Oct 29, 2013
Executives
Glen Ponczak - Vice President, Investor Relations Alex Molinaroli - President and Chief Executive Officer Bruce McDonald - Executive Vice President and Chief Financial Officer
Analysts
Brian Johnson - Barclays John Murphy - Bank of America Merrill Lynch Patrick Archambault - Goldman Sachs Rich Kwas - Wells Fargo Securities Colin Langan - UBS Matt Stover - Guggenheim David Leiker - Baird Rod Lache - Deutsche Bank
Operator
Welcome, and thank you for standing by. (Operator Instructions) I would now like to turn the call over to Glen Ponczak.
You may begin.
Glen Ponczak
Well, good morning, everybody. And thank you for joining us.
Before we get started, I would like to remind you of our forward-looking statements that the company will make statements in this presentation that are forward-looking and therefore are subject to risks and uncertainties. All statements in this presentation other than statements of historical fact are statements that are or could be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
In this document, statements regarding future financial position, sales, costs, earnings, cash flows, other measures of results of operations, capital expenditures or debt levels and plans, objectives, outlook, targets, guidance and goals are forward-looking statements. Words such as may, will, expects, intend, estimate, anticipate, believe, should, forecast, project or plan, or terms of similar meaning are also generally intended to identify forward-looking statements.
Johnson Controls cautions that these statements are subject to numerous important risks, uncertainties, assumptions and other factors, some of which are beyond the company's control that could cause Johnson Controls' actual results to differ materially from those expressed or implied by such forward-looking statements. These factors include the strength of the U.S.
or other economies, automotive production levels, mix and schedules, energy and commodity prices, availability of raw materials and component products, currency exchange rates, and cancellations of or changes to commercial contracts, as well as other factors discussed in Item 1A of Part I of Johnson Controls' most recent Annual Report on Form 10-K for the year ended September 30, 2012, and Johnson Controls' subsequent Quarterly Reports on Form 10-Q. Shareholders, potential investors and others should consider these factors in evaluating the forward-looking statements and should not place undue reliance on such statements.
The forward-looking statements included in today's presentation are made only as of the date of this presentation, and Johnson Controls assumes no obligation, and disclaims any obligation, to update forward-looking statements to reflect events or circumstances occurring after today. Once we get started here with Alex Molinaroli, our freshly minted CEO.
He will give an overview of the quarter and a little bit about as we move into 2014. He is followed by Bruce McDonald, Executive Vice President and Chief Financial Officer, who will give more in-depth review of the business results as well as an overall financial review.
After that, time for questions and answers, and we will end promptly at the top of the hour. And with that, I turn it over to Alex.
Alex Molinaroli
Good morning, everyone. We were just commenting before we started that this is very strange, not seeing Steve Roell here.
He's been doing these calls for as long as there have been calls. So we're going to try to fly without him today.
And we'll have some comments about him in a few minutes. So I'm pleased to announce that we had record sales and earnings in essence, and despite all the mixed economic news around the world, and I'm pretty proud of what the team has accomplished.
The North American automotive production was more positive than we thought. And the production rates for our 2013 have almost recovered to our pre-recessionary levels.
The European production level was lower than prior year, but it seem to end less bad than what we though in for the third and fourth quarter. So we're hoping that means it's stabilizing.
That stabilization in the second half helped us make good progress in improving our operational efficiencies and also made a lot of progress in synergy of our metals organization. We lost $200 million in Europe in the first half of the year and we had a profit in the second half.
So that's a great accomplishment. The China auto production remain strong, it's upper-single digits.
And in our case, we grew 20% and we did have a strong backlog. So we are gaining share in a growing market.
A small component of our Building Efficiency business, the growth in the residential HVAC market was upper-single digits. And if you recall, that's a business that we focused on over the past few years, we've restructured.
And even though we still are not at pre-recessionary rates, we are now generating record EBIT in that business. The commercial HVAC markets remained a real challenge in 2013.
Europe continues to be depressed. And North America, our vertical markets, particularly impacted in the institutional market, the federal government and healthcare.
And we're hopeful as things get sorted out beyond budgets and sequestration, the Affordable Care Act and what that's going to imply, that this will bounce back over time. And lastly in the aftermarket for the battery business, it's still slow in North America.
And it's a combination, we talked about weather with fewer miles driven, fewer vehicles on the road, but we do expect over time that that will pick back up, but we were able to overcome that in the quarter. You go to the next slide, I'd like to highlight a few things for about our fourth quarter.
We had higher revenues in all of our businesses and we were sure that was going to happen as went into the quarter. And in particular, I'd like to point out that BE had 2% growth in their topline.
That's the first time since the second quarter of our fiscal 2012. Both automotive and Power Solutions revenues increased 9%.
And more importantly we had great profitability improvements. 410 basis points in Power Solutions.
The Automotive Experience margins increased a 110 basis points. And the Building Efficiency margins increase 60 basis points.
I think for this quarter indicates that our cost control and our productivity improvement measures are starting to gain some real traction. And Bruce will go through these results in a greater detail in his section.
Lastly, in the quarter we did complete the sale of HomeLink and we're still in the process of selling the remaining electronics business. And we believe we'll have news here by the end of the calendar year.
Let's talk about entering 2014. I think that our view is the markets are, we like it to be stronger, but we believe that they are stabilizing, both in the automotive market and the building's market.
Unfortunately, we don't see a strong demand increase, but I think a lot of challenging markets have troughed, as we talked about Europe earlier, and hopefully the commercial HVAC market will start to rebound at some point. We are almost at pre-recession automotive production levels in North America.
And we do think that European production will improve slightly in 2014, but the restructuring that we've done at this point should bode well. China is expected to grow again, in 2014, and we have a great backlog and we should outpace the market again.
Continuing this trend of what we saw through 2013, I think started in 2012, our team has been working hard at our cost discipline, our pricing initiatives and our productivity improvements, and I believe we're going to continue to see results from that. We do expect, however, we're going to spend less on capital expenditures in 2014, and we should be in a position where we generate greater cash flow.
I will talk a little bit more about our capital spending at our December Analyst Meeting. As you know, we continue to restructure our business, to both improve our productivity, profitability and our efficiency.
Much of that activity is focused on Europe, a lot of it on automotive, and we expect these initiatives to continue delivering the benefits in the months ahead. We continue to invest in the markets that have the best growth opportunities, particularly China in all three of our businesses.
And I'll talk about, over the last few months, we are being more active on our portfolio. Lessening our dependents in the long run on the auto sector and moving more toward multi-industry model.
This morning we announced we're exploring strategic options for our automotive interiors business. As you know, this business makes door panels, instrument panels and other interior components and had sales of $4.2 billion in 2013.
And we hope to have more to talk about at the Analyst Day. We're not going to talk about our timetable at this point or comment on our specific plans, but we want to make sure that we acknowledge that.
Lastly, before I turn it over to Bruce, I'd like to thank Steve Roell. 31 years of service.
And I think all of us that know Steve and I know the folks on the phone, who know Steve for a long, long time, really appreciate his leadership and not only is he a fine leader, he is a fine person. I personally account Steve as my boss, my mentor and now my friend.
And I hope that his retirement is as productive as his working career. He joined us in '82.
He was the Chief Financial Officer in '91; Executive VP in 2004; Vice Chairman in 2005; and became our CEO in 2007. At the end of this calendar year on January 1, he will retire from the company.
He remains as our Chairman until the end of the calendar year. So I just want to make sure, and I hope, I would imagine Steve might be listening that we acknowledge his contributions.
Bruce?
Bruce McDonald
Thanks, Alex. And I too would like to add my best wishes to Steve.
And I wish him a long and healthy retirement. I'm excited this morning really to talk about our fourth quarter business and financial results.
We're extremely pleased with how we came in here for the fourth quarter. And we think we've got terrific momentum, as we go into 2014.
So with our Power Solutions business on Slide 7. Here you can see our revenues were up about 9%.
If you adjust out for foreign exchange and the impact of lead, our underlying sales were up about 11%. If you look at a little bit more granularly, OE volumes were up 15% in the quarter, aftermarket volumes were up 2%.
You can see geographically, we talk about the unit shipments being up 5%, with 1% growth in the Americas, 11% growth in Asia and 12% growth in Europe. And I think that growth in Europe of 12%, particularly noteworthy, given the depressed market conditions there.
And this really reflects the share gains that we're seeing from the European Power Solutions team. Also we've highlighted here, if you look at the high-margin AGM sales, they were up 33% in the quarter.
In terms of our segment income, we had a very strong quarter. Here you see segment income of $330 million, was up 38% from last year.
The results, generally speaking, were favorably impacted by the higher unit shipments, the ongoing benefits associated with in-house lead recycling, strong operational performance and the impact some of our pricing initiatives that we talked about on previous calls. I'd also point out, if you recall last year, our results were negatively impacted by both a high core collection cost, as we had to bring in additional inventory to ramp up and to start up the Florence, South Carolina smelter.
So the year-over-year improvement is definitely flattered by the fact that we had some high start up costs in the previous year's quarter. Our margins at 19.4% were up 410 basis points, as Alex noted.
And I've seen in some of the earlier notes that have come at this morning, sort of questions about the sustainability of Power Solutions margins. I guess, I'll just remind the analyst community that Q1 and Q4 tend to be our strongest quarters in terms of Power Solutions' production and shipments.
And the type of margins that we're seeing here in the fourth quarter, I don't think are atypical. So this was a normative level of margins that we should be delivering in our fourth quarter, when our operations are firing on all cylinders.
One other thing I'd like to point out here in the fourth quarter is we changed our inventory valuation methodology from LIFO to FIFO. And as you know, we've had a LIFO inventory methodology for a long time in Power Solutions and that's tended to make our quarterly earnings highly volatile, particularly in times when lead prices were moving around and we were building or drawing down our inventories.
So the impact of that from a U.S. GAAP point of view for the year was immaterial and same thing in the fourth quarter, but it will, when we restate our numbers, according to U.S.
GAAP, change our Q2 and Q3 earnings up and down by $0.02 or $0.03, they net out to zero. When we issue our Form 10-K we'll provide the impact of this for our previous periods.
But sort of the key takeaway here is we've radically simplified the way we account for inventory in Power Solutions. We're taking away the volatility that introduces to our quarterly earnings and it did not have a material impact on either the full year or the fourth quarter earnings for Power Solutions.
Turning to Building Efficiency. As Alex mentioned in his comments, we returned to growth.
Since the first time this year we saw topline growth of 2%. That's despite the sort of weakness that we continue to experience in the institutional and some of the new construction markets.
If you look at our revenue growth by business segment. Our service business, we saw a 12% growth, in Asia 6%.
Our unitary products group, where we have our residential and light commercial, is up 13%; and those where partially offset by the Middle-East, which is down 7%, which is primarily the timing of large orders; and a small reduction in Global WorkPlace Solutions and Europe of 3% and 2% respectively. In terms of our order intake, we were up about 2% for the quarter here, so roughly in line with where we were at the third quarter.
We did have a few large solutions contracts that we had hoped we would walk here in the fourth quarter. We expect those will slip in the first half of the year.
It's very large orders that we're excited to be close to finalizing here. Looking at our order intake geographically, we are up 5% in Europe, Asia and North America.
Latin America and Middle-East though were down double digit. Our backlog of unexecuted work at the end of the year, if you adjust for foreign exchange and the impact of divestitures, our underlying backlog was down 5%.
And here we basically saw the impact of higher order intake in systems North America and energy solution offset by softness in the Middle-East and Asia. Continuing the trend from previous quarters, our segment income was up more than revenue and we further expanded our margin.
So you can see segment income of $357 million, was up 9% versus last year. Our margins were up 60 basis points to 9.2%.
We saw a pretty good margin expansion in North America service, Global WorkPlace Solutions, Asia, Latin America and then our unitary products group. And then the last thing I would just point out, as you recall earlier in this year, we implemented a business improvement program specifically in our Global WorkPlace Solutions business, and we're pleased to see that we're gaining good momentum from this initiative.
And as we noted here on the slide, you'll see that our full year margins nearly doubled to 2.3% in the quarter. Turning to Automotive Experience.
A real nice quarter the team delivered here. Sales were up 9%.
If you look at that by our product areas, you'll see seating was up about same 9%, interiors was up 8% and electronics was up about 13%. If you look at it on a geographic basis to sort of put our revenue performance and the perspective against the industry, North America we were up 14%, against the 5% improvement in production; in Europe we were up 10%, with production being down 1%; and in China, and I'm counting here all of our sales, which are primarily non-consolidated joint ventures, our revenues were up about 20% and that compares to passenger car production being up about 6%, so again, all three major geographies for us, substantial revenue out performance versus the underlying production environment.
In terms of our profitability, real pleased to see a huge jump of 47% in the quarter, so segment income for automotive came in at $233 million. Generally speaking, we benefited from higher revenues and the operational performance that we saw in our metals business in South America and in our European businesses across all three product lines.
I would note that if you look at our segment income by product line in the quarter, our automotive electronics margins were down on a year-over-year basis and that really by about 260 basis points. That's generally in line with our plan and reflects the higher level of investment that we're making in our infotainment heads-up technology and things like that.
So I think the margin erosion that some of the analysts had in their model, I think it was largely as a result of the increased level of investment that we're making in our automotive electronics business. In terms of the overall margins, up 4.3% or 110 basis point higher than last year.
Turning to the financials now on Slide 10. And as we talked about in our press release, we did have a number of non-operational one-time items that resulted in a net charge of $0.80 this quarter and we had similarly large charges in this corresponding quarter of 2012, but maybe just to sort of put those in perspective, we had a net gain on the sale of two businesses, that's primarily our HomeLink product line that we sold to Gentex.
We had some additional restructuring charges that Alex referred to, primarily targeted our European operations in both automotive and Building Efficiency. We had a non-cash mark-to-market gain associated with our pension and retiree medical benefits and our pension settlement gain.
Last year those were significant losses and that turnaround was really as a result of good asset performance this year and an increase in the discount rate. And then we have some non-cash charges related to valuation allowance provisions on the tax line and a book charge related to repatriation of foreign earnings associated with our electronic business.
We're bringing that cash back to the U.S. We have a book charge.
The net cash tax impact of the divestures is about $50 million, so there is a big discrepancy between book and accounting tax provision and the cash tax provision on the HomeLink divestiture. As we go through the financials, I'm going to exclude the impact of these items from our discussion.
So if we just look at our revenues, you can see we're up about 6% to $11 billion. We're real pleased to see solid improvement in our margins at 17.4%.
We're up about 180 basis points on a year-over-year basis and we saw a good margin expansion in all three of our businesses. In terms of SG&A, you can see where our SG&A as a percentage of sales ticked up here in the quarter.
What you really see in there is higher levels of employee-related costs, and some higher than year-over-year litigation costs in the fourth quarter. Those aren't a trend.
I would just say those are timing-related. Equity income, you can see a big improvement up to $94 million here.
That year-over-year improvement really reflects improved profitability of our automotive joint ventures in Asia. And then if you look at the segment income margin on a company level, we're up a 130 basis points to 8.3% versus last year's 7%.
Turning to Slide 11. Just a little bit more information on the financials here, our financing cost of $54 million, were down $8 million versus last year, not really reflects just lower levels of average debt.
I mean, our debt levels came down very nicely here in the second half of the year and that's what gives us the tailwind on our net financing cost. From a tax point of view, our underlying rate was 20% exactly in line with our guidance, although it was up from 16.3% last year.
And then income from that non-controlling interest was a charge of $36 million in the quarter versus $29 million last year. That's really attributable to the higher profitability of some of our consolidated automotive joint ventures.
And lastly, looking at diluted earnings per share coming in at $0.95, which is a 23% year-over-year improvement. I'd like you to spend a minute on the balance sheet and our cash flow performance here on the Slide 12.
If you look at our cash from operating activities in the quarter, it was a great quarter. $1 billion of net operating cash flow; our strong operating cash flow combined with the HomeLink proceeds enabled us to reduce our net debt in the quarter by $1.2 billion.
If you look at where we ended the year, our net debt-to-total capitalization was about 26.5%, which is about a 510 basis point improvement in the quarter. So I just feel really good in terms of how our borrowing and our leverage metrics ended up here at the end of the year.
In terms of trade working capital, we had a great performance here in 2013, on a year-over-year basis. If you look at our trade working capital, which we define as inventory accounts payable and accounts receivable, it declined by about 70 basis points this year, at about 6% of sales.
CapEx, generally speaking, came in line with our expectations. And lastly, in terms of our pension and post-retirement obligation, I just noted in here our net unfunded liability at the end of this year was about $600 million, which was down from $1.2 billion last year.
So our plans are extremely robustly funded and we do not anticipate making any significant payments to our plan for the foreseeable future. And lastly, I would just comment on our strategy to de-risk our balance sheet.
We did complete the buyout of a portion of our U.S. term vested here in the fourth quarter.
That was worth about a payout of about $450 million. And then lastly, if I just comment on our expectations looking forward here, by almost every measure I think Q4 was a strong quarter for the company.
We have great momentum, as we enter into 2014 and we're highly confident in the improvement actions that the business has continued to deliver here. So we expect to see ongoing sequential improvement in Automotive Experience and that's in the areas that we've talked about quarter-after-quarter here on metals business, South America and Europe.
Building Efficiency, we do expect to see continued, albeit slow topline growth and ongoing margin expansion for 2014. GWS were excited about the beginning results that we're seeing from the business transformation initiative, and there'll be more to come next year.
We see strong year-over-year improvements continuing in Power Solution and our restructuring initiatives were adding to them and they are generally delivering the financial results that we expected. If we look at Q1, we expect EPS growth of about 30%.
If you take out the impact of the HomeLink divestiture and that's worth about $0.02 a quarter, roughly speaking. Our underlying Q1 EPS growth here was up about 35%.
And lastly, as you'll note on the slide, we do talk about holding our Annual Analyst Meeting at Stage 37 in Midtown New York on December 18, and that's the meeting where we're really going to present a little bit more clarity around our business strategy, some of our thoughts on the portfolio and provide full year financial guidance and a lot more information on our underlying assumptions. And with that, Glen, I'll turn it back to you, and we'll open up for Q&A.
Glen Ponczak
Great. Thanks, Bruce; thank, Alex.
Operator, we're ready to take question.
Operator
(Operator Instructions) And our first question is from Brian Johnson with Barclays.
Brian Johnson - Barclays
Just want to follow up on the battery point, because at least I was one of those who wondered if 19% is what we can start looking forward to 1Q's and 4Q's. So a couple of things.
One, to what extent did you benefit from any, it doesn't look like you benefited from any seasonal restocking after two warm winters in a row in Americas. How are you kind of looking for this upcoming winter and how do orders look going into the winter?
Alex Molinaroli
So our team does some modeling, and they don't actually expect, unless there is some weather event that we're going to see a tremendous uptick in sales, that that we do believe that will come, but unless we get some event, we're not seeing anybody anticipate those orders. What you really saw in the fourth quarter and what we expect to continue in the first quarter is the strength in Europe, I mean which is really unbelievable.
Bruce mentioned that, that you look at such a down market, we've been able to grow our share there and of course that's also where we have our AGM batteries and we get replacement for those too. So I think the numbers that we're talking about, they will be representative, but I don't think that we built anything on our plan to have extraordinary sales for the year.
Brian Johnson - Barclays
And as you kind of think of that 410 basis points, you sort of back out, maybe it sounds like 70 basis points or so for the core cost last year. How would you roughly divide the rest of it between higher margin AGM business, recycling facility actually coming online and reducing your run rate, pricing increases and other factors?
Alex Molinaroli
I don't know that I can give you a number, but there is not one single thing that would be the overriding factor, because all those things are beneficial. Our pricing initiative, a lot of that has to do with getting our commercial terms to stick with the OEs.
And that's something that we trace all year, we were able to get that recovery and that will help us going forward. The AGM business, I think you understand that 33%, you'd probably come up with some modeling and what that impact is.
But we also are starting to see a more consistent benefit from our totaling arrangements, our in-house totaling. So I think that we're seeing some consistencies, but we're seeing more than anything else.
Bruce McDonald
Brian, I would probably block it in a little bit more around. I mean if you recall last Q4, we were pretty disappointed with our margins in power last year.
And we talked about the startup cost of the smelter and the hit that we took buying inventory in the open market to start that facility. So I would say, if you look at the rough, on a year-over-year base we're up about $90 million.
I would say probably $30 million to $35 million of that delta. It would be the cost that we'd incurred last year that weren't there this year.
So I'd say it's more a like a third of it.
Brian Johnson - Barclays Capital
And final question. Can you quantify what benefit, if any the LIFO to FIFO change had or is that just perspective in fiscal [indiscernible] actually?
And did that have an impact at all?
Bruce McDonald
When we'll get some more information out on this when we sort of finalize things, but generally speaking it's immaterial in Q1 and Q4 of this year. I'd believe in Q2, it's an income item and Q3 it's a charge and those are $0.02 or $0.03.
But when you sort of take the full year impact it's less than a penny.
Operator
And the next question is from John Murphy with Bank of America Merrill Lynch.
John Murphy - Bank of America Merrill Lynch
Maybe just to follow up on the battery question. AGM obviously outperformed in the quarter for you and it looked like it was great.
Just curious, if you could tell us what percentage of your total units or revenue or AGM at this point and maybe remind us generally what the delta is in the margins between AGM and your regular lead acid batteries?
Bruce McDonald
If you look at on our full year basis, our unit sales is about a $135 million and the AGM is like 5% of that.
John Murphy - Bank of America Merrill Lynch
And the profitability roughly, two times, three times?
Bruce McDonald
Well, we've said it's like two to three time for the margin.
Alex Molinaroli
Margins are like 50% higher roughly, I mean, very generally speaking.
Bruce McDonald
That's not right, so net impact of 50%.
John Murphy - Bank of America Merrill Lynch
Then a second question. Alex, you seem to be going through a portfolio review here, which seems very rational given your new position.
As you look at the interior business, which is coming on your radar screen, is that a business that you necessarily need to have alongside the seating business in your view? Or really could that be something that would be really separated from the run seating on a standalone basis?
And then also just a question on the interiors business as well, I mean there is some antitrust stuff for some investigations going on in Europe around some price-fixing or something that is not actually completely clear get. So I was just curious if you have seen any of that as well in the interiors business?
Alex Molinaroli
We're not impacted by any of that investigation in our interiors business. I think that what we found when we split the seating business from the interiors business for that very reason is we learn how much they are interconnected.
I think that they are only interconnected by convenience not interconnected commercial convenience, not by any other reasons. Whether we divesture that business or do something else with it, I don't think it's going to be harmed or harmful to our seating business.
Bruce McDonald
I would just maybe add to that, John. If you sort of go back in time and you look at the portfolio that we have in automotive today, interiors, electronics and seating, it was really put together with a view that what we're going to see was our customers source complete interiors.
And as we've talked about on previous calls, that the sourcing pattern is now much more at the component level, and not at all customers, but the total interior sourcing just has not materialized by enlarge and so they need to have those three product lines, it doesn't exist anymore.
Alex Molinaroli
And Bruce's point is very valid. If you think about from a customer standpoint that might have made sense for a total interiors, but the amount of complexity for a supplier to have all those products is incredibly complex.
John Murphy - Bank of America Merrill Lynch
And then just lastly, Bruce, I mean you guys are net debt to cap of 26.5%, balance sheet is in great shape. I mean what are your general targets or rules of thumb of where you want the balance sheet to be or go?
And maybe, Alex, you have some different views on this or than maybe in the past as well. But just curious if there is any update there or changes or where you think you stand and where you want to be as far as capitalization?
Bruce McDonald
Well, I'll comment first and then we'll see if Alex agrees. For us the thing that's important for us to maintain, investment-grade balance sheet.
And so I would say we will feel uncomfortable going below BBB plus, just because in the event of a shock to the system like we saw in all '08 and '09, we want to be comfortable in that investment-grade rating, so that we can weather the storm here. But having said that we're probably seven to 10 points below where I would say it's ideal from a optimal capital structure.
And that's where we are right now.
Alex Molinaroli
So I think we'll talk more about that in December, but we've talked about the fact that we are looking not only our capital structure, but looking across capital allocation in a very broad way. So we'll have much more to talk about in December.
Operator
And next question is from Patrick Archambault with Goldman Sachs.
Patrick Archambault - Goldman Sachs
I guess my main ones are on Building Efficiency. I guess the first one would be the backlog, which was down 5%.
How much of that was due to some of the disruption from the government shutdown? I take it that added probably quite a bit of uncertainty.
And maybe kind of tying to that question, sort of what's the prospect for that just given, what you're seeing in the order book for that to swing positively? And I have a follow-up as well.
Bruce McDonald
It would be nice to blame all this on what happened in event. I think that uncertainty does not help these types of investments.
And there has been uncertainty around the federal government spending, the state government funding for a long, long time. These are just events that that really are typical of the kind of things that don't help.
So I wouldn't say that one event, but I think the overall uncertainty about funding of the federal government and state government is hurt. And the other thing that is hurt is in the healthcare business, which is very important part of our business, is the uncertainty about what's going to happen with our healthcare customers.
What I would expect though as they sort that out, that's going to create opportunity. But unfortunately it's not sorted out yet.
And so the opportunity will come, but we've got to wait for them to deal with their business issues.
Patrick Archambault - Goldman Sachs
And just in general, you had this very significant improvement in Global WorkPlace Solutions. Can you just remind us of what the components of margin expansion is?
I mean obviously you've had significant restructuring efforts in that segment, in Building Efficiency, in general, but that seem to be having a very good impact, particularly in GWS. How much of the driver is from additional benefit from that?
How much is mix, as some of the high-margin stuff rolls back on, just giving us a little bit of a roadmap?
Alex Molinaroli
I'll take this and Bruce can probably even give more color. We really don't have restructuring benefits, when you think about GWS at this point.
But what you'll see going forward is we will see some of that as we change our operating model. And so at this point it's really been efficiencies going forward.
There will be some restructuring benefit, but that restructuring benefit has to do with how we're going to change the way that we service the accounts and manage the accounts. So we put a lot more tools and rigor and operational effectiveness inside that process.
In December, we'll probably outline exactly what that initiative looks like, but we've got a strong roadmap and they are executing against that. So we expect to see that improvement continue.
We're hopeful that we're going to continue to talk about that in a positive way over the next few quarters.
Patrick Archambault - Goldman Sachs
And maybe just some comments on how do you see the mix changing, as we go forward? And is that something that's also accretive to margins?
Bruce McDonald
Probably the best way to think about this one is, if you think about GWS in the past, it's been a very commercially focused organization and our structure reflects that. So we would have our business, it was tend to be broken up by vertical market, so someone wanted to [ph] charge up the financials or pharmaceuticals or whatever.
And which was good, because it gave us a very strong focus on the customer. The downside to that structure was if you went, then you took a place like a lot -- let's just take London, as an example.
We did not leverage our resources within let say the city of London. So we may have had staff that was sub-optimized from a utilization perspective.
But if we manage them across our businesses within the same geography, we could better exploit our resources. So what we're really doing here is we want to maintain the strong commercial focus that we have in that business, but operationalize it together.
The cost savings of our delivery model, scale and our purchasing by vertically integrate like self perform more. And then get some more scale and economies of scale on the utilization of our overheads, SG&A.
Alex Molinaroli
And a last point I'll bring on that is, when you go to an operational review for GWS today, you'll hear them talk about six sigma, lean, the types of conversation that we used to have in our execution oriented businesses. And so that's why we feel fairly confident that a lot of this is in our control.
Operator
Next question is from Rich Kwas with Wells Fargo Securities.
Rich Kwas - Wells Fargo Securities
A question on automotive in Europe. So, Bruce, if I have my numbers right, profit for the entire segment was $13 million in the quarter, because I think it was an $81 million swing and you were at a loss of $68 million last year.
Just curious, when you look at seating, what was the relative difference in profitability in Europe across the business segments when you look at electronics, interiors and seating? Just trying to understand structurally how much improvement seating saw?
Bruce McDonald
We can follow that, because I don't know the specific numbers. But what I do know is our profitability was up in seating, and interiors is down and electronics, which reflects the investments that I talked about in infotainment.
And the fact that our electronics business in Europe is one business that we have significant exposure to French OEs.
Alex Molinaroli
And while we're on the topic, you didn't ask, but I would like to make sure that the metals folks know that we really appreciate what they've done. We've turned that business now to where it's crossed over the breakeven line, at least for the quarter.
So we're pretty pleased to see that that part of our business is starting to perform. So that turnaround has really made a lot of progress.
Rich Kwas - Wells Fargo Securities
So, Alex, that's something that should provide some tailwind to seating, as we move forward in 2014, correct?
Alex Molinaroli
That's correct.
Rich Kwas - Wells Fargo Securities
And then on battery, I know in the past you've talked about 8% to 10% growth over the long-term on an annual basis. With the aftermarket being as weak as it has been lately and I know you expect that to get better over time.
But should we think of this as not being quite that level of growth, if aftermarket doesn't return back to mid-to-high single-digit growth? How should we think about that?
Bruce McDonald
I think the law of large numbers will hurt us at some point, because we have a strong position in North America and Europe, but we're making the investments in China. We are also seeing the topline growth because of the AGM mix.
So I think that it's going to move around a little bit. But I don't really change my view of the overall prospects long-term for battery.
Easy for me to say, I'm not there right now.
Rich Kwas - Wells Fargo Securities
And then the last one, first quarter guidance, does it assume any air pocket from the federal government shutdown in terms of Building Efficiency?
Alex Molinaroli
I think in the short-term, whether the federal government is open or closed, it's not going to impact us materially.
Operator
Our next question is from Colin Langan with UBS.
Colin Langan - UBS
Any color, I'm just trying to understand the logic of the interiors announcement today. I know earlier you had talked about, you are looking at all your portfolio.
I mean should we view that, are you still looking at the other divisions and now you feel like you've done the assessment on interiors or have you kind of concluded the other divisions and this is the only one that you're looking for strategic options for?
Bruce McDonald
Well, I'm not sure you'd really expect me to answer that one completely. I think that the reason why we announced interiors now is because we have to make sure that we're able to execute on some of the opportunities.
So it made sense for us to talk about it now. You see we have the impairment, as it relates to the rest of the portfolio, I would say just call it an ongoing process, not something that it's going to be an event.
Obviously, we're having and it seems like an event now, but I would say it'd be more of an ongoing process for us.
Alex Molinaroli
I would just maybe add a little bit of color is, think about of the interiors business, I mean they've done nice job turning it around. But they are sort of sitting in a position same as we were last year with electronics.
And that they've come to us and said look here is some further restructuring that we want to do, here is some increased amount of capital investment that we'd like to make, and it's not a priority for us. So given that we're constraining the capital for this business, and also given the fact there is a lot of rumors out there.
We felt it is important to our people to be forthright with them about what it is that we're planning on doing. And we have talked to various people about and parties about the business, and so we rather handle the communication like this than be reactive to a leak in the future.
It spuds really around the respect for our employees.
Colin Langan - UBS
Going back to your Power Solutions that you talked about earlier, what kind of quarter-to-quarter volatility should we normally expect when we go down to Q2, Q3? Does this seem like, given the Q4 exit rate, we're almost near I think your mid-decade kind of outlook for margins with normal sort of typical seasonality?
Alex Molinaroli
Part of this I'm not going to be able to answer because of the accounting change. So I need to look at what impact that's going to be, because what happens is we basically run our factories, not completely at full load, but as best we can.
And so it's become seasonal, because we have seasonal sales because of the nature of the business. And then we have building inventory and depleting inventory.
The LIFO and FIFO change is going to impact that somehow. So I really don't know if I can answer it completely or probably less volatile, but certainly be more predictable.
But one of the reasons why you saw the change between Q2 and Q3 is one of those quarters were building inventory, one of them were depleting inventory. And so for LIFO that becomes a P&L hit and for our FIFO it does not.
Colin Langan - UBS
And just thinking about going forward, you've kind of indicated as AGM mix grows you'll see margin improvement. So that story and looking at Q4 in and of itself, if AGM is up, we should still continue to see margin expansion over the next few years, there is no reason to think that would normalize?
Bruce McDonald
The one thing that I would just tell you is that we'll continue our investment in China. And as we invest in China, that's a lumpy investment and it's bringing on new clients.
You don't have the absorption that you like. And so I think that that's going to be headwind for a while as it relates to our overall margins, but that's where our growth and investments will come for the future.
So I think that you'll probably start hearing us as we talk about margins, there will be some impact by what pace that when we are opening plans in China that's my guess.
Colin Langan - UBS
And just one last question. On Auto Experience or particularly around the seating side, are the major restructuring actions done or we are still going to see some sequential benefits from restructuring those things?
Alex Molinaroli
We'll see some sequential benefits in 2014.
Operator
Our next question is from Matt Stover with Guggenheim
Matt Stover - Guggenheim
Just a detailed question. Could you reiterate the order detail that you provided in the walk-through, Bruce?
I didn't get quite all of it.
Bruce McDonald
The order detail?
Matt Stover - Guggenheim
Yes.
Bruce McDonald
So in Asia and North America and Europe, we're up about 5%. In Latin America, we're down 15%.
Middle-East we're down 19%.
Matt Stover - Guggenheim
And then the second question is as I look at the sequential progression in the auto business, I know there is a lot of noise that occurs there. But was there something in particular that would affect our impression of the sequential margin, because it appeared as though you had for the revenue delta quarter-to-quarter a pretty significant decremental?
Bruce McDonald
Significant decremental?
Matt Stover - Guggenheim
Yes, last quarter Q3 to Q4?
Bruce McDonald
I can't think of anything in the fourth quarter or third quarter like some that was benefited Q3 or something that hit Q4, I can't think of anything off the top knot. But maybe we can follow-up on that, if you could share your model, maybe we can help you out.
Operator
Our next question comes from David Leiker with Baird.
David Leiker - Baird
A handful of detailed questions here first. Bruce, with the write-down in the asset value of the interiors business where did you write the book value down on that, what are you at?
Bruce McDonald
I'd rather not say.
David Leiker - Baird
And then as you go through this, I mean obviously, Alex, you have got a couple of different options you can go and some of the product lines you are already starting to wind it down. If you went down the path of winding down the whole business, is that positive or negative to the profitability over time?
Bruce McDonald
Well, that's a hard one to answer. I mean in the short-term, what would end up happening, David, is let's say that was with our plan.
Then we could dial-back a lot of SG&A in the short-term, run out our contracts, but then we'd have a series of plant closures as program startup to rolled off. Our strategy, just by the way, I mean we're not planned on winding down the interiors business.
I think we've got some ideas .We aren't saying we're exploring our strategic options and we haven't got a clue what we're going to do. We have a few ideas, some sticks in the fire, but we're not planning on shutting it down.
Alex Molinaroli
I mean, we would rather not even be talking about this, but as Bruce said, we need to be transparent to our employees. But I think it's very similar to electronics.
Obviously, the financials aren't the same, but we run a good business. There is structurally some issues with this market and I think we're not the only ones who are suffering from it, but there is no reason for us to wind this business down, particularly as we explore options, we have multiple options.
Bruce McDonald
David, maybe one other point, I mean we did mentioned in the press release, look, here is what the interior sales and earnings are. Keep in mind and you know this, but we allocate our corporate cost to our segment.
So when I'm looking to do something with interiors, if I back away the corporate costs that wouldn't go with that business, it has positive earnings. So it's the external segment number maybe does a little bit of this justice in terms of what a buyer would get.
David Leiker - Baird
And then on the Building Efficiency side, you have the backlog there of $4.8 billion, there are some adjustments there for down 5%. If we did it apple-to-apples, what would that look like?
Bruce McDonald
I think it's down to 7%.
David Leiker - Baird
It says divestitures and FX, yes.
Bruce McDonald
I think FX wasn't -- and divestures rates where the point.
David Leiker - Baird
So you would have been down to 7%?
Bruce McDonald
Yes.
David Leiker - Baird
And your orders are up and I think in the last couple of quarters you talked about, each of those stages leading to the backlog. It sounds like you are not getting things out of the pipeline into the backlog, is that what we are seeing here?
Alex Molinaroli
I think that everybody keeps talking about this recovery that's hasn't happened yet. And if you look at the indices, what you'll see is there is some recovery happening at the architectural level.
Unfortunately, it's not happening in a lot of the markets where we have our strength, where we are the strongest in the institutional markets and that seems to be a big lager at this time, which is unusual. So as that sorts out, we'll pickup pace, but unfortunately it looks like it's a few months away at least, and so that's why we're going after a lot of these costs initiative, because we're acknowledging the position we have with our backlog.
David Leiker
And then the last item here is on the battery side and I'm going to pile on the margin question. I mean if you look at that business you have the assets in place for AGM and you've got the initial assets in place in China.
And I don't think you are going to open another China plant for a year and a half. You've got the mix of AGM.
You've got the pricing, the vertical integration. It just seems like you've got a pretty high ceiling on margins for that business from where you are today.
Baird
And then the last item here is on the battery side and I'm going to pile on the margin question. I mean if you look at that business you have the assets in place for AGM and you've got the initial assets in place in China.
And I don't think you are going to open another China plant for a year and a half. You've got the mix of AGM.
You've got the pricing, the vertical integration. It just seems like you've got a pretty high ceiling on margins for that business from where you are today.
Bruce McDonald
Well, I think if you're asking do we think we are willing to expand our margin for Power Solutions, we would agree with you, we do. We've talked about the fact that we expect to see couple of hundred basis points more of margin expansion over the next two to three years.
I think we're on track to deliver that. So we don't disagree, we are not saying we're peaked here.
You're absolutely right, as AGM becomes a bigger piece of a pie that's beneficial. And as our China business, which right now losses money because of the investments that we're making as that swings into a profit, that even though it degrades day-to-day our overall margins, but the swinging from the lost to profit it helps the total.
David Leiker
And the timing for China during that is what?
Baird
And the timing for China during that is what?
Bruce McDonald
We're looking to get close to breakeven kind of run rate by the end of next year. I think the breakeven run rate by the end of next year.
Operator
And the next question from Rod Lache from Deutsche Bank
Rod Lache - Deutsche Bank
Just to clarify one thing on the Power Solutions, certain things must have gone better than you expected late last year when you projected 200 basis points of margin expansion from 2012 to 2017. Would you agree with that and what would those items have been?
Bruce McDonald
Well, I think we were saying we expect a couple of, I think 200 basis points or 250 basis points, we were saying over a three year period there, Rod. But I think we've got a bit more lift this year with the pricing that would probably be why we did better.
And that somewhat we lost some of that with the fact that the after-market volumes were softer than we thought coming to this year. So those will be the two little positive and negative, but net to a positive.
Rod Lache - Deutsche Bank
And then switching to seating, you've talked a little bit about that. And obviously there has been some improvement in the metals business, which was a drag last year.
Could you just tell us just from a high level, what actually has happened and what actually do you have to do going forward? I think you originally were targeting a 5% margin in metals by 2014.
It sounds like you've already made some progress but there are some specific actions you still need to take?
Bruce McDonald
You're right. I mean if you looked at our last analyst deck, we talked about metals being at like a 5% run rate by the end of '14.
We're little bit behind that. But basically if you sort of unpack what's going on and what's driving the operational improvement here, the first and formal it's been the fact that we fixed all of our launch problems.
And so for the last up until probably the early part of fiscal '13, we were lurching from problematic launch to problematic launch. And incurring cost to sort of fix it and then another launch would come up and that would be a challenge and we'd fixed that.
So we've kind of been out of that mode now for two or three quarters. So I'm not saying all of our launches are perfect, but we're not having these launches that are really problematic for us.
So I'd say we're back to normal mode. And if you look at our forward pipeline of the metrics that we have on programs that we're launching in the next 12, 24, 36 months, we're back to normal.
So that's a great result. That's what has really driven us from the heavy losses to get to breakeven.
What's in front of us? There is probably two big things.
One is we still have a lot of our supply based in high-cost country and so we have work stream that moves a lot of our tools, this is largely a Europe story, Western Europe to Eastern Europe. And then probably a bigger part of the story is then the product and process standardization.
And that we're really in the early innings on. And by that what I mean is if you think about JCI, KEIPER and Hammerstein, I'll just take recliners.
We all had a recliner and we are standardizing on the KEIPER recliner family, and so we're going through a process of getting that recliner fitted out on our backlogs, that we can stop the product proliferation, rationalize our engineering around the 1-2b product family and then converting our manufacturing operations, so they can all manufacture the same thing. It's a lot of words, but it's can take bit of time, but it drives the big value.
Alex Molinaroli
The other thing that we'll see benefit from is the investments in Chin and we'll start to see that benefit. But this is a long-term fixed, I mean with the cycles of this business, we have to get these things approved and if it's mid-cycle, that's even tougher, so we'll see improvement, but it is going to take a lot of to get to our standard products.
Rod Lache - Deutsche Bank
And just to clarify, at one point, Alex, you had said or the company had said there was a bit of an offsetting trend in that division as some customers were kind of changing the way they were purchasing, moving more towards components away from systems. Is it safe to assume that that's basically kind of played out at this point and that now there is a mostly operational positive that you can affect as opposed to kind of market negatives that you have to deal with?
Alex Molinaroli
Well, I guess, the comment before was that we think our strategy was right. And we think our execution has been suspect and tough, but we had the right strategy.
And I think that was the context of the comment. I do think our customers have picked their way and it's different in different parts of the world, but for the most part component sourcing is where our customers are going.
So I guess, I would agree overall with what was your comment.
Glen Ponczak
We're out of time, Alex, couple of closing remarks.
Alex Molinaroli
The only thing I'd like to do is first is I did say it earlier, but most importantly I want to make sure we thank our employees. Our employees have been under a lot of stress over the last couple of years as we've tried to deal with the market conditions.
And we're starting to see the results and I'm very proud of what they've accomplished. And so I want to make sure I mention that.
And then last we have a lot to talk about. It will be more detailed, more talks, more strategically in December.
So hopefully we'll see you folks in December 18, in New York, because I think it will be a good meeting.
Glen Ponczak
Thanks, everybody.