江森自控 (JCI) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

And welcome to the Tyco report fourth quarter earnings results.

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

Later, we will open up the lines for question and answers.

If you should require assistance during this call, please depress star, then zero.

As a reminder, this conference will be recorded.

At this time, I'd like to turn the conference over to your host, Ed Arditte.

Please go ahead.

Good morning.

And thanks for joining our conference call to discuss Tyco's fourth quarter results for fiscal year 2004 and the press release issued earlier this morning.

With me on today's call are Tyco's Chairman and Chief Executive Officer, Ed Breen, 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.

We ask you to look at today's press release and to read through the forward-looking cautionary informational statements that we've included there.

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.

I also want to point out that with respect to divestitures we are now using discontinued operations accounting for the majority of units that have not been sold and that's as measured by revenue.

I also want to call your attention to a package of schedules that we put up on our Web site this morning concurrent with the press release.

These schedules are designed to assist you in understanding the impacts of divestitures and restructuring activities on segment and on total Tyco performance.

These schedules provide reconciliations of non-GAAP numbers at the segment level.

In reviewing our operational performance with you this morning, we will also present certain financial information for businesses below the segment level in order to provide additional visibility into the particular results at the sub-segment level.

The press release and all related tables and schedules can be found on the Investor Relations portion of our Web site at Tyco.com.

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

Thanks, Ed.

And good morning to everyone listening in.

I'm pleased to report to you that Tyco had a solid fourth quarter with continued strong earnings and cash flow.

This was a good finish to a year of significant progress at Tyco, and I want to take a moment right at the outset of this call to thank our employees for their hard work and commitment to the operating disciplines that we're implementing at Tyco.

Our earnings per share were 22 cents on a GAAP basis, which included 23 cents per share of net charges, related to our restructuring and divestiture programs, and charges for the early retirement of debt.

Free cash flow was 1.4 billion after deducting approximately 400 million of voluntary pension contributions.

Our full-year free cash flow was 4.8 billion, after approximately 575 million of voluntary pension contributions.

Operationally, we had good performance in the quarter which positioned us well for 2005.

We were pleased with the progress we made in a number of areas, and let me run down some of those highlights in the quarter for you.

First, we had strong organic revenue growth of just over 7% for the total Company.

In Healthcare, we saw organic revenue growth rebound to the 5% level, and we are continuing to increase our spending on future growth.

In Fire and Security, we had the best operating performance of the year in the fourth quarter.

Adjusting for restructuring and divestiture charges, our operating margin was 10.3%.

In Electronics, our components operating margin improved to 16.2%, despite headwind from higher commodity prices.

Engineered Products had its strongest revenue quarter of the year and we are seeing signs of improvement in most of our end markets.

Our free cash flow generation continued to be a real strength with 1.8 billion in the quarter, and 5.4 billion for the full year, both before pension contributions.

Our balance sheet continued to improve at a rapid rate, and we also took a variety of proactive steps to strength it for the long-term.

Next, we concluded the restructuring program announced last year, finishing ahead of schedule, and we will generate a higher level of projected annual savings from these efforts.

In our divestiture program, we have exited or contracted to sell businesses with 1.5 billion of revenue, bringing the program closer to a conclusion.

We exceeded our full-year savings targets for our Six Sigma and strategic sourcing programs.

In addition, we made meaningful progress in our working capital efforts in the quarter with working capital generating 166 million in cash.

And finally, earlier this morning, we issued a press release announcing agreement to sell the TGN for 130 million subject to regulatory approvals.

This is another important milestone in our plan to divest non-core businesses.

Let me elaborate on a few of these items, and Dave will comment on a few as well when he reviews the segment results.

First, we're pleased were the progress we made over the course of the year and in the fourth quarter in our operational intensity programs.

Our Six Sigma and strategic sourcing efforts each exceeded their 2004 savings targets.

Our net Six Sigma savings came in at 270 million, exceeding our target of 215 million, and our sourcing savings net of cost increases were 316 million versus our initial target of 300 million.

We also made substantial progress on our real estate footprint reduction program, reducing our Company's square footage by approximately 5%, or 6.7 million square feet, and eliminating 390 facilities.

These initiatives have become an integral part of how we operate the Company, and I am very pleased with our progress.

Improving our working capital has also been a big area of focus for us, and we made meaningful progress in '04.

Our primary working capital improved by eight days year-over-year, driven by a 10-day improvement in inventories and a five-day improvement in receivables.

In total, our efforts freed up over 900 million in cash this year, and we are targeting continued improvement in '05.

In our restructuring program, we accelerated the pace of our activities and completed the program we began in the fourth quarter of '03 ahead of schedule.

For the total program, we spent 417 million, and will generate 285 million of annualized savings, which is 55 million higher than we had planned.

We actually added some additional projects to the program in the fourth quarter, as our execution improved, and this adds to our projected savings.

While restructuring activity will continue to be an ongoing part of our operational focus at Tyco, we would expect to absorb these charges in our earnings going forward.

In our divestiture program, if I exclude the TGN, we made good progress in the fourth quarter, and in the month of October.

As of today, we have either exited or have contracted to sell businesses representing about 70% of the $2 billion of revenue we identified as being for sale.

In addition, we expect to complete the remaining transactions over the next several quarters.

At this point, the transactions completed or under contract will generate proceeds of approximately $410 million.

Finally, we made very good progress in the fourth quarter in our efforts to continue to strengthen Tyco's balance sheet.

We were pleased with the upgrade to BBB+ that we received from Fitch and strength in our balance sheet will continue to be a near-term priority for the Company.

The rapid deleveraging that we've been able to achieve is due to the strength and quality of our cash flow.

During the quarter, we took the following actions and used just over 1.5 billion of excess cash.

First, we voluntarily contributed approximately 400 million to our pension plans, bringing the full year voluntary contribution to approximately 575 million.

Second, we reduced our accounts receivable securitization programs by $396 million.

And third, and perhaps most importantly, we began the process of retiring some of the 4.5 billion of convertible bonds we issued in January of '03.

We used 750 million of cash in the quarter to retire 517 million of face value convertible bonds.

This is 250 million more than we communicated in our September 8 press release.

This is a great use of cash for our shareholders.

It reduces debt.

And it reduces our diluted shares outstanding.

Going forward, we intend to continue using some of our excess cash to repurchase these bonds, but only at prices that are attractive to Tyco.

Let me conclude before I turn it over to Dave in just overall, I thought our fourth quarter was just another solid great quarter of progress for the Company.

Our operational results across the board in all our businesses were right on mark.

We had, I have to say I think strong and spectacular free cash flow this quarter.

We completed our restructuring, our divestiture program, as you can tell was significantly accelerated and is coming to a conclusion soon.

And probably most importantly, we continue to take just excellent measures to improve and strengthen the balance sheet.

And again, both reducing debt during the quarter and the number of shares outstanding in the Company.

Now let me turn the call over to Dave for an operational review.

Thanks, Ed.

And good morning, everyone.

I'll jump right into the segment results starting with Fire and Security.

At Fire and Security revenue grew 4% to 2.9 billion, with 2% organic revenue growth.

Operating income was $159 million, which included $140 million of net charges, related to restructuring and divestitures.

The operating margin was 5.5% on a GAAP basis, or 10.3% adjusted for the net impact of restructuring and divestitures.

Looking at our operating performance by business unit, without the impact of restructuring charges and divestitures in the Fire and Security segment, Worldwide Security, excluding continental Europe, which represented 49% of Fire and Security segment revenue, grew 3% organically in the quarter, primarily driven by stronger commercial sales.

The operating margin in the quarter improved approximately 100 basis points to over 16%, led by improved performance in ADT North America.

Turning to continental European Security, revenue which represented 6% of segment revenue, was flat during the quarter, but we had a small operating profit in this business in the quarter.

The Worldwide Fire business, which represented 33% of segment revenue, was also flat organically in the quarter.

Modest growth in North America was offset by lower sales in Europe.

Operating margin improved year-over-year to the mid 5% range, primarily driven by cost improvements from our restructuring and operational intensity activities.

Finally, Safety Products, which accounts for 12% of segment revenue, generated strong organic revenue growth of 9%, with strength in breathing systems, video surveillance, and access control equipment.

The operating margin in this business was over 20% in the quarter.

Our trailing 12-month Security disconnect rate improved to 15.1% in the quarter, versus 15.8% last quarter, as the account cleanup activity and last year's fourth quarter fell out of the trailing 12-month calculation.

While we believe we have seen the peak in the total disconnect rate, we could see a modest increase over the next several quarters in view of the heavy dealer account activity the Company experienced in 2002.

Turning now to Electronics, revenue increased 15% year-over-year to 3.1 billion, with very strong organic revenue growth of 12%.

In our Connector and Cable Assembly business, organic growth was 15%, with solid growth in the automotive, communications, computer, consumer electronics, and industrial end markets.

Growth in these areas was partially offset by continued weakness in sales of power systems products in North America and commercial electrical services, the latter of which was divested late in our fourth quarter.

Operating income in Electronics was $481 million in the quarter, and the operating margin was 15.6%.

A nice improvement both year-over-year and sequentially.

Within the electronic components businesses, we made good progress with margins improving to 16.2% in the quarter, the highest level of the year, driven by higher volume and cost improvements.

While we were pleased with our operational performance in the quarter, we are not seeing order activity at the level we saw in the spring and early summer.

While orders did improve in September when compared to August, our strong sales in the quarter combined with slowing order rates, resulted in a book to bill ratio that finished the quarter at .96.

Based on conversations with our major customers, we believe we are in the midst of an inventory adjustment and not a cyclical downturn.

We are expecting organic revenue growth in Electronics to moderate to the 3 to 5% level in our fiscal first quarter.

Our full-year forecast is for 5 to 7% organic revenue growth which assumes an improvement in order trends as the year progresses.

Turning to Healthcare, we had a nice quarter with improved organic revenue growth and continued profit and margin strength.

On the top line, revenue grew 10%, and organic growth was 5%, with stronger growth in our international operations, imaging, and our medical division.

Operating income in Healthcare increased to $631 million, and the operating margin was 26.4% in the quarter.

Income in the operating margin were adversely impacted by a $29 million charge for a previously disclosed legal issue.

Operationally, the strong profit performance was driven by our international, imaging and surgical divisions.

We continued to invest in building a solid growth foundation in Healthcare with higher investment in sales and marketing, as well as R&D.

R&D grew 32% in the quarter, to $61 million.

As we look to 2005, we expect top-line growth to be in the 5 to 7% range, but could be lower than that in the first quarter due to tougher comparisons in several of our international markets as well as our respiratory business.

Turning to Engineered Products, we finished 2004 with our strongest revenue quarter of the year, and better profitability as well.

Revenue grew almost 15% organically in the quarter, with higher metal prices contributing approximately 10 points of growth.

Operating income of $158 million was reduced by $38 million of net restructuring and divestiture charges, and our margins prior to these charges were over 12%.

The improvement in end market conditions we have seen for the last few quarters continued in the fourth quarter.

We experienced improved order rates and a growing backlog and flow control, and better pricing in certain markets.

We are also pleased with the additional restructuring activity we were able to execute in the quarter, which will clearly help as we move into 2005.

We are anticipating a strong first quarter with double-digit organic revenue growth.

In Plastics and Adhesives, revenue increased about 4% on both a reported and organic basis, with an 8% increase in the Plastics business unit offset by weakness in the A&E plastic hanger business.

Growth in the Plastics business was primarily due to the partial pass-through of higher resin costs.

Operating income was $3 million in the quarter, which included $17 million of net restructuring charges.

Higher resin prices, which cost us over 120 basis points of margin in 2004, will likely be an even bigger issue for us to overcome in 2005, given the recently announced price increases in the polyethylene market.

We will continue to pursue price increases to offset as much of the increased raw material costs as possible.

Before I turn it back over to Ed, I also wanted to update you on a number of other financial matters.

Our cash flow and resulting debt reduction was outstanding this quarter.

We finished with gross debt of $16.7 billion, and net debt of $12.3 billion.

Both figures include approximately $4 billion of converts, that are currently in the money.

Remember to the extent that we repurchased the converts we are also reducing our diluted share count, along with reducing our debt base.

Our gross debt to capital improved by almost 9 full percentage points year-over-year to 35.6%.

Our tax rate was 30.7% for the quarter.

The tax rate was higher primarily due to charges related to the early debt retirement which are non-tax deductible.

We also had some favorable tax items which reduced our tax rate by approximately 3 percentage points in the quarter.

Capital expenditures for the year totaled $1 billion, compared to $1.3 billion in 2003.

We have plans to increase capital spending by 3 to $400 million in 2005, primarily to fund growth and cost reduction initiatives.

Finally, we are planning to change our accounting calendar to a 4-5-4 format so all of our business units are closing on the same day.

This change will improve our controls going forward as we continue to assess our control environment, and our Sarbanes-Oxley Section 404 implementation.

The impact of this change will mostly impact Tyco Electronics in the first quarter by moving the last two weeks of December, a period of low revenue and profitability, in view of significant holiday period plant shut downs, and this will move those revenues from the, I'm sorry, from the second quarter to the first quarter of our fiscal year.

This movement, we estimate, will shift approximately 2 cents of EPS from the first quarter to the second quarter of fiscal 2005.

Now, let me turn the call back to Ed.

Thanks, Dave.

Let's turn first to our guidance for 2005.

Based on the operational progress we made in '04, and our plans for '05, we expect earnings per share from continuing operations for the full year to be in the range of $1.88 per share to $1.98 per share, excluding the impact of any divestitures and any charges associated with early retirement of debt.

We are assuming that the major economies that we operate in continue to perform as they did in '04, and that the U.S. dollar remains at current levels vis-a-vis the euro and the Japanese yen.

We're also assuming the commodity prices, other than resin, do not increase materially from current levels.

Our estimate is that cash from continuing operating activities will be approximately 7 billion, and free cash flow from continuing operations will exceed 5 billion for the full year 2005.

The cash flow guidance excludes any additional voluntary pension contributions.

As we look to the first quarter, we are expecting earnings per share from continuing operations to be 40 to 42 cents per share, before the impact of any divestiture activity or any charges from early retirement of debt.

Remember, as Dave mentioned, our calendar change will shift approximately 2 cents of EPS out of the first quarter and into the second quarter.

We also wanted to provide you with our thoughts for 2005, at the segment level, from both an organic revenue growth, and operating margin perspective.

Again, these estimates exclude the impact of any divestiture activity.

First in Fire and Security, we see organic growth in the 3 to 4% area, with operating margins above 12% for the full year.

The revenue growth will be modestly better than 2004, with better margins due to an improving cost structure and the benefit of eliminating the divested and discontinued operations.

In Electronics, we are forecasting top-line organic growth in 5 to 7% range, with operating margins in the 16.5 to 17.5% range.

We expect margin progress to continue in '05, and are clearly keeping a watchful eye on copper and gold prices which did cost us 80 basis points of margin in 2004.

We are planning on 5 to 7% organic growth in Healthcare, with an operating margin above 26%.

While we see a meaningful increase in our R&D spending in 2005, we expect savings from operational intensity initiatives and cost improvements will more than offset this increase.

In Engineered Products, we expect organic growth of 4 to 6% in 2005, with the operating margin in the 10 to 11% range.

We expect to make margin progress in three of our four businesses, but do not expect to achieve the margins we experienced in our electrical and metal business, which was heavily influenced by the steel market to match the '04 levels.

Finally, Plastics and Adhesives will see organic growth in the 3 to 5% range, but most of this will be pricing pass-through due to higher resin costs.

We expect to see margins in the 6 to 8% range, due to significant headwind from resin price increases that have recently been implemented and announced.

From an overall Tyco perspective, revenue performance at the higher end of the ranges will be somewhat dependent on economic activity and again, these estimates exclude foreign currency translation.

This type of organic revenue growth at the segment level translates into 4 to 6% organic top-line growth for Tyco overall.

At the margin line, this level of performance by our business segments would result in a 100 to 200 basis point improvement in Tyco's operating margin to the 15 to 16% range for the full year.

I also want to update you on our current thinking about the 2006 segment margin targets we established in March, 2003.

Let me quickly review these with you on segment-by-segment basis.

First in our Fire and Security business, we continue to be comfortable with the 14 to 16% target for operating margins and believe we have further expansion opportunities beyond 2006.

In Healthcare, we believe we can exceed the original 25%-plus target, and now see 2006 at 26% plus, even with our plans to continue to increase R&D as a percentage of sales.

Next, we are changing our target for Electronics from 20% to a range of 18 to 19%.

This is mostly due to higher copper and gold prices as well as the continued weakness we are experiencing in our telecom-related businesses including power systems.

In Engineered Products, as we mentioned on the last phone call, last quarter, the shift in 2004 to gross revenue from net revenue in our infrastructure business has approximately 150 basis point negative impact on our segment margins, but no impact on our actual profits.

As a result, we are adjusting our target to 12 to 15% from the previous 14 to 17% range.

Finally, in Plastics and Adhesives we are reducing our 2006 margin target to the range of 10 to 12%, mostly due to the continued pressure of higher resin prices.

Before we open it up to questions, I also want to say a few words about our plans for maximizing the use of our excess cash.

First, our top priority is to make sure that we are appropriately funding all good growth and cost reduction opportunities within the businesses.

I want to assure all of you that we are in fact doing this and are still generating high levels of free cash flow.

As a result, we strongly feel that Tyco has the cash generation capability to continue to strengthen the balance sheet, and to return capital to our shareholders.

Debt reduction remains a priority for the next two quarters, including the retirement of approximately $1 billion of scheduled maturities in November.

On the acquisition front, we are getting closer to the point where we'd be comfortable in making an acquisition, but we will not consider an acquisition until at least the second half of 2005.

Healthcare and Electronics are the two segments where we are best prepared to integrate an acquisition, and we want to stress that our targets will be modest in size, and you should not expect to see a series of transactions from us.

An acquisition will need to pass through a very disciplined screening process for both business fit as well as financial logic.

Finally, we will address the dividend in 2005.

While I can't be specific at this point as to either timing or amount, rest assured that it is very much a part of our strategy as we think about how to maximize the use of our cash flow.

Let me just conclude by saying that overall, 2004 was a very good, very solid year for Tyco.

We finished the year at even a stronger position than we envisioned at the start of the year from an earnings, cash flow, and balance sheet perspective.

I think all of this and our continued solid execution positions us well for a good year in 2005.

Thanks for joining our call this morning.

And operator, we would be happy to open up for any questions we have.

Thank you.

Ladies and gentlemen, we will now conduct a question-and-answer session [OPERATOR INSTRUCTIONS].

And our first question today comes from the line of Jack Kelly from Goldman Sachs.

Please go ahead.

Good morning, Ed.

Hi, Jack.

In terms of divestitures, you mentioned you're three quarters of the way through the old program.

Can you give us a sense of, you know, if there's going to be kind of a second phase of bigger companies because typically what you've done so far is kind of a group of a smaller companies, so I guess the issue is, is there another round of divestitures coming over the next year?

Secondly, with regard to the timing of the dividend, although you said you didn't want to get into it, it seemed like in the past you've talked about a debt level of around 10 billion as your targeted level, given the free cash flow of 5 billion this year, that would suggest you're getting there sometime around the March time frame.

Is that a reasonable way to kind of look at the dividend increase?

Jack, on the divestiture front, clearly, we want to finish off the businesses we're presently working on and I think you can see from the quarter we had, we're getting very close.

I mean the activity, it takes a few quarters to bring these things to closure and we had a huge fourth quarter and October on the divestiture front.

So I'm thinking the next two, maybe three quarters, we finish that program off.

Look, we will continue to look at some other businesses to potentially divest.

If I were to put a time frame on, it I will tell that you we won't be seriously looking at that until next spring to early summer, but we will continue to do that assessment to make sure we're creating value in all businesses and we don't have any value destroyers in there, and if we do, or we don't think we can improve them substantially, we will make a move there.

But that would be kind of the time frame we would kind of intentionally look at that again.

On the dividend front, let me go back maybe to the comments I made in our prepared remarks and say that, you know, by and large, we will take another two quarters of reducing debt, and I think you can see again, you just extrapolated the numbers out.

We will comfortably be down in the low-end of our range of 10 to 12 billion that we said we would get to.

So I would say that kind of gives you I think a time frame, and I would just clarify, debt reduction in the next two quarters will not be the only thing we will do.

It's just the most important thing we'll do with the majority of our cash.

Just finally on the use of cash, you're buying back stock to the extent you buy the converts, any thoughts along with increasing the dividend of a stock repurchase over the next six months?

Is it on the table?

Jack, I look at that right now and in a way it's kind of a nice situation that we have that converts the buy back.

It is a share repurchase program, and we're taking shares out of the marketplace of some significance.

If you note with the additional repurchases we did since that September press release we put out, we're at 22.7 million shares that we repurchased.

It's about 1% of our share base in about a 60-day period there when we were in the market.

So the fact that we have that ability, I think we will lean towards additional convert repurchase.

Again, if we can do it at the right prices, otherwise we won't make the move.

And we'll be able to address the issue as we go down the road with a combination of the dividend and share repurchase program but we'll throttle that based on where we are on being able to buy back converts.

Good.

Thanks.

But Jack, let me just say overall, look, I think the luxury we're going to have, if we keep running this Company the way we are, is we have the luxury of doing all of the above.

We're going to fund our organic growth.

We can do a nice dividend.

You know, we can buy back shares, whether it is convert or straight shares.

And we can do some acquisitions and we're going to have that flexibility.

Good.

Thanks.

Thank you.

And our next question comes from Lehman Brothers from the line of Bob Cornell.

Please go ahead.

Good morning, everybody.

Hey, Bob.

It does look like a super solid quarter.

With regard to the margin targets one of the questions I get is whether your targets are full year, '06 targets or margin targets that will be achieved during the year?

Bob, they're full year.

And with regard to the Electronics business, could you give us just a little more color on what you're seeing as the, you know, the order weakness and the backlog being down and all turning into, I mean, all as a result of an inventory, you know, issue in the channel?

What's going on there?

Give us a little color.

Bob, let me give you kind of from a customer perspective a second and then maybe go back to some of the numbers to put it into context.

You know, we're obviously talking to our customers across the business, and you know, this is a product portfolio we sell into just about every industry.

You know, as you kind of look at the early summer and through July, I mean the order rates were up in the mid-teens, you know, you remember our July was 16%, and you know, it's just not sustainable at those levels.

You know, so as we've been talking to customers, you know, they were ordering at higher rates, the business is picking up, and our impression is we're going to settle in as we said around a 5 to 7% growth rate this year which means there's inventory adjustment going on in the pipeline with our customers, and that's what they're telling us as we talk to them, and we monitor kind of the end markets that they're in.

If you kind of look at the sequence of how the order rate's has been going, you know, July was up 16%, August was up 5, then September was slightly negative at about 3 to 4%, but then October, rebounded a little bit to, it was flat with the prior year.

So if kind of looks like we hit the trough of that in October flattened out.

I would also point, though, we look at the daily orderings in the business, and our September order rate did pick up from August.

Now I don't want to overstate that because August can be a slower month because of some, you know, seasonality, but September did pick up from a daily order rate, bookings rate, and October continued at that same rate as September.

So, maybe just to give you a few more numbers in there.

And then, you know, I'd also point out, that you know, have you industry analysts and I'd even mention Bishop because they do a lot of work on it, they have the growth rate in these businesses next year being in the high single digits so I think we're being conservative saying our first quarter will be 3 to 5, the full year will be 5 to 7, and I'd point out one industry specifically because we have a higher mix than our competitors, that's the auto industry, and look, projections this year look like auto is at least flat, maybe up a couple of percentage points, and quite frankly, flat would be fine with us, because the increased content of 6 to 8% we get each year, you know, is exactly in our sweet spot, so you can kind of go through the different pieces, it feels like an inventory adjustment period we're going through, I don't know if we're 100% through it, but it feels like we're about there.

One final question.

On all of the divestitures you guys have not mentioned the expected loss of 250 to 750 recently, I mean you're almost through and you're nowhere near that kind of loss content.

Are there a couple of big ones coming or what's an update?

No, there are no big ones coming.

Bob, I'd also point out that the very back of the press release we've included a schedule for you that summarizes just where we are on a program-to-date basis.

We actually have had some development over the last 24 hours.

You see the TGN announcement we put out this morning.

That's not included in the summary, the summary excludes that.

But we have had some development where a transaction that was under contract has moved into the closed category just over the last day or so.

So if you take a look at that schedule just to get a summary of where we are.

And Bob, that takes the proceeds from sales, the number I mentioned in my remarks was 410 million of proceeds on about 70% of the revenue sold, or under contract, and you add to that the 130 million for the TGN.

Okay.

Thanks, guys.

Thanks, Bob.

Thank you.

And our next question comes from the line of John Inch from Merrill Lynch.

Please go ahead.

Thank you.

Good morning.

Hey, John.

Just on the free cash flow front, you guys did over 5.4 billion ex-pension, your guidance was 4.7 and you're now guiding to this coming here to, I think, the phrase is in excess of the 5 billion.

Is there something about this year versus, this coming year versus '04 that would cause that number to be down a little bit?

Yeah, look, we had a great close of the year, and did get the 5.4 as you mentioned ex-pension.

Let me just say overall, no, there is no huge anomaly coming.

No change in how we're running the business per se.

So let me just say that and we're just starting out the year, you know, it's the first inning of the year, but let me add there are a couple of items we are looking at spending at higher levels, Dave had mentioned I think one of them but Cap Ex is going to be up 3 to 400 million year-over-year.

We're going to fund some organic growth programs and some restructuring opportunities that look like they have very good pay back for us.

We will increase some of the dealer spend in the business, probably a little bit more on the cash tax side that will go out the door there.

But so you take those kind of in a lump and that will go up.

However, with our increased earnings and all that, there are no other strange anomalies there.

Let me leave it that way.

Ed would you consider, I mean should we be thinking as investors of 5 billion as a base run rate for Tyco?

Yeah, if you notice, I think the way we worded it, it will be at least $5 billion.

So I would say yes, that's maybe a nice way to say it.

That's the base.

I think you mentioned your footprint manufacturing-wise was down about 5%.

Where, as you look out at your manufacturing footprint and the changes that have to continue to be made to move production to Asia and so forth, I mean how much more do we have to go?

Is there another 5% or a lot more that's embedded within existing ops, kind of excluding the prospects of further specific business divestitures?

Yeah, John, there's probably, I don't know if we'll get that much done this year.

I doubt we will.

But there's at least that much more opportunity in the Company that we did this year.

You know, look, we will continue to do restructuring, every business, it will not be a call-out restructuring, so we'll continue to make these moves and Dave Fitzpatrick and I have a very detailed lineup of the actions we're going to sequentially take throughout the year, with the businesses, you know, as we go through the year.

One of our bigger opportunities to continue on rationalization of the footprint is Engineered Products.

You might know, we did a little bit of restructuring in that business that happened in the fourth quarter of this year, but it wasn't a big participant in '04 in that activity, and we're taking a much closer look at some opportunities that we have there in '05 going forward.

So again, you'll see a good pace from us, probably not quite at that level, though.

But as you go through our footprint, back to those numbers, you know, it's hard to extrapolate that back to exact earnings, but when you can close 390 facilities, you can imagine the logistics improvement it gives us, and less inventory in the pipeline, it really fixes a lot of issues for us.

And then just lastly, what sort of incremental in '05, incremental Six Sigma benefits and then purchasing saving benefits are embedded in your forecast range?

John, as we look at '05, a little bit better than we experienced in '04.

We're looking at about $300 million of savings in each, or about $600 million in total.

On top of what we've realized already?

Correct.

Thank you.

Thanks, John.

And our next question comes from the line of Stephen Volkmann from Morgan Stanley.

Please go ahead.

Hey, good morning.

Hey, Steve.

In Fire and Security, I'm kind of curious if you can give us an update on, you know, what's going on with the sales force change out there and the outlook for '05?

I thought we had some new product that we were going to put through the new sales force and I guess it struck me that the 3 to 4% seemed a little light given that.

Can you just comment on that?

Yeah, Steve, let me just point out, you know, as we enter the year on Fire and Security side, if I were to put back the restructuring savings into the business, because they had significant restructuring during the year, we're actually exiting the year at around a 11.5% EBIT rate.

So I just put in perspective, you know, I said ex-restructuring and savings in my prepared remarks was about 10.3%, which is significant improvement during the year, but if you actually put the savings back in you're actually at around 11.5 so you know, I just stress that because our goal right now in that business has been to get the right business model, get the footprint fixed appropriately, and get significant margin expansion, and I think you can see we're getting that, and entering, I think, '05 at a pretty good clip.

Obviously with a lot of room upside that we need to execute on as a business.

You know, if you kind of transition through '05 on that growth rate where we said 3 to 4%, I think it's pretty consistent with what I've been saying all along.

You'll start to see some new product introductions about midway through '05, would be about the time frame I think you'll see that from us, so the first half of the year will be a little lower organically, we expect organic to build in this business as we move throughout the year.

We also are seeing some, again, some indicators that the buyer side of our business in North America has seen a little bit of a pickup, but as Dave had mentioned in his comments, internationally, that was kind of moderated by we're not seeing it yet.

But hopefully again, on the commercial construction side we'll start to see some just lift in the economy there, which would help that growth rate.

Again, we're not counting on much with the 3 to 4% but obviously that could happen also.

On your question on the sales force piece, and Steve, that's really the key to this, to our timing.

We have about 315 to 320 sales people.

We are still actively trying to recruit mostly to put into two areas.

By and large to put into the residential sales force internal to Tyco.

And secondly into the resale sales group that we are forming in the Company.

So that just kind of gives you a perspective on how much more we have to go.

We are tracking these new sales people kind of weekly against their hit rate on closing sales, and it's pretty fascinating to look at it.

You kind of start to see an uptake, after they're with us about six months and by the time they hit about the one-year point, the acceleration in their close rates really continues to ratchet up, and that's the process we're going through right now.

So maybe I just finally conclude by saying we're kind of getting the last 20% of the sales force in place.

We think we'll be about the levels we want to be at.

That will help organically.

And then that sales group's kind of coming through that learning pipeline and you'll see us as we're into mid next year kind of worked our way through that.

Okay.

Great.

That's helpful.

And just kind of a quick follow-up on Jack's earlier question.

You mentioned the dividend is kind of an H2 '05 event, but you didn't talk really about share repurchase.

Should we assume that the comments apply to that as well or could that be nearer-term, and I'm talking about sort of a straight share repurchase?

Yeah, Steve, I don't know the answer to that yet because we have the converts out there.

Let me maybe say it this way.

If we didn't have the converts you'd probably be hearing me say a dividend at about the same time as we would do a pure share repurchase program, but the fact that we have that right now, I'd like to hold my comments.

And you're confident that you can get a hold of those at reasonable prices?

We would hope so.

If we can't, we won't do it and you'll probably hear news from us on the other front, on a share repurchase program.

Thank you very much.

Thanks, Steve.

Thank you.

And our next question comes from JP Morgan from the line of Steve Tusa.

Please go ahead.

Good morning.

Hey, Steve.

Just a question on first just on this accounting change, what kind of revenue impact does that have for us specifically the Electronics business?

I know you mentioned EPS impact.

Yeah, what we're looking at kind of Q1 to Q2 is about 160 million, 150 to 175 million, kind of in that range.

That pushes from 1Q to 2Q?

Correct.

So is your guidance for the first quarter growth, that includes that 150 million?

In terms of --

The organic growth.

No, the organic, that is out of the organic area.

It's purely on an organic basis, Steve and not adjusting for the calendar change.

Okay.

Just sticking with the Electronics, the growth in China and trends there, you know, you guys kind of talk about, I guess, a 20% kicker over the next few years, what are you thinking about that for this year, and what are you seeing over there?

Steve, I would say no change.

China's feeling good.

And we expect good growth rates to continue there.

What's the revenue base there now?

It's about a billion three on the Electronics side.

One area we are watching is automotive.

You know, we think what's happening is kind of a near-term phenomenon with respect to the decision to raise interest rates.

But that's something that we think long-term should be very, very strong.

And anything we're looking at near-term is we think a matter of just a short-term issue, certainly not a fiscal year issue, Steve.

Okay.

And then lastly, you mentioned you were exiting this year at around 11.5 margin at Fire and Security.

You know, you increased your restructuring savings forecast for '05, assuming still a lot of that is coming in Fire and Security, you have a good chunk of the Six Sigma and sourcing savings there as well.

You know, are there kind of unusual headwinds there that, you know, maybe are included in that, in that kind of 12%-plus or does that just seem, you know, as conservative as we think?

Steve, there's really only, there's a couple of head winds as we go into next year on a relative basis year-over-year from '04.

We're not going to, you know, our forecasts say we're not going to enjoy the level of profitability we got from the steel, electrical, and metal business on the steel side with the spreads we had.

We expect that to moderate its way down some as the year goes on therefore the guidance we gave you for '05 on Engineered Products 10 to 11%.

So there's some headwind there.

And then we're expecting pretty significant headwind on the resin front in the business.

You know, so that, just overall Tyco, that kind of moderates the earnings from that level.

If you go to Fire and Security, no, there's nothing really significantly there.

It's just the fact that we're planning still a lower organic growth rate in the business in '05 and as that ramps up, that will certainly help us over time.

You know, I would put it in the bucket, Steve, of, you know, generally inflationary increases.

Yes like many companies, we have, you know, healthcare cost pressures and those kinds of things, but nothing that I would view as unusual.

Okay.

Great.

Thanks guys.

Thank you.

Thank you.

And our next question comes from the line of Jeffrey Sprague from Smith Barney.

Please go ahead.

Thanks, good morning, everybody.

Hey, Jeff.

Just looking at Fire and Security, when we look out into '05 and '06, and Ed, the upside to '06 that you alluded to, I mean obviously U.S.

Security is really humming as is Security products, you know, as we look for the margins to go higher, you know, what bigger, you know, what size roll do you expect kind of improvement in Europe and I would assume some cyclical improvement in the Fire business to play?

Let me just clarify.

When we think there's upside to that 14 to 16% which we clearly do, it's beyond '06.

We still think we've got good leg room there and I would also add, quite frankly, there should be in Electronics, also, as we get out into those outer years and hopefully we don't have the headwind pressure of raw materials forever there.

But specifically, look, I think you're seeing very consistent sequential improvement in our Security ADT sensormatic footprint really on a global basis.

It's just consistently been ratcheting up all year and I would expect again as we can add new products to that with the sales forces I just mentioned a minute ago, we continue to see nice solid progression in that and that's 50% of the portfolio right there as we go out over the next few years.

And then secondly, on the Fire side, there's really two things, one is, does the economy help us some, and let's not forget that this is in the lowest cyclical down trough on the commercial construction side that we've seen for years.

Projections are, I look at the Dodge Reports and everybody else, I think they think it's coming back from the trough this year to grow about 6% next year.

We're forecasting internally when we did our modeling that the business, the commercial construction market, picks up 2 to 3%.

So that's kind of where we are at.

But any pickup would be awful nice in that business.

But secondly, a big part of this is within our control because we put new management in, in specifically in our SimplexGrinnell U.S. business about six months ago, and we have been very focused on a restructuring program in that business that continues into '05.

Very similar to a little bit more of the restructuring we did in all Fire and Security that started earlier in the year and I hope we have some nice pay back from that.

That's kind of the big pieces.

When you think of European Security, is there any reason that over some extended period of time once the bad stuff rolls off and you've kind of, you know, changed how you fell into that market that you don't move up to U.S. rates?

Is there something structural there that would say that's unattainable?

I don't know that we'll get all the way up to the U.S. rate, but your point I think is a fairly accurate point that look, it should not run at these levels.

In our modeling we have it getting into the high single digits in the next few years in the business, and quite frankly what we're dealing with is exactly what you said.

Look, unfortunately, Europe, the whole base was 100% to dealer program and it was even into the commercial group, it wasn't even sold through our own sales force so that's simply what we're dealing with it, we're monitoring it as we go out, we're bringing on new quality accounts now but dropping off at a decent pace the old ones and we kind of have a couple year process we're still living through there.

When Dave FitzPatrick mentioned the disconnect rate, just overall, if you note, his point, that the dealer program, really 2002 was the last big bubble up year of it and that's what we're living through in '05, is kind of the last year of that three-year bubble.

So we are finally getting to that point.

Just two other quick things.

Just on tax.

Dave, if we think about kind of the 45 cents being kind of the clean all-in number, excluding, you know, charges, et cetera, what is the tax rate you're using there?

And Ed, I'm wondering if you could give us a little color on where you're funding additional growth?

I mean obviously we've heard about more R&D spending in Healthcare, but are there other areas that you can kind of point to that's getting more focus in '05?

Sure I think Jeff, as we look at the tax rate, if you look at kind of the run rate tax rate that we experienced this year and are looking at experiencing, you know, given the level of business we're at, and the portfolio for 2005, you know, it's in about the 27% range.

When you look the at couple percentage points we benefited off of that level in the fourth quarter, we had some, you know, year-end, you know, matters kind of come into conclusion that we don't see as being recurring, more just, you know, hit the period.

With respect to, you know, funding growth, I'd say we're funding growth in a couple of different dimensions.

First, on the capital, you know, side of things, the 3 to $400 million of capital spending we're looking at, you know, is pretty much across the businesses both for growth as well as cost reduction, and in addition to, you know, funding some of the R&D, you know, at Fire and Security, as Ed mentioned, we're still funding some sales force growth and development in our Security business, in Fire and Security, as well as continuing to look at, you know, sales force, you know additions selectively in some of the Healthcare businesses, particularly outside the U.S. as we are looking at growing that base even further.

You know, the nice thing for us, if we can continue what we did in '04, though, you're watching our total cost structure come down.

We're getting good reduction in our G&A expense line, yet we're able to ratchet up the growth side in this thing which is R&D and sales, and net-net you saw a nice reduction on costs but we're funding the growth piece and we think we have that opportunity out over the next few years.

Thanks a lot.

Our next question is from the line of Don MacDougall with Banc of America Securities.

Please go ahead.

Good morning, everyone.

Good morning, Don.

I'm sorry if I missed this, guys, TyCom it was just announced this morning, is that, I assume that TyCom lost money.

Is that included in your 2005 guidance?

Yes, it is.

Okay.

With regard to restructuring, you upped the projected savings for next year to 285.

Now, I know that there is going to be some level of ongoing restructuring so it's not as simple as just adding that to the bottom line.

Can you give us a sense for what the ongoing restructuring expense is, Ed, you noted that you don't plan on calling these out next year?

Yeah, I think, Don, as we look at restructuring going forward, I think we'll be looking at programs and activities that are funded by the businesses that don't have a material net negative, you know, on the year.

There may be some, you know, impacts quarter-to-quarter, you know, particularly as lumpy as some of the accounting, you know, is these days, but we don't expect to have things necessarily being net negatives in the year.

Okay.

But we don't have anything at this stage to quantify for you, as we look at things, you know, opportunistically.

So I should just add the 10 cents to my base level of earnings for this year?

I think as you look at, you know, the overall impact, you know, the 285, you know, annualized, I don't want to say all of that's hitting in '05, but most of it is.

I mean that's the annualized run rate savings, a bit of which we have to ramp in '05.

But, you know, we're also not calling out, you know, general wage inflation, general, you know, healthcare inflation and some of those things that I think it would be fair in your model to add an increment.

I wouldn't go to the full dime on restructuring but, you know, partially offset by certain cost increases.

Okay.

Jumping back to Electronics, I didn't hear any commentary on pricing.

What are you seeing with respect to your ability to pass through some of those higher costs?

I think the number Ed had noted was $80 million on copper and gold.

Is that a net number or gross number?

And do you expect to recapture that?

The price pressure we're seeing in the business, Don, continues to be approximately 5%.

Has not changed.

Okay.

Any sense as to whether, I assume that you're pushing for price, we're hearing that from the market.

Any sense from the businesses whether or not, or I guess, maybe a better question is, what are you modeling for '05 and '06 when you look at those targets that have been laid out for Electronics?

We're modeling 5% price pressure going out in the forecast period.

Okay.

And look, your point, Don, I think I said this last quarter, you would think at some point here, potentially we could get some price, but we haven't seen it yet and we're not counting on it.

Okay.

Final question, Ed.

You mentioned that we're kind of almost through the bubble of some of these big, this is in the Fire and Security side at ADT, this big bubble of accounts that were added 2001, 2002.

Beyond that, beyond this year, what is your sense of where the attrition rate falls to as kind of a normal sustainable kind of number?

Well, you know, first of all, that 2002 bubble will kind of hit through this full fiscal year, just to put that into perspective, back to Dave's point.

We might see a slight uptick here for a few quarters because of that but I wouldn't say it will be anything specific.

Hey, look.

Over time and I'm not going to put a time frame on this, this is not a one-year comment or a two-year comment.

But what I would consider some of the companies that have run a very good program that aren't dealing with some of the legacy cleanup we have, are clearly down in the 12% range.

Quite frankly there's a couple that are a little lower than that, regional players I think have done a great job, but I mean maybe if you just target and model for us over time that that's a 12% number out in the future, I think that would be appropriate.

Thank you.

We're going to take two more questions.

All right.

We have a question from the line of Dave Bleustein with UBS.

Please go ahead.

Good morning, everyone.

Good morning, David.

You mentioned you weren't expecting high raw materials prices with the exception of resin.

Can you talk a little bit about your steel purchases in '05, what you're seeing in terms of availability and really what the '05 contract environment looks like?

Yeah, I mean, David, just generally on the steel front we're still seeing pretty good pricing there.

It's coming down some, the spread, and we sense that it will continue to, as we go through the year.

But quite frankly, it's held up, I mean I think obviously better than we forecasted, and looks like it's continuing to in the short-term.

Dave, do you want to add any comment to that?

Yeah, in terms of availability, David, it's not been an issue to date.

That's one of the things that I think the electrical and metal products business of our Engineered Products segment has done just a super job this year, you know, in terms of availability, and having the volumes being requested by customers.

You know, in terms of other commodity, you know, headwinds, I mean you have gold at, you know, $429 an ounce, I mean that's clearly, you know, headwind, you know, year-over-year, even for our Electronics business, look at where copper, you know, is today.

We're modeling things for the year, kind of out at these levels, and as a consequence, that's really the bulk of the change as we look out to 2006, you know, in Electronics.

I mean the 80 to 90 basis points that we got hit and we're not seeing, as Ed mentioned earlier, pricing relief for this cost increase, we have kind of in our numbers for the next couple of years.

Okay.

Terrific.

Thanks.

Thanks, Dave.

We're going to make this the last question.

Our final question today comes from the line of Brian Langenberg with Langenberg and Company.

Please go ahead.

One quick thing.

Good morning.

Just wanted to know, [inaudible] a little bit on the Electronics side, when you talk about margins in the out years, is there anything in terms of long-term structural change in your view about Electronics or is this really, if telecom and [inaudible] came back to something, let's just say something more like normalized, your margins are 20, or is it, even if that business were to come back in a couple of years, 20% is still a little bit more of a struggle?

No, Brian, I'd say if those businesses came back nicely or maybe that segment of the economy came back nicely, no, we could get there.

And as I mentioned, '06 we're seeing 18 to 19 mostly because of the headwind on raw material, but there's nothing structural going on that says we can't get above that.

Got it.

Thank you.

Yup.

Great.

Thank you very much, everyone.

And thanks for joining us.

And ladies and gentlemen, that does conclude our conference for today.

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