Johnson Controls' CEO Discusses Q2 2012 Results - Earnings Call Transcript

Apr.20.12 | About: Johnson Controls, (JCI)

Johnson Controls (NYSE:JCI)

Q2 2012 Earnings Call

April 20, 2012 11:00 am ET

Executives

Glen Ponczak -

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

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

Analysts

Emmanuel Rosner - Credit Agricole Securities (NYSE:USA) Inc., Research Division

Rod Lache - Deutsche Bank AG, Research Division

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Timothy J. Denoyer - Wolfe Trahan & Co.

Ravi Shanker - Morgan Stanley, Research Division

Brian Arthur Johnson - Barclays Capital, Research Division

Patrick Archambault - Goldman Sachs Group Inc., Research Division

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

Colin Langan - UBS Investment Bank, Research Division

John Lovallo - BofA Merrill Lynch, Research Division

Operator

Welcome, and thank you for standing by. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. I'd like to go ahead and turn the call over to your host for today, to Mr. Glen Ponczak. Sir, you may begin.

Glen Ponczak

Well, good morning, everyone, and thank you for joining us. Before we begin, just want to remind you of our forward-looking statements. That Johnson Controls will make forward-looking statements in this presentation pertaining to financial results for fiscal 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 include terms such as outlook, expectations, estimates or forecasts.

For those statements, the company cautions that numerous important factors, such as automotive vehicle production levels, mix and schedules, energy and commodity prices, the strength of U.S. or other economies, currency exchange rates, cancellation of or changes to commercial contracts, changes in the levels or timing of investments in commercial buildings, as well as other factors discussed in Item 1A of Part 1 of the company's most recent Form 10-K filing, could affect the company's actual results and could cause its actual consolidated results to differ materially from those expressed in any forward-looking statement made by or on behalf of the company.

In just a few moments here, Steve Roell, Chairman and Chief Executive Officer of Johnson Controls, will give an overview of our second quarter results and take a brief look at the balance of the year. He’ll be followed by Bruce McDonald, Executive Vice President and Chief Financial Officer, who will give a more detailed review of the business results by segment and a financial review. That will be followed by questions and answers, and we expect to conclude the call at the top of the hour.

And with that, Steve.

Stephen A. Roell

Okay. Thanks, Glen, and good morning, everyone. Our second quarter financial results were consistent with the guidance that we provided earlier to you this year. Before we comment on those results and provide you with our outlook, I'd like to take just a minute to thank the Johnson Controls employees who are listening for their continued contributions to our success. Well, let's start with the business environment for each of the 3 segments.

North American automotive production was stronger than we anticipated, and several of the U.S.-based automakers increased their output in response to higher sales. The benefit of this increase was partially offset by the continuing weakness in Europe. However, our sales in the region were not significantly different from the expectations we had coming into the period.

Industry production of passenger cars in China were 2% higher and again, in line with what we had planned. And I know that we've talked in the past that there's varying numbers coming out of China, and again, our number references specifically passenger cars, as opposed to the overall vehicle production.

Our Power Solutions business had overcome the mild weather conditions in North America, that I'm sure all of you are well aware off. As we discussed in January, the period just ended is dependent upon restocking by our aftermarket customers. And unlike the prior year or probably even the past 4 years, the lack of a winter did not allow that to occur. We were fortunate that European -- that Europe experienced a more normal weather pattern in January and February, and we did see demand recover quickly in that market.

We believe that the inventories in the aftermarket channel in the U.S. are lower than they were a year ago, and therefore, we would expect our shipments to normalize. And in fact, we could see some upside in late summer time period as a result of that.

Turning to Building Efficiency. The nonresidential markets remain mixed, while growth rates have slowed. And in China, we continue to see expansion of the Tier 2 and Tier 3 cities. The same really holds true in the Middle East across Saudi Arabia, Qatar and Turkey, and of course, those markets are driven by infrastructure projects.

In North America, the overall market is showing some signs of recovery, but at a very modest level. Some of you follow the American Institute of Architects Billing Index, which has shown slight growth in the past 5 months, after 4 years of decline. The most recent data from McGraw-Hill forecast also suggest that nonresidential institutional markets will not grow the remainder of 2012 and be fairly flattish.

But now, I guess I want to share with you what we're seeing in our own data, which is more optimistic given the bidding activity that we see, which we often refer to as our pipeline. In our systems business in North America, we're seeing good year-over-year activity at health care, higher ed. and K-12. And really, the only segment that we see that is soft or down from last year is really the state government activity, which, I think, we all could probably assume what that's attributed to.

In our own energy solutions business, the improvements we see in K-12 and the federal activity are somewhat offset by softness in health care and local government. We've gained share over the past 4 years, and I'm encouraged by our pipeline activities. So if I look at it, there really is a divergence from some of the data that we're seeing from both McGraw-Hill and from the AIA. And I would just tell you that we are very, very optimistic based on what we see in some of the vertical markets that we participate in. The lower U.S. industry residential HVAC shipments persisted into the quarter, partially attributed to the weather conditions. But we believe there are a lot of fundamental issues that are impacting that industry.

Now let's just turn to the numbers. For the second fiscal quarter, sales were $10.6 billion, up $500 million or roughly 4%. Segment income increased slightly to $558 million in the period. Net income of $353 million was lower than last year, primarily due to the interest cost associated with the new debt we issued at the quarter and the higher tax return. Bruce will go into more detail, but we just want to give you some idea of what the high level was.

With the first half now behind us, we want to focus then on the second half and the projected improvements that we have. And I just wanted to highlight some of the factors that we believe will contribute to the stronger third and fourth quarters. Starting with Power Solutions. It's really a combination of a number of items: number one would be the pricing actions that we've announced; secondly, the benefits of our vertical integration; third would be the avoidance of the cost that we've been incurring as we've imported batteries in China due to the closing of our Shanghai plant there. And then as I mentioned earlier, we do believe that the summer months will see some recovery from the depression versus the past 3 months in North America.

Automotive Experience, it's a combination of several factors: one would be stronger North American production; continued improvement in our new program launches and containment cost shutting; and the avoidance of the cost incurred last year as a -- excuse me, the avoidance of the cost incurred last year due to the earthquake and tsunami that occurred in Japan.

In Building Efficiency, it's really a function of lower SG&A cost. We've highlighted that. I'm sure Bruce will talk more about that. But we've consciously taken our SG&A cost down just basically to protect us against the softness in volumes, should that occur.

We also have instituted a number of pricing actions across all of our businesses in Building Efficiency, if you’ll recall. So there's a seasonal pattern, which drives our profitability and sales into the third and fourth quarter. And finally, we see improved performance in our service business.

And shifting more from the near term to more the mid-long term. We just wanted to make the comment that our long-term strategies remain intact: our position on the SLI battery market; our ability to drive higher margins through vertical integration is intact; the role of our AGM battery technology to support our customers' Start-Stop vehicle production; our position in the emerging markets across all 3 of our businesses continues to be a key factor for us in the future; our metal strategies and our ability to improve margins in automotive is -- with our core product portfolio and standardization; and finally, the fact that our Building Efficiency's ability to gain market share and help our customers improve their energy efficiency and reduce greenhouse gases. So those are some of the factors that give us confidence that, looking forward, our strategies, as we've described to you on an ongoing basis, continue to be very much intact.

Now I'm going to turn over the conference to Bruce for his remarks on the quarter and the outlook. Bruce?

R. Bruce McDonald

Okay. Thanks, Steve. Let me first start off with a bit of an overview in terms of some of the nonrecurring charges. You'll see in our press release, we kind of referred to 3 of those. And as I talk through the financials and each of the business results, I'm going to kind of strip these out.

So really 3 things: one is we had a gain on the divestment of 2 of our non-core businesses in Building Efficiency. Those were businesses that we sold with gross proceeds of just a shade over $90 million; we had a write-off on a Power Solutions investment that went bankrupt; and we took some restructuring charges in automotive and Building Efficiency to accelerate second half cost reduction initiatives. So as I talk -- as I said, I'm going to exclude those items. The net effect of all those is they completely offset one another, so they don't really affect the bottom line in aggregate.

So turning to auto. Our business delivered here another nice quarter against the backdrop of modest improvements in global production volumes. You can see our sales were up 7%. If we back out foreign currency and acquisitions that we made last year, our sales were up 4%, with strength in all 3 geographic regions. And that’s really attributable to the backlog flowing through in our numbers here.

In North America, our sales were up 12% versus a 17% increase in production. I know there's been some questions in some of the early notes about the decline versus the industry here. If you just kind of look at our sales by customer, what you really see is a few of -- few, 2 or 3 customers, were business that we did not requote in the 2009 time period because they did not either meet our financial criteria or were unable to get material indexing in place or beginning to ramp down. So we'll see a little bit of that in the next couple of quarters. But that's sort of margin accretive and something that we thought was critical to de-risk our business here.

In Europe, we are up about 8%, if you back out -- backing out foreign currency, if you take out -- and that compares very favorably to a 4% decline in production. Acquisition’s about half of that delta. The other part would be the new business awards. And then, if we look at our sales in China, where we are primarily in non-consolidated joint ventures, our sales were up 5%, just over $1 billion, and as Steve indicated in his comments, passenger car production, which is our primary market, was up 2% in the quarter.

Turning to segment income. Excluding the items I referred to earlier, we were down 4% at $236 million. We continue to benefit from higher volumes, particularly in North America, the accretive impact of the acquisitions, though as we've talked about before, our results continue to be impacted by some of the launch difficulties. In addition, we saw exceptionally strong performance from our Asia business. Most notably, that was in Japan, where we were up significantly on a year-over-year basis.

Looking at our sort of margin rates. If you look at North America, we were down about 180 basis points versus last year. And that's really the start-up of the new metals plant, that the costs that we had there were significantly lower than the first quarter. So we're confident we're on the right path here. And in Europe, generally, our results were in line with our expectations, though down on a year-over-year marginally due to higher launch costs.

So if you just look at these in sort of geographic ROS, north America we’re at 5.4%, and that compares to 7.2% last year, but a big improvement from the 3.5% in Q1. In Asia, our margins were 13%, up from 8.5% last year, and that's the strength in Japan. And in Europe, we're at 1.2%, down from 2% last year, but up from 0.8% in Q1. So I know we -- in our slides, we haven't sort of shown the decimal point. So on a sequential basis, our margins in Europe were up about 50 basis -- 40 basis points in the quarter.

If we turn to Building Efficiency. Here, you saw our sales were up 1%. If we sort of back out the impact of the euro, it'd be up 2% excluding that. We saw modest revenue growth across most sectors. The strongest sector was in Asia, where we're up about 10%. Look at our North America Systems and Global WorkPlace Solutions businesses, we're up 6%. Service, we were down where we're continuing to see customers defer maintenance. Europe was down 4%, and we saw much larger declines in like mid-double digit, 20%, 30% reductions in Latin America in our residential business.

Just commenting on residential. Even though it's a small piece, that's one of our higher-margin businesses and just to put our numbers in perspective here, unit shipments in the quarter were down about 27%. I think that's kind of comparable to what we see in the industry. So don't think we're losing share, that sort of just reflects the depressed state of that market.

In terms of our backlog, you can see here a record at the end of the second quarter for us at $5.3 billion, which is up about 3% versus last year. In the quarter, our order rate was a little bit softer than we were expecting, but we do expect to see that pick up as we go into the back half of the year. We're up 8% in Asia, 6% in North America, but we were down in Latin America, the Middle East and -- in solutions. And those markets tend to be pretty choppy because we have large orders that come and go. And you can really be -- distort sort of the underlying trends in the business when we look at it just on a 1-quarter basis.

Looking at segment income. You can see we were down x items, about 4% to $127 million. In terms of the margins, we were up in North America Systems, North America Service, Global WorkPlace Solutions in Asia. But these were offset by declines in Europe, the Middle East -- sorry, Europe, Latin America and a higher margin residential business. In fact, if you just look at the absolute level of profitability decline here, $5 million in Building Efficiency, the decline that we saw in just the residential sector is $10 million. So x residential, we actually saw a little bit of improvement in our profitability in Building Efficiency here.

If we slip over to Power Solutions, the business performed well in a pretty tough environment, owing to the weather factors that Steve mentioned earlier. Sales were up 1%. You can see in terms of our shipments, we participated in the uptick in the OE markets globally. So we're up 6% there, though aftermarket volumes were down 1%. And I think as we noted in our press release, if you just look at the aftermarket volumes in North America, we are actually down 6% in the quarter. And that's something that we're hoping that we -- if you just look at general patterns, we would expect to recover that volume decline over the next 3 to 4 quarters here.

We're also starting to see good -- our product mix rich enough [ph]. AGM shipments continue to grow. Maybe just a comment on our Shanghai facility. I think in the last call, we mentioned that we were going to make the assumption that facility would remain idle for the balance of the year. That was certainly the case in the quarter, although we are continuing to dialogue with local government officials to see if we can find a mutually agreeable solution to restart production at that facility. But our guidance that we're providing here, we're not assuming that happens.

In terms of segment income, you can see up about 10% to $195 million, again, excluding items. We saw strong margin performance in the quarter as we're benefiting from our vertical integration initiatives, that's the investments in smelters and separators and the accretive impact that the AGM volume has on our margins.

I'd also mentioned that partially offsetting that is the consolidation of the Saft joint venture. So that was a business that we now have 100% ownership in the start-up and investment mode, so we're bearing 100% of the start-up costs versus 50% a year ago. That had a slight depression on the margins in the quarter. Nonetheless, a very solid performance for Power Solutions.

Just flipping then to the financial statements. You can see our top line was up 4% to $10.6 million. If you exclude the impact of the euro on that, this year, it was $1.31 versus $1.37 last year. Our underlying sales increased by 6%. In terms of our margins, they ticked up about 20 basis points versus last year. Here, you can see us getting the benefit of higher revenue, slightly richer product mix and some of the benefits of our cost reduction initiatives.

In terms of our SG&A as a percentage of sales, you'll see those were up about 50 basis points year-over-year to 10.1%, which is a level that's comparable to our first quarter run rate. And kind of in our SG&A, a couple of things you need to remember when we sort of compare year-over-year here is we're not comparing all of the automotive acquisitions because some of those came into Q3, so we have those in this quarter. We've also got the consolidation of the hybrid business, which sort of is a shift of cost into SG&A out of equity income.

So those are sort of -- make the year-over-year comparisons a little bit less meaningful. But nonetheless, we continue to invest in our longer-term growth initiatives, but we are scaling back our SG&A levels to cope with these slightly softer revenue outlook that we guided to at the end of our first quarter.

In terms of equity income, you can see a 30% increase to $79 million. The bulk of that increase is due to the loss-making hybrid joint venture flipping into 100% consolidated associated with that acquisition.

Lastly, on Slide 12, as I go through the financials, commenting on financing charges. You can see a fairly significant increase of $17 million versus prior year. This has really just represented higher general levels of debt associated with the acquisitions and the increases that we're making in our capital expenditures for the year. Our tax rate for the quarter at 19% is consistent with our guidance and what we told you last quarter.

Lastly, in terms of income from noncontrolling interest, you'll see that charge has gone up $7 million to $38 million. This is primarily attributable to increased profitability at some of our consolidated power solutions joint venture, primarily in Europe. Then, lastly, our earnings per share coming in at $0.53, down $0.03 from a year ago.

Then, lastly, on our -- in terms of the balance sheet, we continue to make focus here in terms of deleveraging. Cash provided by operations increased by $207 million versus the second quarter of last year. You can see our capital spending was up 63% to $448 million. And as I commented on early, you'll see in our cash flow statement the $91 million cash inflow associated with the Building Efficiency divestments.

We continue to focus on improving our trade working capital performance, which we sort of define as inventory payables and receivables, so pleased to see a big improvement year-over-year. And we're confident we'll see further improvements as we get into the third and fourth quarter.

And then, lastly, in terms of our debt-to-total capitalization -- our net debt, sorry, to total capitalization, we ended the quarter at 34%, which is where we were at the end of the first quarter. We continue to have a strong balance sheet, which gives us the ability to take advantage of attractive growth opportunities when they arise.

And now if I just look at our full year earnings, like we said in our press release, we're comfortable where the -- with the current analyst consensus estimates here. If you sort of look at the quarterly phasing, a little bit different than the analyst consensus out there. We think Q3 earnings are to be a bit about 20%, and we see top 25% in the fourth quarter as some of our cost reduction initiatives kind of gather momentum.

Overall, if you sort of look at the markets, they’re little changed in aggregate versus what we thought they were going to be at the end of the first quarter. We're confident that we're taking the right measures to both deliver our near-term financial commitments, but also to continue to position our businesses for long-term growth.

And with that, Glen?

Glen Ponczak

Yes. José, we'll open it up for questions. [Operator Instructions] José, we're ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Emmanuel Rosner with CLSA.

Emmanuel Rosner - Credit Agricole Securities (USA) Inc., Research Division

I would like to talk a little bit about your strategy of vertical integration in the seating business and sort of your new focus on the metals. We're about a year after your acquisitions in Europe, and I'm curious. Are you starting to see the benefits from these strategy, either in terms of margins or your rate of business wins, as you quote on seating business?

Stephen A. Roell

This is Steve. I think the -- let's go back to the strategy itself in the quarter. We really have seen continued success in terms of the quoting activity. They had a big backlog coming in for both those transactions. And again, the trend from the OEs is to disaggregate the complete seat award into the components side. And so we certainly are seeing the increase in our backlog. We'll share the new backlog with you in October at our analyst meeting, but you should expect that to be a strong backlog. So it’s continuing. The strategy, we believe, is very much the right strategy just given the -- how the OEs and more OEs are doing that practice. So I feel pretty good about what's there. I think we realize we've got a lot of -- as we've gone through the acquisitions, we've learned not only what's their value in terms of their capabilities, in terms of process and product technology, but they were very, very good at launch. And so we've actually borrowed on some of their expertise to help us in some of our prior launch initiatives as well.

R. Bruce McDonald

Maybe one thing I’d maybe add to that -- it's Bruce -- is in addition to -- there's been a lot of talk about component sourcing, but one of the trends that has definitely materialized as we had expected is source -- global sourcing of the structure in particular. And so with the acquisitions that we've made, we really have an unparalleled global footprint versus our competition, and that really has positioned well for us to quote and win some of these global structure awards, which are starting to manifest themselves both within the customer, but also customer groups are coalescing and asking for a common structure as well.

Stephen A. Roell

We've also had -- one other comment I can make, as well Bruce, is the fact we've had a lot of requests from our Chinese partners to locate -- bring the technology into that market. So we're currently facilitizing [ph] in China with our JVs there.

Emmanuel Rosner - Credit Agricole Securities (USA) Inc., Research Division

Okay. So I guess that leads me to my follow-up. I understand the strong benefits in terms of winning new business and how that sort of the trend sourcing is going. But what is really the expected impact on, I guess, the margins of your seating business? Is the ultimate goal to sort of -- that it should enable you to surpass prior peak margins because, obviously, everything is sort of vertically integrated and there are some synergies there? Or is it more a case of protecting margins in an environment of pricing pressure from the OEMs?

R. Bruce McDonald

Yes, no. I think the profitability on metals is higher than average. So when we made the acquisitions, we upped our sort of margin guidance in automotive from a previous range of 6% to 7% to 7% to 8%, and that's really associated with the higher profitability that we see the metal area being able to deliver. And we need those margins because capital intensity in that business is higher as well.

Stephen A. Roell

But I think also the fact that there is such capital intensity and the fact that there aren't any competitors who really have that -- not many competitors that have that global capability that Bruce described earlier. So that allows us to protect and improve those margins.

Operator

The next question comes from Rod Lache with Deutsche Bank.

Rod Lache - Deutsche Bank AG, Research Division

In automotive, first of all, you mentioned that launch costs moderated from the first quarter to the second quarter, and I'm assuming that, that's one of the factors behind your first half to second half improvement. Was hoping you can give us a sense of how those cost containment in Europe and the metals launch on an absolute basis, how should we be thinking about those first half versus second half sequentially and year-over-year. And also, just kind of more broadly, if we're thinking about back in October, in Automotive Experience, you were targeting, like, a, I think it was 5.3% to 5.5% margin, and obviously, those expectations were taken down maybe to the mid-4s. It looks like you probably need to get to at least the high-4s by the back half. Broadly, is that a correct -- is that reasonable?

Stephen A. Roell

There's a lot there. Let me try a part of it, okay? Rod, part of the strength in the second half is the improvement we expect in Europe, again, okay? If you recall last year, we had a lull in our margins in the first half and then by the time we got to the third and fourth quarter, I think we ended the year with about a 3% margin in that business, okay? If I look at Europe, I would expect us to see, probably, something close to 3.5%, 4% margin in Europe in that fourth quarter. So we do see that, and that's a function of the fact that our launches are improving, that our cost of containment and the quality issues are also being reduced. So sequentially -- I'm trying to go back to your question sequentially, we continue to see improvement in terms of our, what we call, cost of portfolio, which is really nothing more than our containment cost. And as we shed that, we also see that the launches that we do have are -- in terms of readiness, are in great shape. We've been able to go through with the issues that we had, and given the combination of our -- where we think we are in the design validation and production validation, we feel very good about that. So we expect a consecutive -- sequential improvement in our cost quarter-over-quarter, but also year-over-year as a result of that. Bruce, you're [indiscernible].

R. Bruce McDonald

Yes. I think, Rod, I think we talked with you early in the quarter, and I know we've had several discussions with other analysts here. And given our revised guidance, we talked about the fact that we did have some at-risk launches in the pipeline. And I think we said we had 4 or 5 in particular that we -- weren't in the shape that we would like them to be and in the guidance that we provided at the end of our first quarter, we said we tried to take a realistic assessment on how those were going to flow. One of those launched in this quarter. It wasn't great, but it wasn't as bad as some of the other ones we've experienced earlier. And as Steve's mentioned, if you look at the sort of status of those ones that we still have on our watch list, they continue to get better. But they're not going to be flawless. They're just too late. But we're confident that we're going to continue to make improvements. If we just look at the metals plant in North America, if you look at the rate of improvement we have to our containment cost in the quarter here versus Q1. So we know how to do it. I think in the guidance that we've given, we factored in where we think they're going to come out, and our teams are making good progress. We've also added a lot of resource to try and minimize the financial impact sort of ahead of time here. So we're adding cost to sort of make sure that we don't go into production and stub our toe.

Stephen A. Roell

And maybe let me just elaborate just for a second on what Bruce just said about resources. When we launch a program, it's what's called an SDT team. It's a strategic development team that's comprised of advanced manufacturing, advanced engineering, quality financial people, and where we got behind was the staffing of those programs because they got pulled off in programs that had issues. So we've actually been adding that talent, that advanced manufacturing, advanced quality talent, all the way through the last 9 months to the point where we know we're fully staffed right now for all the launches we have. And so what we're looking going forward, the key from our year-over-year performance will be our ability to launch all the new programs we have over the next 3 years flawlessly. That's our objective.

Rod Lache - Deutsche Bank AG, Research Division

Okay. And then on, Building Efficiency, how much savings are you targeting there? I know you've mentioned something about $150 million, but some of that may have included cost avoidance. And how should we be expecting that to start rolling in into the results?

Stephen A. Roell

At the end of the first quarter, Rod, that's right. We talked about $150 million in SG&A reduction, primarily in Building Efficiency.

Rod Lache - Deutsche Bank AG, Research Division

Can we see that in the numbers currently? Or is that something that you affected the restructuring and we should be looking for that going forward?

R. Bruce McDonald

Well, it would be both. I mean, we did take some restructuring in Building Efficiency that's going to give us, I'll say, probably another $30 million or $40 million of run rate savings over and above that number. And that will start kicking in here in Q3.

Stephen A. Roell

The key thing we were trying to do, Rod, was get our run rate and SG&A below last year's level, and we have achieved that really out-of-the-box from September. But right now, we're probably running probably 3% lower than last year on a monthly basis, okay. And that's a big number for us in that business.

Rod Lache - Deutsche Bank AG, Research Division

Right. And GWS, just my last thing here is it sounds like you're over the hump in absorbing some of that growth here because you did comment that the margins were up. Is that reasonable that we should be looking for a kind of sequential improvement from the low levels that it had been running at?

R. Bruce McDonald

Yes. I mean, obviously, I think in -- I don't have the number right in front of me. But I think in Q1, we were at like 0.8. I think we're at like 1.3 or something for this quarter. So we still have a longer-term goal to get that unit up to a 2.5% or 3%. But yes, we didn't have any of the ramp-up or the efficiencies that we have associated with some of the new business are coming through like we expected.

Operator

The next question comes from Chris Ceraso with Crédit Suisse.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Okay, so I wanted to talk a little bit about your expectations for the Building business. I think, last quarter, you reiterated your expectation that you'd grow revenues 9% to 11%, segment margins of 5.6% to 5.8%, but the hurdle looks pretty tough. I mean, year-to-date you've grown revenue less than 3%. Your backlog is growing at 3%, and the implied margin for the back half is north of 7%, which you haven't done in a long time. So let's talk about that.

Glen Ponczak

Chris, it's Glen here. We didn't really talk on revenues on BE for the balance of the year. We didn't change any of those expectations. But certainly -- so we didn't reiterate that number. Certainly, you're right when you look at where we are the beginning of the year, the softening of our markets. That's not a number that we confirmed.

Stephen A. Roell

Now let me go back and tell you what I think, Chris. We will -- I can give you some guidance, okay? If, first of all, the backlog we've got today is -- the 3% growth is not going to be indicative of where we think we'll be at the end of the year. And we've talked to the management team. We've looked at the pipeline and backlog or the order activity, and we believe that by the end of this fiscal year, our backlog will be up somewhere in the 8% to 10% range. Secondly, I guess, I would tell you, and I've said this before, because of the cost reduction initiatives that we've initiated, I feel very confident in some significant margin improvement in BE in the second half of the year. And I continue to feel that as we've gone through our forecasting that we'll be very close to the guidance that we provided at the beginning of the year. But that's probably the one that I feel very good relative to how we're going to handle the market and how it's going to play out in the second half.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Okay. It just seems that each quarter that division falls a little bit short on both revenue and margin. And I'm wondering if you agree with that and if you think you need to take broader restructuring action in that. I know residential has been a drag, but broadly speaking, it seems that the other divisions have had some fits and starts, but this one seems chronically to fall a bit short.

Stephen A. Roell

Yes, I think that's fair. But I would tell you that I think the outlook we have for this quarter and for the second half has been something that we've had in mind since the beginning of the fiscal year. This is not different, okay? So some of the actions they've taken from a cost standpoint was really there just to protect us in the event that volumes did soften in the industry in the second half. So again, I'm just going to reiterate, I feel very confident in the second half performance by Building Efficiency.

Operator

The next question comes from Tim Denoyer with Wolfe Trahan.

Timothy J. Denoyer - Wolfe Trahan & Co.

A quick question about the North America services part, specifically within BE. Can you comment on how you expect that revenue growth trend to go in the second half? Clearly, that's seasonally the strongest time of the year as you mentioned, but on a year-over-year basis, relative to the -- despite the decline in 2Q?

Stephen A. Roell

We're expecting some pickup in the North American service business in the second half. We did start to see that occur in March. As you can imagine, with the warmer weather in North America, we thought that might occur, and we did see that. So we're hoping we'll get some of the improvement there. But I'll be honest with you, our forecast isn't predicated on volume improvement as much as it is execution, so that's what I would say is going to drive that business. There's still a sense out there that some customers are deferring maintenance. And so that's why we're not going to bank on it. We've got an early start on the spring season, but from our standpoint execution will be the key, not revenue growth in service on the second half.

Timothy J. Denoyer - Wolfe Trahan & Co.

Okay. And if I could throw in a follow-up on the Asian automotive business. I understand that you outperformed in China specifically. But can you address the sequential decline in Asian EBIT from the fiscal first quarter? It seems like China was roughly flat sequentially and Japan was up.

R. Bruce McDonald

Yes, I can touch on that. I think if you look at the -- I think in Q1 our margins in Asia were 15%, which was exceptionally high. In Q2, they were 13%. The year-over-year increase in the first quarter was more attributable to China, Tim. In the second quarter, as I said in my comments, maybe you missed that, most of the increase was due to Japan. If I look at our equity income coming through in China, it was flat versus last year. And the reason for that is we've got one facility that we are in the midst of closing and moving. Our facility is actually expropriated by the government. So it's something that we knew was going to happen. And then, we've got some start-up costs associated with a couple of new joint ventures. So if you look at the underlying profitability of our like, say, a same-store-type comparison of our JVs, we are up slightly, but the combination of this plant move and some start-up costs associated with some new joint ventures pushed the absolute level of profitability in the quarter to be sort of flat. Versus Q1 then, as I said, there's 200 basis point reduction, that will really be those start-up costs in this facility that we’re moving.

Operator

The next question comes from Ravi Shanker with Morgan Stanley.

Ravi Shanker - Morgan Stanley, Research Division

A couple of questions. One is you seem to have a good level of visibility for -- through the end of the year with your guidance with 3Q and 4Q. Do you get a sense that the issues you're having right now are more near-term issues that can be resolved in 2012? Or are these launch costs -- I mean, the complex launches and the metals plant and such going to persist into 2013 as well? And the other question is on cash flow. You spent nearly $1 billion on CapEx in the first half of the year, and you tend to be back-end loaded at least in the recent few years. Where is CapEx going for 2012?

R. Bruce McDonald

Yes, maybe I'll take the CapEx one first. You're quite right. We do typically tend to be back-end loaded, but that's not going to be the case this year. I think we've guided to -- I think $1.7 billion is our CapEx number, and I would say we're going to be in the $1.6 billion to $1.7 billion range for the year. So we're very atypical this year in that we're much more front-end loaded than in the past.

Stephen A. Roell

This is Steve. Let me give you some general comments about things that persist here that would go on. I'm going to probably take it in a different direction to begin, then I'll come back and talk about auto. Two items in Power Solutions. We're currently at full production right now. We're using all of our capacity, and we're doing that because of just the demand that we see. So we will be at full capacity in Power Solutions from now through probably going into the first of December. So some of you may not be familiar with that business, but at this stage, we are not weather-dependent. This is where we begin to stock, and given where we believe the market is, we'll have to go at full production in North America to be able to meet demand. So that's one factor. Second thing is the subtlety of that price increase, that went up in Power Solutions, the 8.5%. That price increase is not to recover ongoing cost in the context of material costs or freight cost. That is really to offset capital investments that we have to make relative to environmental improvements. So that margin, that price increase will go -- that's effective May 1 -- will go directly into margin in Power Solutions. So that's something that's probably a subtlety that some of you may not realize as well. In the segment of auto, the key thing there is the issues that are persisting, I think, because we've described to you the fact that we really are getting some of the -- I'll call them, programs that were engineered 3 years ago, that those are behind us, we feel good about where we are in all the new engineered programs. And so we would expect to see sequential improvement going well into 2013. We still have a lot of ways to improve, not only on our operations, which I think gives us good opportunity to improve profit quarter-over-quarter, year-over-year. But also, I think we're also focusing on our commercial excellence relative to how we negotiate change management. So I feel good about the sequential ability to improve our business quarter-over-quarter, but that will extend into 2013. And in my mind, that's a good thing because we do have year-over-year comparisons we can make. That's the best I can give to you.

Operator

The next question comes from Brian Johnson with Barclays Capital.

Brian Arthur Johnson - Barclays Capital, Research Division

Just on a similar vein. North America Service, you're continuing to see revenue pressures there, but the margin, which, I guess we'll get the real margin in the 10-Q, but it's ticked up. Are you beginning to get some benefit from rolling in contract restructuring, pricing increases, that internal effort you've described to kind of relook at the -- particularly in the facility side of that business? And if so, kind of how is the cadence? And is that part of your fourth quarter optimism? And will that continue on through 2013?

Stephen A. Roell

Well, Brian, let me try to separate things. So I think we've probably confused the world here a little bit. When we talk about service, there are 2 elements to the service. There's what's called truck based. And then, there's also what we call energy solutions, which is where our performance contract is. So 2 different factors. The truck based service business is the one that's more seasonally based. The solutions business is the one we described, which is more the performance contracting, energy solutions selling. Neither one of those had to do with Global WorkPlace Solutions, GWS. So from the standpoint -- let's go back. I think from my standpoint, the key to the margin improvement and -- the pricing issues we take are primarily around product, although we did increase our pricing in the service area as well in terms of our labor. So that should be kicking in, and we should see that benefit. And that was, like, the core of your question in the second half. The pricing on product has a tendency not to have that immediate reaction because it flows through our backlog. It takes longer to get that realized. So that's really those 2 factors, Brian, okay? Relative to GWS, we really didn’t do anything [ph] with pricing. That was really more of an execution base that's going to get us that improvement. Okay?

Brian Arthur Johnson - Barclays Capital, Research Division

And on the Solutions side, I thought you had mentioned at one point that some of those contracts were in need of restructuring for profit improvements.

Stephen A. Roell

They're not -- those -- I guess, I wouldn't tell you it's those projects. What we've done with the price condition, if you recall, I brought in Bill Jackson. And Bill’s worked with Dave Myers and his team at Building Efficiency on how we price our solutions business going forward. So they've got a different -- whole different ballgame and playbook relative to how they price new contracts, not really into restructuring the existing ones that we have.

Brian Arthur Johnson - Barclays Capital, Research Division

Okay. So that -- this North American Solutions effort is really more -- exciting more profitable new business? And to the extent things are repriced, it's more on the product side?

Stephen A. Roell

That's correct. That's correct. And I think...

Brian Arthur Johnson - Barclays Capital, Research Division

[indiscernible] on technical services?

Stephen A. Roell

We took those up, the service business, so that will be immediate for us in the second half, okay?

Brian Arthur Johnson - Barclays Capital, Research Division

Okay. So really when you think 2013, you're selling solutions?

Stephen A. Roell

That's correct and beyond. And I think, Brian, at some point, we'll go through and describe what that means and how we get there. But we think we've got as much as a 400 or 500 basis point improvement opportunity in the solutions contracting work we do.

Operator

The next question comes from Pat Archambault with Goldman Sachs.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Just on the automotive side, I wanted to go back to, I guess, a comment that was made about, I guess, an implied content decline, right, the revenue going up by less than the production for the quarter. Maybe we can dig a little bit into that. I mean, how much of that is just the way your North America revenue is measured because I think a lot of the Japan stuff is still not consolidated, right? So you might have a CPV headwind there. But then, you did mention that there was a portion of it that was getting rid of -- or not getting rid of but not renewing contracts, and I'd like to hear a little bit more about that. How much of a tailwind is there in your portfolio from getting rid of some contracts that were maybe not optimally priced? And maybe we can just find out a bit more about that.

R. Bruce McDonald

Yes, first of all, while we do have some sales to the Japanese customers through nonconsolidated, the bulk of them is consolidated, and especially in North America. But just to give kind of a bit more granularity, if you look at our sales by customer and I was to compare that to the production increase in the quarter, we are down in 3 customers, okay? And I'm not going to get into which ones or which platforms on the call. But those declines, where we have an adverse delta to the industry, is directly related to programs that went out of production in the quarter, that were in production last year and weren't in production this year. And we didn't rebid those contracts because either the profitability didn't meet our hurdle rates or we were unable to get -- in 2 of the 3 cases, we could not get material indexing, commodity recovery indexing in place. So if you kind of go back into the late 2009, early 2010, what we said we were going to do, particularly in North America, was we had to de-risk our business. For us, that -- one of the key tenets of that was getting commodity recovery mechanism in place with our customers. And if we were unable to do that, we decided we were not going to bid for the renewal contracts. So it wasn't a case of these are contracts that we lost money on, that we didn't rebid. You should think about this in more of a risk mitigation strategy, and we're seeing the impact right now. But I think you could kind of feel bad in terms of the short-term impact here. But we took a much longer-term perspective here and felt that for us to earn the returns that we need to make in this business for shareholders over a longer period of time, it was critical for us to get the indexing in place.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

And maybe if I can just follow up on that -- not to beat a dead horse because I know you guys answer questions on this all the time. But the fact that the industry pricing is such that some people are refusing to give indexation. Is that something that we should be concerned about in terms of the behavior of some of your competitors? Or are these just kind of one-off instances and you would expect that, on a go-forward basis, you're not going to have to go through such aggressive pruning? And well, I guess, I'll just phrase it that way.

Stephen A. Roell

Pat, this is Steve. Let me try something. I guess I would tell you that we've learned some lessons here over the last 3 years relative to staffing levels and having capabilities to execute programs, too. And so I think we're working extremely hard to get our workforce planning done, and let me tell you how that comes into play. There's probably -- and I'm going to use an estimate. There's probably $1 billion worth of business that we're passing on right now. And a lot of it pertains to the fact that we just aren't going to overextend our resources and take on marginal jobs where the execution risk is high. Now we're still going to have good growth, so I don't want to mislead anyone on that. We're still going to have good top line growth and growth in our backlog, but I do think that our disciplines and our ability to just to walk away and not bid on programs is really a reflection of the risk that we see, whether it be material price recovery, or in this case, it's really a function of do we really have the resources that are going to be available to execute the program. So right now we have more opportunities than we can bid on.

R. Bruce McDonald

And I think you need to look at it in the global perspective. You're focusing just here on North America. If you look at our $4 billion backlog, it's very heavily skewed towards Asia and Europe. In those markets, we are a lot more successful in getting the cost-sharing agreements with the OEs. And so if you just say, well, where is there the best use of our resources? It's in those markets. And so if we go back to the 2000 and time -- 2010, our backlog, I mean, we talked about North America was negative. There was really a shrink in North America, and our growth was all in Europe and Asia where we felt the risk profile better matched our appetite.

Stephen A. Roell

Rich Kwas.

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

On Power Solutions, any benefit this quarter, tangible benefit from lower lead cost?

R. Bruce McDonald

Rich, with our investments in smelting, we actually are disadvantaged by lead going down now. So our vertical integration benefit is higher depending on the higher lead. So it's actually the fact that lead last year or I think, in the quarter was around $2,600 a ton, and this year, it's in the $2,100-type range. There's actually a headwind year-over-year, but not material.

Stephen A. Roell

It's pretty small, that's why we didn't call it out.

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

Okay. And then, just on this discussion around the underperformance versus North American production, and I think Bruce and Steve, you have explained how you've walked away from business. But what was the margin impact? Is it tangible? When you look at the margin versus say, first quarter or just last year, was it meaningful in basis points?

R. Bruce McDonald

No, that wouldn't have been a factor. I mean, if you look -- if you sort of look at the North American automotive decline year-over-year, I think last year, what was it, 7.2%, and this year we’re at 5.4%. The main factors would be -- for that delta would be the metals plant that we're starting up. And so we still have costs associated with that, although they did improve a lot in the quarter. That would be the single largest item. The loss of the 3 pieces of business that I referred to wouldn't be accretive or dilutive.

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

Okay. And then, just real quick one before I run. Equity income has been bouncing around. I know you explained that the hybrid consolidation in China impacts that line item. How should we think about that for the back half of the year?

R. Bruce McDonald

It's going to be in that $80 million to $90 million. I mean, it could be $100 million. But in the $80 million to $100 million range, I'll say. It is kind of choppy.

Operator

The next question comes from Colin Langan with UBS.

Colin Langan - UBS Investment Bank, Research Division

You talked a lot about Building Efficiency margins getting better in the second half. Any color on the sales? Obviously, they're coming in weak, and I was a little surprised that the discretionary services is actually softening. It seems like an odd time in the market for that to happen. Any color there? And then, you also commented that your mix was -- I thought you had a lot of government business, which I would think would be negative. But you seem to think that, that would actually be a positive in that segment. Any reason why you think your customer base is actually good even with a lot of government?

Stephen A. Roell

Yes, it varies. As I mentioned, I think we've got situations where we've got nice improvement in our pipeline activity in federal work, but we have state markets, which are very weak for us, particularly in the systems work right now. It's dropped off dramatically. So you have to look at the type of government, where the funding is. If you look at the funding activity over the last 6 months from municipalities, that's way down. But we've been able to find ways to grow local government. State has been our weakest part. Federal has been strong. So that's why I guess I would describe that one, Colin. Okay? I'm trying to go back. Your earlier question had to do with the softness in sales. I think that you've got a mixed blend here. I think that Europe is a weak market for us. We've had good growth in our systems North American business. And in the service side, this is not typically a very strong -- if you think about truck-based service, the January through March period is not typically a very strong period for us. We really start doing a lot of our commissioning of units for customers in spring, and that's really what the April, May, June time frame is. And then, after that is primarily a lot of truck-based service doing repairs and maintenance. That's the way that -- that market flows that way, okay?

Colin Langan - UBS Investment Bank, Research Division

So since it's normally small, you're not worried about the year-over-year decline there? You think it'll get better?

Stephen A. Roell

I think it will get better.

Colin Langan - UBS Investment Bank, Research Division

And just one last follow-up. In terms of your-- obviously, your balance sheet is in very good shape. It sounds like you're having some integration issues from recent acquisition. What is your outlook right now? I mean, if there's a large deal, is that something you'd be willing to do? Or is that something that has to wait until you kind of fully integrate what you've done recently?

Stephen A. Roell

Well, I guess, in terms of large deals, there's nothing that we would want to take on right now with our balance sheet. I think we always look at opportunities to invest in technology. Things that we're looking at right now would be, primarily, engineering-technology related, but we're not going to expose our balance sheet at this stage. That's not our intention, okay? In the automotive side, particularly, we have to continue to further integrate the metal transactions in fabric. So I don't see anything significant for us in 2012 or early 2013.

Operator

The last question does come from John Murphy with Bank of America.

John Lovallo - BofA Merrill Lynch, Research Division

It's actually John Lovallo on for John Murphy. I missed the very beginning of the call, so I apologize if this was spoken to. But it looks like your revenue in China was up about 5%, and I think previously, you had spoken to about volume being up about 8% to 10% for the full year. Are you guys still comfortable with that outlook?

Stephen A. Roell

Yes, we are. I just confirmed with our leaders in China. We've got exposure to a couple of OEs that are particularly strong, particularly SAIC, with our joint ventures with both Volkswagen and with General Motors. And those volumes are strong. If you look in the quarter, I think, the production levels were up 24% in those JVs. So as we look at the balance of the year, we feel good about that 8%, 9%.

R. Bruce McDonald

A lot of our growth is tied to some new plant openings in the West.

John Lovallo - BofA Merrill Lynch, Research Division

.

Great. If I could just ask one more. With the Shanghai facility still down in Power Solutions -- or still not reopened, I should say. Have guys made any decisions on where you're going to build the AGM batteries?

Stephen A. Roell

No, we're still in discussion, and in fact, there's meetings next week to talk about that. We're going to be making decisions soon because we do have a lot of requests from our customers to get the facility running [ph] there.

Okay. Well, listen, thank you very much for your questions. And we'll be here to help Glen and Dave with any follow-up questions. But thank you very much for coming on the call and expressing your interest. Thank you. Have a good weekend. Take care.

Operator

Thank you for your participation in today's conference call. The call has concluded. You may go ahead and disconnect at this time.

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