江森自控 (JCI) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Tyco first quarter earnings results conference call.

At this time all lines are in a listen-only mode.

Later there will be a question-and-answer session and instructions will be given at that time.

If you do need assistance during the call today, please press the star followed by the 0.

As a reminder, today's call is being recorded.

At this time I'd like to turn the conference over to the Senior Vice President of Investor Relations, Mr. Ed Arditte.

Thank you, and good morning.

Thanks to all of you for joining our conference call to discuss Tyco's first quarter results for fiscal year 2004 and the press release that we issued earlier this morning.

Joining us today will be Tyco's Chairman and Chief Executive Officer, Ed Breen, and our Chief Financial Officer, Dave Fitzpatrick.

Before we start, let me remind you that during the course of the call we will be providing certain forward-looking information, and we ask you to look at today's press release and to read through the forward-looking cautionary informational statements that we've included in the press release.

In addition, we will use certain non-GAAP measures in our discussions this morning, and we also ask you to read through the sections of our press release that address the use of these items.

Now to get us started this morning, I'll turn the call over to Ed Breen.

Thanks, Ed, and good morning.

We are pleased to report today that Tyco's year has gotten off to a good start.

We had better earnings and cash flow than last year, and we feel that this quarter positions Tyco for a good 2004.

In addition, we also made progress in a number of areas, including the strengthening of our capital structure, our restructuring and divestiture programs, as well as our operational excellence initiatives.

Before we get to those items, let me provide you with some highlights of the quarter, and then Dave Fitzpatrick will take you through the segment results.

First, we had earnings per share of 34 cents for the first quarter on a GAAP basis.

These results included $51 million of charges and $13 million of savings related to the restructuring program we began in the fourth quarter of '03.

We had another strong quarter in Healthcare and Electronics, and improved results in Fire & Security, partially offset by weaker results in Plastics & Adhesives, which is primarily due to the charges from the restructuring program.

While operating profit in Engineered Products was down on a year-over-year basis, it did improve sequentially.

In addition to the stronger operating results, our earnings per share also benefited from lower interest expense and a lower tax rate, and Dave will cover that with you in a few moments.

Our cash flow was also very strong in the quarter.

We generated free cash flow of $736 million, which exceeded last year's results by $600 million.

The first quarter's traditionally the lowest cash flow quarter of the year, and our performance in this quarter increases our confidence in the full-year strength of our free cash flow.

Overall, we had a good operational quarter relative to our plans, but we still have a long way to go in our transition to a world-class operating company.

Let me also update you on a few other developments in the quarter.

I am pleased with the progress Tyco has made in repositioning our debt structure for the future.

As most of you well know, the liquidity challenge we faced last year was quite significant, and from my perspective the progress we have made since then is very satisfying.

The combination of our cash flow strength and the repositioning of our debt maturities makes our debt service very comfortable going forward.

We reduced debt by over $2 billion in the quarter, and we are on track to continuously strengthen our balance sheet over the next few years.

On the restructuring and divestiture front, we made progress in the first quarter, but both programs are in the early stages of execution.

We expect to see a higher level of restructuring activity in the second quarter and are on track for the full year.

Our divestiture activity is ramping up, and while we only closed two small transactions in the quarter, we are actively involved in approximately 20 potential transactions representing about half of the revenue we have targeted for divestiture.

We expect to make good progress on this front over the next few quarters.

A quick update on operational excellence activities.

Many of you will remember that we have targeted $3 billion of cumulative benefits through 2006, including $1 billion each in our Six Sigma and Strategic Sourcing programs, as well as a $1 billion improvement in our working capital.

Our programs are gaining traction in each of Tyco's segments, and we are encouraged by both the level and quality of the activity that is underway.

Those of you that had the opportunity to either attend or listen to the webcast of the Electronics and Healthcare investor meetings heard from each of those management teams about their operational excellence initiatives, and you will hear from the other management teams at their investor meetings, but let me share a few highlights with you.

In our Six Sigma program we have over 1300 active projects underway, and we have trained over 600 green belts, black belts, and master black belts in the first quarter to reach a total of 1500 belts across the company.

Our efforts are global, and we are implementing a common project tracking tool across Tyco.

We are looking for about 200 million in Six Sigma savings in '04, ramping nicely towards our $1 billion goal.

We also expect to generate working capital improvements from the Six Sigma program in 2004.

Our Strategic Sourcing activities are also moving forward and accelerating pace.

We currently have 18 One Tyco sourcing teams in place, comprised of sourcing professionals from each segment.

These teams also now have sub teams.

All tolled, our efforts include 70 different groups that are addressing key categories of our buy, ranging from capital equipment and information technology, to travel and office supplies.

We believe we can reach nearly $300 million of annual savings in '04 from these efforts, and again, we are making good progress towards our $1 billion goal.

These operational excellence initiatives are an important part of our strategy, and we will keep you updated on our progress.

The savings we are generating are built into our guidance, and while not all of the savings we are targeting will fall to the bottom line, these efforts are critical in helping us offset price erosion.

In addition, these savings are important to funding growth initiatives like the increased R&D spending we have begun in our Healthcare business.

With that as an overview on some of our important activities, now let me turn the call over to Dave Fitzpatrick.

Thanks, Ed.

Good morning, everyone.

As Ed indicated, this was a good quarter for Tyco and a good start to the year.

During the quarter we had revenue growth of 9%, operating margins of 12.8%, a 100 basis point increase from the period a year ago, lower interest expense, a lower tax rate, all resulting in a 27% increase in income from continuing operations.

Now let me expand on each of these items.

First, looking at revenue, revenue in the quarter increased 9% to $9.7 billion, with every segment posting revenue increases.

Foreign exchange was indeed a big contributor to the revenue growth in the quarter and accounted for about 7 percentage points of the 9% improvement.

All the segments grew organically except for Engineered Product, which was down 2% for the quarter.

Top line growth in the quarter was let by Electronics and Healthcare, with each growing at approximately 11%.

Operating income grew almost 18% in the quarter to $1.24 billion, being led by profit improvement in Electronics, Healthcare, and Fire & Security, partially offset by modest declines in the other two segments.

Foreign exchange accounted for approximately $40 million of the $187 million improvement in operating income in the quarter.

Our net interest expense declined $24 million in the quarter, primarily due to lower borrowing costs in our bank credit facilities.

In addition we executed a number of fixed to floating interest rate swaps in the quarter in order to achieve a higher mix of floating rate debt in our debt structure.

Finally, our tax rate was 27% for the quarter, and this is a level that we believe is appropriate for the full year.

The decline in the rate is principally due to better operating performance in certain countries outside the United States, allowing us to make better use of previous tax losses in those countries.

All the items I just mentioned led to good growth and income from continuing operations which increased 27% to $719 million.

Let's now look at the segments starting with Fire & Security.

Turning to Fire & Security, revenue increased 7%, driven almost entirely by currency translation.

Operating income grew 16% to $252 million, including the impact of our restructuring actions.

Restructuring charges, net of savings from the program we announced last quarter, were approximately $7 million.

Using the business unit break down we've shared with you in previous quarters, Worldwide Security, excluding Continental Europe, which represented 47% of the segment's revenue, grew 8% year-over-year, with currency contributing about half of the growth.

Operating margins were 14.1%, up 170 basis points versus last year's first quarter, led by stronger performance in ADT North America.

Continental European Security, which represented about 7% of segment revenue, had an improved quarter.

Revenue increased 14%, attributable to foreign exchange.

The good news is that the business was essential break-even in the quarter versus a $7 million loss in last year's first quarter and a $37 million loss in the fourth quarter of 2003.

The sequential improvement resulted from a number of factors, including higher gross margins, lower bad debt expense, as well as SG&A reductions.

We believe this improvement is sustainable over the remainder of the year.

Tyco Safety Products, which accounted for 11% of segment revenue, had a strong quarter with revenue growth of 9%, or 5% excluding currency, and achieved operating margins in the mid teens.

Finally, the Worldwide Fire business had a tough quarter, with revenue growth of 5% year-over-year, but down 5% in terms of constant currency.

This business represented 35% of the segment's revenue in the first quarter.

The operating margin was down over 200 basis points at approximately 3%, a level that is not acceptable to either the Tyco or Fire & Security management teams.

The revenue and profit declines were primarily driven by our U.S.

Fire Protection business, SimplexGrinnell, which continues to suffer from soft commercial construction markets in the U.S., as well as strong competition in the mechanical contracting side of that business.

As we discussed last quarter, a portion of our restructuring efforts are targeted at reducing the cost base in this business.

We believe we are taking the right actions to get this business back to double-digit margins over time.

Spending for new dealer accounts was $70 million in the quarter, compared with $195 million in last year's first quarter.

This level reflects a much tougher quality stream that has resulted in our generating fewer but higher quality new accounts through this channel.

For those of you who track our disconnect rates, our trailing 12-month disconnect rates were, in the first quarter the U.S. average was 15.6% compared with 15.5% last quarter.

Outside the U.S., the rate was 15.9% compared with 17.0% last quarter, resulting in total of 15.7% disconnect rate, two-tenths of a point better than the 15.9% posted last quarter.

The U.S. average was essentially flat compared with the fourth quarter, and the rest of the world average decline by 1.1 percentage points as higher disconnect rates in the Latin America region and last year's first quarter have dropped out of the trailing four-quarter average.

We will hold an investor meeting for the Fire & Security segment on February 18th, and will you hear more from Dave Robinson and his management team on the specific steps they are taking to improve the performance of this segment.

Moving on to Tyco Electronics, the first quarter clearly saw an uptick in order rates, with a building backlog and a higher book-to-bill ratio.

Backlog grew by over $300 million, and the book-to-bill ratio for components business finished the quarter at $1.06.

The results shown in the press release for both the first quarter of 2004 and 2003 include the revenue and operating income of Precision Interconnect for which management responsibility was transferred from the Healthcare segment to the Electronics segment.

In addition, the results for the Tyco Global Network, which is currently for sale, are no longer reported in the Electronics segment and are now reported with corporate and other.

Revenue increased 11% year-over-year to over $2.8 billion, with foreign exchange accounting for about 7.5 of the 11 percentage points of growth.

On a sequential basis, comparing the first quarter to the fourth quarter of fiscal 2003, revenue increased 6%, with approximately half of this attributable to foreign exchange.

Operating income in Electronics grew 31% year-over-year to $424 million, and the operating margin for the segment increased to 14.9%.

The results for the quarter include approximately $20 million of net restructuring reversals and other credits from prior restructuring programs.

Within our Electronics components business we saw 10% revenue growth.

Looking at our Connector and Cable Assembly businesses, these experienced a 15% increase in revenue, with foreign exchange contributing 9 percentage points of this increase.

The growth in these areas was partially offset by weakness in both battery packs and power systems.

The Electronics Components operating margin in the quarter was 14.6%, excluding about 40 basis points from net restructuring credits, compared to 14.2% in last year's first quarter.

The margin in the quarter was adversely impacted by higher copper and gold prices which cost us approximately 50 basis points of margin on a year-over-year basis.

In addition, higher R&D spending also cost us about 20 basis points of margin year-over-year.

As we have pointed out at the investor meeting for the Electronics segment on December 10th, we expect our growth rate to gradually build throughout the year and the increased backlog will benefit our second quarter.

The overall tone of our end markets is better, and we believe that the operating margin in the Components business can increase into the 15% to 16% range over the course of the year as higher growth drives better operating leverage and our productivity programs generate higher savings.

Looking at Tyco Healthcare, we had another strong quarter with continued revenue growth and margin expansion.

Revenue for the quarter increased 11% to $2.2 billion, with foreign exchange contributing about 5 percentage points of the revenue increase.

Revenue in North America grew 5%, reflecting solid growth in our Medical, Respiratory, and Pharmaceuticals businesses.

Our international business rebounded nicely in the quarter and grew 25%, including 16 percentage points of currency.

We expect continued solid growth from the international business throughout the remainder of 2004.

Operating income grew 21%, and operating margins expanded 220 basis points to 24.7%, driven by higher volumes, a better sales mix, and productivity improvements.

Research and development spending increased $12 million, or 41%, in the quarter.

Revenue in our Engineered Product segment increased 6% in the quarter.

Excluding a $97 million benefit from currency, revenue declined 2% as revenue increases in Electrical and Metal, Fire and Building Products, and Infrastructure Services were more than offset by a 9% decline in Flow Control.

Order activity was stronger in Flow Control, and backlog was up 9% sequentially.

Compared to last quarter, Engineered Products had modestly better revenue over all and better operating income in each business within the segment.

Operating income for the segment declined 12% in the quarter, driven by continued price pressure across several businesses and unfavorable steel margins.

Steel prices continued their rise due to the global demand for steel, particularly in China.

However, we expect to see sequential profit improvement throughout the year in this segment, driven by better volumes, higher selling prices, and cost improvements.

Moving on to Plastics & Adhesives, revenue for the quarter grew 2% to $460 million, with the increase almost entirely attributable to currency translation.

Our Plastic Films business grew 10% in the quarter, driven by higher volumes and better pricing due to the pass-through of a portion of higher raw material costs we experienced in the quarter.

Offsetting this strength was a decline at A & E, our plastic garment hanger business.

Operating income declined $33 million in the quarter, largely due to the restructuring related charges which totaled $30 million.

Operationally, profit improvement at Plastics and Ludlow were offset by declines in A & E and Adhesives.

Before I finish up, let me provide a bit of detail on a few other items.

Our cash flow was strong this quarter.

While capital spending was down, we are not deferring spending and have significant manufacturing capacity available to absorb a meaningful pickup in volumes in most of our businesses.

In addition, primary working capital, by this we mean receivables, plus inventory, less accounts payable, consumed $280 million of cash in the quarter.

This use was in the face of some improvement in velocity, as we improved our working capital days sales outstanding slightly, about one day, from last quarter on a sequential basis.

However, we expect to continue to generate primary working capital improvement in 2004 despite our anticipated revenue growth as we focus on improving our velocity.

With respect to corporate and other expenses, while we had a modest decline from $97 million to $93 million, we absorbed approximately $30 million of foreign exchange related charges in the quarter.

For the full year, we expect corporate and other expenses to be in the range of $350 million to $400 million.

This estimate includes the expected operating loss for the Tyco Global Network, which we are estimating at approximately $100 million for the full year.

I'm also pleased that we rounded out the leadership team in the finance organization recently with the appointment of John Davidson as Senior Vice President and Controller of Tyco.

John joins us from Dell, and the two of us previously worked together at Kodak.

He brings very strong control skills to our organization.

Let me now turn the call back over to Ed to finish up with a few closing comments.

Thanks, Dave.

Before we open up to questions, let me make a few additional comments.

First, our guidance for the second quarter is for our earnings to be in the range of 35 to 37 cents per share, excluding the impact of the divestiture and restructuring programs.

We expect top line growth to be somewhat similar to the that growth we experienced in the first quarter.

We also want to confirm our full-year guidance with earnings expected to be in the range of $1.42 to $1.52 per share, prior to the impact of the divestiture and restructuring programs we announced last quarter.

As we indicated in last quarter's earnings conference call when we provided this guidance, we continue to believe that an improving economy will be needed for Tyco to achieve the high end the range.

We continue to see more positive signs in our end markets, and we are cautiously optimistic that this level of economic activity will continue.

We also want to confirm that we expect free cash flow to exceed the $3.2 billion level we achieved in '03.

As I said at the outset, we feel good about the first quarter, but we still have lots of work ahead of us.

We are gaining real momentum in Six Sigma and Strategic Sourcing, and I'm confident that these efforts will be helpful in driving stronger operating discipline across Tyco.

As I said, the economy seems to be strengthening, and that will be helpful.

All in all, we're doing the things we need to deliver consistent and stronger results over the balance of 2004 and beyond.

Operator, let's now open up the lines for questions.

Thank you.

[OPERATOR INSTRUCTIONS]

And our first question comes from Robert Cornell with Lehman Brothers.

Please go ahead.

Can you hear me?

Yeah, Bob.

Hi, Bob.

Yeah, hi.

Ed, you keep mentioning at various times the need to have the industrial, the non-res markets improve to make the high-end number.

Maybe you could flesh out sort of where you are there, and comment a little bit about trends in January after the quarter, just give us a little more visibility.

Yeah, one of the points that Dave Fitzpatrick made in his comments, Bob, I think is, at least, an important initial indicator is, we did see some turn in the order rate in Flow Control during last quarter, which is the first time we saw that in a couple of years.

So despite the fact that Flow Control on a sales basis was weaker in the quarter, the order rate was trending the other way and was up pretty nice in the quarter.

So I'd say there's, at least from that kind of industrial nonresidential construction standpoint, I think a key, at least initial indicator we're seeing there.

But I'd sure like to see another quarter of that trend in that area.

But, you know, by and large across our other segments, as you can tell, Electronics, Healthcare, even most of Fire & Security, except the SimplexGrinnell area, we did see pickup in the economy and strength across almost all those areas.

So the two weaker areas again, SimplexGrinnell and kind of the Flow Control end of Engineered Product, but again, may be an indicator that we're seeing a little bit of a turn there at this point in time.

I'd also point out, just kind of from a macro standpoint, and again I'd rather see it happen first, but if you look at reports out there, that other kind of third-party reports, it does look like non-residential construction has slowed down its decline.

It's very minimal during the last few months, and it appears that it's picking up continuously now through the next three to four quarters here and will be positive maybe in another quarter or so from a construction standpoint.

So if, again, if that macro piece holds, I think that's very good for those couple businesses that we're still seeing weakness from.

A follow-up question then would be, on the SimplexGrinnell business, I mean that's a business that was sort of jammed together by prior management.

I mean, you talk about getting costs out, but there was some thought maybe that needed to have some costs added to get Simplex back in the up-front design and bid business.

What's really going on there?

Bob, just one point.

We did just put in a new president of the business.

Our -- the last gentlemen is retiring, and we put in a new leader.

We are very high confidence in Dean Seavers out of our ADT who just started a few weeks ago.

We think there is cost to take out of the business, and as we highlighted, part of our restructuring activities are centered on that piece of the business.

What we've been experiencing there is, obviously, softness in the mechanical end of the business.

But I'd say more so than even that is we've had pretty significant price pressure because of the softness there.

So at least the initial actions we'll take is restructuring at our end, and then really look at the structure of the business and how we want to manage it going forward with Dean now in position.

So, we'll have more to report on that at the Fire & Security meeting in a few weeks.

Okay.

Thanks.

Thanks, Bob.

Thank you.

And we do have a question then from Jack Kelly with Goldman Sachs.

Please go ahead.

Good morning.

Dave, on the cash flow forecast you have, the $600 million increase in the first quarter, was done in spite of, as you mentioned, I guess a minus 280 from certain primary working capital items.

Is there any reason to think that over the balance of the year, that we wouldn't at least maintain that $600 million plus versus the 3.2 we did last year?

In other words, what could happen -- assuming your forecast comes in somewhere within your range, what would be major items that could go the other way, or is it a $600 million minimum increase kind of in the cards already?

Well, I think Jack, as we look at cash we need to keep in mind we continually state at least $3.2 billion in terms, you know, in terms of cash flow.

The one area, you know, that I guess I would point out in terms of your analysis is, you know, when we look at the cap ex side of things, you know, things were low, you know, again there was no constraining spending.

I think it was more just timing.

So if you look at net cap ex of just over, you know, $200 million in the quarter, $70 million in the dealer program, I think it would be a little bit unfair to annualize those numbers.

We're looking for spending more in the billion four to billion five range, slightly below depreciation.

But, you know, overall I'm not going to discount too much your issue.

As well as, you know, you'll recall a year ago we contributed a couple hundred million dollars to the pension plan, and that's something that we've had decent returns in the plans over the last 12 months.

But we'll be assessing what, if anything, we may want to do in terms of making some additional contributions to the pension plan.

Just as a follow-up in Electronics could you give us some color on the various end market as you did in the, you know, the December presentation?

In other words, computer, telecommunications, automotive, et cetera, in terms of any revenue gains there?

And just how the pricing might be -- might have been in those particular segments?

Jack, general speaking, the segments you just mentioned were all up nicely.

And I would say the order rate continues to trend nicely as we've entered this quarter.

The two weaknesses that we had in the business from a kind of book-to-bill standpoint was the Power Pack Battery business and the Power Systems business.

Again, I would think that maybe the power systems business, just looking at macro models going out, should pick up as the year goes along.

But we did not see that in the last quarter, so they were the two weak areas, but the rest of them trended pretty nice book-to-bill wise and continue to.

Okay.

Just in terms of percentage decline there, Ed, can you give us any sense of what they were off?

Well, the battery business, Jack, off of -- admittedly, a small base, was down, you know, significantly off of a base of only $36 million in the first quarter a year ago.

The Power Systems business, you know, declined, you know, about 5% year-over-year for the quarter.

And, you know, benefited about 2.5 points from F X, so stripping that out was down about 8%.

8%.

Okay, good.

Thank you.

Thanks, Jack.

Thanks.

We do have a question then from Don MacDougall with J.P. Morgan.

Please go ahead.

Good morning, everyone.

Hey, Don.

I had a couple of questions on Fire & Security.

First, on Europe.

Turn around there was a little quicker than I was expecting.

You're breaking even now, but break-even is not where you want to be in your businesses long-term.

What's the strategy in Europe for ADT?

And then secondly, on Worldwide Fire, 3% margins you noted you're pretty disappointed with that, and you think you can take it to double digits.

What kind of a time frame are we talking about, and what are the measures necessary to get there?

Don, I'll start, and maybe Dave you want to jump in and make a couple comments.

But, Don, just generally speaking, I felt very good about the performance in Fire & Security at kind of the top level when you roll it all up together.

We had nice sequential improvement in the business.

And really we improved in three of the four pieces that we kind of break out for you to look at, as you mentioned, Continental Europe, ADT, rest of the world ex Continental Europe, improved nicely.

And by the way, we've had very significant improvement in the Safety Product Manufacturing business, and that by the way is partially due to sales focus and a big piece of restructuring to make that one global manufacturing company.

As we mentioned before, that was really run as eight or ten different companies, so we're starting to get really good leverage there.

So our -- you'd mentioned the two key points, we've got to now focus significantly on SimplexGrinnell and [INAUDIBLE] continued improvement in Europe.

Just kind of from a strategy standpoint, you'll hear more about this again in a few weeks from Dave and his team, but now that we kind of have that business around break-even in Europe, the real issue is a sales focus on the commercial account business over there.

And it'sits significant change we made to the business model with this, you know, minimum $1500 down instead of the free give away.

And we think there's significant opportunities in many of these key metro market over there.

And I would say to you, and I think our new management team would say to you, we just were not focused efficiently with an internal sales force selling to the commercial accounts.

And they are very good accounts that we think they're going to be good quality account for us long-term, so that's how the focus is shifting.

But that, changed to an internally generated sales focus with the right talent, the training and all behind that, is going to take us some time.

So I'd say this year we'll have some improvement, but it's going to be an '05 event, I think, when you see margins really start growing better in that business in Europe.

On the SimplexGrinnell side, that's a little bit longer conversation, which we'll have with you in a few weeks, but I'm counting on the economy beginning to help us here at some point in that business.

Again, If I'm right on the macro models that we're looking at, that business should be turning here during this kind of time period.

And maybe we'll see a little bit less pricing pressure in that business on top of the restructuring actions we'll do, and we should be able to turn around the margin decline that we had.

But again, I would tell you this one's going to take us a longer period of time to turn the margins up to the double digits, as Dave talked.

It's not an '04 event that we'll be there.

My follow-up question may be for Dave on the restructuring side.

You noted $390 million this year.

You've done 50 in the first quarter.

How is that going to be apportioned over the next three-quarters, and kind of where is the emphasis?

And maybe update us on what the net benefits that you see from the restructuring, both this year and then in '05.

Okay.

I mean, as we look at the restructuring, we're holding to, you know, our $390 million kind of number, Don.

As we look at, you know, the programs, execution is proceeding in accordance with plan.

The accounting, as we know, is really more on kind of a pay as you go basis these days, so we will see some acceleration the next couple of quarters.

As we kind of dissect that $51 million, the majority of it was in the Plastics business during the quarter, so we'll see things ramping up, particularly in Fire & Security in quarters 2 and quarter 3.

With respect to the overall savings, we're still looking at, you know, approximately a nickel net headwind from this program in the five to six cent area for the year.

As we look at the benefits in terms of 2005, the costs go away, pretty much entirely.

There are some trailing expenses that move into the early part of 2005, you know, the savings, you know, ramp up.

So we could see, you know, a net benefit in next year's numbers, you know, savings, you know, in excess of costs in the kind of 150-ish range for the year.

Thank you.

Thanks, Don.

Thanks.

We do have a question then from Lee Cooperman with Omega Advisors.

Please go ahead.

Thank you very much.

I guess the question I'm trying to drill down on is, how do you view present profitability versus normalized?

Do you think you're now in a normalized level and you'll grow with the economy and economic activity, or do you still think from everything you're looking at that your profits are below what they ought to be on a normalized basis?

Lee, I mean, I think, you know, we've had one year to kind of start working our operational excellence programs, but I think as you know, we've really just, from my perspective, gained good traction in the last kind of two quarters.

And on a worldwide basis, I'd even say maybe in the last quarter or so, you know, as it's more broad around the company.

I just think from the cost base we're dealing with and the lack of integration in three of our five businesses, we have more leverage and opportunity to execute on over the next few years than maybe some of our other peers do, if I could say it that way.

And so I wouldn't quite say we're at normalized levels at this point in time.

We have a lot to reap on the operational side first before I would say we're there.

Gotcha.

And secondly, any new information or progress regarding litigation?

Really, nothing new to report, Lee.

Gotcha.

Okay, thanks.

Good luck, guys.

Thank you very much.

Thank you.

Thanks, Lee.

Thanks.

We do have a question then from Barry Bannister with Legg Mason.

Please go ahead.

Yes, just two clarifications regarding some earlier statements that were made.

One, I believe I heard you say that pricing was still down 8% or 9% in Electronics, little change from the preceding quarter.

Is that the case?

No, Barry, pricing in Electronics is down about kind of 5% to 5.5% in the quarter if you lump the whole business together.

And then there was a comment by Dave earlier that --

Which, by the way, Barry, I'll just kind of comment, because we talked about Electronics, it hasn't gotten really worse, but it hasn't gotten better with the pick up in the economy.

So we're still seeing about the same level of price pressure that we saw before the pick up began.

Just easier comparisons.

What about this accounts receivable inventory and accounts payable?

When you net it out, it looks like it'sits consuming $551 million of cash year-over-year, but I heard Dave say $280 million.

Could you clarify that?

Yeah.

About half of that's currency, Barry.

Half of that's currency --

Yeah.

-- when you were talking ex currency?

Correct.

Yeah.

You also noted that one of the things that helped us in the debt to capital, was the significant move in the euro.

You know, the CTA added about three-quarters of a billion dollars to our net worth for the period, so currency had a big impact pretty much throughout the balance sheet.

Okay.Thanks.

Thanks, Barry.

Thank you.

We do have a question then from John Inch with Merrill Lynch.

Please go ahead.

Yeah, thank you.

Good morning.

Question on the payables front.

It looks like, Dave, there was a material improvement in the year-over-year trend in accounts payable.

Could you talk about that, what potential progress you're making, particularly in Europe, and just maybe a little bit more color on payables?

Yeah.

I mean, I think it's safe to say we've seen the payables situation, you know, stabilize, number one.

And number two, looking at it in terms of, you know, within our overall supply management purchasing programs, I mean, the keys there are, you know, not only price, you know, but terms and quality.

So I think payables, number one, indeed stabilized, and we want to look at that in terms of opportunities going forward.

That holds for Europe, as well, for that problem?

Yes.

Okay.

I guess the follow-up is really in Electronics, and specifically I see in your Automotive and Automotive Pricing businesses, and maybe if you could just also, you know, talk about Electronics overall in the month of January what the trend has been.

John, I just want to leave that high level on the trend.

I don't want to get too much into the quarter end.

But let me just say that the order rate trend has continued at the nice pace that we saw the last couple of months before.

And it's been across the board, except as I mentioned earlier, from our Power Systems business.

But we're seeing pretty good lift everywhere consistent with what we saw kind of in November, December.

Okay.

Just lastly, could we get a -- overall what did raw materials cost in the quarter, and what did -- what's baked into your expectations for the year?

Well, I mean, as we look at in the Electronics business, you know, we had, you know, increases in copper, gold, and the like, you know, that cost us, you know, in the area of about 50 basis points.

So you look at that, it's about $14, $15 million for the quarter, and, you know, those trends, you know, we expect to continue in terms of, you know, commodity headwind there.

Looking at the Engineered Products business and specifically the electrical and metal products, we did see increases in steel costs.

We have seen some pricing, you know, improvement in that business, but year-over-year spreads were compressed.

But we do expect that to improve, you know, in the next couple of quarters.

In Plastics, on the resins side of things, we have seen some increases year-over-year.

On a quarter sequential basis not that much headwind, but with some of the continued increases in oil and natural gas, you know, resulting in resin price increases, you know, that's going to continue to be a challenge for Terry Sutter and the Plastics & Adhesives team throughout the remainder of the year.

Great.

Thank you.

Okay.

Thanks.

And we do have a question then from Phil Marriott with Arnhold Bleichroeder Please go ahead.

Thanks, good morning.

I have a couple.

With respect to your capital comments, you said that there are no constraining factors currently on capacity, but I was hoping you could provide a little more detail there in terms of relative capacity availability by segment.

Is there any differentiation?

Yeah, I think if you look, Phil, I mean, across the businesses, there is plenty of capacity in Electronics, in Engineered Products, in Plastics, and Adhesives, and the manufacturing side of Fire & Security, our Tyco Safety Products Business.

The one business where a number of the products, you know, may require some additional capacity is in our Healthcare business.

That's the one business where we may see some, you know, needs for capacity related capital in 2004.

I would add to that though, Phil, just as a point as we're looking at things as One Tyco, if we did need it in that area, in Healthcare as Dave mentioned, it would be capital equipment, because from a factory standpoint we're starting to look at it at the highest level and sharing of factories, including what we're just beginning in China, is a benefit we can take.

So for instance, if Healthcare wants to move into China in a bigger way, we have capacity in some of our Electronics components area there, and we will do some sharing of that as we go down the road.

Something Tyco probably wouldn't have done in the past, but we will going forward.

And then one sort of detail question.

I'm hoping you could provide revenues for TGN and Precision Interconnect for this quarter and last year, and hopefully also EBIT, just so we could get a quarterly comp to make our models a little purer.

Yeah, I mean, as we look at the TGN business, operating losses in the year-ago period, which are in corporate, were about -- I think it was $25, $26 million, and those declined approximately $10 million this quarter to the $15, $16 million range.

As we look at, you know, the Precision Interconnect business, quarterly revenues are in the area of $30 to $35 million.

And margins in that business, you know, are kind of in the mid teens.

Okay.

Thank you very much.

Thanks.

And we do have a question then from Michael Regan with CSFB.

Please go ahead.

Thanks.

Dave, given what seems to be growing cost pressure within Electronics, especially, and what feels like continued pressure on price, when do you expect, as you get more volume running through the factories, to be able to stem that price decline a little bit and perhaps even make up for some price in the commodity side of things?

Michael this is Ed.

I think -- one of the things we have to focus on as a company, again, we're getting good traction, but we're not where we want to be as on our sourcing programs, and that's why we're so focused on it.

We, as you've heard us say before, we have $15 billion of spend in this company, and a predominant part of it in our Electronics business, and we need more leverage there on our end to offset the price pressure.

And in my mind, as I go through it and look at the details, there's just no reason we can't continue to improve in that area, especially as we focus and leverage it as a One Tyco opportunity in our negotiations.

So, you know, just from a -- that standpoint, we've got to get more leverage there to offset the pressure we're seeing to get a net advantage out of it.

My personal opinion on the pricing pressure is I'm not sure it subsides and we're not planning that it subsides from the level it's running at.

I'd say historically it does in a pick up but I think with moving to China, and more manufacturing going there, and the competitive field we're in, I'm not taking that into account, and that's why we haven't modeled that pricing pressure does decline in the business.

If it does, that'll be a benefit to us.

Dave, you might just want to touch though on the leverage if the market -- if things pick up in the business.

Yeah.

I mean, I think, will we see most likely a full ramp next quarter, Michael, probably not.

But I'd like to see some steady progress in the areas you addressed over the next couple of quarters.

And should we think about hedging as a potential strategy to offset some of the commodity price pressure, or are you just going to sort of let it run as it is and try and offset it through better buying and perhaps some price?

At this stage we're kind of in that latter category from these levels.

We don't have much, you know, in the way of comparable hedge at these levels.

But it's something, obviously, we'll continually look at over time.

Okay.

Thank you.

Thanks.

Thanks, Michael

We'll plan to take two more questions, Operator.

Could we have the next one?

Certainly.

Our next one comes from David Bleustein with UBS.

Please go ahead.

Morning.

Ed, following up on Don's question, can you comment on your philosophy on restructuring programs?

And as you get into this one, are you finding more opportunities that could lead to another round of restructurings in 2005?

Yeah, I mean, David, I just -- philosophy, I think, we could probably talk for an hour on that.

But I think generally speaking we're looking for very good fast payback programs.

And I think what we've presented in this call-out restructuring, we have that in these programs.

We know there's other opportunity for restructuring in the business.

By the way, there's clearly more opportunity in Engineered Products, just because of the way we're structured.

And I know there is in Fire & Security, but our leaning and inclination is not to have another call-out restructuring as we either exit this year or enter next year.

But we will just run that through our normal operations as we move forward, and we continue to identify them, we'll continue to take them as we go.

And by the way, we have been doing that in our Electronics business and in our Healthcare business, presently

Terrific.

Thanks.

Thank you.

And then our last question comes from Brian Langenberg with Langenberg & Company.

Please go ahead.

Look at Healthcare very quickly.

Had some really nice margins there.

If you were to take the year-over-year improvement and put it into, say, three buckets, mix, currency, and operational improvement, could we have some detail there?

Let me just mention one, because I'm real pleased with the focus, and maybe walk through the others here with you.

One of the things, Brian, you saw in Healthcare this quarter, we mentioned this at the investor meeting at Healthcare is, we did see a nice turn in our international business during the quarter.

As you know, last year we were actually minus 1% on the revenue line, and we had extremely good pick up across the board in the business.

So I think we're on track, and it looks like it's tracking very well in the second quarter.

I think most of the issues we were dealing with that we talked about in that business last year are behind us.

I wouldn't say they're 100%.

We're still very focused on it, but pretty much there, and that progress is back in place.

Okay.

Do you want to highlight this?

Well, I guess in terms of the mix, I mean, if you look at the, you know, the overall improvement in Healthcare, you know, a little over a quarter of it, Brian, was currency.

Mm-hmm.

Another significant piece I'd put in the category of volume and mix, with good margins outside the U.S. and the very good organic sales growth internationally.

And I guess the remainder I'd kind of put in the productivity operations side in terms of continued improvements, largely in North America.

So if we said a quarter, a half, and a quarter, that's not too far off?

It's probably close.

That's ballpark.

Okay.

Thank you.

Okay.

Ladies and gentlemen, thanks for joining us today.

Just as a reminder, as Dave Fitzpatrick mentioned, we have a Fire & Security investor meeting coming up on February the 18th, followed about a week later on the 26th by a site visit to Jacksonville, Florida, where we have two Fire & Security facilities, a monitoring location, as well as one of our marketing centers.

So we look forward to seeing you at either or both of those meetings and being in touch with you over the phone over the ensuing few days or weeks.

Thanks very much for joining us.

Thank you.

And ladies and gentlemen, this conference will be available for replay starting today, Tuesday, February 3 at 3:30 p.m.

Eastern time.

It will be available through Tuesday, February 10th at midnight Eastern time.

And you may access the AT&T Executive Playback Service from within the United States or Canada by dialing 1-800-475-6701, or from outside the U.S. or Canada, please dial 320-365-3844, and then enter the access code of 716127.

Those numbers once again are, 1-800-475-6701 from within the U.S. or Canada, or from outside the U.S. or Canada, please dial 320-365-3844, and then enter the access code of 716127.

And that does conclude our conference for today.

Thank you for your participation and for using AT&T's Executive Teleconference.

You may now disconnect.