江森自控 (JCI) 2008 Q1 法說會逐字稿

Welcome to the Tyco reports first quarter results conference call.

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

Later we will conduct a question-and-answer session.

Instructions will be given at that time.

(OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Mr.

Ed Arditte, Senior Vice President of Strategy and Investor Relations.

Please go ahead.

Thank you.

Good morning, and thanks for joining our conference call to discuss Tyco's first quarter results for fiscal year 2008 and the press release issued earlier this morning.

With me today are Tyco's Chairman and Chief Executive Officer Ed Breen, our Chief Financial Officer Chris Coughlin, as well as Patrick Decker, who is the President of Tyco Flow Control.

We will periodically be including our business segment Presidents on the earnings call to provide with additional details on their businesses, and we're pleased to have Patrick join us today.

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 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 and we ask you to read through the sections of the press release that address the use of these items.

This morning's press release and all related tables can be found on the Investor Relations portion of our website at Tyco.com.

Now let me quickly recap our results for the quarter.

On a GAAP basis, we had diluted earnings per share from continuing operations of $0.74 per share, and this included a net gain of $0.01 per share for special items.

Diluted earnings per share from continuing operations before special items was $0.73 per share, benefiting from stronger operational performance and a lower tax rate than our previous guidance.

As we indicated in our press release on January 23rd, our revenue growth and our operating margin before special items were both ahead of the guidance we provided due to better results across the company.

It's important to note that the lower than anticipated tax rate is a matter of timing within the year, and we continue to believe that our full-year tax rate will be approximately 25%.

Chris will have more comments on this later in the conference call.

Finally, as most of you know, we increased our guidance for full-year diluted earnings per share from continuing operations before special items to a range of $2.60 to $2.70 from our previous range of $2.50 to $2.65.

Now let me turn the call over the Ed Breen for some opening comments.

Ed will be followed by Patrick who will discuss our Flow Control business, and then Chris will review the results from our other businesses before we wrap up and take your questions.

Thanks, Ed, and good morning, everyone.

This was a strong first quarter for Tyco, and a good start to the year.

We are pleased with the progress we are making in three key focus areas.

Operational execution, capital allocation, and portfolio refinement.

And I want to comment on each of these areas as we believe they will drive our earnings growth going forward.

First, we continue to be focused on operational execution.

We had good revenue growth in the first quarter with double-digit operating income improvement before special items in each of our segments.

In addition, our operating margins before special items were stronger due to better growth and operating performance.

Let me comment on a few examples from the quarter.

In Flow Control, our goal has been to gain market share in rapidly growing markets.

This quarter we continue to have strong top-line growth and good incremental margins which benefited from higher revenue, productivity, and better mix of higher margin products.

In ADT we continued the focus on growing our revenue by improving our customer service levels.

We had good year-over-year growth in our recurring revenue base and our key metrics continued to improve.

Our total account base grew, our average revenue per user increased, and our disconnect rate also declined.

Our income improved and included approximately $24 million of charges for the analog to digital conversion in North America.

Chris will give you more details on the other three businesses in a few minutes, but each had revenue and operating income that were better than or equal to our expectations.

As part of our restructuring program, we also continued to make progress bringing down our corporate expenses and have reached our target run rate ahead of schedule.

Secondly, from a capital allocation perspective, we continued to use our cash as we've previously indicated with increases in internal investment to improve growth and productivity.

We invested more in the quarter for capacity additions, mostly in Flow Control, to support our revenue growth, restructuring actions in Europe, mostly related to ADT, as well as capital spending for internally generated accounts within ADT.

We believe these investments will generate high returns and strengthen our businesses over the long term.

On the share repurchase front, we have been an active buyer of our shares.

To date we have spent $531 million under our $1 billion share repurchase program.

Our activities so far has resulted in the repurchase of 13.3 million shares which represents 2.7% of our diluted shares outstanding.

Third, our portfolio refinement efforts are underway.

We expect to close and receive approximately 300 million in cash from the sale of Earth Tech's Brazilian operations fairly soon, and we would expect to complete the sale of the remainder of Earth Tech later this year.

We are also exploring options to divest or exit a number of other small businesses within our portfolio.

For example, while our overall fire business has good growth opportunities, there are a few noncore and marginal fire businesses in Asia and Latin America that we will divest or exit.

As part of this plan, we initiated a sale process for NDC, a fire business in Japan, which we classified as a discontinued operation this quarter, and we have already begun to exit certain small fire businesses in Latin America and Asia.

Collectively, these actions should have a positive impact on our overall margin and should generate significant cash proceeds for us to redeploy within Tyco or return to our shareholders.

Based on our performance this quarter, and what we are seeing today, we expect good performance for the balance of the year, and we have raised our full-year guidance accordingly.

Despite the housing downturn, and consumer concerns over the past year, the ADT residential business in North America continued to grow its account base, and as I mentioned earlier, the average revenue per user also increased.

Operationally, we feel we are well positioned and making improvements in this business, which will be positive going forward.

On the commercial side of our ADT business, we are carefully monitoring our retailer customer base.

As we indicated last quarter, we are seeing some softness in our sales in North America as some of our large retail customers have pushed back their spending in new systems or upgrades.

Based on our conversations with these customers, we believe that these delays are delays rather than cancellations as the payback on these investments for our customers are very quick.

Double-digit growth in Asia and Latin America helped our overall growth rate in this business, and we expect those markets will continue to grow nicely.

In our fire business, our North American Simplex business continued to perform well with 4% organic revenue growth in the first quarter.

Order rates were up 5% year-over-year, and our backlog is strong.

Before I hand the call over to Patrick to review Flow Control results, let me just say a few more words about Tyco's portfolio of businesses and our prospects going forward.

First, our revenue base is balanced in terms of geography.

More than 50% of our revenue is from outside the United States.

And our international markets continued to grow faster than in North America, as Asia Pacific and Latin America grew more than 10% during the first quarter.

Next, our Flow Control segment, which is now our second largest business, continues to benefit from very strong end markets.

Particularly energy and water, and we expect this to be the case for some period of time.

Third, Tyco as a whole has a strong base of service business.

More than one-third of Tyco's total revenue comes from service, which provides a stable base of higher margin recurring revenue for us.

Finally, and most importantly, we are taking the appropriate steps to drive earnings growth.

We are working diligently on our growth initiatives and continued operational execution, including the restructuring program and the savings that we will get from that.

Tax planning, which should continue to reduce our tax rate over the next few years, the portfolio refinement actions we are taking to divest or exit some of our businesses as well as make bolt-on acquisitions to strengthen our existing businesses, and finally our capital allocation decisions that have us investing in good return internal projects and returning capital to our shareholders.

Now let me turn the call over to Patrick to provide you with a further update on Flow Control.

Thanks, Ed, and good morning to everybody on the call.

It's great to be here this morning to report on Flow Control's first quarter and to give you our thoughts on the outlook for the business.

First, to put the business in perspective for you it represents about 22% of total Tyco revenue.

Our end markets are split about one-third for energy market, the water market, and general process industries like chemical, mining, and food and beverage.

Our business is also very global with more than 75% of our revenue coming from outside the U.S.

This end market and geographic diversity provides very good balance to both our revenue and profitability.

We're currently benefiting from macroeconomic trends that are shaping the energy and water markets.

In the energy market, we continue to see good order rates in the replacement market as well as new projects around the world to add capacity.

Our water business primarily serves the European and Pacific markets where we continue to see a strong need for infrastructure upgrades as well as new water facilities.

In addition, our Australian business continues to benefit from our strong position in that market and the significant water transmission needs required to get fresh water to population centers, particularly given recent drought conditions.

We're also expanding our water business in some key emerging regions such as Asia and the Middle East.

The strength of these end markets resulted in first quarter revenue growth that was the strongest we've seen in this business in a long time.

Revenue grew by 29% to just under $1.1 billion, and organic growth was 17.7%.

This strong top line helped drive solid improvement in our operating income, which grew over 50% to $173 million.

Our operating margin before special items was 16.1% and improved primarily due to operating leverage, seasonal strength in our thermal controls business, which I will address in a few minutes, and the mix of higher margin products.

Our backlog continued to grow in the quarter and is up 20% versus last year with eight points of that coming from currency.

Many of you are familiar with companies that make valves and related products but I wanted to spend a minute highlighting our thermal controls business, which is a significant part of flow control and has very strong growth potential given its unique capabilities to service our customers.

The thermal controls business provides electrical heat tracing products and general heat management solutions to our customer in the energy and process industries.

We partner with many of our clients in the early design stage of their projects.

Using very sophisticated and proprietary engineering modeling tools, we help our clients significantly reduce their industrial heating and insulation costs.

Our turnkey heat management systems are relatively unique in the marketplace, and we've been able to capture a much larger share of our key customers' business as a result of our front end design capabilities.

We are the market leader in this business and we expect revenue of approximately $650 million this year.

We're particularly well positioned in the oil and gas industry, and due to the continued additions of refinery capacity around the globe, we expect to continue to see double-digit organic growth in this business for the foreseeable future.

Looking forward, our total Flow Control business is performing very well and we expect a good year of operating performance with continued top-line strength and solid operating margin improvement for the full year.

So with that, I will now turn the call over to Chris.

Thanks, Patrick, and good morning, everyone.

Now let me discuss the results of our other businesses, and I will first begin with our worldwide ADT business.

Overall, ADT Worldwide had good revenue growth and solid operating margin improvement year-over-year.

Revenue grew 7% to $2 billion in the quarter, while organic revenue growth was 3.4%.

Recurring revenue, which represents almost half of ADT's total revenue, continued to improve globally to 4% organically and our leading indicators continue to show positive momentum.

Our global account base grew 1.6% year-over-year to more than 7.1 million accounts, and was positive across North America and all regions internationally.

We also improved our disconnect rates by 10 basis points sequentially to 12.2%.

In addition, we continued to increase our average revenue per user by 3% year-over-year, excluding the impact of foreign exchange to $46.50.

ADT's product installation and service revenue grew 3% organically in the quarter, with double-digit growth in Asia and Latin America more than offsetting modest growth in Europe and a slight decline in North America.

North America's growth was weaker in the quarter, primarily as a result of some project delays by some of our largest retail customers, which Ed talked about a few minutes ago.

From a profit perspective, ADT Worldwide had nice improvement in its operating income and margin before special items on a year-over-year basis.

Operating income before special items improved 10% to $256 million, and the operating margin before special items improved 30 basis points year-over-year to 12.8%.

This quarter's results also included $24 million of expenses for the analog to digital conversion, which we discussed with you last quarter.

And we are expecting our costs in the second quarter to be similar to that amount.

We made significant progress in converting many of these customers, and by the end of the second quarter, we expect the cost of conversion to be largely completed, which should improve our margins in the second half of 2008.

On the restructuring front, we incurred $7 million in charges this quarter, primarily in Europe.

Since the program began, we have incurred approximately $90 million of restructuring charges in ADT, and we began capturing some of the savings this quarter.

We are reducing our headcount, closing locations, and simplifying operations.

In addition, our customer service programs are improving our disconnect rate, which has had a positive impact on our recurring revenue.

Our focus on simplification, standardization and execution should have a meaningful impact on our European margins as we move forward.

And 2008 will be a transition year for us as we implement all these actions.

Now let me turn to our Fire Protection Services segment, which also had a good start to the year with strong improvement in operating income and operating margin before special items.

Revenue grew 5% to $832 million with flat organic revenue growth.

The North American SimplexGrinnell business had good organic revenue growth of 4%.

Order activity grew even faster at 5% and backlog grew 8% year-over-year.

The growth in North America and modest growth in Europe was offset by negative growth in our other international markets as we exited some of our fire businesses in Asia and in Latin America.

While the year-over-year revenue growth over the next few quarters in these markets will reflect a runoff of these lines of businesses, our core business in both Asia and Latin America offers solid growth opportunities for us.

From an operating income and operating margin perspective, the first quarter was the strong quarter, and the improvement came from all regions.

The operating income before special items was $72 million, and the operating margin before special items was 8.7%, 120 basis points higher than last year's first quarter.

North America had better margins and the international businesses benefited from better execution and the exit of the lower margin businesses.

Moving to our Safety Products business, revenue continued to -- revenue grew 10% to $447 million, and the organic growth of 5% continued to be strong in fire suppression and electronic security.

Operating income before special items improved 12% to $87 million, as a result of higher revenue, and the operating margin before special items was similar to last year at 19.5%.

While we only incurred $1 million of restructuring charges this quarter, we do expect to incur substantially more later this year, as we continue to execute plans to simplify existing operations and exit certain manufacturing facilities in high-cost regions.

Now let me turn to electrical and metal products, where revenue grew 10% to $487 million with organic revenue growth of 7.4%.

On a year-over-year basis, we had strong volume gains that were partially offset by lower pricing for our copper products.

Our operating income before special items was $45 million, and our operating margin of 9.2% was about what we had expected.

Compared to last year, our operating income before special items grew 10%, primarily due to higher volume and improved steel spreads.

During the first quarter, we also incurred restructuring charges of $4 million as a part of an overall plan to consolidate our U.S.

distribution footprint and improve our cost structure.

As we look to the second quarter, we expect revenue to increase 5 to 7% year-over-year with an operating margin of approximately 12%.

The expected improvement in margin over the first quarter is due to increased spreads related to our core steel products.

For the remainder of the year we have assumed that the operating margin will be approximately 10%, and we will provide you with more detailed estimates each quarter as we have additional visibility.

So before I turn it back over to Ed, let me make a couple of other comments.

First, let me discuss our free cash flow.

As we expected, we used $407 million in the first quarter, including $53 million for restructuring and separation payments.

Consistent with our free cash flow pattern in the past, our free cash flow picks up as we move through the year, and we continue to expect our free cash flow for the year to approximate net income.

As I mentioned in my remarks last quarter, we are implementing tax planning strategies appropriate for our new company.

Our GAAP tax rate in the quarter was 24.8%, and our tax rate adjusted for special items was 23.5%, reflecting the progress we've made in this area.

I would continue to expect, however, that we could see swings, quarter to quarter, in our tax rate.

But we believe that our overall rate for the quarter will approximate 25%, as we've said in the past.

In the second quarter, we expect our tax rate to be in the 28 to 30% range.

Next, we have moved aggressively to restructure our corporate organization to support the new Tyco.

We completed these actions somewhat faster than our plan as shown by our first quarter corporate expense of $116 million net of separation costs.

I should highlight that these expenses can swing somewhat each quarter.

But we would expect that our run rate to average approximately $125 million per quarter.

Finally, let me quickly touch on interest income and expense.

We expect net interest expense in the second quarter to be about $15 million higher than the first quarter, primarily due to reduced interest income from lower cash balances.

Now let me turn the call back over to Ed Breen to wrap up this morning's call.

Before I open the lines for questions let me provide you with our outlook for the second quarter.

Overall we expect revenue growth to be approximately 8%, with organic revenue between 4 and 5%.

We expect that our Flow Control business will continue to have very strong top-line growth of 20% with approximately 13 to 15% organic revenue growth in the quarter.

We expect ADT Worldwide's nominal revenue growth rate to be approximately 5% with continued growth in its recurring revenue base but slightly lower growth in its product, installation, and service revenue as a result of lower sales to our retailers compared to last year.

For our other businesses, we expect similar growth rates in the second quarter as we had in this quarter.

From a profit perspective, we expect solid year-over-year operating income and margin improvement across our business, and anticipate our operating margin before special items to be approximately 9.5% in the second quarter.

We expect our Flow Control business will have a significant increase in both operating income and margin versus the prior year due to strong growth in operating leverage and expect the margin to be approximately 14%.

For our ADT business, we expect operating income to be higher than last year, even with the impact of the analog to digital conversion and for operating margin before special items to also improve slightly over the prior year.

In our Electrical and Metal Products business, we expect nice improvement in operating income and margin year-over-year due to higher steel spreads.

Thanks for joining us on the call, and, operator, if we could please open up the lines for any questions.

Operator, we would just make one clarification here, just to make sure that I got it right on the tax rate.

I just wanted to make sure that we believe again that our overall tax rate for the year will approximate 25%, and the second quarter we would expect that rate to be in the 28 to 30% range.

Now let's turn it over for questions.

(OPERATOR INSTRUCTIONS).

One moment, please.

We do have a question from Shannon O'Callaghan from Lehman Brothers.

Please go ahead.

Good morning, guys.

Good morning, Shannon.

On ADT, the margin ex the conversion expenses was 14%.

Can you give us a little flavor on how that varied by geography and what kind of improvement you might be seeing in Europe at this point?

Yes, let me touch on it.

Chris might want to jump in also.

What we're obviously seeing, Shannon, is good performance in the recurring base.

As you know the recurring part of our business is a higher margin business.

So we're finally seeing nice incremental moves sequentially quarter to quarter in that part of the business, and very good progress in North America, along those lines.

You do not see really in that result any movement yet in the European margins upward, although I would expect you will begin to see some of that in the second half of the year as some of the restructuring savings start to kick in.

We are on track with the restructuring in Europe, and so we'll start to see some of that second half, as I said, and obviously, a significant part of that as we go into fiscal '09.

But one of the highlights I would mention in the quarter, I'm not declaring total victory on this yet, but as Chris mentioned in his remarks, we did finally bottom out on the recurring revenue business in Europe, which is a good sign.

We said we would do that by the end of the year.

My gut is we stay around the 0 level for a couple quarters.

So it looks like we're getting ready to turn that up as we kind of exit this year.

That's on track also.

So the good recurring business, higher margin, the mix helped us there.

And we're just better -- we're executing better across the whole business from a service standpoint and installation standpoint.

We're just doing a better job each quarter as we go, and hopefully that will obviously continue for us.

Yeah, I guess I would just add one more thing in terms of our EMEA business of ADT that we would expect, as we complete some of the restructuring actions, as you know, take some time in that part of the world.

It's really toward the back half of the year that we'll start to see more significant margin improvements in that part of the world.

And just to clarify also, this quarter we're in now will be the last quarter of this amps conversion program.

We won't have that going forward.

Remember also that we have a nicely growing business in ADT, in Asia, smaller but growing in Latin America, and as we highlighted in the call, those were nice contributors as well.

And, you know, in Europe, getting ahead of that plan in terms of the recurring revenue decline, how much was that -- is the attrition rate come down significantly more?

Are you getting better productivity out of the sales force?

Which is kind of the driver?

Well, both are improving.

Our productivity is improving, but I would say that is secondary.

That will be a very big focus for us after we get done restructuring.

That has improved.

But the disco rate in Europe has had a nice steady decline which is contributing to this overall improvement you're seeing in the ADT disconnect rate.

A lot of the programs we instituted a year, year and a half ago in North America, we're doing the exact same thing in Europe, except we're taking a little more time on some of those because we're doing so much restructuring.

We don't want to throw too much on the table at once.

We're doing some of that.

We will do more in the second half of the year as the restructuring starts to wind down.

Just on this portfolio refinement topic, I guess specifically to fire, but any other areas, too, in fire we saw some margin improvement there related to, I guess, getting out of some of these areas.

How does the exit of these fire businesses change your view of the potential margin for fire?

If you could quantify that a little more.

And when you're thinking about portfolio refinement and things that could get sold, can you give us a ballpark of scope of total revenue base or total expected proceeds or something?

Well, let me touch on the first part of that.

What we're exiting, as we said, kind of noncore and marginal businesses, mainly in Latin America and Asia, and I will point out, they're mostly what I would call the pipe fitting-type business, doing the sprinkler type work where we don't get as much leverage putting the whole system in, and we're getting out of that, and we did do a fair amount of that in the quarter we just reported, and that did reduce our growth rate in the fire business internationally by three full points.

So we weren't focused on growth there right now.

We're trying to get the portfolio where we want it.

We've got more work to do there.

But the good part is where we are staying, which is obviously most of the markets, the fire business is a good business to be in with good incremental returns on our investment, because it's a low investment business.

So that will take us a couple more quarters to clean that business up.

I'll maybe let Chris comment.

In total, maybe I'll go in to total on this, we're working on the Earth Tech sale.

We're working on the sale of some of these fire businesses in addition to exiting some of those.

They add up, give or take, to a few hundred million dollars in addition to the sale of Earth Tech.

I think the fire business, again, just to reiterate, one of the things that Ed said, as we pare down the portfolio and work off some of the projects and some of the marginal businesses, we'll increase our margin.

However, the key in that business is really getting some incremental growth as return on capital is very significant as there's no capital being poured back into these businesses.

So again I think we'll see some incremental proceeds.

As we mentioned, we have started the sale process for NDC.

It's not a huge number in and of itself, but a number of these things will add up.

Okay.

I'll leave it there.

Thanks, guys.

Thanks, Shannon.

next question we have is Nicole Parent.

Please go ahead.

Good morning.

Ed, curious to hear, maybe if you could elaborate a little bit on why you think the retail customer delays are delays versus cancellations in the U.S., with kind of the weaker U.S.

consumer.

Nicole, this business has been a lumpy one for us in my over five years here.

We've seen this I think three times now where we go up, we go down some, and, we started to seat last quarter.

We saw it again this quarter.

It was North America related.

The reason -- look, we've talked all these customers.

This is for our -- basically our antitheft system, our sensor-matic product.

These programs are very good paybacks for our customers, so they're going to do these programs.

It's just a matter of when they spend the capital to actually do it.

So we have taken into account in our guidance for the year that we will see softness in that area continue and not pick up, and that's kind of how we've laid out our thinking.

That's helpful.

With respect to organic growth, you saw modest uptick sequentially.

Do you feel like you're happy with the contribution by business, and could you quantify the internal investment that you made in new products in the quarter?

Look, the organic growth rate for us was as good as we've had it in these mix of businesses, and it was pretty much across the board.

The one area when you look at the aggregated number that will look a little light was the fire business, but the points Chris and I made, that really was because we were exiting some of these businesses internationally, and when you look at what I would call the business that we weren't doing that to was SimplexGrinnell in North America, had very nice growth, our backlog is at an all-time high in the North American fire business, so that feels good for us as we go through the second quarter.

So organically, I feel good.

The thing I'm most pleased about, though, is the business model change that's occurred at ADT and it's been going -- we started this, give or take, 2004, 2005.

We are seeing the benefits of that kicking in for the company, and it's showing in every metric that Chris highlighted, the base is going up, the attrition rate is coming down, it's coming down in every region around the world, it's not one spot.

The ARPU is going up consistently.

The resale rate is hanging in at a nice level.

So all the metrics we track feel good, and to me getting the organic growth rate of our recurring business up at ADT, if I had to prioritize it, that's number one to he me in the Tyco portfolio because it's such a profitable business.

That's great.

And just on the internal investment in the quarter, any quantification?

There are a number of different metrics that you can look at quarterly.

You saw our CapEx go up.

As you know, CapEx broadly defined for us includes new account generation.

We had better new account generation internally within ADT, we actually had a little bit of a decline year-over-year in our dealer spend.

From a product point of view, Nicole, the one area of the company that I would highlight for, if you will, R&D and new product innovation is really our Safety Products business.

The numbers in the quarter are not gigantic, but on a year-over-year basis we'll see a nice increase there in our R&D spending for new product development.

And I guess the last comment that I would make is the two small acquisitions that we've made have been in that area.

One was the retail expert technology that we bought in Safety Products, and then the other acquisition has to do with video capabilities that we can put over the Internet.

Both of those are really bringing in new product technologies into our portfolio that we think we can make available not only within ADT to our customer base, but also to third-party customers.

Thank you.

And the next question we have is from Steve Tusa of JPMorgan.

Please go ahead.

Hey, Steve.

Just curious, what surprised you most in the quarter relative to where you got started a couple months ago?

Clearly ADT was very strong from a profitability perspective, and the trends at flow are very good, but what were you most surprised with?

Steve, the piece that felt good to me that we were maybe hedging on a little bit was the ADT performance, and one of the reasons we were being a little cautious was that we were going through this amps conversion, and to put in that perspective, our truck rolls during the quarter are almost 50% higher than at a normal run rate if we weren't doing the amps program.

You can imagine the stress that puts on the company.

So that had us a little bit nervous and what was very nice to see in the quarter is despite all of that kind of extra work, the company is doing in the field everywhere, the performance came through very nicely for us, almost like that program wasn't affecting us at all.

But you know it has to be having some effect and will again this quarter on the business.

So that to me, if I kind of put in order, would be the number one.

And obviously Flow Control is just I think the business is just smoking right now, and the good news is the trends in that business look like there's a long run on this thing because of the markets and the project.

Some of these projects were beginning to book are three to five-year projects.

Very significant size, and they're just beginning.

So kind of, as Patrick said, the macro trends in that business just feel good.

Yes, many of your competitors are putting a very strong backlog there, so that looks sustainable.

A follow-up to that question on ADT, was there anything unusual in this quarter from a mix perspective?

It just seems unusual that you go from such a strong first quarter to maybe a little bit of a weaker sequential second quarter.

And then if we think about the second half of the year you have some nice things going for you with those costs rolling off, and seasonally it is the strongest part of your business in the second half historically, so is there something in the mix here that you guys should call out just to let us know why it's declining sequentially here?

No, not -- there's no one-timers or things like that in the number.

What I would just say though, Steve, we look at each quarter as we go.

You clearly get some lumpiness on the contracting side of continues.

The recurring piece we can almost model it out at this point in time.

The other piece you get some lumpiness in.

We're eventually a little bit of lumpiness this quarter in the negative because a couple of these retail orders pushed out.

That could bounce back the next quarter.

It bounces around like that.

So, no, but lumpiness on that side.

I would just highlight that.

It's the way that this business flows internationally.

It can quarter to quarter, the margins can go up and down depending on the mix of particular commercial projects within our region at any one quarter.

I think we're confident that over the year our margins will continue to improve on a year-over-year basis, but again, as we've seen in a number of our businesses, including Flow Control, those margins can swing, based on project timing and shipments and whatnot, because these are large projects and not just shipping of particular product.

It can have swings quarter to quarter.

One more quick one just in ADT.

Do you guys know how big your kind of new commercial -- sorry new residential exposure is in that business and what did it in the quarter?

Look, obviously we've had residential exposure for two years now with the downturn in that end of the economy, and when you look at it, I think we highlighted this maybe last quarter, the focus of new home construction is not our focus.

Only 15% of our new business that we bring in comes from new construction.

So if that drops in half, give or take it's 7, 8% of the volume that we can bring into the company.

And, -- we're probably seeing some effect of it, but the tact that we've gone to our new business model, we now have a sales force that is seasoning, we have a great product offering that we're adding to, which has taken our ARPU up and I think it's stickier and more enticing.

All those things are kind of powering us through and you're continuing to see this recurring base slowly continue to creep up.

I expect it will go up a little more over the next year.

Thanks a lot.

Thanks.

Operator, next question.

Next question we have is from Jeff Sprague of Citigroup.

Please go ahead.

Good morning, Jeff.

A couple of questions on ADT but maybe since we have Patrick on the line a quick one on flow.

Patrick, one of the discussions we've had often is kind of in the initial stabilization of Tyco going back a few years ago, the restructuring of flow wasn't front and center, it was more focused on ADT and other things.

Kind of the gist of my question is how do you feel about how the plants are actually aligned to capture this revenue growth opportunity you have in front of you, and what type of restructuring actions might we see there over the next year or so?

Sure.

Jeff, from a restructuring standpoint I would say that obviously over the last couple years we've continued to reduce the size of our footprint.

I think last year we took out about twelve different locations.

We'll continue to evaluate that.

The key to our ability is continuing to build our capability in emerging markets.

From a manufacturing standpoint, that really is the cornerstone to our footprint transformation.

So we'll continue to evaluate and see what opportunities are out there.

If you look at a number of our plants right now, we have added capacity in certain areas where the critical product lines are very profitable and at the same time, have shed other capacity along the way.

So I don't see any big bang out there at this point in time but we'll continue to prune as we see looks appropriate.

And we are expanding capacity in certain areas as well to meet the demand.

So you're expanding and planning simultaneously to kind of improve the throughput?

That's right.

The key for us is not so much the number of facilities we have, but making sure we have them in the right location to better supply our customers.

We're really one of only a couple global competitors out there that really are well positioned right now to go after a lot of these big global oil and gas projects, so again in many respects our footprint is the strength of our well.

Just a little bit more detail on ADT.

We've hit at lot on the call.

Ed, given the focus of trying to drive the organic at ADT given the margin opportunity there, should we expect -- I'm just thinking about the amp conversion.

That rolls off, but would there be more marketing investment and selling investment and things like that that maybe layers on into the company as you try to drive the growth rate?

Not on a percentage basis.

As we grow the business, obviously I think some of the sales expense will increase, but, no, not generally.

There's not going to be a spike up.

You will remember, Jeff, a couple years back we took it up, somewhat significantly from the spend level we were at, but we're getting close to kind of spending at the percentage rates that we should be spending in the business.

We're doing more advertising.

I don't know if you noticed that, We've done some in Europe even in the business, so we're spending some extra money against that but it it won't move that percentage around much at this point.

Look, just to stress it, our goal in this business, and I've said this many times, we could get this growth rate to go up significantly from here but we're not going to do it until we get the quality of business that we want to take.

I still think we're going to get the growth rate up but we're going to do it very prudently based on sticking with the metrics that we want in this business.

And I'd also add, we've spent a fair amount of time over the past year on sales productivity initiatives, so we are investing more in our training and development and getting a lot more productivity out of the existing.

So I think that will also continue to produce results going forward, rather than just a lot more money at it it.

When you look at the ARPU improvement, would you say it's more a function of just mix, what you're adding versus what's rolling off, or is there some true upselling that you can kind of visibly feel going on in the account base?

We're definitely upselling in the business.

With the different packages we now have, we always said before we had our own seasoned sales force.

We weren't -- it wasn't easy to do through a dealer program.

So now we are capable of doing that.

And on the service end of the business, we're doing well, we're focused on price.

We've had initiatives in a few of our businesses, ADT being one of them, on pricing, especially around the contracting end of the business.

And all these things are I think going to help us as we go forward.

The organization is becoming much more professionalized than it was a few years ago.

One of the big metrics in the ADT business is being able to do an install very quickly when you have an order.

We've brought that time down to install significantly.

All those things help you become more efficient and do better.

This big truck roll for this amp program benefits you on ARPU or account retention or anything like that that was notable?

No, I don't think it's impacted that significantly yet.

Again, we will have some accounts that haven't been converted and we'll have to see whether that has some one-time impact on our attrition rate but so far we have not seen that has an impact.

No impact on ARPU at all really because what we're doing is we're changing out an analog phone for a digital phone, not changing the monthly rate that somebody pays.

Just one final quick one for Chris.

So just thinking about separation costs going through corporate and tax sharing is and all that, that played out in the quarter, how do we think about that for the balance of the year, where those items play out?

I think we're about completed on most of the separation.

We do have some that will impact us here in the second quarter and a little bit going forward so I think both -- if I look at our restructuring, as well as our separation, and sort of the cash impact of that, I think we'll see outflows of cash that would approximate $200 million on those two projects, relatively small amount of separation.

They will be finished as we probably finish up the third quarter.

And, Jeff, the restructuring will wind down as a special item.

I will say it that way.

As we exit this fiscal year.

We're on track.

We will, by the way, spend more money, it looks like, in this quarter and next quarter in our safety products business on some restructuring that you've seen on a few key problems, but we're on track.

That will end at the end of this year.

We're tracking those savings quite closely.

We are generating the kind of savings that we had anticipated on the program and again if you look at things like our corporate expenses which have been taken down pretty dramatically very fast, that was a key initial part of our restructuring plans.

Thanks a lot, guys.

Next question we have is from Scott Davis of Morgan Stanley.

Please go ahead.

Yeah, good morning, guys.

Good morning, Scott.

just want to follow up on Jeff's question on ARPU.

When you think about, 3% year-over-year is a pretty solid number.

When you think about the next, let's say calendar '08, how much of that is locked and loaded?

How much of that do you have in contract form versus really requiring the sales force to get out there and up-sell?

The second part of that question really is does it concern you or concern the sales force at all that the consumer is certainly in the U.S.

and even in Europe is getting a little stretched, and maybe looking to make some cut-backs here and there, so maybe a little tougher to make that upsell?

I think, Scott, we're pretty confident in the ARPU that we are seeing in the improvement there.

We can model it out as we look here, certainly over the next few quarters, so I think we're pretty confident that that will continue to improve slightly as we move forward.

Again, a lot of focus has been put into place.

We are looking very carefully at the -- at our payment and whether we're seeing a push-back from our customer base.

We haven't seen anything significant.

Again, I think people who have security systems in their home think it's an important thing to have, and so we haven't seen this.

Again, we're seeing very consistent performance in our residential business.

And the downturn that we've seen certainly in housing, it's been with us about two years.

And we haven't seen any significant impact of that as the consumer gets a little more -- a little tighter we'll continue to take a look at, but again, we haven't seen anything to date that has us overly concerned.

Scott, just to Chris' point, the housing thing and that's been with us for a couple years now, our ARPU almost every single quarter over about a -- ten quarters in a row here almost the ARPU has consistently gone up.

I go back to fourth quarter of '05.

ARPU was around actual rates, like $42 and something, and Chris just reported we're at $46.50.

So you can see the progression, and it it's pretty sequential as you move out.

I think the key to that, Scott, as Ed just pointed out is not that they're great big increases.

It's solid, slow, steady increases has really been the way this has worked.

And I think that's a good thing.

You also asked about Europe.

And let me make the point on Europe that our residential business in Europe is really quite small.

And so really our residential business is very, very U.S.-based, and to Chris' comment, the quality of the portfolio is materially better than it was a few years ago, and we're not dependent, nor have we ever really been dependent over the last few years on new home construction.

So we think the quality is much better, and the performance that we've been seeing has been really pretty good in this environment.

Yeah, and part of the question, I don't think you answered is just contractually how much is that is locked and loaded?

When you're signing new contracts, either bought contracts or something your sales force originates, are there inflation clauses built in?

No inflation clauses built in.

You said none?

None.

I get it.

All right.

Second part of the question, on corporate expense, I think you really beat our model on almost every line item, not Electrical and Metal Products, but almost every other line item except corporate expense.

When I think of your composition of businesses, $500 million seems like a pretty big number for me compared to comps.

Can you walk us through maybe what is keeping that number up or if there's some -- something in there like pension, for example, that's holding that number up a little bit higher than maybe what it ought to be, and I guess the logical second part of this question is just, where can you cut?

Are there things you're doing on a corporate side that maybe you were doing as a bigger conglomerate that you can really start to revisit as a smaller company?

Yes, first, Scott, one of the things that I will stress is there are no two companies out there that define corporate expenses in the same way.

We tend to and I tend to look at this as where is the control over those expenses.

So we don't do a lot of allocating of costs down to the various business units.

Those things that are controlled at the headquarters level we just leave at the corporate center where I think many other companies that you look at will have pushed some of those costs into various business units.

We also have some other sort of business head quarter costs that are in there.

So there's nothing that I would say, like pensions or anything like that, which drive that cost.

Certainly we still deal with legacy issues.

Therefore, we've got the shareholder suits that are primarily behind us, as you know, but we still have some of the tail suits that we are spending some legal costs on, but I would say organizationally, we are about where we expect to be.

We always look at those costs and look at how we can become more efficient and have plans to simplify our organization which hopefully will continue to drive down those expenses.

So we've taken on a run rate basis a couple hundred million dollars of costs out of these businesses, but I think don't expect -- we'll continue to look at it it, but I don't think you will see a dramatic ramp-down from where we are.

Okay.

Thank you.

Thanks.

The next question we have is from Nigel Coe of Deutsche Bank.

Please go ahead.

Back to ADT, I know it's a relatively small part of the portfolio, it seems to have drawn a disproportionate amount attention, existing home sales are probably a bit more important.

As existing home sales fall do you see people disconnect from that?

Is that helpful to you in the short term?

Obviously the largest single reason for disconnects are moves.

So we do see that during periods like this where there are fewer existing home sales that the -- that does impact the fact that our disconnects are less on those homes.

Okay.

So that helps your organic growth because you see you have to drive the new adds -- drive the new additions, hard to get the organic growth.

Correct.

Second, you talked about the fire exits in Latin America and Asia.

Just want to confirm, doesn't sound like it will be, but would there be any dilution as those operations drop to discontinued operations?

No, there won't be any significant dilution from those businesses.

Again, those are relatively modest.

Again, other than NDC, which we are in the process of selling, most of these are actually wind-downs as opposed to selling of businesses.

So it impacts negatively our organic growth rate, but the cost and the revenues of those businesses remain in continuing operations.

So right now it's only the NDC that we have put into disc ops.

This quarter was a good example of that.

We did a fair amount of it this quarter.

It did lower our international organic growth rate in fire, by the three points that I mentioned, but you don't seat on the profitability.

It's helping our profitability because these are extremely low margin and marginal businesses.

We're not dropping them into disc ops.

on the buybacks it looks like the average price of the buyback was $40 per share.

That's broadly where you are now.

Is there any reason to believe you wouldn't still be aggressive for the buybacks at these kinds of levels?

No reason.

I think we've averaged about $39.60 $39.70, so you're close, on the buyback.

We still have authorization left.

I think you've watched our pattern and our actions over quite a few years here.

There's no reason to think we would change.

As we generate cash, we have room to buy back more.

Thanks a lot.

Okay, operator, we're getting close to the bottom of the hour so we have time for one more quick question.

Thank you.

We have a question from Deane Dray of Goldman Sachs.

Please go ahead.

Good morning, Deane.

Thank you, good morning.

Ed, would love to hear your comments on your approach to guidance.

You've had a nice beat this first quarter, came in ahead of that positive preannouncement, raised the bottom end $0.10, but the high end by $0.05.

Is this just inherent conservativeness or can you address what you might be thinking on how you addressed guidance?

We're feeling very good about the year, which is the reason we took guidance up.

We're not seeing anything that's bothering us except the one little corner of the retail market being soft, but everything is feeling good to us besides that.

And maybe I'll just put in a word, you've probably kind of said it the way I would say it, but we're one quarter into the year.

That's early.

Let's see how things progress here.

Just on that last point, it was interesting how with, absent that retail softness, which is understandable because that's not very new pressure on the retail side, but broadly you're not talking about any sort of industrial slowdown down or pressure or spillover from credit markets, and you're certainly seeing positive results in flow.

But beyond that --

That's true.

Believe me, we've been looking at this every week just because of what you hear in the news, and, look, a lot of the other big industrial companies reported and have said the same thing we've said.

I would point out we also look at our contracting business in its pieces, and when you look at it, it's very interesting that a lot of the work is happening because the codes and certain vertical markets, and, for instance, 40 to 45% of our fire business in North America to give you an example, is things like schools, universities, hospitals, nursing homes, and nothing is going to change there, in my opinion.

So, you know, we actually study it by vertical, and we haven't seen any of the verticals really move at all where we would be concerned except the retail end of our North America market.

So, look, just for your guidance comment, it it's early in the year.

Let's see how we progress and we'll update next quarter.

Thank you.

Okay, ladies and gentlemen, thanks for joining the call.

Look forward to talking to you over the next few days.

If you have any follow-ups, and look forward to reporting to you on our second quarter results which will be somewhere around the first part of May.

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