Apr 21, 2009
Operator
(Operator Instructions) I'd now like to turn the call over to Glen Ponczak.
Glen Ponczak
Before we begin, I just want to remind you that Johnson Controls has made forward-looking statements in this presentation pertaining to its financial results for fiscal 2009 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, NITs and schedules, financial distress of key customers, energy prices, the strength of the U.S. or other economies, currency exchange rates, cancellation of or changes to commercial contracts, liquidity, the ability to execute on restructuring actions according to anticipated timelines and costs, as well as other factors discussed in the company's Form 8-K, which was filed March 9, 2009, could affect the company's actual results and could cause its actual consolidated results to differ materially from those expressed in any forward-looking statement made by or on behalf of the company.
I'm pleased to be joined this morning by Steve Roell, our Chairman and Chief Executive Officer. Steve in a couple moments here will give some overview comments and take a look at the economic environment in the quarter and the near-term.
Then Bruce McDonald, Executive Vice President and Chief Financial Officer, will give a review of our business results in the quarter, as well as financial results and that will be followed by questions and answers. And with that, Steve, I'll turn it over to you.
Stephen A. Roell
Before we talk about our second quarter results, I wanted to comment on the improvement that we're expecting in the second half of our fiscal year. First, that improvement is not predicated on a recovery in our end markets.
There are some signs that markets are stabilizing, but I think it would be premature to assume any benefit in the next six months. Rather, our confidence is really directly related to the actions that we've taken to improve our cost structure and to right-size our businesses.
All those actions have been taken in concert with our long-term strategies, and by that what I mean is that we continue to invest in energy services by building efficiency solution sales force emerging markets and technology, such as hybrids. So I really wanted to set that.
We'll go through it in more detail, with both Bruce and I talking about some of the positive trends we see and why we're confident about the second half. The near-term has proven challenging.
Our sales of $6.3 billion were down from $9.4 billion in 2008. If you look at the slides on page three, you'll not that we've isolated three elements that contribute to that decline with the automotive volume globally being down $2 billion, the impact of lower lead pricing being roughly $500 million, and the impact of foreign currency of $700 million.
Our segment income was a loss of $113 million, and net income was a loss of $97 million. Those numbers exclude the restructuring and the benefits then also of the tax benefits that we achieved in the quarter.
Our earnings per share was a diluted $0.16 per share very much in line within the consensus of the street. If we look at the environment and the outlook, starting with the automotive markets themselves, and I'm going to talk first about production.
As you're well aware, I think, there were some extensive shutdowns in both North America and Europe, particularly in the month of January, but also in February. Those we're going to show you the impact they had on us as the quarter progressed.
As we look at production for fiscal 2009, the numbers that we're providing here are really unchanged from what we provided when we announced our restructuring in March. And that is that North American production for our fiscal year will be roughly 8.8 million vehicles.
Again, that compares to the previous guidance of 9.3. And in Europe, production forecast right now is 14.3 million vehicles, and that compares to a previous forecast of 16.2.
But again, these are exactly what we shared with you when we announced our restructuring in mid-March. On the far right-hand side of this slide, now moving from production, we just wanted to show you the North American SAAR.
Again, many of you are aware of this. You can see that, in the month of March itself, 9.9 million units, roughly 34% below last year's rate of 15 million.
And if you look at the last three bars in this chart, you'll note again that the SAAR has been below ten, and by contrast, it seems like a long time ago, but by contrast each of the months a year was in excess of 15 million units. As we look at the building markets in terms of the environment, our primary vertical markets, which are associated with the institutional buildings that being both state, local and federal government, healthcare and education, remained the most resilient in the new construction sector.
Information that we've seen in terms of forecasts from global insight would apply that those markets will be relatively flat in '09 and might decline slightly in '10, but we're talking in the neighborhood of something like 2%. So, again, we thing we're in the right sectors, and we'll benefit from that.
Markets that are general weak that drive down the overall indices, such as retail and lodging, we have a very low presence and those are expected to continue to be weak through 2010. As we indicated to you in previous calls, we have seen some atypical customer behaviors in this economic environment, particularly in the retail markets where service and maintenance and retrofit referrals have taken place.
But as I mentioned, that's not a very large market for us but we wanted to again acknowledge that we did see that and has continued into this quarter. As you might expect, with all the uncertainty regarding what's going to get funded from the government energy efficiency projects, the stimulus funding there has been some deferral in wait-and-see by state local government and even some school districts as they've waited to see if they're going to be the beneficiary of some of the government and energy efficiency projects.
On a little more global basis, we would acknowledge that we do see some slowdown in deferrals and projects that we have in Dubois. We've highlighted that as a major growth market for us over the last three to four years.
Other mid-east markets are stable and I'm referring to Saudi. And as we look at some of the industry projections for the Middle East for the next four years, once we get through 2009 there's still anticipation that those markets will yield 10% plus compounded growth rates for the next four to five years.
The U.S. housing market, as you're well aware, remains depressed.
The current estimates right now is that house starts will be down 20% in '09 with a recovery of roughly that same rate in fiscal '10 but we have not seen the bottoming out yet there. Now there are some encouraging signs and I'd like to walk through those.
Let's start with the automotive market. First of all, in Europe where there have been several programs what are called scrappage programs announced as an incentive to drive demand we've seen a good reaction in Germany, France, Italy, particularly in the A&B segments.
So that's a plus to us. We think that will continue and we're waiting to see if that's adopted here in the U.S., as well as in the U.K.
In terms of the term we use her is managed government-backed process, I think what we're referring to there is simply a function of the U.S. government and its intervention at stabilizing Chrysler and GM until we can get a decision here.
We obviously think that in the next week to 30 days we'll know a little bit more about what's going to transpire with those two OEs. But we do believe that whatever takes place it'll be more of a managed process than what it would have been had it have just progressed on its own.
U.S. Treasury Department for domestic suppliers what we're referring to there is the fact that there is suppliers aide that the way it's programmed it will help in terms of providing some liquidity into the supply chain and that, again, is beneficial just in terms of that stabilization.
Internationally, China volumes have remained strong in the first quarter and we expect that they will continue to be strong for the remainder of this calendar year. There are improvements in the U.S.
consumer credit availability. Certainly, some of the asset-backed securitization is now available and that's certainly helping availability and should help spark some increase demand as the year plays out in U.S.
The inventory levels in North America and Europe are lower than what they have been so we do believe that future production is not going to be impacted by that. There certainly are some pockets where we know that there are accesses, but in general we believe production levels should be fairly secure.
Earlier I referred to the months of January and February and so if we go to the next page on the chart and what it depicts is simply how we progressed through the quarter and you can see in January and February where we were impacted by the shutdowns, you can see how things improved in March. We were approaching a breakeven at that point.
Restructuring benefits continue to be accretive for us. We're starting to see some benefits of that in this quarter, but we'll see major benefits this year and the following year.
The second half of this year I'm saying it next year, and we have other cost reduction initiatives that we've taken, such as flexible workforce movements in both our European and North American operations. Commodities have also stabilized.
Other news, I guess I wanted to highlight just two items on the right-hand side. One is the, let's call the Toyota Global Contribution Award.
We were honored by Toyota in late February in Nagoya where we were named as one of the three companies, along with Denso and Yazaki, as receiving the Global Contribution Award. It really is extremely prestigious and it really does speak to how well our teams and our automotive group partner with that OE.
It's very prestigious and we're very pleased and honored to have been recognized by such a great OE. We were the only supplier from the interior side and the only U.S.
company to gain that top recognition. I really want to drop down to the third bullet.
What that states is that we intend to participate in the U.S. Treasury supplier credit insurance program, and just to elaborate on that just for a second.
Yesterday was a key date in terms of filing for application to participate in the programs that are sponsored by the U.S. government, GM and Chrysler.
We have entered both of those programs for what's known as the credit insurance aspect of that. We are not intending to do any factoring that purely the credit insurance aspect of that and we did that last night.
Some other encouraging signs of Power Solutions, in the first quarter and still in the second quarter we saw some destocking. And what we mean by that is that the retail and wholesaler channels have really maintained extremely low inventories.
Our service levels are high and that allows them to do such, and I think there again just reacting to liquidity and watching their own balance sheets, but we think that destocking is over and that positions us well for a normalized shipment pattern in the second half. And then as you're well aware the U.S.
federal and state funding for domestic hybrid battery capacity, some of the state funding in terms of our award in Michigan was announced in the past two weeks and we expect the U.S. federal funding to be announced later this summer.
In terms of Building Efficiency, the stimulus funding for investing in energy efficiency and infrastructure we currently have a pipeline and what a pipeline refers to is contracts that we're bidding on for projects in the neighborhood of about $535 million. Secondly, one of the things that we monitor is the architectural building index.
It is stabilizing, as you know there has been a sharp decline in that indices for the last three months and we do see signs of it stabilizing. We believe it will start to pattern up now.
In the past we've talked about continued strong growth and demand in pipeline for Global Workplace Solutions. We see that across a variety of different vertical markets but strictly in the pharmaceutical.
Some banking areas, but there's over $1 billion of identified projects and we think that with our global infrastructure and footprint that we're well positioned to win our share of those contracts. In terms of the economic stimulus package the ARRA.
For those of you that don't know that that means, that's the American Reinvestment and Recovery Act. The opportunity that we've sized from our standpoint in terms of the addressable market is roughly $12 billion.
The pie on the right-hand side breaks that out in terms of those areas that were identified in the stimulus package were we think we have an opportunity to win bids or win awards. We think we're extremely well positioned as a preferred or pre-qualified supplier with many of the federal entities, such as the DOE and DOD.
We have a strong presence on over 50% of the top 85 military installations worldwide. We just highlighted again some of the major work that we do in the white prestigious jobs like the White House, the U.S.
Capital and the Pentagon. And I know there's again more renovation that we're involved in with the Pentagon.
And finally, if you'll just look at fiscal 2008 in terms of our market share of the Department of Energy performance contracts we were the one who was roughly 70% of those awards and that bodes well for us going forward. Our state and local branch network will certainly help us in terms of the presence that we need and the expertise we need to take advantage of the education modernization some of that local and state government work that we've identified and to qualify for some of the higher value projects, consistent with the ARRA objectives.
In terms of 2009, the other thing we did in late March and most of you are probably aware, we did introduce a $230 million restructuring. It was done to improve our cost structure, 80% of that was focused on the automotive experience segment of our businesses, and the remainder was primarily Power Solutions.
Approximately $185 million of that restructuring is cash. It includes ten plan consolidations and closings.
In terms of accretion, we believe it will be slightly accretive in 2009, but it offers roughly a $0.15 per share benefit in 2010. I want to combine that with what we had done previously on the right-hand side the blue bar the blue box I referenced the September of 2008 restructuring.
The actions are proceeding ahead of schedule. We're about 70% complete.
Increasingly accretive to our earnings in the second half of the year so that's part of our second half story, but the real story, again, is in 2010 where we expect to see an incremental benefit of between $0.20 and $0.25 per share. So, yes, you can add the last two restructurings and you would expect to see a $0.35 to $0.40 per diluted share benefit in 2010 from the two restructuring actions.
In March we also, in an effort to improve our liquidity, we were successful at issuance of $850 million convertible debt mandatory equity units offering. Some of the reasons why we did that offering are highlighted there in terms of reducing our alliance on commercial paper market stabilizing our credit metrics and then also helping us basically position ourselves for future growth and future opportunities as they become available.
Bruce is going to touch upon this in his presentation as well so I'm not going to elaborate more but I'll let him do so. Next, we're going to go through each of the businesses and their performance during the quarter.
I'll turn it over to Bruce for that.
Bruce McDonald
So first we'll talk about Building Efficiency, so if we look at on slide 11 you'll see net sales we were at $3 billion, we're down about 2% on a constant currency basis. If you sort of look at the pieces within Building Efficiency, our North America Systems business was up slightly as the institutional market remains fairly resilient.
And we saw 16% growth in our solutions business, which rolls up into our North American Service business. I think that 16% growth is a little bit disappointing in terms of what we've seen in the past and our business has been kind of negatively impacted here in the short-term.
We see this only temporary as there's been some contracting delays while the ARRA funding guidelines are clarified with the various government agencies. Look at Europe and strip-out exchange and the rest of the world on this constant currency basis.
Revenues were generally in line with year ago levels. And then as we've indicated previously, we continue to see our service business adversely impacted by discretionary spending reductions.
On the good news part of it is we continue to grow our PSA business, that's the sort of scheduled service business we sign up with new customers. But despite this, we're seeing revenues in our overall service business down 8% to 9%.
And that's really just reflecting that cutback in discretionary levels expenditures, which in the long-term are going to be a negative in terms of our equipment. Overall, if you look at the quarterly backlog, we are at $4.5 billion.
Again stripping out exchange, we're up about 6%. Our pipeline, which monitors our quoting activity, it continues to be up modestly.
Looking at residential business, which as Steve indicated is a fairly small part of Building Efficiency, but nonetheless it continues to be depressed. If you look at our second quarter earnings or revenues, they are down 24% versus last year.
In terms of actions were taken there to improve our profitability, we've reduced our footprint from three to two facilities and we've implemented a number of initiatives that I'll talk about here in a minute to return this business to profitability at the current volume levels. In terms of the earnings side of Building Efficiency, our segment income was down by 49%.
I guess I would point out that, with the exception of our residential business, all our businesses in Building Efficiency are solidly profitable. From a good news point-of-view, Europe slightly higher margins than last year and that really reflects the benefits that they're making in the structuring program.
Good momentum there that's helping to offset some of the sales softness. So look at our residential business.
I mean that accounts really for about 40% of the year-over-year decline in our profitability here. So just to give you some specific numbers, our loss in UPG segment was $46 million in the quarter, which was $32 million higher than 2008.
Of that $32 million, about $7 or $8 million is attributable to lower volumes and the remainder due to one-time charges of $24, $25 million associated with skew reduction, inventory rationalization and other non-recurring charges associated with changing our product specifications. Second biggest negative factor that we had impacting our segment profitability in a quarter here was the impact of currency devaluation on our unitary products business in Latin and South America.
These are product that we call mini-splits and largely we import these units from Asia and sell them into Brazil and Mexico. Those would be the two largest markets.
With the big devaluation and the exchange rates in Mexico and Brazil, we've had to liquidate our inventory at a loss position. So if you just look at the Latin America and South American businesses on a year-over-year basis, our profitability was $14 million less than last year.
So really those are the two big items that drive the large year-over-year decline and are largely non-recurring. Just look at the gross margins within Building Efficiency.
We did see a little bit of downward pressure about 1% in our equipment business. The factors there would be lower volumes.
The impact of some legacy copper and aluminum hedges and some discounting associated with reducing inventory levels. And you'll see on our cash flow statement later on what a big reduction of inventory in the quarters we're trying to shore up our working capital position.
Turning to Power Solutions on slide 13, sales were adversely impacted by the 60% reduction in lead prices that Steve talked to earlier and foreign exchange. If you just look at their underlying volumes, they're down about 9% versus last year.
If you sort of strip that down to its components, aftermarket volumes were generally speaking flat versus last year, but OE volumes in North America and Europe were down in the, as you can see, the 38% to 39% respectively here. In turning to segment income, negatively impacted by our lower volumes and some of the costs associated with our footprint consolidations.
In the quarter, we closed two manufacturing facilities. So that's going to provide us with some headwind or some tailwind as we go into the third quarter.
To look at our end earnings on a geographic basis, what you would see is America's profitability was roughly in line with last year and Europe and Asia to a lesser extent where the areas where we were significantly lower. I'd like people that remember if you look at our European business, it's about a 50% OE business versus 20% in North America and our results were impacted by our inability to flex short-term labor to take out variable costs.
As we look into the third quarter, we do anticipate Power Solutions profitability returning a lot closer to year ago levels. Here is really what's driving that.
First of all, new business is largely going to offset the market softness. Secondly, as I said we completed the two plant closures, which will improve our contribution margins.
Third, and this is important, in Europe we've implemented short time government sponsored work programs so that we're better able to flex our labor in all of our facilities in Europe. And then lastly, our investments in hybrid and Asia become sort of flat on a year-over-year basis as we go into the second half of this year.
Just a couple of other points on Power Solutions, I'd like to first talk about how our business is extremely well positioned to both gain share in our traditional lead acid battery business, as well as take advantage of the significant growth opportunities that we see in the emerging hybrid battery market. So just on the lead asset side, we were pleased to win new business with Genuine Parts Napa in the western region.
And we anticipate these shipments will begin in the middle of the third quarter. n addition, in the second quarter we commenced shipments to O'Reilly CSK, a new customer that we announced last quarter.
If you look at our Power Solutions lead acid battery and aggregate, on an annualized basis our new business awards this year have been over 6 million units. So we're particularly pleased with that.
Also in the quarter, we were especially pleased to be named as Wal-Mart's Vendor of the Year. It's a prestigious award and we won that in the automotive category.
I'd like to congratulate those in the Power Solutions team that are listening today with their continued strong focus on customer satisfaction. So look on the hybrid side.
We recently announced our intent to invest in a second manufacturing facility for lithium ion batteries. As many of you already know, we have a facility up and running in France that currently supplies lithium ion batteries for the S Class Mercedes.
Here in the United States, we intend to invest $220 million to retool an existing manufacturing facility in Holland, Michigan and have been awarded almost $149 million in financial incentives from the State of Michigan. This facility we expect to be able to produce up to $15 million sales a year and will initially supply Ford and Azure Dynamics and other new customers that we expect to announce in the next few quarters.
Flipping over to slide 15, let me talk about automotive experience. You can see, obviously, the impact of the horrible production environment that we're in right now.
Our sales and profitability have been significantly impacted. On a constant currency basis, you can see sales are down 40% with significant declines in every geographic region.
It would probably be worth while pointing out that in China, which we largely don't consolidate, we saw sort of flattish to slightly up revenues in the quarter. If you adjust for currency, you'll see some small consultation but sales declines were generally better than production declines, which reflect kind of our new business launches in the year.
For the quarter, our segment income was a loss of $275 million and was primarily weighted down by the lower volumes and factory absorption issues. Now on the positive front, the low levels of production have allowed us to pull forward our restructuring initiatives, and as a result of that, and we'll talk about this a little bit later, we're going to be able to report significantly improved results in our automotive business here beginning in the third quarter.
Flipping into the financial side here on slide 16, I'm going to talk about our second quarter financials excluding the non-cash and non-recurring charges. Steve already sort of indicated where we were on restructuring so I'm not going to go there again, and I'll talk a little bit about tax later on.
So if you'll look at the sales line $6.3 billion down 33% of that decline you'll recall $700 million is roughly due to the foreign exchange and $500 million would be let. Look at gross profit you'll see 10.8%, roughly 310 basis points lower than last year, but those margins are roughly comparable to where we were in Q1.
The decrease that we're seeing on a year-over-year basis is really due to lower factory absorption and, to a lesser extent than last quarter, short-term difficulties adjusting European direct labor to dramatically lower production rates. In addition, we experienced some gross margin pressure as we worked through legacy commodity hedges that I talked about in Building Efficiency, and to a lesser extent, Power Solutions.
SG&A at $803 million is down 10% versus last year. We continue to aggressively reduce our cost base while protecting investments in some of our key longer term growth initiatives.
We expect that over the balance of the year SG&A comparables will be even more beneficial as a lot of the March restructuring plans that we've recently announced have a little bit heavier focus in SG&A areas. You can see a big decline here in equity income at $8 million versus $31 million a year ago.
Overall, that decline is due to lower production volumes in our automotive joint ventures in North America and Europe. Look at China, our equity income was actually slightly up versus last year and that's a good news story.
We've continue to reinvest our earnings growth in new joint venture initiatives. Our team over in China has made great progress in automotive.
We have over 30 joint ventures right now. We're extremely well positioned to benefit from the long-term growth opportunities in that market.
On slide 17, let me just point out a couple of things. On the financing line you'll see interest, net financing charges down $20 million at $46 million in the quarter.
We continue to benefit from lower interest rates, and also we have some favorable foreign currency gains that run through the financing line on a quarterly basis. If you look at the, if we think about financing costs in the balance of the year, we expect those to be comparable to prior years.
We do think we're going to continue to benefit from lower short-term rates, but you'll start to see the higher interest expense associated with the convertible offerings flow through our P&L in Q3 and Q4. Taxes, I'm going to talk about taxes on my next slide.
The key takeaway here is that an overall basis we're looking at an underlying rate of 31% for the balance of this year. On an earnings per share basis you can see we're at a loss of $0.16, as Steve talked about earlier.
From a financial perspective, though, clearly the worst is behind us. For the first time, if you sort of look at our results in the quarter, we became cash flow positive for the first time this year in February and March, and we were profitable in the month of March.
So that gives us good momentum as we get into the third quarter. A couple of comments on the tax rate, first of all as I said before, we're increasing our effective rate here for the full year from 24% to 31%.
That's really attributable to the geographic shift in our income, and also the fact that we have losses in some European tax jurisdictions where we have full valuation allowances. So that's sort of a short-term negative but as our earnings recover it gives us the opportunity to generate earnings in zero tax rate jurisdictions as we go forward.
At the top of the slide, we've provided a short reconciliation of how we get from our 31% effective tax rate to the rate that we reported and there's really three reconciling items. First, you can see the tax benefit on the restructuring was booked at 19% and that really reflects the geographies that the restructuring occurred in.
Secondly, there's a $7 million retroactive adjustment to bring our Q1 tax benefit up in line with the 31% rate. And lastly, we had $81 million of non-recurring tax benefits associated with both audit settlements and tax planning issues.
See at the bottom here, a couple of important messages. One, we continue to anticipate that we'll have incremental, non-recurring tax benefits of over $150 million in the second half of the year.
And secondly, and probably more importantly, as we look into 2010 our expectation is that our rate's going to be back in the 25% range. So it's up 31% here for the balance of this year, but we anticipate that falling back into the mid-20 level in 2010.
Going over to slide 19, just a few comments I'd like to talk about on the balance sheet and our cash flow. At the end of the quarter, our net debt to total capitalization was 36%.
We were especially pleased with our working capital performance in the quarter, particularly given the challenging environment of our auto business. In aggregate, if you look at our sort of the specific line items, generally speaking payables and receivables were in neutral.
But we were able to reduce our inventory levels by almost 15% in the quarter. Look at capital expenditure in the quarter $158 million, which was a sequential quarterly decline of over $100 million, and you're starting to see the impact of our curtailment activities here.
For the balance of the year we continue to expect CapEx to trend lower, and our full year forecast we now see as being in the $600 million range, which is at the bottom of our guidance that we gave last quarter. And we did talk a little bit earlier, but I want to expand upon the equity the mandatory convertible in cash settled convertible offering that we completed here in the second quarter.
We raised net proceeds of $828 million. And for modeling purchases, I'll just remind folks that our fully diluted share count is going to increase by about 13% here beginning here in the third quarter.
Just because that was completed late in the third quarter, or second quarter, it didn't really affect our share count but that will start to impact us here in the third quarter. With the proceeds of our debt offering, quite frankly our liquidity position has never been stronger.
And the liquidity cloud that we had hanging over heads has sort of been fully addressed. In aggregate, we've got about $3.2 billion of committed and non-committed bank lines, and roughly speaking a peak intra-monthly cash need of about $1 billion, which leaves us with a $2.2 billion cushion.
Our $2 billion bank line, bank revolver which backstops our commercial paper program, is undrawn and doesn't mature until December of 2011. We also have minimal debt maturities over the next 18 months, less than $200 million.
Our ratings are stable and have been reaffirmed by all three of the credit rating agencies within the last month and our access to commercial paper is strong. Just look at our rates, just from sort of mid-March to now we've seen overnight short-term rates drop from 2.5% to about 1.1% and that's what's really giving some of the benefit in the financing line.
In terms of the balance of the year, forecasting strong cash flows here and we expect to end the year with net debts comparable to last year. Then finally on my last slide, let me just talk about guidance.
It's not our intent at this point in time to reinstate quarterly guidance, but we are forecasting return to profitability here in the third quarter. Our automotive business is making just terrific progress right-sizing its cost structure in the current production environment.
We're very confident based on the current production visibility that we have that our operating loss in the automotive business be less than $50 million and be at the breakeven level here in Q4. Also helping us return to profitability are the seasonal uplift in our Building Efficiency business, falling commodity costs, and accelerating benefits from our restructuring activities.
And so with that, Glen, I'll turn it back over to you for questions.
Glen Ponczak
Bruce, maybe just some more comments so there's no confusion, I know we talked about when Bruce went through the tax rate, our reconciliation, he talked about the fact that the second half we'd be expecting some benefits from a tax standpoint. When we talk about improvement of our earnings in the second half, we're not considering those, just so there's no confusion.
And with that, we're ready to take questions.
Operator
(Operator Instructions) Your first question comes from Brian Johnson – Barclays Capital.
Brian Johnson
I would like to talk about the pie chart on page nine and just the overall stimulus impact and the cyclicality versus counter-cyclicality in Building Efficiency. What do you mean by addressable market?
Is it everything the government spends on green buildings, which could include construction labor, insulation or other things you are involved with, or is 12 billion compressors controls and HVAC services?
Bruce McDonald
It's the latter, Brian. I think when we sort of boil down the $797 billion, I think is the number, we sort of get to $95 billion is in the building space, and then when you take the building space and condense it down to how much could we actually sell, our addressable market becomes $12 billion.
So that's where we have a license to hunt.
Glen Ponczak
Yes, we just thought to show something bigger, Brian, it didn't make any sense. This is really where we, this is contract value we can achieve.
Brian Johnson
Okay, and if you think about some of those buckets in terms of either your revenue or the overall addressable markets sort of in '07, '08, how would you break that out between federal, state, education?
Glen Ponczak
I guess maybe the only credit is if you look at our, see if this answers your question, Brian. I think what I'm hearing is how does this address where we normally get our volume, our business?
Brian Johnson
Right and then sort of how big could this be compared to the run rate of revenues you typically see in those segments?
Glen Ponczak
Well remember this is going to be, first of all this is going to be over a couple of years, so let's start with that, okay?
Brian Johnson
That was one of my questions. So the timeframe is two years, three years, five years?
Glen Ponczak
Let's assume three years for the sake of conversation, okay, and you have to put what portion of the $12 billion we'll win, but nevertheless we've got great capacity, Brian, to be able to do this. We've got a dedicated government unit and what we've done to organize and take advantage of this is really taking our construction group, our service group, our GWS and really put them together and as a coordinated workforce really that's targeted this business.
That's a way to describe it, but certainly from a capacity standpoint there's nothing in here that would concern us about our ability to execute on these major projects.
Brian Johnson
And is this just one time, is this going to be booked, assuming you get some share of it, in the products area or in the services area?
Glen Ponczak
No, it would be probably would be construction area. That would include some projects, but obviously what we would like to do beyond that is also maintain the lifecycle of those buildings including all the service work.
Brian Johnson
Okay, so this is the upfront retrofit or new construction revenue potential?
Glen Ponczak
Yes, a lot of it will be retrofit, some new construction.
Bruce McDonald
And also there will be an element of performance contract.
Brian Johnson
Okay, and secondly in the technical services, since that was a part of JCI and the two prior recessions, what did you see in the 2001 downturn, and if you can remember back in '92 about the pace of technical services, deferrals and if and when that comes back in bigger repair bills down the road.
Stephen A. Roell
That's a good question, this is Steve. I can go back I'm the historian probably on that piece first of all we didn't see much at all on that.
If you go back to 2000, 2001, Brian, I don't recall really any slowdown at all even in our backlogs in terms of our building side, okay, and certainly in our service area. If you go back to the early '90s, my recollection was that it was similar to this market except we didn't have a lot of involvement in retail at that time.
We hadn't penetrated some of the big buyers or some of the retail outlets like JC Penney's, or CVS Pharmacy those kinds of accounts, and so we've done a better job over the last couple of years of securing that type of work and that's where we're seeing the softness.
Brian Johnson
And are those stores still occupied or are some of those stores shuttered and unlikely to come back.
Stephen A. Roell
No, those stores are occupied. They just have deferred the maintenance.
Brian Johnson
Okay and technically when do you think that results in a service call or is this just endlessly deferrable for two or three years.
Stephen A. Roell
Well, it can come up in two ways, obviously it should come back. Let's go back, as Bruce indicated we're still seeing what's called PSA, which is still people entering into performance contracts with us.
What people are doing is not doing what we call that discretionary where they come in and do project type work. But typically, Brian, what that results in is some time down the road there's going to be a failure or a bigger repair on that piece of equipment but it's hard to project when that's going to happen.
I think the key will be that when the economy improves and those companies feel better about their financials, then they'll begin to look at how they can improve their energy and that's where we'll be able to take advantage of it.
Operator
Your next question comes from Richard Kwas.
Richard Kwas
Steve or Bruce, could you comment on Tier 2, Tier 3 support at this juncture and what you incurred in the first quarter in terms of expense in cash and what your outlook is for the rest of the year?
Bruce McDonald
Yes, I'll take that one Rich, it's Bruce. I would say we're definitely seeing an acceleration of the numbers of suppliers that we have Tier 2, Tier 3 suppliers that are financially distressed and I think we have a good process for managing that.
I'd say that the changes or the acceleration has been in Europe, which we really haven't started seeing significant issues there. Just to put it in perspective for everybody, we are very vertically integrated, which means our biggest suppliers are chemicals, steel, fabric things like that, so we are pretty vertically integrated so the distressed suppliers we have tend to be small.
So I would characterize this for us as putting out brush fires and not forest fires, okay. Secondly, if I had to quantify how much it's cost us in the quarter, I would say it's in the $15 million range roughly speaking.
And if you think about how structural that cost is, I'd say generally speaking we have a customer or supplier that goes into bankruptcy we're able to largely get out of that situation in a three to six-month time horizon. There's some acceleration of payment terms to distressed supplier, but I would say in aggregate I don’t think it could be more than $20 or $30 million.
Richard Kwas
And, Bruce, how would you characterize Europe right now versus North America on the supply basis? Is it getting meaningfully worse in terms of the [inaudible] versus North America or are you starting to see some stability in Europe?
Stephen A. Roell
Well, this is Steve, Rich. Clearly, what's helped a little bit here is those scrappage programs I referred to in Germany, France, and Italy.
I think even if you read about [Okal] I think suddenly the OEs got a little bit healthier because of that increased demand and that certainly flowed through the German and French supply base. So probably improved a little bit just by virtue of what's taking place last couple of months because of the higher demand.
Richard Kwas
Right, and then how do you look at the mix of that because those are less expensive vehicles, how do you look at the mix and I know incremental unit that's a good thing, but in terms of just the revenue your booking on that versus kind of what you would normally book I would think lower fixed cost leverage how do we think about that?
Stephen A. Roell
Well, I'd say two things. First of all, there's no correlation between a segment and profitability versus, I mean we have good and bad contracts in every segment, okay.
So we're not like our customers in that some of them don't make any money on the lower end. Secondly, I think the way we look at it, Rich we sort of forecast the industry right now in the low 14's in Europe.
Right now the production runs a little bit north of that, so we're just happy to have a little bit of extra volume and take out some of the risk with the inventory that's in the pipeline.
Richard Kwas
Right, okay, and then last question and I'll get off. CapEx going forward you talked about $600 million this year, how much are you deferring and what initially do you think the increase is going to be for next year?
Stephen A. Roell
I think next year we're going to be comparable to this year and think about the big pieces of what we've deferred. We deferred a battery plant in China out of this year and we're satisfying that by importing products from the U.S.
into China to sort of steed that market before we put a production facility in place, scaled back our investment in smelting and make some green field investment in smelting, we sort of slowed those down. And then the biggest impact being the auto side where we've seen launch deferrals or cancellations and we have surplus capacity so we've been able to take our CapEx way down in auto.
Glen Ponczak
I guess the only thing I would say is that there's also an opportunity here to go back and revisit some of our cost reduction CARs. We put some of those on hold from a discretionary standpoint and depending upon the economy and depending upon the paybacks we can go back and revisit those next year.
So it's clearly within our control of what we want to do.
Operator
Your next question comes from [Colin Langin].
[Colin Langin]
Looking at your cash burn in a quarter, how much of the new restructuring the $185 million in cash is in the quarter, because if you took that out you're actually cash flow positive.
Bruce McDonald
About $15 million.
[Colin Langin]
So that $185 million would be a second half cash burn or is that…
Bruce McDonald
Well, let's say its $185 and we spent $15 so we've got $170 to go. I would say it's sort of probably 70% balance of this year and some will flip over into the early part of 2010.
[Colin Langin]
And I know you went through it I just want to make sure I understood. In terms of the Building Efficiency margin decline, a lot of that was related to write-downs.
Why aren't those pulled out as one-time items? Is that because you're reducing the number of products offerings?
Bruce McDonald
Well, I think what we're doing in our unitary business is a couple of things. First of all, there's a change in refrigeration coming that we mandated at the end of this year, so right now we're selling two different types, all of our products are two different types of refrigerant, R-410A and R-22.
So we've got, you can think about twice as much inventory as we'd like to have, while we're managing through that change over because right now customers are taking both types of product. Secondly, what we're trying to do is speed up, given the volume decline, trying to speed up the liquidation of the old refrigerant products so we're not left with an obsolescence hit at the end of the year or at the end of December of 2009.
Secondly, one of those things that we're focusing on here is trying to rationalize our skews. And in doing that, we've discontinued a number of product variants and, again, we've discounted or established reserves to discount that inventory to get it out of the system.
I think just with the huge reduction that we've seen in the marketplace, we've really got to simplify our business and we've taken our lumps to get rid of some inventory here.
[Colin Langin]
So is that mostly done or will we see additional headwinds in Q3 and Q4?
Bruce McDonald
It's done. We took all the charges here to write them down to what we think the liquidation value is so that we get some out by the end of this year.
[Colin Langin]
And then just one more clarification, you disclosed you have $535 million of the stimulus plan in your pipeline. How does that relate to the $12 billion total adjustable market?
I mean these are contracts that are sort of being delayed because they could be eligible for stimulus?
Glen Ponczak
No, it's really the other way. The $535 is with pipeline, so what we're saying is that's the first wave of the $12 billion that we're starting to see.
That's the way to think of that, [Colin], okay.
[Colin Langin]
Okay, so these are the first contracts that are being proposed that you're already bidding on?
Glen Ponczak
Right.
Operator
Your next question comes from Pat Archambault – Goldman Sachs
Patrick Archambault -- Goldman Sachs
First on the credit insurance program, can you give us a sense of where you stand now post the quarter in terms of accounts receivable exposure to Ford, GM, and Chrysler broken down, if possible, and maybe give us a sense of where that might be on a net basis, including the benefits of this program that you signed onto last night?
Stephen A. Roell
Well, let me try here, Pat. Some of the terminology you used is a little strange, but let me see if I can clarify here.
I'm going to work with General Motors and Chrysler only, though, okay because those are where the programs are in existence. They're not in existence for Ford.
If you go to General Motors North America, we project, at the end of April that our outstanding receivable will be roughly $115 million. Now, of that you have to break it up between U.S., Canada, and Europe, but what qualifies out of the U.S.
is roughly, I'm going to give you a rough number of $100 million would be U.S. specific, which would qualify.
There are programs in Canada that we're working with that are not part of, obviously, the U.S. stimulus that we're still working on and we don't have an answer for a very small amount, which pertains to Mexico.
Chrysler is about $145 million, these are projections for the end April, and of that about roughly $110 of that is in the U.S. There's a bigger portion in Canada, again, we're working on that for a Canadian program.
What the insurance does though is it basically provides for just that its credit insurance, and we will pay 2% of that invoice value as we process those invoices. That's what that refers to, okay.
We are not factory and receivables, which is what that program also provides for, and I know some suppliers will sign up for factory and we're not doing that.
Patrick Archambault -- Goldman Sachs
Okay, so there's an ability to sort of, even though the intention I guess, or the way it was presented when it was originally discussed was as a source of liquidity, you can also use the program as a more traditional insurance as you're describing?
Stephen A. Roell
Right.
Patrick Archambault -- Goldman Sachs
The other question I had was just on the CP outstanding. I think you said that you didn't have anything drawn down on your $2 billion facility that backstops the CP program.
I understand that you may not have anything physically drawn on it, but do you have any CP outstanding against it at this time?
Bruce McDonald
Yes, we choose to have, we want to have some variable rate interest debt and we want to have some short-term debt because that's just efficient. So right now we're sitting, if you look at the end of the quarter, our outstanding commercial paper is about $400 million, and we had no amount outstanding against any of our other committed or uncommitted bank lines, which in aggregate, total $1.2 billion.
But $400 million of CP, Pat, and if you look at it on a monthly basis, let's say we start the month at $400, we need about $500 to $600 million to accommodate the variability of our cash flow in the month, so that's why we say right now we're in a position where our liquidity cushion is $2.2 billion.
Glen Ponczak
Pat, just as a point, before the issuance our outstanding CP balance would have been over $1 billion, okay, and that's how we finance ourselves, as Bruce mentioned, from the standpoint of balancing our short-term long-term debt exposure, okay. That's normal, that's been what we've done for decades.
Patrick Archambault -- Goldman Sachs
And I guess just one last housekeeping one. Minority interest it looks like was obviously a positive given your losses, I guess, which you put a share of to folks outside of JCI.
Can you give us a sense of how we should think about modeling that just for the rest of the year as you become profit making on an EBIT level?
Bruce McDonald
Minority interest is going to continue to be significantly lower than the last year. You're quite right.
What it basically means is we're losing money in consolidated joint ventures. That's what that line item means, in fact that's positive.
So we do expect to see it trending getting into an improving trend, but it's going to remain in a loss position here over the balance of the year, but it's not probably going to be as large as it was this quarter.
Patrick Archambault -- Goldman Sachs
Meaning that it's going to be a positive to earnings, it's just modeling on its own, understanding the process.
Bruce McDonald
Yes, it's going to continue to be a positive, but it's going to decline.
Glen Ponczak
We've probably got time for one more caller.
Operator
Your next question comes from Himanshu Patel – JP Morgan.
Himanshu Patel
A couple of questions, on the $12 billion addressable market for the stimulus, just historically what kind of win rates would you guys see and should we apply something like that to this $12 billion number?
Stephen A. Roell
Well, we would tell you a minimum 25 and, of course, our goal is obviously going to be much more than that, okay.
Himanshu Patel
So that's $4 billion, $5 billion of revenue for JCI incrementally over the next three years from stimulus, is that right.
Stephen A. Roell
I would say if I start with 25% I'd start with 3 and target to 4 or 5. But, Himanshu, that's tough.
Historically what we've done. We think, again, if you go back to what will make us successful, it goes back to the extent we can drive it towards energy performance contracting, we'll have higher win rates.
To the extent it's in federal entities where we have strong ties with the DOE and DOD, we think we'll have higher win rates, and I think we're well positioned with the state and local governments relative to state and educational upgrades, so these aren't our sweet spots, but maybe if you put a number out there I would have used 3 as a base and we'll try to grow above that.
Bruce McDonald
Himanshu, it's kind of tough to quantify. It's really evolving rapidly.
If you asked us two weeks ago what our pipeline was, it would have been $150 million. So it's moving very, very quickly and we're trying to give people as much information as we can about the size of the opportunity, but it's just tough to call at those very early stages.
Himanshu Patel
Steve, I know you had mentioned earlier that this would take maybe three years or so, roughly speaking, to flow through. When should we think about peak execution period for these contracts?
Stephen A. Roell
Again, we've tried to guess that. We're trying to see how quickly it's coming out and visible to us.
I think our bidding activity, Himanshu, will be in '10, if I had to guess right now that'll be our bidding I think will peak then, which means our execution will be towards late '10, '11 and '12, okay? That's my best guess.
Obviously, what it depends on, if it's an energy retrofit, it will go quick. If it's a major construction project, then we're talking about the latter end of that time cycle.
Himanshu Patel
Okay. If we go to the building division segment EBIT was down $87 million.
Bruce, you had mentioned unitary was $32 million of that. It looks like the majority of the rest may have been outside of the U.S.
but the revenues look like they sort of hung in there outside of the U.S. Can you give a little bit of color what happened there?
Bruce McDonald
Well, $32 million was residential and $14 million was the Latin and South America. So let's say those two combined were sort of pushing $50 of the $87, okay?
If you look at the pieces here, you would say in Europe the margins, like I said, were comparable. They're up a little bit.
And GWS is sort of flattish, okay? China and the Middle East, China was up, the Middle East was flat.
Then you really get into systems and service in North America. So if we look at our systems business, our margins were down about 150 basis points, and that would be the comments I talked about there being legacy, copper and aluminum hedges.
And we have, as we've talked about before, we hedge a lot of our exposure or competing against people that may not be hedging their commodities. So we're out there pricing new jobs, we have say copper that we've hedged at $3.50 a pound and right now the spot's, say, 202 or something like that.
So there's some margin pressure there. And then there's the destocking that I talked about, trying to lower our equipment inventory.
If you look at in the quarter, we brought our inventory down by nearly $270 million or 15%. So we put a lot of focus on, look we've got to run our business here a little bit more for cash and let's take some inventory, let's take some short-term pain and get some inventory out of the system.
In terms of service where we said we're down in the 8% or 9%, our margins were down about 30 or 40 basis points. So we did a pretty good job.
And then there's clearly an element of FX in passing it, too. Those would be the big items.
Himanshu Patel
Okay. And then the unfavorable hedges that you have in the battery division, it sounds like that was a big issue this quarter like last quarter.
I think you said that impact pretty much rolls off next quarter. Is there a way of quantifying what that impact was that quarter if you had led at current market prices in your cost base?
Bruce McDonald
There's some impact of lead on our profitability, Himanshu, but it's not the major item, okay? The major item is we have a very highly capital-intensive business, as you know.
We shut down two plants in the third quarter, sorry, in the second quarter here, so we're carrying right now three too many plants. We cut down two and we weren't able to flex our labor fully in Europe, its factory absorption and not being able to get the flexible costs down.
And so that's why I think that going into the third quarter, lead really isn't a quarter-over-quarter differentiator. It's really about the cost performance that we're going to get by right-sizing our manufacturing base, and I'd say that's all behind us.
So I feel pretty comfortable with getting the profitability in our Power Solutions business much more in line with what you would have expected here beginning in the third quarter.
Himanshu Patel
So, Bruce, I just want to clarify your comment earlier on battery operating profit for the second half. Did you say it would be flat with a year ago or you just said it would go back to normal levels?
Bruce McDonald
I think we're saying we still seeing some volume softness on the OE side, okay? So it's been down slightly, but the comps are going to get much, much more friendly in the third quarter here, starting in the third quarter.
Glen Ponczak
If I could just applicable final comments, I think about what you've seen from our company in the first half of the year, I think the thing I think I'd point to is our ability to do the restructuring that was necessary to get our businesses positioned for the future. It's really painful taking those restructuring charges for several reasons.
But I think the benefit that we get going forward, and the fact that we can do it when much of the industry and our competitors cannot do it, I think really positions us extremely well in terms of our margin improvements in the future, in terms of our ability to benefit from any upward volume benefit we're going to get when the industries recover. And I think, at the same time, I really feel good about how we're servicing our customers and positioning ourselves for the growth aspects of our industries.
So that's my comment. Again, I appreciate everybody coming on the call today and Glen will be around today for questions.
Thank you very much.
Operator
At this time, that would conclude today's conference. You may disconnect and thank you for your attendance.