all there with another purpose around what their entity drives or delivers or manufactures or teaches. And what they need is help optimizing the environment that helps support that goal. And so when we had those discussions, we really focused on 3 areas that are the common themes across a broad set of customers. And as mentioned in the video, it's partnership, innovation and human development. When you talk about partnership, since that is not what they do every day, they don't have tremendous number of experts and engineers sitting around to optimize the components and the things that we can help deliver. They're seeking someone who can advise them, guide them, give them insight, give them different ideas on how to solve a problem versus the traditional industry mechanisms that have been in place, centered around procurement and construction.

Innovation. They want creative ways to know how to do it. Somebody else down the street operates a building, can't we use and leverage and support their methods instead of relearning and redoing this ourselves. And what are different ideas that can help solve and optimize performance for my business or my organization versus centering solely a narrower set of activities. And human achievement, how do we put ourselves in position to allow our organization, our customers, our students achieve what is expected of them and what's possible for them.

If we look at the partnership side of it, this is one of the keys that we focus on with the investment that I described right upfront around our footprint. The direct branches, the distribution networks that we have, the in-place support we have through our GWS organization. We need to be present. We need to help these people, where their buildings are located facing the unique challenges of their organization locally. And it's one of the reasons we continue to invest in both quality and also the quantity of resources we have to support these customer relationships that are so vital based on what they see as the value add and a key part of that decision. And this just highlights some of the strength we have in our sales organization, our distribution partners, the service force and the GWS touch points that we have with our customers every day. It also highlights the importance of the life cycle that has been a major focus of our business for many years. We need to continue to get more and more robust at the value add and articulating that well to customers, around everything from planning and the strategy and design of buildings through construction, through operation and ultimately the retrofit cycle that comes with that, particularly when you see such an aged stock of buildings in place today. And those kind of attributes are very important and very valued by a customer for us to develop partnerships and relationships to sustain in time. It becomes a foundation for the broad set of services and capabilities that we bring to the table. We can deliver more and add more value here than others. And you'll see as we move in to some of the margin expansion discussions, the importance of unlocking that further value proposition and articulating and quantifying the value to continue to allow productivity and margin expansion for us as well.

If we talk about innovation, the goal was to be efficient at their operations and what they do within their organization. And we need to make sure we help deliver that. Energy efficiency is critical. Low operating cost is critical. But those things are focused on the outcomes as they perceive it, and what they're required to do as part of what they do in those operations. And they want to do that optimizing the assets that are invested, typically the building itself, and the comfort and safety and environment that's conducive to what takes place within that building. We're also investing in key technologies, and it's going to be a driver around the capabilities that we have in the future. Energy management tools and ease-of-use and the ability to measure are more and more critical. We need to have the most efficient offerings in the components that we provide as part of the capabilities we deliver.

Order management and enterprise work management, key to the investments in organizations like GWS and service for us because we have to be efficient at solving their needs and being productive. We can't do it one-off in every site when you're talking about 21,000 locations or 1 million different customers. And then I have mentioned earlier integrated systems. We're going to come back and talk a lot about what that capability means and why it's important to a customer.

As a few examples of innovation, I just wanted to highlight a couple of key things that I believe demonstrate the value add that are important distinctions that we can deliver that do differentiate our offerings and our capabilities. The first is EnergyConnect. That was an acquisition that we made of a demand response company in July of this year. And one of their strong capabilities is that they had software tools, relationships and automation in place with utilities that can help take advantage of real-time pricing, help negotiate discounting for the management of peak shaving and the loads that are in place there. And as part of our organization, it's a great complement because we're the ones in the buildings operating it and driving savings already. The marriage of our capabilities with EnergyConnect allow us to monetize the savings and optimization that we're doing every day within customers, and also presenting a way to automate the ability for the demand response capabilities to drive decision-making and changes at a customer level that really drives peak shaving that is valued by the utilities, and they get paid to do it. And we get a portion of that by helping deliver this as an outcome. So it's a key attribute that we can help marry the capability to deliver this for utilities and monetize it on behalf of our customers for things that we do every day. It's immediately become a key part of our offerings around energy retrofit activities, and further value that we can add to the customers part of their decision-making and then enable us to drive some pretty margin expansion by quantifying things that we already did anyway and now getting paid as part of the overall profile.

Central Plant Optimization, a key capability and tool that we've built and are deploying now throughout our retrofit organizations. This -- today, when you operate a central plant, it's generally being constructed by putting together all of the pieces. And what we've been able to

demonstrate is even if you have the optimize energy efficient component in all cases, you're still leaving about 25% to 30% savings on the table. And we have new plants that have just been built that we've been able to go in with these tools and capabilities, and generate 20% to 30% energy savings right out of the gate. In retrofit situations, we're commonly getting 50% to 60%-type savings. So very strong value-add capability driven by automation and the capabilities we can deliver through software that really unlock value, and it's very measurable to

demonstrate for customers.

The last is the next-generation building performance system. Steve mentioned earlier the brand name that has been launched on the 4th of October is Panoptix. And I'll go into deeper depth to help understand what that means and why it's a critical part of being able to integrate the activities that we see within buildings and drive performance, drive efficiency and drive ease of use for customers. So if we look at Panoptix, the key here is to help our customers achieve more by knowing better information, real-time information and being able to take action in a world where today, that's a very limited opportunity, and we'll illustrate why that's a distinction. We did launch this capability on the 4th of October. It is a new platform that's entering the market and will be agnostic to all BAS Systems that are out there. And it's been well received because of the ease of use and understandability around what it can do and what it can deliver in the future. And I'll take you through a few points that help illustrate that.

If we look at technology trends, they were a key driver in this activity. And over the past several years, these factors have been in place in broader industries, as well as ours. And it's the focus on energy and sustainability. That continues, people want to be more efficient. IT and building automation convergence, more and more integrated activities taking place, more of a driver around a comprehensive need to operate multiple systems. You've all heard a lot about smart grid, smart buildings, smart devices. All of these are coming to fruition. And to me at the heart of it, you have to have the ability within a building to

take advantage of all of the things that will be delivered through the smart infrastructure that takes place, and you've got to be able to have a building dynamic enough to reap those savings. New IT technologies that are coming out and being deployed in multiple industries, a tighter need to integrate systems in IP-based solutions, all of those are combined within Panoptix to enable this to take place and facilitated in the world of operation of buildings.

Now if we take a look at the components of what that means, on the 4th of October, we talked about Panoptix being a breadth of customer-facing applications. This is something that customer will see and tools that they will use directly, and I'll talk about that in a few moments. It will include capabilities we've developed ourselves. It will include acquired capabilities. It will include partnership and third-party capabilities as part of it.

So one simple example of that, I'll bring up, is a product called FacilityDude. Probably no one in this room knows what FacilityDude is, but it's become a mainstream system that school districts use to help them with basic things like scheduling of gyms, of notification when a classroom lighting system is out or the HVAC doesn't work in a particular location. And it's become a very easy tool to use that they spread throughout their organization. That will be embedded as part of Panoptix that, as soon as there's an out-of-bounds HVAC condition, we'll be notified and we'll go solve that as part of working with the partnership of the penetration they have in place within school districts for other reasons. Really, really significant opportunity for us there to integrate and touch with mainstream systems that take place in customer applications. All of this will be hosted in the cloud. Today, every single BAS system is hosted locally in a single site application. This dramatically changes the visibility, ease of use and sets the stage for remote capabilities in the future.

We also, in this slide, talk about the different capabilities with site manager, which is how we can connect and the open platforms allow us to integrate and connect with a wide variety of systems that are in place in the market today. And then the future of smart equipment, where there'll be intelligence down at that IP level that drives the optimized performance of the various components. All of those are on their way. Panoptix launches this first stage, which is the overarching umbrella.

Just a couple elements to help distinguish that. Panoptix is not a BAS system. And if you look at the picture on the bottom, it really illustrates we have own Metasys system, which is the leading installed market share BAS system globally. Schneider, Siemens and Honeywell and all others, Panoptix will be a layer above that. And there's adapters already in place where we will be able to connect to the Metasys system all the third-party BAS solutions that are out there and a generic adapter, which basically will be able to withdraw information from a building that does not have a BAS system in place. It can simply connect to key data points that we can extract and drive, all handled in the cloud. So a layer above that is agnostic to the tool that may physically be in place. This is a major change in what we see as a barrier to ourselves where it's been a proprietary installed base. Now we can go into any location regardless of what BAS system is in place and extract significant value over the top of that.

The next couple of slides just show a few examples of what that means today. In the BAS environment, everything operates in a single building. That's generally what's measured. That's generally the amount of data that's captured whether you have a wide enterprise campus or one site. There's multiple computer stations and different tools for every system in the building. So you'll go into some of these rooms and you'll see 10 or 15 different things that someone has to monitor, have to watch, all discretely done, all independent of each other. And most of the screens are complex and not intuitive, and you have to be a very sophisticated user to be able to operate, change, understand what's taking place even though there's phenomenal capability available within those systems. With Panoptix, you're going to quickly get a look at the entire portfolio of the buildings that you have. So if you're running a university today, you're adding up manually single sites and locations. In the future, you'll have your whole portfolio visible immediately in real time. You have the ability to extract and see data and the key points from all systems that operate or that you just chose to include within your building. And it’s anytime, anywhere, all with touch screens, user interfaces, very similar to the types of activities you see in dynamics in leveraging our Automotive business and the skills you have to operate a car and the visuals go with that, as well as things like Apple and the intuitive nature of the capabilities. And those will be the interfaces that people will see as a driver and a user. How is energy managed is going to be a major change. Well, in fact, can we go back one slide?

Just to clarify on the test sites and what we expect from this. Just the user operation cost, we believe we can achieve a 9% on average reduction in user cost of the systems that are in place today for current outcomes. That's how powerful the tool is. If we go to the next slide on energy savings, we believe we have the ability to deliver a 15% savings from what we've tested on the buildings that we've installed today. And one quick example of that would be today, when you look at energy management, you generally get the utility bill, 30, 60, 90 days after you've already used the energy. You might identify an out-of-balance condition or concern or you can do it in a system query and find out where there's been a problem. You have to dispatch someone or a technical person to go and decipher what it is, where it is in the system, hopefully, fix that. Once it's fixed, you're back into another 30-, 60-, 90-day cycle to verify it actually happened and that the savings have materialized. In the future, with Panoptix, what we'll have is real-time benchmark. We'll have fault diagnostics and capabilities that identify out-of-balance conditions, and we'll prioritize them as far as the criticality

to it, or the least or most favorable energy savings opportunity. You can dispatch. You can do it through technology-enabled services as far as resolution and then you can immediately determine whether that fix solved your problem in real time, and save that 30-, 60-, 90-day window. So very action-oriented, very supportable, and as I've mentioned earlier, about a 15% savings associated with that on average in each building.

It makes it easier than ever. I mentioned all of the applications and capabilities. I'll highlight on the next slide 4 that have been launched in the initial version. In the future, we'll see multiple capabilities around water efficiency, use of energy site by site. We'll have all the benchmarking to compare like buildings of similar operations. We'll have the benchmarking for buildings in local areas and neighborhoods, and great algorithms that we'll be able to be put to use by customers to drive and identify savings opportunities. We've also launched a connected community. It's the first in the industry around a forum to allow users to interface and talk about the challenges they have, the application issues they have. And we believe this will become a tool to allowing the energy efficiency story to be told more effectively around successes and removal of barriers that are out there. You will most commonly see this in IT organizations around user groups, using software and applications and tools. And we're intending to leverage that kind of mechanism to help bring visibility to Panoptix, what's possible and what's able to be delivered within building. We'll have live guide supports, so we're going to have live person anywhere where you need help, you need issues resolved, you need insight or information and we'll provide live customer support for anyone using this system.

And perhaps the bottom right is the most important of all because in the future, I believe this is the technology that's really going to enable technology-delivered services to become more mainstream in the future. Today, since it's single site often not connected, remote services and the diagnostics tools never took off to the level that's been expected perpetually. Now cloud hosted live communications is going to be a very interactive set of visibility and capability to customer data and what's taking place within the building. We think that's a major productivity play for us, and we also believe it's going to provide a lot of insight into being more effective at serving customers and resolving their issues through technology-enabled services versus always having to roll a truck. So a major difference. And while remote monitoring and all of these capabilities have been talked about for a long, long time, and technology-enabled services that can actually take action remotely are going to be pretty powerful both as a value proposition and as a productivity measure. But then the intelligence and the tools that come with that around, the benefit when we do roll trucks and they know what the problem is and they have the right parts, a tremendous change I think is expected over the next several years in our Service business. So really a big deal.

If we go to the last slide on Panoptix, this just highlights 4 examples of applications, these are the first 4 that will be available and you can see different elements that are going to be very intuitive, easy to use and things that customers aspire to and want to do today, they just can't do it very well. Just one quick comment on measurement and verification as an example. Today, there's a lot of energy efficiency initiatives that take place by us and others in industry, a lot of investment by customers. But they're based on projects that take place and actions that are put in to different buildings. Very few have the ability to measure and verify that the outcome that was signed up for actually materializes. We believe this automation changes that immediately. We're going to have the ability to deliver through the capabilities here, the outcomes achieved by the operational efficiency associated with those changes. Today, we do it more manually within our Solutions business and we guarantee those outcomes. In the future, that's going to be a major factor in how we deliver and quantify and articulate that value add to our customers. And we believe that expand margins because we’re going to have the ability to get paid for it if we can verify that it showed up and was executed well. So really important for us.

When you look at overall growth, I guess to summarize how JCI wins. If you look at the markets, we're going to have some tough markets in Europe and North America. But we're going to gain share. We have and we'll continue to do that. Our growth rates and our backlog support that. We have leading position in the emerging markets for both short- and long-term growth. China and the Middle East will be 2 major examples of that, and we expect them to continue long into the future. And you look at the suite of energy capabilities we can bring, we believe they are very comprehensive, much further ahead than most of our competition, and we continue to bring advances to that in the form of capabilities like Panoptix that will only accelerate the value add we can bring. The growth of relationships, very key. You have to be present, you have to have relationships with people operating the buildings. We have 33 customers touch points every day. We have a lot of long-term relationships. We're growing that base and we’re continuing to

invest in both the quality and quantity of our field organization. In competitive advantages, the new platform around Panoptix is a key driver of one of those examples and we believe we'll change the world of building and building management. Leading efficiency across all our offerings, that's critical, legislation, major trends, everybody wants to save money. Those are all going to continue to be the key themes. We believe that's a key part of what we do, and the holistic capabilities to deliver it. Customers ultimately don't just want one thing or want one single outcome, they want their building to operate the way they need to support their operation. And the ability to do that holistically is a lot more valuable and meaningful for them if it can be achieved, and we believe that's a strong differentiation as well.

In my last few slides, I'd like to talk about the summarization of growth and then the margin expansion activities. If you look at revenue growth, energy solutions, Global WorkPlace Solutions in the emerging markets, we have continued expectations to grow at 15% level, and we think that will continue into the midterm as well. In the short term, around system service and residential based on the market conditions and the macroeconomic challenges, we're very confident we're going to continue to outgrow the market and gain share, but it will be at a lower rate given the market conditions. So for 2012, we have an expectation for revenue growth at 9% to 11%. And in the midterm through 2016, we expect 10% to 15% growth collectively across those markets.

As we talked about margin expansion, we do have 2 major investment streams under way. Steve highlighted these in his presentation earlier as well. On the left-hand side, 2011 and 2012 are the peaks of some of the investments that we see around Panoptix, the smart equipment platforms and the next generation of HVAC projects. We have a lot being deployed and a lot coming out in 2012, and we’re also continuing to enhance selection tools for ease of use and making it simpler to use more of the portfolio that we have in a customer situation for our sales people or the customer themselves.

On the right-hand side, a significant investment in moving towards the global ERP platform. And the technology positioning to be able to deliver the services I described earlier is a key component of what we do both within our GWS infrastructure capabilities, and the field tools we've deployed throughout North America and ultimately globally with that. So 2 major areas of investment, and the bulk of that runs through our P&L.

We talk about margin expansion and scale. Several key initiatives are underway. If you look in the short term, our pricing and margin expansion, service pricing, energy solutions and values are good examples of that. It's not always just a form of raising price. It goes back to what I talked about with our customers. It's the articulation of that value proposition and what we deliver and solve for them, and making sure that we're pricing and capturing the value that we bring in a way that delivers a great outcome to our customer, but is not always in a cost marked-up environment the way the industry has traditionally worked. We believe we'll see expansion from that and that's a key short-term driver of what we would expect to see as improvements. We also have a lot of focus. If you look on the bottom around continuous improvement in productivity, manufacturing and purchasing excellence. Those are key things continuing with the businesses. And I mentioned G&A optimization earlier where we want to continue to make sure as we grow, we're leveraging more and more the G&A side of our business. And it's one of the fundamental reasons you see the large ERP deployment, it's one of the reasons you see more and more leverage of revenues coming through distributor and partner channels because we can make that more valuable and grow it significantly even though we have sales investment as part of it. We need to make sure the G&A side of it becomes more and more fixed every day as we grow in those key markets. And if you look long term and beyond, some of the keys there are the evolution of the business models that are embedded in the capabilities I described with Panoptix. We will be launching, selling Software-as-a-Service. We will be looking to sell capabilities under subscription that begin to introduce business models that are not new to peripheral industries and not new to many industries, but certainly for our businesses are. And we believe that's a key driver in margin expansion as we look forward. The standardization and the capabilities I mentioned in how we deliver tools and resources to our customers is critical, and also the leverage we'll get through the systems that we're putting in place to support our activities globally. But the key is really at the heart of that value proposition, ensuring that we're pricing, capturing and sharing in the value that we bring, and we make sure that we continue to differentiate for our customers.

So in summary, we're positioned to deliver the 10% to 15% growth rate that we've described through 2016. We're investing in the people and the technologies, which are going to be the key differentiators to allow us to continue to win and to continue to drive value for our customers. And we're focused on several initiatives to make sure that we're driving margin expansion and getting paid for that value that we bring. So that's the story of Building Efficiency, and I'm going to pass it over to Beda Bolzenius to talk about Automotive. Thanks.

[Presentation]

R. Bruce McDonald

Good morning. In my presentation this morning, I will show you how we will accelerate our growth and how we will improve our margins over the next couple of years. We will do so by focusing on just a handful of key initiatives that will be very impactful, and they are all part of an overarching strategy around the question how can we move the business out of a commodity corner into a business where technology matters and where technical expertise is important. With these strategies, we will support profitable growth through product and process excellence by transforming into a technology company. And at the end of the presentation, I will come back to that point by leveraging our global capabilities. The key levers for our profitable growth that I'm going to talk about, how we systematically elevate our operational performance. I will give a short deep dive on vertical integration and how we're leveraging our recent acquisitions. We will increase the technology competencies around these vertical integrated components. And last but not least, I will talk about our strategy in China, how we expand our -- the leading position that we already have today.

Already, in 2011, we were able to expand our position as the leading provider, global provider of systems and components for seats, overhead systems, doors, cockpits and electronics. And going through that list is underlining that we have a very unique position in offering everything that the carmakers need to design a holistic approach to their interior design and to their interior strategy.

And we do that based on a global presence. You can see from our phase distribution that Europe is, in the meantime, our strongest market. We have a balanced situation between North America and Asia. In the Asian numbers, there are -- there's not consolidated, there's not a business that we don't consolidate of additional $3.5 billion because you know that we are doing business in China basically through not consolidated joint ventures.

We expanded our capabilities on the component side. We have a strong market position not only through the acquisitions but as well through the acquisitions. As Steve mentioned in his opening remarks, we were successful to acquire 2 of the leading technology companies on the metal and mechanism area -- in the metal and mechanism business.

We keep improving with these acquisitions and organically or vertical integration, and we will support this growth long term by investing in technology and advanced development and through 2010 and 2011, we did not slow down in spending money on these advanced developments.

We have a outstanding global leadership team in place. This leadership team is able to support our global sales, distributions and we have last but not least financial strengths, as Steve mentioned in his opening remarks to keep investing into organic growth here as well.

If you look at our position within the top 10 of the global OEM suppliers, we improved our position if you would add back the acquisitions that we did in 2011. We would improve our position in that overall and global ranking from the #7 under the global suppliers to the #6. But what is even more important is that if you look at the structure of the size and the structure of the revenue, you can see that we have a leadership position not only in complete seating, but in the seating component area as well. As you can see that metal and mechanism, we are strong, #1 in Foam. We are basically twice as big as the next biggest successor. And in fabrics, through the acquisition of Michel Thierry, we positioned ourself in the #1 position. And the important statement here is that the component business is where the technology story happens, where you can offer unique selling proposition where you can differentiate yourself from the competition, where you can get out of the commodity corner and where you can come to a value-driven business.

That this story starts to work out and that it's starting to pay back. You can see from our backlog development and as Steve mentioned, we are going in 2012 with a record level in our backlog of $4.2 billion incremental sales backlog. We further strengthened the diversified customer portfolio. And if you look at the pie charts, you can see that Europe is still the leading area for us to go into business followed by a strong backlog contributions out of Asia and still defending a strong position in North America.

If you look at the distribution by product, you can see that obviously the seating business is still the strongest contributor and obviously it was boosted through the different acquisitions, and it was boosted through the strategy of vertical integration in 2012. The new acquisitions and the metal business alone is contributing with roughly USD $1 billion to this backlog. But the good news is that the business is developing very well on the interior side, as well we were able to book a couple of really major businesses specifically on the European customer side, and I will come back to 2 pieces of business that are really worthwhile to mention with Mercedes and with Volkswagen. And we did all this, expanding our backlog by not walking away from our discipline around our terms and conditions, and with not waking -- walking away from de-risking our business, as Steve mentioned before and I have not added another slide in my package about this. But as Steve mentioned, we are extremely confident [ph] in material economics and [indiscernible] engineering or engineering recovery, on volume sensitivity, on distressed suppliers, on the question on how we handle the directed supply base with our OEM. So we did not walk away from all this quoting, what we call quoting discipline, and we were able to significantly de-risk the business. But coming back to the Mercedes order, it's a significant order for the new C class. The business is a global business. It will add lot of $400 million annual revenue. It is based -- it's basically the C class, but it's going into the different derivates of that car and of that platform and will be a worldwide interior auto. It's good business, it's profitable business, and it will support significant growth in our interior area.

The other order that I would like to mention is the Volkswagen business that we acquired -- or that where we got this order about 2 months ago based on technology that we acquired through the Hammerstein company. It's the first time ever metal order for us with Volkswagen. We got the development order, and we are the lead engineering company for the front end, for the rear seats structure. We already could book the business in Europe, and that piece of the business is only something north of $250 million annual revenue. The good news is that they will carry on this structure into the different regions, so the next order that we'll follow is Latin America is obviously Asia and China, and last but not least, they will put it into cars in North America as well. So there is out of these first steps into the metal business with Volkswagen, a clear upside potential to our backlog through the metal strategy and through the technology that we can offer. This decision was not made on price. It was a strictly technology-driven decision. We could offer significant weight reduction. We could offer significant improvement in packaging, and all the other technical features that metal foresee [ph].

If you look around that slide, you can find a couple of good news for our electronics business as well. We are the leading supplier and partner for our customers related to design of the human machine interface. We have good business with Ford. We have good business with GM. Related to that, they highly estimate our capabilities to design menus to guide the driver through a complex load of informations without distracting him. And last but not least, we were successful to book business at BMW. It's most probably the biggest order on electronics that we ever got in Europe that positions us on the technology high end with specific bus [ph] system with a record level of line coats that is put into this body controller and really shows and underlines that we are a really competitive player on the technology side of that business as well.

If we look at the global market, all these backlog activities that are indicating that we are gaining market shares over time are happening on a still growing market. The headline that I put in this slide is that despite the economic concerns, we don't have any signs of production slowdown. So before this meeting, we checked again the order book from all of our customers around the world are not showing any kind of slowdown for our first quarter, for our -- for the last quarter of the calendar year. They are not slowing down. The inventory levels in North America are still on a very healthy level and the waiting time for premium cars in Europe, it's still around the 6 to 9 months. It's obviously supported by strong export into China. Another indicator that where we are present with our product portfolio, there is no slowdown and we are taking a significant benefit of these export activities from our customers into China. So if you look at the overall numbers, again, we don't see North America slowing down. We see an increase from 12.9 million to 13.8 million cars in 2012. We see Europe flat still with a slight increase in the eastern European countries. I will come back to what we expect for Russia at the end of my presentation, but there will be a slight pickup in production in 2012. And if you look at the BRIC countries obviously the main driver behind future growths are the Chinese volumes, and there we still see a 2 digit percentage of increase going from 2011 to 2012. The overall growth rate over the next couple of years might slow down a little bit, but with 9% as it is our forecast, it is still on very healthy levels, and it will very much support an overall growth rate for this market of 5.6% over the next couple of years.

If you look at the underlying market trends, I had a similar slide in my package last year. The main driver for the OEMs is obviously what the final consumer is looking for and what are the criteria for somebody going to a showroom finally to buy a car. And you will see that there will be a growing demand for smaller vehicles around the world. A lot of OEMs are bringing the European powertrain technology into the North American market and they do that quicker and faster than ever. There will be a rising environmental awareness on the consumer side, but at the same time an increased quality and safety expectations so people will buy the car because obviously the outside design is nice, but the final decision of buying a car or not buying a car is the perceived quality of the interior. And last but not least, there's a huge move in the direction of connectivity, and as I mentioned in my opening remarks, we are very prepared to take advantage of all these developments with our product portfolio going through seats to interiors and covering the electronic side at the same time.

The OEM strategy did not change, so it's very similar to what we presented last year. Everybody is trying to upgrade the interiors, leather wrapping of steering wheels, leather wrapping of the entire IP, real wood stuff [ph] in the vehicle is not a high-end or premium platform privilege anymore. It's going really down into the BC segments of the cars. Everybody keeps trying to differentiate himself through innovation, but it must be innovation that is that the final consumer can feel, touch and experience. There is obviously an ongoing trend to the component sourcing. There's basically no customer out there anymore that is just sourcing the complete seat, so you will get RFQs from all of your customers around the world now in the meantime for the different components because they know that's where they can standardize the business, and on the other side where they can take out weight, where they can bring in new technology and where they want to have direct access to the strategic partner on the supply side.

Cost reduction is obviously still important, but not the only criteria anymore and at the end of the day they are starting to source the business really globally. They know they can get to the cost leverage only if they buy the same seat structure. Not only North America across different platform, but they expanded directly to the other regions. It will take out a significant amount of engineering load out of the whole industry. The testing load will significantly go down and the speed in which new structures and new technology can be introduced in the market will significantly go up. And if you look at our product portfolio, as I mentioned before, we are really well positioned in all 3 areas of the interior business to take a full advantage of all these developments in the market.

I will structure my presentation around 4 topics, about 4 key strategies and levers for growth and marginal improvement in that environment to underline how we take advantage of all these market developments. And I will talk about operational excellence first, and I will talk about vertical integration technology, advanced development, a little bit under that headline about our acquisitions as well, and I hope I will be able to convey the message that the acquisitions, the money that we spend for technology, and last but not least, the vertical integration strategy are part of a holistic approach in going into a technology company that offers unique selling propositions to our customers. And last but not the least, we need to take advantage of this leading technology position by bringing the technology that we introduce in the mature markets later on into the emerging markets and further capture future growth and even increase our market share in the emerging markets. I will talk specifically in my presentation about China. We were part of a $300 billion [ph] gain in 2016, and we will expand our market share compared to today in the future.

So to the first bullet point, operational excellence. If you want to differentiate yourself to technology, you need to really dominate your processes, you need to be really firm in your production system and in your launch system. We invested a lot of money over the last year and a lot of management energy to support the launch management. We added overall 300 resources globally including 60 Six Sigma black belts problem-solving resources. We significantly improved our launch performance. We are very transparent on measuring key and leading indicators, and we can forecast pretty precisely if a launch is going to be a problem or if everything is under control. We are operating in the real world. In the interior side customers are coming in with late changes. They are coming in with new ideas very short term before start of production, so it's not always easy. But we significantly improved our discipline and our transparency, and we are pretty sure that our launch execution significantly improved over the last couple of months. We know that on first part of the year on, on-time delivery, we are in good shape for everything that is coming up over the next 12 months. And obviously that is based on real good program management expertise that we added over the last 12 months.

We continue with our best business practice, internal benchmarking processes. We are driving our cost to this business practice, and we closed our gap to that best business practice in that internal benchmark exercise by $350 million, savings that we brought home over the last 12 months. And last but not least, we do not do best business process improvements only on the shop floor. It's really essential and important that we expand this activity to our business processes. We need to gain speed. We need to react quicker to customer demands. I just picked one example I think where we can be really be proud of and it's about tooling and tooling timing where we were able to go through all the different steps, work with the right partners and cut the supply time of the new tool by roughly 50%.

We focused all these activities on the European turnaround and as you can see here, there is a significant step forward in 2011. And as you could see in our press release, we promised to meet the 3% target in the fourth quarter of our fiscal year, and we got there helping the run rate to improve into a way that supports then the expectations of 4.5% for the fiscal year 2012.

The second part we cite operational excellence are 3 initiatives that somehow, again, belong together under the headline of what do we do to drive the business into a technology area. One of them and the first of them is our strategy about vertical integration. It's the component business where the technology happens. You can see that it is not only a defensive strategy, but it's certainly taken by the OEMs as well, so it's a response to the OEM sourcing patterns. It is absolutely driving the business into an area that the profit levels are higher, and again where technology is a differentiator. So at the end of the day, vertical integration, advanced engineering and the acquisition are supporting the vertical integration strategy. It was part of the technology game that we are going for.

So the next piece is that technology and advanced development, and as I mentioned before, we did not slow down with spending money up front for new product and product areas. And we were able, in 2011, already to create unique selling propositions, and we already were able to improve our profit margin with the newly acquired businesses. We can balance and influence the standards that the customer bring to the market. I mentioned before, the Volkswagen order, so if you are out with the new technology in time, you can really define and set the global standards around these new seating products and components. And you can go into a new business field. I will talk a little bit about carbon fiber and new materials, and it's certainly a technology that can carry out outside of or carry-on outside of our traditional product portfolio. And you can see some amazing achievements that we got out of these activities over the last 12 months. You can see that a recliner that is 20% less weight, that has a Best in Class pricing and that has all technical features that are world class in each and every dimension. It is something that the customer is asking for, and that the customer wants to pay for. And if you look at the weight reduction that we put in a modular front seat structure, but just taking the different components from Johnson Controls, from Hammerstein and from Keiper and put it together in a kind of synergy seat, what you can get there is a weight reduction of 4 to 7 kilo. This is really amazing. We presented that seat at the Frankfurt Auto Show, and there was no customer that does not want to come back and look at this and have a deep dive, a deep understanding about these technologies, and it will position us extremely well for further expanding our backlog.

And last but not least, through all that story we support our complete seat capabilities. Nissan gave us a very important innovation award in 2011 for the complete seat solution that we offered with a lot of technical features that were really unique. So it's not only the component story, but the component story obviously helps you to be very competitive on the complete seat side as well.

We want to do all these innovations outside of the normal development cycle, so we put a firewall between these advanced development activities on the one side and our launch programs on the other side. We don't want to do in-cycle innovation or last-minute innovation anymore. We really want to have a deep understanding about the processes that we do need, about the material that we use and about the long-term behavior of that material in the car before we even consider to put these new technologies into specific applications. But you can see that out there, if you look to 2013, '14 and '15, there are huge potentials coming from a deep understanding about metal forming and joining. We are convinced that a seat in the future or a seat structure in the future will just not be only welded, but there's riveting, there's gluing, and there are composite materials that you need to put in there with very different and difficult behaviors. We are very successful in testing these solutions, and we are pretty optimistic that within the next 12 months, we will go to market with these solutions. And it's not only on the metal side, it's on the material side like the rear seat structure that could offer the 30% weight reduction, and it's on the foam side that has a significant impact to the overall weight and where you can use on top of that material in the future that is eco [ph] friendly and helps the OEMs to reduce their field to exposure.

We supported -- it was not the only activity, but we supported these pre-development and technology activities through a couple of acquisitions and again as we explained last year, these acquisitions were technology centric, so we expanded our technology offering specifically through these acquisitions, and we already talked about Keiper and Recaro and the seat structure questions, but there have been more. The textiles and integrated trim offering that we have is paying back already/skins offering new surfaces, extremely important for the interior business. And last but not least, I mentioned that questions like leather wrapping are getting more and more important, and we achieved to get to these technologies through acquisitions.

How these 3 initiatives, the acquisition, the vertical integration and the Advanced Technology activity, how these activities work together? We showed at the Frankfurt Auto Show, and we took a short video and I hope it can convey the message very well. If you can show this video now.

[Presentation]

So again, I would summarize this short video. Under the headline that through technology, we will improve our margin, our midterm margin expectations from 6% to 7% before, to 7% to 8% in the future. And this statement is backed up with a backlog of already $1 billion of business that we acquired on the -- that we were able to book on the component side.

The other dimension and the new dimension is our global footprint, and what we do to leverage our outstanding global position today to further grow into the emerging markets. I would just like to go very briefly and quickly through the different BRIC countries and then focus obviously on our position in China, and you can see from the pie chart that this is obviously the most important and dominating part of the BRIC story.

In Brazil, we have a very solid position. We have a market share north of 30% and we are significantly growing on the interior side and electronics side. This growth is specifically supported by the global sourcing strategy of our customers, so we can basically carry over solutions for all of our customers into Brazil.

In Russia, we have a very unique, a very strong leadership position in the St. Petersburg area. We are very carefully exploring additional opportunities so we are not rushing into opportunities. We know about the risks in this market. And I think focusing on a couple of global customers, focusing just on a handful of regions and expanding that business step wise is up to now a very successful and very wise strategy.

In India, we are the unquestioned #1 in complete seats engines [ph] already today. We drive our interior and electronic growth, so while we are doing the seat business out of the joint venture, we are driving the interior and electronic business up to now out of wholly owned activities. We will expand our engineering footprints, so India will be part of our low-cost country engineering strategy going forward. And last but not least, we will focus more and more on the global OEMs. We strongly believe that the global OEMs will significantly increase their activities in India, and we want to be part of that.

And last, but not least, focusing on China, we are the undisputed #1 in seating already today. We have put our largest focus on China to position ourselves, to participate in this attractive growth opportunity, and you could see from the bar chart that we increased our revenue or we will increase our revenue from 2011 to 2012 by more than 20% and that our growth rate in the market will be significantly north of 10%. We are forecasting the 13.4% over the next couple of years, reaching out for a $7.4 billion revenue number in the year 2016. 2011 was already a good year $4 billion of basically and mostly unconsolidated business. Restrengthening our market position north of 44% market share.

We are in the meantime, a strong #2 in interiors. We are still a niche player in electronics which is just joined a tremendous growth opportunity for these 2 areas in that market as well because related to partnership and related to technology, we are extremely well positioned to increase very quickly our position in these 2 business areas as well.

We have a very diversified customer base. The global players are taking more and more influence on the sourcing decisions in China as well. That helps us to be present around the globe, strong with European customers being present with the North American OEMs and have a strong position with the local OEMs as well. It's helping us to take really advantage of the overall goals in the country. And everybody is keen in China to have a technology partner, so somebody who can bring something to the table and basically that's what the technology strategy for China is about, so we need to leverage our acquisition, and we need to increase verticalization. The 44% that I mentioned as a market share is basically the market share on complete seats. We have a lot to do on the component side. Our market share with recliners, with height adjusters or seat frames is significantly lower. Now having the technology onboard. It's just a simple exercise to phase in with these new programs coming on board with the programs that the global customers are sourcing, it will give us a tremendous opportunity for growth in China and a tremendous opportunity for expanding our margins in this country.

And last but not least, we are already fully integrated on the engineering side, and we have our own development activities positioned in China. All these things giving a tremendous value to our partners that stick to us and we were very happy to expand our business. And again, as I mentioned on this slide, not only with the Chinese customers, but with the global customers in China as well, there are always a lot of discussions on who will win and who will lose, and will the government restructure, the OEM supply base, our strategy is pretty straightforward. We want to be strong and present with most of them, most probably with all of them. And we can obviously see how that shake out overtime might work out with this very diversified customer base.

We have more than 50 plants already established in China, out of 28 joint ventures. We are managing 45 major launches in 2012. Most of them based on global seating structures. And again, this is not going through the traditional supply base, our strong customer base but it has a very balanced presence around the global customers and the Chinese customers as well.

If I can summarize my short presentation, I think I would highlight that we will accelerate our growth and improve our margins through short term ensuring operational excellence and long term to strive for technology leadership. And we will grow faster than the underlying market short term by just executing the $4.2 billion of backlog and long term by driving the vertical integration and expanding our position into the emerging markets. We are increasing our midterm profitability target by these strategies from 6% to 7%, to 7% to 8% in the future.

Thank you very much. And with that, I think I can invite you for a short break. Coffee is outside. Thank you.

[Break]

Alex Molinaroli

Welcome back. Good morning, and we'll spend the next half an hour or so going through Power Solutions. A bunch of you -- I've had a bunch of questions in the break, and I know a lot of you understand our story, so I want to make sure that I don't spend a lot of time regurgitating some parts of the story that you already understand. Hopefully we can add value in this presentation, some of the things you already know, and then later on, we have a chance to answer some questions. But I would tell you that as our story has evolved over time, and it has been a changing story, I do think there is a lot of consistencies to the story, and I want to make sure we point out, not only what's changed, but what's consistent because I think part of what's important about Power Solutions is the things that have not changed and the very important basics to our business that have helped us be successful and build a platform for the future.

Speaking about our profile, the profile of Power Solutions, I think it's well known around our product quality and the products that we have and the presence that we have around the world and our core SLI products and the emerging products around Start-Stop and then our position, our early position in advanced battery. I also want to make sure that we talk about diversification that you understand, and I think you do our position both in the aftermarket and with the OE business. That's always been a staple of our business, the strength in our aftermarket products and the strength in our OE. Our market shares and our presence with our customers both in the OE, as part of our business, and the aftermarket are representative very similar shares. And so when you see the mix of our business, it just gives you an idea of the size of the aftermarket versus the size of the OE business. Now over time, and we won’t talk about that today, over time that complexion of our business will change as we move into more Powertrain type application, the aftermarket, the nature of our business will change, and so we need, together, talk about that as the business moves forward.

Our mission hasn't changed. Our position around leadership in the automotive space and in the emerging advanced battery space is ultimately our goal and objectives and the mission that guides us. What has changed is the market itself, and I want to spend a couple of slides here in the next few minutes talking about what has changed. Now our message hasn't changed. I've got a couple of different graphics here to illustrate that change and before I get into that, I know that some of the things are still the same. The representation that we have around the world, and for those of you that know us well, you know that in North America which traditionally we've gone through, not only wholesale market, but the big-box retailers along with our OE customers and that we don't -- we're not branded in North America. Where our partners have the brands, and our position is very strong in that space. It has a lot to do with our product differentiation, our network economics, the manufacturing economics and advantage we have. The quality and consistency of our product and also I think that we haven't spent a lot of time talking about is the real differentiation that we put together with our customers around helping them manage their business, their category management, pretty much like a consumer products organization. If you were inside our organization particularly in the Americas, you would see that it's a very much a consumer products-oriented conversation, around how we help our customers be successful in this category and adjacent categories. So we have lots of things that help differentiate us. Everything from the quality of our product which I think is something that we've always talked about, all the way down to the services that we provide our customers and that's what helped us enjoy the shares that we enjoy in North America.

Now in Europe, a little bit different. South America different. Mexico different, and emerging market of China different. We actually have branded products. And so, we also don't have a customer set in the other parts of the world around things like big-box retailers. They really don't exist the way they do in North America, so it's much more of a wholesale distribution. And so if you look the nature of our business in the aftermarket in those markets, it's how we build out the aftermarket. It's how many steps and channel. Channel management and brand management programs that we have to take our products through markets, through channel partners and sometimes ourselves. And so it's a little bit different profile because we are in North America. You may not be familiar with some of our brands but the leading brands of Barta [ph], Bosch, we take to market in Europe. Barta's [ph] our brand today in China. Heliar is our brand in South America, and LTH is our brand in Mexico. So a little bit different way that we go to markets in the rest of the world versus North America.

So let's talk about what's happening in our business, and this is not an inconsistent story. We've talked about the trends and how we find ourselves in an energy storage marketplace in a market that is changing dynamically. And what we try to do here is illustrate, and this goes back in time to give you a time reference. This is 1990 time set to today. And what this is supposed to illustrate. We could take this back further and would even be more dramatic, is that all the things that we've talked about, these megatrends around cost of commodities, around environmental standards, as we talk about the globalization of our business, or the fact that the emerging markets have a much different growth rate than the mature markets, those things are all things that we've talked about. This puts it in a picture that shows you why all of the things that we've been talking about are happening at such a rapid pace. I spoke with someone earlier today and they said it looks like everybody's talking about Start-Stop now. We were talking about it. We were all talking about it together for the last 6 months or a year, and now everyone’s talking about it because it just makes so much sense. You look at fuel prices and that translates to CAFE standards and changes how the café standards are actually managed. CO2 emission reductions is what you see in places like Europe and other parts of the world. Those standards are changing dramatically. These are dramatic changes in fuel prices, the cost of our commodity so why are we vertically integrating? Well, you don't have to think very hard when you look at what's happening in the volatility of lead and how important that is in our business. You look at where the business is growing and that explains our footprint changes. And then you look at things around environmental issues that are facing our industry, and this lead air emissions standard is a North American standard, EPA standard, but that's what we're seeing around the world. In all places, and we'll talk about China and what the implications are there. All that plays to the strategies that we've talked about. Our growth in emerging markets, our vertical integration strategies, our change in battery requirements and technologies because fuel prices are now making this important. Because new standards are put in place for the OEs to drive more fuel economy and fuel efficiency into their vehicles. And the emission standards, and it's just starts with the emission standards, but the environmental standards that are changing radically in our business. All those fit our strategies and really put us in a competitive advantage in the long term. What's happened over the last few years, you can see that there's just been a rapid change and all the things that we've been talking about for years so that's actually coming home as we see it today.

So how does that turn into products? How does that turn into technologies? What's different today than what was different in the past, and how do we anticipate the future? A lot of times we get together the questions always talk about when will these new and emerging technologies actually become part of the mass market and become really adopted by our customers and by the consumers, and as you know, Johnson Controls is only been focused on the real economics for the consumer. Understanding that regulations in commodity prices and environmental standards are also going to drive those economics, or be a part of those economics. But the real economics of switching cost from one powertrain to another. And one of the things that we see especially over the last year or so is this leap from a powertrain, a combustion engine powertrain to an all electric powertrain or hybridization is one that we've been talking about that economics aren't there yet. And the economics are moving toward hybridization and at some point, and we talk in terms of 10 years out, we'll start seeing mass adoption of things like electric vehicles.

In 5 to 7 years, we'll start seeing hybridization. But what we're seeing today, the real transformative thing that's happening is Start-Stop, because it just makes so much sense and it actually pays for itself today. So that's what's happening in our marketplace and so far, we've been reasonably right. I mean, we've had a good fortune to have a -- placed our bets across the spectrum and have capabilities and customers that are working on all these different Powertrain opportunities so we do have some insight in what their plans are. We see what the stated volumes are versus what the real volumes are. We see what the stated capacities are versus the real capacities are in order to execute against these technologies. And we're still in the same place that we've been. We see a transforming from today's combustion engine to tomorrow's combustion engine which is more efficient, but it will include things like Start-Stop, and then we'll see hybridization. All these things are happening, but when I talk about it, it's a frame of reference around mass adoption. So as I talk about adoption, doesn’t mean that those technologies aren't available. You can buy a Leaf and you can buy a Volt. You can buy a transit connect. You can buy these vehicles today, but you're going to pay a premium for that. Over time, those choices will become real economic choices. And we recognize that, we're going to be a part of that. So our strategy follows that life cycle of new technologies.

As things change, they really -- as things seem to change, they really are the same. What's the attributes to being successful in this business aren't any different than what they've always been. What's changed is the globalization of this, so the execution of that is a little more difficult. It's not just where it's 70%, 80% of the market is in Western Europe and North America. The market is evolving. And the application, the energy storage application that are required but the same requirements for our OE customers are the same ones they have today versus tomorrow. And that is to be able to the OE capable and have products that are effective, not only effective from a standpoint of the performance but cost effective and consistent in the quality. So we see those attributes being important in the future, and in our models when we start talking about winners and losers in the future, who will survive this, we think you have to have both. You have to have R&D capabilities, you have to have scale, you have to be able to be capable in the technologies as they evolve, but you also have to be automotive capable and you have to be -- you have to understand how to operate within an automotive environment. And I think we're starting to see some of that shake out today in consolidation. We think that'll continue over time, particularly in the advanced batteries space.

So our message is pretty simple, we really have 3 planks, and Steve showed this slide earlier. Our strategies and our investments are based around a couple of things. First our core markets are -- continue to be important to us. And it's something that I always try to remind myself and remind our employees and we remind our stakeholders that what has made this business is our core markets and our core capabilities. Our core markets around SLI and the expansion of the SLI business from a global perspective. Now the thing that's different is being able to execute on that globally. So being able to standardize our products, standardize our systems and standardize our capabilities, and we've done a decent job of that, but I would say we've done a decent job with that within regions not necessarily across regions. So when you look at our investments in people, in processes, we too are going through ERP transformations. We are going through globalization and changing our processes. Organizational structures and capabilities are changing to able to match our investments in places like China, South America, Eastern Europe in our core SLI business.

The next part of our platform is emerging markets and that shows not only investment in today's technologies because to a large extent, a lot of these emerging markets may just move straight to Start-Stop technologies, or whatever technologies are emerging, and then as it relates to things like hybridization, or the electrification of the powertrain, they are not going to wait to participate in that market. They're going to participate in those markets at the same pace as our mature markets. So this idea of continuing to invest in our core, and that's what's made us successful. We're reaping the rewards of the success that this organization has had for decades because it continue to reinvest in our plant and equipment, and to our manufacturing processes.

Emerging markets, it's the expansion of our footprint, taking that capability globally, not only for today's products but our future products. We'll talk about things like AGM and our advanced battery investments. And technology itself. That is different than what in the past. That is much different than where we've been previously because we had such a stable market, such a stable business model. Those things are changing and there are implications to a lot of changes we're seeing in the marketplace moving forward as Start-Stop becomes ubiquitous, which we think it will, are some form of Start-Stop because it only makes sense. And then beyond Start-Stop, the hybridization and electrification of the powertrain. That won’t be ubiquitous, but it'll be a choice that consumers will have. And so that will change our business model and change our customers' business model. It's certainly forcing us to spend more and more on our R&D efforts and think and have a different time horizon than we've had in the past.

So what has made us successful? I talked a little bit earlier about our commercial excellence that I believe is something that is a differentiator for us and particularly in our mature markets. The relationships we have with our customers we cherish. We manage them, we work with our customers and we have a perspective of helping our customers because we're such a large category for our aftermarket customers. Batteries are very important. Batteries and tires are the most important things for out aftermarket customers. And as batteries go, as tires go, that's how our business for our customers go. And for our ability to help them, receive the value, support their customers and support their strategies is very important.

A hallmark of this business is our business process and operational excellence capability. And we continue to invest in that in order to not rest on the advantages we have today because today we -- quality shows up in our SLI business because we're able to make a battery that's more consistent at a higher quality with less cost. But our competition is not resting. They understand what's made us capable and so we continue to invest in that. And then one of the things that is new, you saw the chart around the LME is taking advantage of the situation that we find ourselves that's particularly in the mature markets starting in North America around vertical integration. I have a slide here earlier, but that is going well, and we have a stated strategy on that, that we are in the midst of executing.

Here's an update on where we are on the vertical integration. I think everyone recognizes that in North America a few years ago, we made a strategic move to vertically integrate because we saw as the LME was changing and being such a -- important part of our cost structure that our business was at risk and was also an opportunity for us to be able to capture margin that was being captured by the secondary tollers [ph] in our marketplace in North America. And so we made a strategic move to be able to take advantage of the situation that we have. We have strong market share. We have strong customer relationships that gives us the ability to get raw material back core batteries. We were using secondary tollers [ph] primarily to have that converted to lead that we could use for new batteries. We move to a strategy to be vertically integrated. Where we are today is Garcia, which is our facility in Mexico, is essentially at full production. We continue to get more and more productivity at it, but we're at our objectives within our investment criteria that we expected. We've continued to invest more to get more and more productivity out of that facility, but production is stable and that is working well. We're basically building a sister facility in Florence, South Carolina. That facility is up, and now we're putting in the equipment. This time next year, we'll be actually making lead. So when we go through the last fiscal year quarter for Johnson Controls, we'll be ramping up that facility and we'll start seeing lead come out of Florence, which means in 2013 fiscal year -- end of 2012, we will have essentially have made those investments. We also had a question that came earlier. We need to make sure we give you the visibility of this. We are seeing the benefits to Garcia that we expected, and there's no reason not to anticipate that we're going to see the benefits that we expect from Florence since it relates to the margin that we've been talking about.

Emerging markets, very simple strategy. I won't go into a lot of details to know that all emerging markets aren’t the same for us. We need a market that's ready for us, that speaks to infrastructure, it speaks to the market being mature enough for us to be able to provide the products that we provide. All markets will mature, the OEs will drive the technology requirement, as the OEs drive the technology requirements for us to be able to provide maintenance-free batteries of the quality that we provide, then we will enter those markets aggressively. That shows up in our efforts in energy, in investments in China. So we'll talk about China and I’m going to step back here a little bit because I'm sure everyone has a question about what's going on in China. We have opportunity in China to be able to work with the local government in Pudong district that's where our plant in China that you've read about, I'm sure, that has been suspended as it relates to operations. Let me make sure you understand what is going on in China and what we're doing. So first off, this hasn't -- doesn't change anything around our strategy. The thing I will point to, to make sure that you understand the perspective that I have of this. I have 2 perspectives. One perspective is the same one that I've been talking about. I've talked to you about consolidation. I was reviewing the slide we have in the last couple of times we got together that we anticipated all of this to happen, what we didn't anticipate that it was going to happen to us. And so as we talk about consolidation of the competition, as we talk about environmental standards changing radically, as we talked about manufacturing processes and capabilities needing to move very quickly, we were seeing lots of competitors be suspended or being shut down or having to change their processes. One of the things we did not anticipate was that we would get caught in that which is what happened in the Pudong district. So our facility in -- it's outside of Shanghai, if you're familiar with Shanghai, the Pudong district is between the airport and Shanghai, it's changed on us. We acquired the facility in 2005 as part of the Delphi transaction. When Delphi put that facility is, is early in the 1990s, over time, that's become a much different neighborhood than it was when it was originally put together. So there's some villagers, their children were tested with high blood lead levels. We don't know how long they've had that situation, so that you really understand the situation there. They are testing these children before they go to school just as you would get your inoculation with your kids, but it's a new test, so these kids tested with high blood lead levels. Well, the only thing that we're sure off is that by shutting down or suspending operations of our plant in Shanghai. It's not going to change that situation, because the facility that we have in Shanghai is the facility no different than any facility you have in all of our footprint. It's not something that would cause this issue. So we’re working with the government right now even though we're suspended, we're working with the government to help them find the real source of this problem so it can be resolved. So at this point, I don't have the end of the story for you, but that's the situation. Now in the near term, what does that mean is we're having to ramp up quicker in our new facility in Chongqing. We're also having to qualify OE customers in the Chongqing facility, and we're having to import batteries. So it's going to have a near-term effect on us over the next quarter or so as we deal with this unexpected suspension in Shanghai. Over the long term though, we see this as being something that is consistent with the strategies that we put out. We also need to work with the Pudong district to make sure that the right problem is solved, so that the local village there doesn't have that problem that they have on a continual basis. So we'll surely keep everyone posted on where we are as it relates to the situation in China, but our investment profile has not changed.

As you can see and I just referenced it, in Chongqing, we have started production in Chongqing. We're having to move some of the OE production there. As you can imagine that it's been a disruption to what our tactical plans were over the next few quarters as we make sure that our OEs are getting batteries. It's also causing us to pull forward and make sure that our Chongqing plant which is under construction, gets -- put together -- put up as quickly as possible. The other investment we'll talk about that later. We've also announced internally and we've had some communications around the fact that we are adding AGM capacity in China, which is a part -- was not a part of this original footprint but as that market is evolving and changing as it relates to technology, we're going to be putting our same AGM technology in China. So it's a little hiccup for us and it's something that we're really focused on to make sure our customer support it and to make sure we can help the Pudong district solve their problem, but our long-term investments in China around capacity expansion has not changed. And in fact, if I can look past the next 3 months or 6 months as we get through this, I would tell you that all this plays in our favor as it relates to all the attributes that makes us successful.

Around technology. So the technology in our business is changing dramatically and we've made lots of moves and I want to make sure that you see those moves in a strategic light that are consistent with how we see the market place. Over the near term, we'll continue to provide SLI batteries and we'll keep adding capability to do that as cost effective as possible. What's rapidly changing is Start-Stop. Including in Start-Stop is AGM and AGM capacity. We talk a lot about AGM, but Start-Stop is not a technology. Start-Stop is an application. And there are other applications that when we talk about Start-Stop a lot of times are broadly bundled under this umbrella but it's ways that the customers is using electrification of its systems to bring more fuel economy to the consumer. It includes a Start-Stop function, which includes things like AGM. So as we look at our product technology roadmap, it includes AGM, it includes other Start-Stop lead acid batteries, it includes other technologies from a system perspective to work in conjunction with a lead acid battery. It also includes other chemistries including lithium-ion for our future Start-Stop applications, which a lead acid battery may not be able to support. So I'll start tying some things together because a little while, we'll talk about our advanced battery strategy. This was one of the reasons why it was important for us to take control of our own destiny as related to our former joint venture with Saft, because we didn't want to have 2 development programs, 2 manufacturing processes and we also didn't want to give away a market that we see as ours to the joint venture, and it was never anticipated when the joint venture was put together that these technologies would bleed across multiple functions.

So I'll get into the Saft negotiations and a resolution in a minute, but one of the reasons that we did this was to allow us to access the technologies, the technologies that were in development activities we had inside the joint ventures to have access across our portfolio. And then as it relates to other -- the hybridization and electrification of the powertrain, we still see mass adoption not starting for quite some time. So we don't think that the market is going to be very stable for a long time, because it's going to take 5 to 10 years to see the kind of capacity to have the number of competitors that are out there today. So we think those still be more and more consolidation. You're starting to see some of that, if you pay attention to this market now, and you can kind of anticipate there'll be other moves that people make in the future. Our position is that it's very important for us to be in this and to be in the market as it matures and as it becomes a mass market.

So here's our position and our forecast as it relates to Start-Stop. I mentioned earlier that this is a lead acid view of the world. So I'm going to timeframe. You can see here between now and 2015, when we start talking about other chemistries or other systems that we're working with our customers on, it's beyond that 2015 time horizon. But today, I'm talking out as it relates to this slide and this conversation. This is the adoption of current Start-Stop technologies in current platforms. So this is, as of this morning and as of this last few weeks, what we know of what our customers are doing. You can see that in Europe essentially we're moving into a Start-Stop world. And in North America, we're making progress not quite to the same extent as Europe, but I would still say and I keep saying this that this only has upside. It doesn't have downside. So I continue to come back and show you these slides and see that we have more and more needs than the capacity that's currently in place.

So let's talk about capacity. If you add all this up, I'll give it to you so that you have the actual numbers. I believe it's a little over $11 million, $11.2 million of capacity in Europe that's already funded. It's not all in production, we're building the capacity now. It's coming on in increments. It's in 2 facilities in our Hanover, which is our headquarter facility, and Switkau [ph], which was our first AGM facility, so we have 2 facilities that are transforming to -- that are either already AGM or transforming to AGM. We're putting $6.8 million of capacity in North America, that includes one line in Saint Joe's, Missouri, and full transformation over time of our Toledo plant, which is our OE plant. And if you went to Toledo today, you'd see cranes and steel, that project's underway. And a little less than $2.5 million, I think it's actually $2.4 million of capacity that we'll be putting in China. We have not announced where that location is going to be. So that's where we are today as it relates to capacity that has been decided on and the investment is already put in place over the next while. So you can get an idea of how important this is to our strategies. I think everyone understands the margin profiles and the revenue profiles have not changed related to that business. We see 3x the margin content and twice the revenues on an aggregate basis, on an equivalent basis within SLI battery. Some of it will be cannibalized, obviously, some of it will be new growth in places like China but there won't be a cannibalization. It will actually be a new platform as that market grows. Everywhere else, it would probably show up as cannibalization of an SLI battery.

The future of Start-Stop, which will transform into hybrid. So the hybrids, hybrid things, like the Prius, were a little bit ahead of themselves from a technology standpoint. But we also see that there's not mass adoption of those technologies, but one of the things that we do see is mass adoption of what we -- this family of Start-Stop products, which move all the way up to what would look like a mild hybrid-capable vehicle. So those technologies as they evolve speak to our R&D efforts include everything from advanced lead assets and SLI battery with some different alloys and attributes, AGM batteries with different attributes and different manufacturing processes that are required, along with systems requirements that are going to be things that don't may not just be chemical or chemistry-based. We will see applications of capacitors and products that act like capacitors. The 2 problems that need to be solved is rapid charge and discharge and cyclability. The one problem that doesn't need to be solved is energy storage is not the issue, it's how quickly the battery can accept the charge and how we can manage that, how quickly can discharge and how many cycles a battery can withstand over its life. So those are the product challenges. Clearly beyond that, there's other attributes. You start changing chemistries, things like weight reduction are also important to our customers. So those are the types of things if we had our generation 1, generation 2, generation 3 roadmap here, you'd see those type of products and chemistries and other products and systems capabilities that we're working on.

So let me shift gears and talk about the -- what was formerly the Johnson Controls Saft joint venture and give you some of the details. I think that everyone understands. Well, we’ll make sure we’re all working from a baseline here. We purchased our Saft shares of the joint venture for $145 million in cash. We were very pleased with the outcome of the fact that we were able to gain access to all markets, not just automotive markets and not just the current hybrid and plug in electric vehicle markets for the chemistry that's developed in JCS but also that was supplied by Saft to the joint venture. So that was something -- if you recall, as we talked about this, it was very important to us.

I'll be happy to tell you that we were able to maintain our customer relationships throughout this entire process. And in fact, we just did not talk about it over the last few months, but we've had some customer wins. I'll go through some of them just to give you a snapshot of some of the customers, but there's also some other wins that we're not able to talk about because our customers haven't made the announcements yet.

So we have been able to actually grow the business during this process, which I think was one of the things we weren't too sure of because our customers were -- everyone was a little bit concerned about the future here. And also, one of the things that was important to us to maintain the government grants, and those government grants, these are North American, primarily, government grants. The ARRA grant, which is a little bit less than $300 million, and then our grants in the state of Michigan, all told is a little bit less than $150 million. So we maintain the rights to all those grants as a part of these negotiations. And this is probably the first time we've giving you any kind of revenue expectations. Although I would tell you that's not the way that we're thinking about this business. We clearly need to get capacity so that this is something that funds itself, today it does not. But we can see, with the book of orders that we have today that this is the revenues that we can generate by the 2015, 2016 timeframe.

So this just gives you little bit more. Over time, you're going to expect more, and we're going to give you more and more information around the progress inside this joint venture. But we also see this as much more of a long-term strategic move, and there's lots of strategic decisions that we're making today. It also unlocks some possibilities that were really blocked to us. So more to come on that in the future. Here's a snapshot, and I would just call this representative. So these are some of the things that have been going on over the past few months that we have not talked about. There are others that we're not in a position to talk about, over time, as we're allowed to. We'll give you more insight, but we have been successful in securing orders with the existing technology, and also with the technology that we're developing in what was JCS.

I won’t have a slide on this, but to make sure everyone understands the technology that we're moving toward, we'll continue to have our cylindrical NCA product. That's the IP that Saft brought to the table. We're working on an LSP product. You can see here on the China order, that's very important to the China market. We're also, in more near term, working on an NMC prismatic product, which is where the market is seen to be coalescing around, with the exception of the Chinese market. And so we will talk about our product roadmap as we start talking more about advanced technologies. The other thing that I referred to earlier is a 12-volt lithium-ion battery application, which will be important as we start talking about advanced Start-Stop applications. So those are some of the things that we're working on.

Let me wrap some things up for you. First off, I think that we've been very blessed and fortunate to be in a marketplace that, as it evolves, is playing to our strengths. We have a strong capability in our core products as the market evolves. And I think this is very important, as it evolves from a starter battery market to a Start-Stop market. It really puts us in an incumbent position. That's very important. I think anything that you can get out of this is it relates to our own strategies, as it relates to mass adoption, this market will not move in a mass-market way from starter batteries to hybridization or starter batteries to electrification. It will evolve as the technologies, not just our technologies, but as our customers' technologies, are competitive with the combustion engine current powertrain.

So that is working for us. Our position in Start-Stop is very strong, as we've talked around our current products and our investment in the next generation of products is also very important to us. And this Saft buyout was a part of why we feel strong about, not only our current capabilities, but our future capabilities.

I think our ability to bring scale to this market, our costs and quality advantages. This is something that we're not going to continue to focus on. It's something we're very proud of. We continue to win recognition from our customer awards, we continue to be able to keep our customers and add to our portfolio, and I expect that to continue, not only in emerging markets but in our current markets. Our vertical integration is on track and is working, for the most part, exactly like we thought it would. There's some nuances to it, but in the end, it's actually working out as we expected. And so I think that, that strategy is one that is something that we feel very good about. What we can't control is what the LME is, but beyond that, it really doesn't matter because our ability to insulate ourselves from that volatility is very important.

Our investments in China, regardless of what the current headlines are, and management distraction we have over the next few months, all these changes actually are consistent with what we expected. We just didn't get our -- they just didn't plan on us being caught in the center of this. But the China market needs us and we need the China market and our investments won't change. The resources that we have mapped against China and the time that we spend there would indicate how important it is to our market. And the market will evolve. So we're going to aggressively continue to develop, not only current capabilities, we're going to look more and more like an R&D company as it relates to new product developments. If you pay attention to those types of things that we're talking about today, if you read about our business, you'll see the type of investments we're making, not only in the current generation, but our next generation of lead-acid and Lithium-Ion and other technologies, and you'll continue to see those investments in order to ensure, not only our current position and not only our position that we feel good about for the next 5 years, but really the decade after that, which is where a lot of these investment are being placed.

So that's a snapshot of our business. I look forward to later answer your questions, but I would leave you with -- our plans really haven't changed. The market is just moving and changing much more rapidly than we ever expected, and we're fortunate to be able to make the investments to not only keep up with that, but lead the marketplace.

So with that, I will turn it over to Bruce MacDonald. He will make sense of all these presentations.

Unknown Executive

Ladies and gentlemen, please welcome Chief Financial Officer, Bruce MacDonald.

R. Bruce McDonald

I think we need to go back one. Can we just go back one slide? Maybe just before I -- I mean, technical glitch here. Before I get into the 2012 assumptions here, let me just talk about our fourth quarter. I think in our press release that we issued this morning, we talked about our Q4 revenues being about $10.7 billion and our EPS being about $0.75. We are going to have a few gains and some charges and some onetime tax benefits in our GAAP number, but we sort of strip everything out, we're coming out of the $0.75, which was consistent with our guidance, and includes $0.01 or $0.02 of acquisition-related charges. So it came through well in the fourth quarter. Batteries finished the year strong. Our business in Europe, we saw demonstrable improvement in terms of the quality initiatives and the benefits from the quality initiatives in terms of European margins, and in Building Efficiency, we saw good revenue growth.

So if I turn to 2012 key assumptions that really underpinned our guidance, let me first just talk about the market. So Steve talked about these numbers being a little bit weaker than when we thought, maybe 60 or 90 days ago. In terms of the auto sector, you can see that these, by the way, are fiscal year numbers for us. So October 1 to September 30, I think just to clarify in one of Beda's slides earlier, he referenced some volume numbers that were calendar years, so I just want to clarify that. Our outlook is generally in line with the IHS-type numbers. North America at 9.6%, looks probably a little heavy in light of some headlines. But if you think about this current quarter that went up 19%, what we're really saying is, what kind of in low single digits for Qs 2 to 4 or the first 3 calendar quarters of 2012.

Europe, we're looking at a similar story, kind of flattish for 2012. And China, we're looking at 8% type growth, which is in line with GDP. Just a caution on the China number, I'd remind folks that when you look at the overall volumes in that market, a real split between small vans or light vans that they call them there, which are primarily directed towards the transportation and commercial sector and the passenger car sector. Passenger car volumes have actually held up a lot stronger than the overall market. So we feel pretty good about our exposure being largely in the passenger's car side. They don't feel good about that 8%.

In terms of construction, there's the numbers, very low growth, and again, we've taken those down in the last 90 days. And in the emerging markets, Latin America, Middle East, China, those numbers holding up pretty well in that 6.5% to 7%, pretty robust and largely in line with what we thought last year.

In terms of some of the more detailed assumptions here, you can see the outlook in terms of the euro. We're forecasting $1.35 versus about $1.40. It was the average for our fiscal year in 2011. That's about just in terms of numbers, that represents about $600 million in revenue, about $0.05 a share in terms of the headwind as we look at our EPS guidance. The tax rate for next year, we're going to just be consistent about 19%, the sort of upward pressure that we thought we were going to see this year is not going to happen. It really is a result of improved profitability in our overseas operations, primarily automotive.

We do expect our tax rate to tick up into the low the 20%, 21%, 22% here over the next 2 to 3 years, and that sort of consistent with what we thought a year ago. It's just happened a little bit lower than and slower than we thought. In terms of our pension and retirement assumptions, you can see we had about a $0.05 headwind as we head into next year, really driven by lower discount rates, kind of across the world, and poor asset performance in this last fiscal year. And you can see from a funding perspective, we expect to fund about $250 million next year. Our overall unfunded pension and retiree medical obligations, about $850 million at the end of this year. That's kind of where we think it's going to shake out.

Commodities. Here, I think the headline here is as we talked about last year, we've made a lot of progress indexing our automotive contracts. We take a pretty risk-off approach in terms of hedging, so we're very heavily hedged in terms of our exposure on those commodities that we can financially insulate ourself from. So very minimal exposure as we go into next year.

In terms of lead, right now, we're forecasting lead to be at about the same as this year, about $2,500 a ton. Right now, it's running a little bit below that. That really would just impact our revenues negatively, but has no impact in terms of our profitability. So it really doesn't affect us much on the bottom line, but it can place some gains in terms of reported margins that we see in Power Solutions.

And then lastly, we talked about the buyout of Saft. It's about a $0.04 headwind for us. I mean, that business, roughly, in terms of 2011 revenues, around $75 million to $100 million, the losses that we have in that business, supporting the startup and the technology generations, about $70 million to $80 million. That's kind of a number that we expect to see over the next 2012 and 2013, and it'll start to get better. We, right now, are forecasting that business breaks even at about a $500 million revenue number.

In terms of just our overall guidance in terms of the headlines here. So sales, and Steve's obviously sort of let the cat out of the bag in terms of the numbers, but I'll go in a little bit more detail. So in terms of the revenue, we're looking at just a shade over $44 billion, which is 9% growth, and as Steve indicated earlier, the negative impact of the euro completely offset the benefit that we get from the acquisition. So you can think about that 9% as being organic growth, driven by slight global uptick in terms of the markets and Building Efficiency, modestly higher vehicle production levels and the impact of the acquisition and the benefit that we're going to get from converting our backlogs into revenue.

In terms of earnings per share, we're giving a guidance range here of $2.85 to $3, up 20% at the midpoint. Drivers here being volume, being cost reduction initiatives and the benefit of the quality improvements in our European automotive operations. Our acquisitions are accretive. They add about $0.10 a share to us next year, and partially offsetting that is the continued investments that we're making in innovation, our emerging market infrastructure, and some of our new product initiatives.

Our margins for next year, up about 60 to 80 basis points. That'll sort of take us into that 6.5 to 6.6 type range. That'll be a record high for us in, at least, the last 10 or 12 years. Financing cost are going to be around where they we're going to exit 2011, and quarterly interest expense in that $50 million to $55 million range or $210 million to $220 million for the year. We talked earlier about ramping up our capital investment to $1.7 billion, so that's about a 30% increase next year. In the key areas -- and I'll talk a little bit more about this next later on in my presentation, but emerging markets, the vertical integration and Power Solutions, AGM and obviously the investments we're making, our infrastructure and support, the new business growth in automotive.

Our free cash flow for next year, if you sort of take all that in the elevated levels, CapEx is going to be down, it's about $900 million. That's pre our dividend. We still have a lot of, obviously, capacity to make increased investment, and tuck-under type acquisitions when we see something attractive come up. And next year, we're sort of highly focused on improving our working capital position. As you know, that's been a problem area for us in 2011. Next year, we plan on scaling or clawing some of that back. So from an overall perspective, our working capital's an outflow next year of $200 million to $300 million.

I'm going to actually spend 2 slides on each one of the 3 businesses. I'll start with automotive. My first slide, I'm really just going to talk about 2012, and then in my second slide I'll kind of talk about the intermediate outlook in terms of both growth and margin [ph] expansion.

Starting with automotive. Sales are up about 6% next year, you can sort of see at the bottom this is the business that is most heavily impacted by the euro, because of business is about 50% in Europe. So if you back out exchange, the underlying growth is about 9%, and as I indicated earlier, modestly higher levels of production, really getting most of that benefit in Q1. The growth that we're seeing in the emerging markets, just reminding folks, but that really flows -- it doesn't really flow through in our top line. We benefit from a bottom-line perspective through higher equity income. Just noted the launch activity, we actually have a slightly higher launch level in 2012 than we did in 2011.

In terms of our margins, you can see we're guiding to a range of 5.3% to 5.5% at the midpoint. That's up about 130 basis points. The real drivers in there sort of laid these out in terms of the positives and negatives. But clearly, an awful lot of the benefit coming through from the accretive impact of the acquisitions, the higher volumes and really important to us, is the quality improvements in Europe. And as I mentioned before, we saw good progress on that in the fourth quarter.

Partially offsetting that, we have some slightly higher launch costs in Europe and China, an increased level of R&D, and new product development expenses.

So when we talk about the midterm here, I'm really thinking about the outlook over the next 4 to 5 years. So here, in terms of our top line, it's consistent with what we said last year, which is a real -- our sales growth from 2% to 3% over and above the industry. I just remind people that overall, pricing is about a minus 2%. So when you sort of think about what our underlying growth, what we're talking about here is 5% real growth. That really flows through via the backlog in our new quoting disciplines and it's slightly lower than maybe some of you might think, because again, I just remind folks that growth in China not really flowing through our top line.

In terms of our margin aspirations, we're going to exit 2011 just over 4%. So we're increasing our target to go from that 4%, 4.1% in 2011, up 130 basis points next year. But our new guy -- new range, as Beda talked about being 7% to 8%, that's really driven by the increased profitability from our investments in both metals and fabrics areas. Those are highly margin accretive, and that's what's really driving the increased longer-term margin guidance here.

In terms of the glide path, beyond 2012, we're looking for margin expansion at 50 to 70 basis points. Obviously, if the markets improve at a double-digit clip, we would reach that endpoint higher. You can see kind of the main drivers of the operation type improvement, the benefits from vertical integration, higher production volumes, partially offset by a need to increase our investment in new product initiatives.

We go to Power Solutions. For next year, our sales outlook is up about 11% to 13%. We expect to see higher volumes benefiting us in all 3 geographic regions. We continue to experience market share growth, and we'll get the benefit of the new plant coming online in China. As Alex indicated in the first quarter or maybe 2, we'll have a little bit of headwind with the closure of the Shanghai plant, but we expect to offset that with import volumes from other areas of the world.

In terms of AGM. You saw in Alex's slide that we expect our production to improve from about 3 million to 7 million units next year, and that higher selling price, that 2x on the selling price side drives the top line higher. And then the hybrid [ph] business, which as I said before, was on a nonconsolidated joint venture. We consolidated that this year and that we pick up somewhere between $75 million and $100 million in terms of revenue.

In terms of our margin guidance for next year, we're looking at a range of somewhere between 13.5% and 13. 9%, so if you look at the midpoint, that's up about 60 basis points. So that's a little bit less than the 100 basis points we've talked about before. That delta 50 basis points of that delta is attributable to the consolidation of the hybrid joint venture. So the incremental start-up costs that we're picking up 100% of this year is worth about 40 or 50 basis points of the headwind, backing that out our underlying battery business is performing as we expect, and the margin's going up about 100 basis points.

Obviously, the drivers here being the higher volumes globally, the positive product mix shift is associated with the higher AGM units, and the ongoing improvements that we're making on our operations where we’re benefiting both from vertical integration and improved manufacturing efficiencies.

In terms of the longer-term outlook for Power Solutions, we're looking -- I mean, these really haven't changed versus last year. Top line of 10% to 12%, really driven by market share gains. The growth in China as we progress to that 30% market share is our target. And the growth in AGM. And you saw from Alex's slide, we're really looking to go from 3 million units of production this year to 20 million units in production by 2015.

In terms of the margin expansion here. So we think we're going from the 13.1% in 2011, up about 400 basis points. The main drivers here being the operating leverage, especially at the higher volumes. The benefits that we're going to get from the richer product mix as we build our AGM volume, our operational improvements, and again, some downward pressure associated with the investment that we need to make in new product development, particularly in the hybrid business so we get to that 16% to 17% goal.

Lastly, if I just talk about Building Efficiency, our sales for next year up about 9% to 11%. Here, we have very good visibility on Building Efficiency top line growth because of both backlog that we exit the year, which turns into revenue over the next 3 to 5 quarters, and also some of the GWS contracts that we had. So good visibility there, but kind of leading the way is the growth in the emerging markets our Energy business.

I talked about the emerging markets. We are forecasting a moderate recovery in our Service business. I mean, that's been a real headwind for us this last year. And next year, we do see that ticking up little bit. And we do have some pretty significant growth in GWS next year. We're looking for that business revenue to be up about 15%.

On the margin slide, for next year, we're guiding to 5.6% to 5.8%. That's up about 60 basis points versus this year, we're going to end just a shade over 5%. We also talk about our margins pre- and post-GWS. And I just noted those off on the slide, on an overall basis, the margin growth pre- and post-GWS, is similar 60 basis points, pre-GWS, 40 or 50 points after GWS.

Drivers for Building Efficiency margin next year, the benefits of our volume growth, the recovery, as I talked about in our technical service business. On the downside, GWS growing faster than the rest of the segments, the headwind. And then, some of the investments that we need to make in sales force, IT, service, emerging market infrastructure, and the Panoptix launch.

Just kind of putting the new product introductions into perspective for Building Efficiency next year, our new product development costs are expected to go up about $40 million to $45 million on a year-over-year basis.

If we look at building efficiencies, glide path here, over the next 4 to 5 years, as Dave talked in his presentation, we continue to believe we can grow our top line in this business by 10% to 15%, with the drivers being energy, emerging markets, share gains in the mature markets. And we do expect that over this intermediate term, we will start to see the benefit of a late cycle improvement in the nonresidential markets. We don't expect that to happen really much really much in 2012, but over this next -- over the five-year time horizon, we do expect that to turn into a significant tailwind for us.

In terms of the glide path, in terms of that 8.5% margin guidance that we're giving for the midterm, which is 10%, excluding GWS and consistent with what we said last year, the real drivers here being the better operating margin performance in there -- we already talked about getting some leverage on our SG&A, and some of our manufacturing capacity utilization. Dave, in his presentation, talked about some of the work that we're doing in terms of value-based pricing in our Solutions business and in GWS.

And then I have a slide here on new business model. What I'm really referring to there is the benefits that we expect to get through our margins of selling Panoptix products, software as a service. We're not really selling a product so much as a software service. And notice margins in that business grows become highly accretive for us. And on the downside, again, like all of other businesses, we expect to continue to make investments in our R&D expense and infrastructure.

I think the important thing to note on Building Efficiency, unlike the other 2, is when we talk about investments, they all flow through the P&L in Building Efficiency and we have to invest ahead of the curve. And when you think about the investments that we need to make to our infrastructure and their overseas growth, we're really talking about growing a $15 billion business at 10% to 15%, that's a business that's going to double in size over the next 5 years, and so you can kind of appreciate the magnitude in terms of the infrastructure and investments that we need to continue to make to support that growth.

Let me just spend a little bit of time on our capital and our capital plans. So if I kind [ph] put this slide together to really show how it breaks out by business and to put this year's guidance in historical perspective.

So you can see in 2012, we're actually guiding to spending more money than we spent in '09 and '10 combined. I kind of show it here by business. If you look at Building Efficiency, this really doesn't consume a lot of capital main that's the yellow part of this chart, that's really IT investment. The blue box is Power Solutions, and that's where you can see the math have increased. That's really driven by the AGM investment, the vertical integration, the capacity expansion in China and the Lithium-Ion business. So prior to this year, our Lithium-Ion investment was nonconsolidated, now it flows into our CapEx line. So that drives in an uptick here.

In terms of Automotive, we have about $100 million a year increase in Automotive, and that's kind of a level that we see on a go-forward basis. That's all attributable to the fact that as we've increased our vertical integration into our Metals business, that tends to be capital intensive business. So our ongoing level of CapEx has kind of stepped up from that $400 million to $500 million to the $500 million to $600 million, hence the need for those higher margins I referred to earlier.

As we go forward, you can see we tend to think our CapEx here, on an annual basis, between the '13 to '16 timeframe, is going to be in that $1.4 billion to $1.6 billion range. And I think the way you need to sort of think about that, that's what's really driving our organic growth. We expect that as a result of the strategies that we've outlined here today, this is a level of capital that we can put in place in our businesses to drive 8% to 9% organic growth from the top line perspective over the next 3 to 5 years.

We just looked at some of those -- and I just picked out a few of the big ones or maybe that kind of warrants some comments. So over the next 5 years, we anticipate investing about $300 million in our Lithium-Ion business. That, I would remind folks, is 50-50 matched by the government. So the real expenditure is $600 million. We get back about $300 million from the federal government.

In terms of geographic expansions, about $550 million. That's very heavily skewed towards China and low-cost countries. Stop-Start, I mean Alex referenced a slightly larger number, but this is kind of over the next 4 years, we expected to invest $375 million. And that's a number that as we see the market development, that one's likely to increase when we come back a year from now.

In terms of vertical integration, the main investments that we're making in smelting and Power Solutions kind of go away after 2012. Further investment in the smelting business for us really depend on us improving our junk collection in Europe and in China. So we really don't see a lot of capital in that area as we look forward. What I'm referring to here is the need to make more investment in the vertical integration into the metals. That's about $250 million over the next 3 years. In terms of automotive launches, about $400 million, and then an awful lot of investment in IT initiatives, so at about $550 million over the next 4 years. I think it's probably fair to say, what we're trying to do in the sort of elevated level that we're putting into IT area here is really challenging our businesses to gain competitive advantage through IT initiatives. And so if you sort of think about what we're doing, we're putting global single instances, we're standardizing our systems landscape. Just to sort of giving you an example, if you looked at our Auto business right now, we run our whole Automotive business on one global instance of our financial system. And we do all of our transaction processing in [indiscernible]. If you look at Building Efficiency kind of on the other end of the spectrum. We have dozens of different financial systems and we still do all of our accounting largely in high cost countries or at the operational level. So we'll be looking to sort of doing the model that we have in place in Automotive, we'll be looking to replicate that in both Power Solutions and Building Efficiency. And we think there's some significant benefits that we can look at in terms of SG&A and leverage, and taking advantage of lower-cost labor in those countries.

Lastly, in terms of our capital allocation, our primary focus on capital allocation, as you can tell from my presentation, is increased in level in investment and organic initiatives. So our CapEx is significantly higher than we talked about last year. We continue to look for tuck-under acquisitions in those areas that we can accelerate some of our growth initiatives. We are committed to fully funding our global pension plan, and as I said before, about $850 million unfunded. We hope that by making $250 million of funding this year, a similar level in 2013 and some half decent market performance or at least interest rates ticking back up, that it will get to a fully funded position by the end of '13. And then importantly for us, we've been long-term believers in dividends is a important component of shareholder value, and we didn’t cut our dividend in the dog days of 2009. We maintained it at a constant level. We increased our dividend last year, and that's something that we're committed to. We kind of look at our dividend every fall. So we'll be discussing that with our Board of Directors. Overtime, we'd like to get to a 30% type payout ratio where it's kind of in the lower 20s right now. You could probably expect that. It's going to be a little bit -- that path to get to the 30%, it's probably going to be a little bit muted here over the next one to 2 years, which is just due to the amount of capital that we're reinvesting in our businesses.

So with that I'm going to ask Steve and the rest of the management team up to the stage, and we're going to spend about half an hour on Q&A. Thank you.

Question-and-Answer Session

Stephen A. Roell

Okay. I guess I'm trying to make sure I understand the process. We have mics on the side. Okay, so you've got a mic here. Wait, just the one or do we have 2? Okay. Well, what we're going to do is we'll try to circulate through the room here. We've got about half an hour. And if you have a question, raise your hand and we'll try to get to you. I'll try to alternate between the 2 sides. I'll try to answer the questions, or at least I'll enjoy hearing the answers from this team. So let's see what we've got. Rich, all yours.

Richard M. Kwas - Wells Fargo Securities, LLC, Research Division

Just 2 questions. Groups [ph] on auto for margins for the guidance for fiscal '12, given the improvement in Europe, it seems to imply that North America and Asia are flat to down, is that a correct assumption on the margin front for '12?

Stephen A. Roell

I think we're looking at fairly flat margins in North America. Asia, my recollection is Asia's up.

Richard M. Kwas - Wells Fargo Securities, LLC, Research Division

And then, Steve, question -- longer term question on the -- In the past, you reiterated that the 10% goal and in the past you talked about getting there maybe by 2014 or 2015. For fiscal '12, you're going to see another big year in GWS, which meets the margin. That seems to be a business that will continue to grow at a pretty nice clip. How should we think about the timeframe of getting to that margin level? And given the backlog where it is today, we think that the mix of that backlog is pretty favorable and should be beneficial to you in fiscal '12. It seems like it should be maybe more beneficial but it's [ph] current, what your margin target is for fiscal '12. So if you could help us...

Stephen A. Roell

Sure. Let me try to -- although first of all I think we want to go back to make sure people understand that 10% margin, Rich, again, is without GWS. So regardless of what GWS does -- I think we should think about it in the context of 50 basis points per annum. The reason I say that, I think we have actions that will accelerate that. But here's my problem, we can actually beat those numbers, but to do so, I take away some of the future growth. I could quit investing in some of the IT initiatives, I could stop the investments in the sales force. But that's not the right thing to do for the business. So I think the 50 basis point improvement year-over-year is the right cadence. This is a business again where it's people driven, it's not machine driven. And as a result of that, we have to put in the sales engineers, the project management globally, probably 18 months ahead of when that revenue's going to be secured, let alone when it's going to be revenue recognized. So it's a business that has a different -- as Bruce mentioned, it's a little bit different. We have to invest ahead of the curve and to get the growth of 10% per annum, plus what we want from that business, that's going to weigh things down. We'll eventually get the economies out of that business, but the 50 basis points is the right thing to do. And that's really what I -- that 50 basis point improvement is really what I've challenged Dave and his organization. That's the goal we've taken on as a management team, continue to invest, position ourselves for the long term to get 50 basis points per annum.

John Murphy - BofA Merrill Lynch, Research Division

It's John Murphy from the Banc of America Merrill Lynch. First question, Steve, when you started off this morning, you mentioned that you saw the industry condition sort of better than what the talking heads on TV have been talking about. Good orders. We've been hearing this from a lot of CEOs. I'm just curious what you're seeing out there that makes you confident about -- more confident than what the talking heads are saying. And if things continue to come through the way that you're actually seeing them, could there be some upside to your expectations in the near term particularly around 2012?

Stephen A. Roell

Well, John, I think it depends on what industry you're in. As an example, if I were probably in the home industry business, I probably have a different view of what the world looks like right now. But when I look at -- then we look back to Beda’s business in North America, Daily [ph] inventories are in good shape. Average age of the vehicles is the oldest it's ever been. We're seeing the pickup in the large pickup trucks, which is a good indicator. September retail sales were good. If you look at all of that information, sort of counterintuitive to what you read in terms of the consumer confidence piece of information, okay? When I'm in China, Bruce and I were there only 3 or 4 weeks ago, and when I listen to the slowdown that everybody's concerned about, and I meet with the government officials, and we've met with the mayor of Shanghai. And to understand the structure of the Chinese government, the mayor of Shanghai, actually oversees SAIC, the largest automotive company. He sits on the board, he makes decisions. So we meet with him and we hear things like the fact that they're going to continue to march toward the 30 million unit build here in the next 5 years. You get a sense for the fact that their economy -- they're still going to be driving towards job creation. They have to, they've got so much of the -- so many individuals in that country that they've got to provide jobs in for the next 5 years from the Tier 2 to Tier 3 cities. You sort of realize that they're going to have to sustain a level of investment and keep that industry healthy. Could it represent upside? Sure it could. But the question is, is it going to and where is consumer confidence going to rise as the year goes on. We'll see. I certainly hope so. That's where we start our planning when we've met with our board, began talking back in July and August. But we were concerned about everybody talking themselves into recession. But as I indicated, I'm much more optimistic today than I was 4 weeks ago, just based on what I'm hearing and some of the fundamental data in the leading indicators we're looking at.

John Murphy - BofA Merrill Lynch, Research Division

Maybe a micro question might be easier to answer. Beda, your backlog of $4.2 billion, you indicated that had about $1 billion of acquisition revenue in it. As we look at last -- so it means that the core business would be $3.2 billion in backlog. So actually will be a decline. From the $4 billion last year, am I missing something? Or is there something slowing down in new business? I’m just trying to understand what's going on there.

Beda-Helmut Bolzenius

Well, if you want to understand our backlog, you need to go back to the definition. All the money that we put in the backlog is gaining market share. And it's a 3-year window, and that 3-year window has changed. So the available amount of business in the new window is just going down, and the time that a certain structure and a certain business stays in place is getting longer. So the pieces of business you get is getting better and it takes longer, so it has a longer life. So it's a pretty complex calculation to really say, "Is it slowing down or is it not slowing down?" You know that the Auto business is going through different sourcing cycles, and the upcoming years 2015 and '16 will be slower activity than '12, '13.

Stephen A. Roell

Yes, can I try something different on that? I don't think you can you just look at that blatant [ph], in an isolated fashion, that's what Beda's really saying. Because the way that awards are being made, they're being made based on the component level. We happen to get that component-based business. Now we may have gotten legit [ph] business, but unfortunately it would've been primarily assembly value. So I don't think you can look and say, well $1 billion is the new acquisitions, therefore your other backlog would've been down. I think what you need to appreciate is the fact that without that component business, we would have had backlog, but it would have had a lot less value to us, because we would have been assembly based without that component capability.

John Murphy - BofA Merrill Lynch, Research Division

And just lastly, Dave, on Panoptix. What is the payback period for your customers, as they put that in place.

C. David Myers

Well, as Panoptix launches, it'll be in different formats and different capabilities. So for example, you may just choose one application. And there could be an immediate payback depending on what that drives as an improvement within the customer's operation. We also look at it initial term as significant payback for us around the ability to deliver services much more cost effectively with the intelligence and capability that brings. I think the goal, as Steve mentioned earlier, is a little bit longer-term. We look out 2, 3, 4 years as the business models evolve. What we want to do is drive them towards value to the customer. And sharing those savings or ensure that there's significant payback associated with it, regardless of what cost of delivery there is within the services provided. So to me, I can illustrate examples, I gave one earlier today about the [indiscernible] plant optimization, which will be an application in Panoptix, and we have examples in order plant operations, where you achieve 60% savings. So that will be less than a six-month payback. The more typical will be 20% or 30% in savings, which will be in 1 to 18-month payback. So it depends on application and which component you would choose to install. The difference for bringing is that you can do it piecemeal based on where you have a challenge or an opportunity versus a holistic purchase of everything out of the gate.

Ravi Shanker - Morgan Stanley, Research Division

Ravi Shanker, Morgan Stanley. A question for Bruce or Alex. On the back of your business, the 100 basis point a year margin growth target that you've given us is similar to what you had last year, and yet your outlook for the AGM business is much stronger than it was last year, which is margin accretive. So is there something here that's offsetting that or is there room for that target to be higher?

C. David Myers

I think you need to look at the time frame. So when we talk about investment, I think it just brings a longer tail to how long we'll be able to see those margin improvements. Because the investments we're making and the awards we're getting, they push out. It hasn't changed, unfortunately, because we can't put capacity in, how rapidly that capacity will go in. So I think it just extends that time period and probably, the right question or one of the questions that we need to ask ourselves, is how long can we continue to get those improvements. So it just kind of extends out that period.

Ravi Shanker - Morgan Stanley, Research Division

[indiscernible]

R. Bruce McDonald

I'd maybe just add to that. I think the other factor, Ravi, the -- in the window that we're talking about here, AGM's largely in the OE side, and we know our margins in that are much -- our margins tend to be stronger in the aftermarket side than on the OE sector and we have a huge opportunity to radically improve our margins, especially in Europe, as that product develops in the aftermarket.

Brian Arthur Johnson - Barclays Capital, Research Division

Yes, I'll try to make it one question with 2 strands, and it's about ROIC, which you haven't talked a lot about. As we look at the different organic investments by business, are you targeting a common ROIC, it's somehow risk weighted? And what should we be thinking about for public consumption of that ROIC target? And second, as you move to the acquisition front, you've talked about further tuck-in acquisitions. What kind of goals do you have for the ROIC on those acquisitions? And are you explicitly ruling out any bigger acquisitions? Your name has certainly bandied with various properties in China, one of your large competitors –- [indiscernible] companies is breaking up into several pieces now, and maybe comment on that in your relation to your capital strategy.

Stephen A. Roell

Okay, let me tell you what our process is. When we sit down with our board in the May timeframe, we provide them with a 5-year view of all of our M&A and capital investments by business, by line item. And that's prioritized based on –- while we see the returns of those investments, as well as the importance of those investments from a strategy standpoint. It's easy to get our hands around the organic investments, around capital expenditures, therefore, they stand out. The paybacks, we can pretty much gauge, particularly around AGM, the vertical integration, things of that nature. The rest of the transactions –- they become a little more difficult because not only are they targeted transactions, but we don't have full control. So in some cases we have targets in categories, maybe on a specific company, that we will identify as something we would like to have in our portfolio. In some cases, those aren't actionable. So we have to take that into consideration as well. But realize, it's a 5-year prioritization, that's how we allocate capital, that's where the decision-making takes place. In terms of how it plays to our return on invested capital, I would tell you that we look at, at least a 50% adjusted risk, to your point, Brian, okay? Rate of return typically is higher than that, and I do believe that we're consistent with that. If we look at our -- for those of you that aren't familiar with our company, in our capital appropriation process, we look to return on a transaction and acquisition, it has to return at least a 15% ROIC by the third year and a little bit [ph] of the fourth year after the transaction is completed. So if you think about any acquisition we're going to make and the multiples that are typically assigned to that, that implies that we're going to have to probably grow the earnings after acquisition by somewhere between 15% and closer to 20% per annum. That's the criteria that we use. If I think back over the last 12 months, I can think of one large transaction that we did not be because we couldn't get it above an ROIC of 12%. That's the kind of discipline that we've applied to that process. I'm not going to comment, Brian, on the -- I think I know which company you're referring to, and I just don't think it will be appropriate to discuss that. Okay?

Himanshu Patel - JP Morgan Chase & Co, Research Division

Hi Patel. I have a question on the Building business. It sounds like over the last year, you guys have been discussing pricing issues in that business a little bit more. Can you just shed some color, how pervasive is it across the sub segments? How fast does it require -- how fast can you guys get your arms around it, and are most of these issues just a matter of more focus by JCI or are they contingent on competitors cooperating?

C. David Myers

Well, I think we captured all under the title Pricing, but I would say, in many cases, it's the value proposition to customers in addition to just pure pricing. So to comment on that, I think we have had success passing through things like commodity cost, both ourselves and as an industry. And as you would imagine, in all component-per-component comparisons where we would sell, it's a pretty competitive marketplace. And we think we're probably on the higher end, but competitive where we need to be. The opportunity lies in that many cases, we believe we deliver broader value to a customer or a more comprehensive services embedded within that core offering for a similar price. So one of the things that we're driving towards is ensuring that we are valuing each of those pieces, we are articulating that value proposition more succinctly, and making sure we're pricing according with the value we deliver or withdraw to only compete at the scope that's been included in the RFP or the offering. And that's really a fundamental aspect. The other aspect of pricing that's a key initiative in all of our businesses is when we deliver broad capabilities such as the solutions market, GWS. We want to make sure that we are value pricing not cost based markup pricing, which has been a traditional practice in some of our labor activities. We believe it'll still support the value proposition to customers, but should drive margin enhancement and more value to us as part of that proposition. So those are the 2 main focuses around the pricing activities.

Stephen A. Roell

So maybe just to go back and clarify, what Dave is saying is we're not going to go out with broad price increases that the market's going to have to accept like on equipment. That's not the objective, okay? What we have done, though we didn't have in the past is we have hired pricing specialists who are dedicated to that within our business, and they report to our senior execs. That's really what we've done in the last 9 months, is to add a cadre of people who really are pricing experts from around the country.

Unknown Analyst -

[indiscernible].

Stephen A. Roell

No, I would say solutions is probably the richest area we've got. And again, go back to what Dave said, it's where we have value pricing. Let me give it a different term, it's outcome. Where we actually –- our value added is an outcome to the customer, not a functional piece of equipment, we think there's a lot of room to how we package them.

C. David Myers

Yes. Steve, that would primarily be GWS, energy solutions and our broad-service activities.

Brian Sponheimer - Gabelli & Company, Inc.

Brian Sponheimer from Gabelli. Steve, we've seen something financial engineering in the market over the course of this year, and obviously you have a strong strategic growth plan as JCI is a 3-pronged stool, 3 distinct paths of growth, is there anything that could potentially happen within the marketplace that would make you cause that strategy to shift and potentially look at any sort of financial engineering as a way to unlock value in the company shares?

Stephen A. Roell

Well, let me answer it and I'll let Bruce take a shot, too. I don't believe so. I mean, I have to admit I'm frustrated by our share price at times, but when I look at what I'm trying to do for the long-term, I believe the best way to enhance the value for our shareholders is to continue to invest, the way we are in our capital, looking at M&A opportunities and -- because I think the returns are pretty attractive, and that's really what I'm trying to do is invest for the long-term shareholder. We haven't been really financial engineering in the past. It's something that we don't need to do. I think we've got a good growth, you can see our growth pattern. And so no, I don't expect any financial reengineering. Bruce, you have a way to answer that?

R. Bruce McDonald

I think in the past, I think we're going to see some significant benefits from a Power Solutions being associated with our Automotive business, as an example. As we try to exploit the advanced technologies that Alex talked about in his presentation, our key differentiator for us versus the other folks is we're an automotive company and they're not. But we do sit down with our board on an annual basis and look at what's the sum of the parts valuation, what's the value that we think we're going to create with our strategic plan. We've just recently done that, and unfortunately, if you look at our valuation in the context of the greater market, I mean if you look at sum of the parts value for Johnson Controls, it's just as depressed as our stock price because all the comp multiples have come down as well. So even if you price each of our --- valued each of our businesses, at the higher end of our comps, on an individual parts basis, I don't think there's a lot of value that we can unlock in the short term.

Stephen A. Roell

One other thing, just real quickly. We don't lack for ideas. We have -- each one of the gentlemen up here running a business has an idea where they'd like to invest and accelerate capital investments and/or do invest in M&A opportunity. But there's 2 things we have to consider. One is the cash flow that we're generating, the CapEx that we're spending, saying that we’ve got to digest and integrate some of the transactions we've done. So to some extent, we've got a pause here in the first half just to make sure we do the integration properly on the metals transaction, as an example.

Unknown Analyst -

One for Alex and one for Beda. Alex, on the Start-Stop systems, I think it's clear that the penetration of that as an application make sense, maybe you can talk about the adoption of AGM versus lithium for that application, because I think some OEMs are going to be using small lithium batteries to support their Start-Stop system. So what's your view on that and is Johnson Controls positioned to win Start-Stop business, whether it's AGM or Lithium?

Alex Molinaroli

So I think that, that transition for certain applications, could happen over some period of time. I think that what you've seen so far is demonstration projects, very low volumes and the same issue, in fact, when you think about a small lithium battery, you have even a bigger overhead issue than you do with a larger lithium battery. So it's really cost prohibitive for almost any application. I think what you're seeing is for some boutique type applications, very high-end, probably more than just Start-Stop applications are being utilized for that. But that being said, as part of our own development cycle, it's something that we will participate in. But I think the adoption rate for that is a very, very long term adoption rate. I think you'll see other applications, somewhere between a Lithium-Ion battery and an AGM battery before we see mass adoption of Lithium-Ion. It could include some lithium applications, but I think you're going to see some very complex solutions that'll be chemistry based and nonchemistry based before you see mass adoption of lithium. On our product roadmap, to be clear, it does include cobalt Lithium-Ion battery.

Unknown Analyst -

I was hoping just to ask a question on Automotive experience, and then a very quick on Building Efficiency. But on Automotive Experience, in the past, one of the ways that the division has been described to us when we looked at the components, for example, seating had a somewhat higher margin consistent with some of the publicly traded competitors, maybe North of 7%, but there was a big drag from the interiors business and maybe electronics. If you do the math and say 80% of the business is seating, it does imply almost no margin from interiors and that it was -- I was just curious because you've mentioned that most of the margin expansion going forward is going to come from things like mechanisms and fabrics as opposed to improving that underperforming 20%. So that was my first question. And secondly, very quickly on Building Efficiency, you had a tremendous pop in certain markets over the past year, so for example, the Middle East up about 2x, I think. What's your view on the sustainability of that as you look out beyond this coming year? Are there some anomalies there that are driving that, or is that something that you see as sustainable?

R. Bruce McDonald

I'll maybe take the margin one first there, Darren. But I think if you look at our interiors business today, it tends to be -- we're probably the furthest behind in terms of migrating our footprint from Western Europe and even, say the United States to Mexico or Eastern Europe. I would tell you that directionally, you're right. We do have very low margins in interiors. We have some issues we need to work through on recovered economics kind of from 3 or 4 years ago. That business tends to be oil-based type economics. But we do expect our margin interiors business to get better. They are going to be below seating level just because of there’s probably some overcapacity. It will drive the margin expansion, but in the scheme of things, it's not the one. It doesn't really move the needle as much because it's a small -- it's about 15% of the portfolio. On the other hand, electronics is Richard and his team [ph], so I think if you probably put the 2 together, they're probably in line.

Stephen A. Roell

And just to comment, I think on -- there's some things we can do on the interior side that we would probably define as operational in terms of logistics, things of that nature. But we're back to revisiting the entire business model. I mean, the industry still has too much capacity, it's got a lot of the distressed suppliers in that industry, particularly on the plastics side. But -- so I'd say that's one that we're taking on head on, but you're absolutely right in your assessment of the fact that it's dragging it down. We do have very high margins in our seating business. The other one on BE, you want to take that one, Dave?

C. David Myers

Yes, specifically emerging markets, we did commit short-term and long-term to 15% or greater, that will actually be on the higher side, even above that for the Middle East. And we do expect that to continue. One of the things that's happening in the Middle East is the overall construction spend has come down a little bit in the broad region, but when you look at Saudi, Turkey, the Emirates and Qatar, it's actually increased, and that's expected to continue. Also, when you look at our role in that market, we expect to continue to outpace the market growth substantially because of the scope, size and scale of those projects where they're very integrated and we are getting leading shares in that comprehensive set of capabilities that we're delivering. Most of those are long-term projects as well, so we've good visibility out for a few years, and we expect that to continue.

Unknown Analyst -

Yes, question on seating, I don't know if you can hear me or can you? Okay. Can you just give us an overview of how you see the competitive landscape in that business? It seems like there hasn't been like other areas of automotive supply, it really hasn't seen that much consolidation recently, you still have 2 big players and a couple of regional players. You guys have obviously been gaining good share in that business, at the same time as increasing price. How do you reconcile that with what seems to be, still a very competitive business? And maybe if you can comment also on sort of what you think the future looks like if you do expect consolidation, that'd be helpful.

Beda-Helmut Bolzenius

I don't think that competition will go away. There will be always a need for a couple of strong players. There's a strong interest of the OEMs, not to leave you alone. So as soon as somebody like Faurecia did, facing significant problems in the European market through the financial crisis, they are willing to step in and to keep these players alive. So we don't count on competition to go away. I think that for the time being, if you look at the backlog, if you look at the new business that we already booked, independent from this landscape on competition, it can improve and expand our margins by driving the vertical integration. And then really by picking the component business where the margins are easier to get, where the entrance barriers for competitors are extremely high because they are normally global orders, they are normally capital intensive, as Bruce mentioned before, and where technology matters and technical expertise that you can't build up overnight is a significant entry barrier. And if you look at how our competitors are positioned exactly in this different business field, you just need to go back to the slide that I have in my package, and you can see that in most of these areas, we are twice as big, and technology-wise, by far ahead of them. So just to look at seats, we'll not give you the right answer. It's more of the question on how the structure below the seat, and how quick you can develop in that area where the margins are protected by technology.

Kelly A. Dougherty - Macquarie Research

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Kelly Dougherty from Macquarie. I'm just wondering, now that you're not encumbered by the restrictions of the JV, if there's maybe some interest in using the battery technology, maybe specifically the Lithium-Ion technology to integrate more the Power Solutions and the Building Efficiency business maybe where you’re doing the smart grid or renewables, anything like that?

Alex Molinaroli

Well, I'll take it and Dave can talk about from his perspective. One of the things that we have looked at almost every year, at least since I've been in this position is that application, the one that you're speaking of. And what are the appropriate technologies, and do we have the appropriate technologies to serve the market? I think that there are some applications. We certainly aren't encumbered, and there are some reasons to think that we could provide product into that market. But I would say that it's a product-based strategy from my perspective, not from Dave's perspective, versus a channel based strategy. We'd be enabled to take advantage of the products that we have and some capacity we have and apply it to the marketplace. So I expect that you'll see some of that. But it's not going to be from my perspective as a manufacturer, a market-based strategy, where Dave is looking at the applications and he would be one channel that I would serve in that market, not an exclusive channel, because he really could support the kind of volumes that I would need. So that's a manufacturing view of the world. He would have a little different view of the world, but that's from where I sit.

Unknown Executive

Alex, what I would is I think we have a complementary perspective and work it jointly on this. We do have the ability to deploy a lot of technologies out into the marketplace, as people seek to add renewables and other sources to portfolios. One of the key questions is always energy storage. And what you can do and it doesn't make sense? Today, we have many a projects where there's different technologies deployed to test that and to see what works. It's common with wind farms and different storage techniques. A lot of discussion in residential and could you do some local storage. So we believe we would be a path to market. We believe we serve customers who have that desire and would to be a very natural distribution channel, as Alex described. What's unclear is what is the winning technology, and in an ideal world, it's our lithium batteries for power, and that becomes the mainstream offering as part of it. So energy storage is, and stationery and distributed methods is, clearly an area of interest. We think we have the path to market, what we need to do is make sure we have the right technologies or can access them to distribute, just to complement Alex, who would use us as a channel as well as others if that application becomes the winning application for it.

Alex Molinaroli

But just to be clear, from the standpoint of what it is that we're trying to build, we would not want to get into multiple technologies, so we would have certain applications that would complement what we're already doing or be very closely adjacent, but we wouldn't want to be build a new factory, for instance. We want to leverage the capacity that we have, so that would limit the portfolio that we would serve. If that makes some sense.

Stephen A. Roell

Your question's a good observation. Let me answer it also. We have no restrictions from having -- as a result of what we've achieved with Saft. So we can enter that market. I think where it comes into the play for me is when I start to think about the growth that we have towards the end of the decade, I could sit here and Alex and I could might get very blinded by the AGM opportunity, to go all the way through the OE structure across the globe, followed by an aftermarket investment across the globe. I can get very comfortable. My concern is the resources we have to dedicate to do that are significant. I can't afford to lose sight of the fact that underneath that could be an energy storage opportunity that we need to invest in right now. So that's really what we're challenging ourselves is making sure that were not blinded by some of the near-term opportunity, which is, I think, [indiscernible] in the face by some of the longer-term opportunity that we need to take advantage. We're going to need some big global growth initiatives here towards the end of the decade. We'll be growing -- we can see ourselves do $70 billion to our company. Well, at that point in time, we've got to really find a lot of billion-dollar growth legs per annum to be able to continue that growth rate, that's the challenge we're faced as a management team right now that we're addressing. Yes, Jim?

Unknown Analyst -

Just a quick follow-up on the Building Efficiency. You talked about some pretty impressive savings that bring to your customers with retrofits and some other solutions. With respect to financing, what's the payback on period for a typical customer, and do we see an opportunity to bring in a more direct partnership with finance companies to make it a more palatable solution to spend any money in this environment, given that you have, I think, in the past, you've even had some guaranteed savings built into some of your programs. I'm just curious in terms of financing side of the equation, is that a bottleneck currently? Is that an opportunity to get more partnership with some third parties, and am I overstating the importance of the financing side for -- given the current environment, I can see a lot of people hesitating to spend $1.00 in the current environment on, basically, retrofits?

Alex Molinaroli

Let me give you 2 perspectives on financing. One is the public sector. And today when you look at our large energy solutions projects, it's mainly concentrated in the federal, state, local K-12 public sectors projects. They have a longer tolerance for payback, because they put a lot of the investment and the return into other initiatives that help them. For example, K-12 school also wants to invest in computers and teaching capabilities, facilities that support school activities, as well as energy using HVAC systems and lighting and other activities that are associated with just the infrastructure itself. So with that longer tolerance, we step in and provide is the path to get there, the ability to execute it and a guaranteed energy-saving stream. In all cases, that's attached to some form of financing, and we use partners who come in and fill that role and provided the guarantees there and a return aspects are appropriate, financing has been available to that market in most cases. A few exemptions to that, but broadly it's available. The flip side of it, when you talk about returns, we don't think financing is the barrier when we look at the private sector, because they aren't necessarily seeking third-party financing. What they are seeking is a return window that's dramatically different. And we have to have projects that are in the 3-year or less window to be attractive to them. They want to drop the impact to operating budgets very quickly, and they want to use these techniques to avoid capital. But generally, at the end of the day, in decision-making for private sector, capital and financing becomes less of a barrier versus the true absolute return associated with that. So our goal is to unlock more and more capabilities that speed the return, do it with less investment to get it inside that window to move forward. And today, the energy sector and the impact to our overall markets helps us grow and is driving an impact. I think if you look out longer-term, making it attractive and easy to get fast paybacks to that private sector, would be an exponential opportunity that we really want to open up. But it's not primarily driven by financing barriers.

Stephen A. Roell

Jim, it's exactly the right question, and it's really going to have to be the question we need to answer to unlock a lot of the retrofits. You're going to hear in e-mail [ph] report that they're looking for over $2 billion of investment to create jobs by retrofitting is just [ph] -- that's one of the 6 platforms. The key is where that financing comes from. And as Dave mentioned, the real issue that we haven't unlocked is what to do with the private sector. Well, I think we have time for one more question, Len [ph] on your side.

Itay Michaeli - Citigroup Inc, Research Division

Itay Michaeli from Citi, maybe a question for Bruce or Beda on European Auto margins in fiscal '12, you've got a real nice improvement coming from the acquisition and operational efficiencies. How should we think about the volume sensitivities there in fiscal '12? Does that change from the typical kind of 15% incremental, detrimental that we typically think about for that business? If volume in Europe, say, comes in a bit below your expectations?

R. Bruce McDonald

Yes, I think we can handle a modest volume reduction and offset some things. But something significant then, I would say in Europe, it's probably more at the 20% level just because of the -- with the acquisitions be a little bit on the higher side.

Stephen A. Roell

Okay. We're going to wrap up. I appreciate your patience and your questions. I have just 2 slides for you. One is taking the trajectory that I shared you this morning through '11. This is really adding '12 to it. And as you look at that, you can see that as we look at our net income forecast that we just presented to you today, you can get a sense for how that compares to the trajectory of the last couple of years. We're confident in these numbers, based on the assumptions that we've given to you that we can achieve this data and still be making the investments we need to make to ensure that when we're a year from now, that we talk about growth rates similar to what we're talking about today. From the standpoint of the shareholders, it’s very simple. We understand that our business is driven by organic growth. We'll look for opportunities to invest in M&A to accelerate that growth, but our primary driver's organic growth. That's certainly the story for the next 2 years. ROIC, Bryan, as you raised, we're very focused on improving our return on invested capital. That'll be achieved through the investments that we're making, the paybacks we believe we will get plus the margin expansion. We've heard loud and clear from the investment community that they're looking for not just the growth associated with our top line but they're looking for the margin expansion. We've got the ability to make investments. Our balance sheet's strong, that's why we can continue to look for growth opportunities that provide us with that 18%, 20% return unless we make them. And finally, as Bruce indicated, we very much want to provide return to our shareholders. We view this as a multi-industry company, to do that we know we better get to a 30% payout ratio. And we also understand from many of our major investors that dividends is the key, and we're committed to that. As Bruce indicated, we'll be taking the next dividend recommendation to our board at our November board meeting.

And with that, thank you very much. Hopefully, you've learned a little bit today. Thank you for your attention. We appreciate your attention.

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