江森自控 (JCI) 2009 Q4 法說會逐字稿

Welcome and thank you for standing by.

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

After the presentation, we will conduct a question-and-answer session.

(Operator Instructions).

Today's conference is being recorded.

If you have any objections, you may disconnect at this time.

I would you now like to turn the meeting over to your host, Mr.

Ed Arditte.

Good morning and thanks for joining our conference call to discuss Tyco's fourth quarter results for fiscal year 2009 and the press release issued earlier this morning.

With me today are Tyco's Chairman and Chief Executive Officer, Ed Breen, and our Chief Financial Officer, Chris Coughlin.

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 there.

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

The press releases issued this morning and all related tables as well as the conference call slides can be found on the Investor Relations portion of our website, at Tyco.com.

Now let me quickly recap this quarter's financial results.

Revenue in the fourth quarter was $4.4 billion, which represented a 12% organic revenue decline.

Earnings per share from continuing operations were $0.44 and included $0.17 related to special items.

Earnings per share from continuing operations before special items was $0.61, and this compared to our previous guidance of $0.50 to $0.53.

Now, compared to the Street consensus of $0.54, our operations were better by $0.13, driven by solid operating performance in each of our businesses.

The net impact of higher corporate expense and below the line items cost us $0.06 per share.

Now, with that, let me turn the call over to Ed Breen, for some opening comments.

Thanks, Ed and good morning, everyone.

Although 2009 will be remembered as a year of significant challenges, I am pleased with both our operating performance in this economic environment, and how we have positioned ourselves for the future.

Before I get into our results for the quarter, I want to spend a few minutes reviewing our key areas of operational focus in 2009.

First, given the environment, cost management became our top priority.

As the economy weakened, we quickly responded with additional restructuring actions to reduce our cost structure.

Throughout the year, we were very active in executing these plans which resulted in charges of about $250 million.

These actions, which should provide incremental savings of $175 million in 2010, included staffing reductions as well as the consolidation of both back office operations and manufacturing facilities.

In addition to the restructuring actions, we launched various other cost containment initiatives which reduced our operating expenses in 2009, helping to partially offset the revenue decline.

The benefits from these efforts are reflected in our operating margin.

While our operating margin before special items declined 170 basis points year-over-year, this was primarily driven by the weaker results in Electrical and Metal Products.

The operating margin for the rest of the Company remained similar to last year, despite a $3 billion decline in revenue.

Next, we continued to invest in our businesses for long-term growth.

First, our large and growing service revenue base has provided stability and consistency through our performance in 2009, and now represents about 40% of our total revenue.

A significant portion of our service revenue is contractual recurring revenue in ADT, which grew 4% organically for the year with growth across all geographic regions.

Second, we continued to invest capital to grow our Company, targeting recurring revenue in ADT.

In 2009, we increased our capital and dealer spending level over the prior year, and coupled with the early stages of a multi-year ramp-up in our residential sales force in ADT, we grew our account base by 3%.

Next, we continued to devote additional engineering headcount to our R&D efforts.

We recently launched a wireless Electronic Security control panel, which provides secure wireless communication between the panel and all elements of our residential home security system.

Additionally, we recently developed an emergency management system for monitoring emergency personnel on the scene of a fire.

This technology not only allows site commanders to monitor those on the scene, but monitors air tank pressure and sends out an evacuation alert if danger becomes imminent.

In addition, our R&D centers in Shanghai and Bangalore are focused on developing products tailored to meet both the needs and cost considerations of local markets.

In addition, the emerging markets have grown nicely over the past several years, and although growth did moderate in 2009, the infrastructure build-out in these regions over the last few years has allowed us to strengthen our global footprint, while providing revenue and earnings diversification.

We currently operate or sell in over 40 emerging market countries, which account for approximately 15% of our total revenue.

Lastly, our strong operational focus and execution allowed us to finish 2009 with a stronger balance sheet than when the year began.

During the year, we actively managed our working capital, keeping our days flat year-over-year, despite the revenue decline.

Additionally, we made significant progress in settling most of our remaining legacy legal matters.

We ended the year with $2.4 billion of cash, which provides us with the financial flexibility to execute on our strategy.

Our priorities for using cash are clear.

First, investing in organic growth initiatives.

Secondly, funding productivity improvements in our businesses.

Third, making acquisitions.

And fourth, returning capital to shareholders.

Now let me give you a quick overview of our results in the quarter for each of our businesses.

Starting with ADT, our performance in the quarter exceeded expectations on both the top line and operating income.

Organic revenue was similar to the third quarter, with growth in recurring revenue helping to partially offset declines in our product and systems installation revenue.

We also saw continued improvement in our operating margin, both sequentially and year-over-year, as growth in the higher margin recurring revenue base, coupled with the benefits of cost containment initiatives and restructuring activities, more than offset the decline in volume.

The attrition rate remained flat with the third quarter, and account growth and ARPU continued their positive trend.

Next, Flow Control did somewhat better than expected on the revenue line, while the operating margin exceeded our expectations by a full margin point.

Improved productivity and cost containment initiatives allowed us to increase the operating margin in the quarter, both sequentially and year-over-year.

Turning to Fire, we continued to focus on increasing our service revenue, which is now about half of Fire's total revenue.

The summer seasonality of our service work as well as the additional benefits from restructuring and cost containment initiatives, result nd a better than expected operating margin in the quarter.

In Safety Products, the revenue line remained consistent with the prior quarter.

However, a sequential shift in product mix, coupled with cost savings, result in a stronger than expected operating margin.

And finally, Electrical and Metal Products returned to profitability in the quarter.

Although steel volume was flat with the prior quarter, the improvement in steel spreads resulted in better than expected operating margins.

Now let me turn the call over to Chris to discuss our operating results in some more detail.

Thanks, Ed.

And good morning, everyone.

Let me start in talking about ADT worldwide.

Revenue of $1.8 billion declined 5% organically, as the 4% growth in recurring revenue was more than offset by a 14% organic revenue decline in systems installation and service.

Recurring revenue, which represents more than half of ADT's total revenue, continues to be resilient in this environment.

However, systems installation and service revenue continued to be impacted by the weaker economy.

Despite pressure on the top line, the operating margin before special items in the quarter of 14.3% improved 160 basis points over the prior year and the full year operating margin before special items improved 70 basis points to 13.6%.

Cost containment actions and restructuring activities coupled with growth in our higher margin recurring revenue business more than offset volume headwinds, resulting in year-over-year operating margin improvement.

From a regional perspective within ADT, our US residential business grew its recurring revenue 6% organically in the quarter, and the operating margin before special items improved nicely over the prior year.

We continue to be opportunistic in this area, with a focus on growing our recurring revenue, which currently represents more than 85% of our residential business.

On a year-over-year basis, we have added headcount to our internal sales force, and increased our dealer spend, generating account growth of almost 5% and an increase in our average revenue per user of 3%.

Additionally, our residential attrition rate improved 20 basis points to 13.4% on a quarter sequential basis.

Turning now to our US commercial business, the revenue mix is quite different.

With 40% recurring revenue, the remaining 60% is related to systems installation and service.

Organically, revenue declined about 13%, as our commercial end markets continue to be impacted by the economic downturn.

However, the operating margin before special items improved year-over-year, as the benefits of restructuring and cost containment initiatives have offset the volume decline.

Orders remain flat with the prior quarter, as did the attrition rate at 14.1%.

Moving on to Europe, Middle East and Africa, organic revenue declined 10%.

However, the benefits of our restructuring actions are taking hold and the operating margin before special items improved almost 3 percentage points over the prior quarter, to a seasonally strong 7.4%.

In other regions around the world, we are predominantly commercial.

Organic revenue grew 5%, with year-over-year operating margin improvement.

The operating margin before special items for those regions was in the low teens.

From a global perspective, we continue to see positive traction in all of our key metrics.

Our account base grew 3% year-over-year, and excluding the impact of foreign currency, our average revenue per user grew 1% to $46.23.

Additionally, attrition held steady at 13.4%.

Now let me turn to Flow Control, which had revenue in the quarter of $1 billion, with a 10% organic revenue decline.

Valves declined 7%, Water declined 17%, and Thermal Controls declined 12%, as softness in the global economy impacted capital spending.

Before special items, operating income was $141 million in the operating margin was 14%.

Year-over-year, the operating margin before special items improved 40 basis points, despite the volume headwind as we continue to drive our cost management initiatives and restructuring actions.

For the full year, the operating margin before special items remained flat with 2008, at 14.3%, despite a $568 million revenue decline.

This results from the actions we took throughout the year to address our cost structure.

Excluding currencies, order rates declined 18% year-over-year, but grew 11% sequentially, primarily due to a large previously announced Pacific Water project order.

Excluding this project, order rates were down 27% year-over-year and about flat sequentially.

The backlog of $1.7 billion increased $65 million or 4% in the quarter, but declined 1% if I exclude foreign currency.

Now, turning to the Fire business, revenue in the quarter of $904 million declined 7% organically, with continued softness in both service and systems installation revenue.

Within service revenue, the growth in inspection and maintenance contract revenue was more than offset by customers delaying other service projects, resulting in an organic revenue decline of 5%.

Our systems installation activity, which represents about half Fire's revenue, declined 8% organically as it continues to be impacted by the economic environment.

Backlog of $1.2 billion decreased $58 million or 5% in the quarter, and excluding foreign currency, backlog declined 7%.

Operating income before special items was $96 million the operating margin of 10.6% improved 60 basis points year-over-year.

We have been focused on cost reduction activities globally and it's these initiatives that have helped again to offset the volume decline.

Turning next to our Safety Products business, revenue in the quarter of $382 million declined 22% organically, which is about what we had expected.

Weak demand in our end markets resulted in organic revenue decline of 26% for Fire Suppression, and 21% for Electronic Security.

Organic revenue in Life Safety declined 13%, primarily due to a decline in municipal spending.

Before special items, operating income was $60 million, and the operating margin was 15.7%.

Our operating margin was driven by product mix and the favorable impact of cost containment initiatives and restructuring activities.

Year-over-year, however, our operating margin continued to be significantly impacted by underabsorption in our manufacturing facilities.

Despite this lower revenue generation, we did not back away from our R&D and sales and marketing growth initiatives.

Additionally, we executed restructuring actions totaling $63 million during the year, which included the consolidation of three manufacturing facilities into a single 200,000 square foot manufacturing facility in a lower cost region.

These actions, coupled with our cost reduction activities and initiatives, are positioning Safety Products for enhanced overall performance when these end markets improve.

Now I'll turn to Electrical and Metal Products where revenue of $326 million declined 41% organically.

The revenue decline was primarily due to significantly lower Average Selling Prices for both steel and copper products and to a lesser extent, a decline in volume.

Operating income before special items of $21 million was a nice turnaround from the $7 million operating loss in the third quarter.

The sequential improvement was entirely attributable to improved steel spreads.

Although average selling prices remain relatively flat with the third quarter, the average cost of our steel inventory sold declined significantly.

As we look ahead to 2010, we are not planning on a pickup in volume, but the improvement in steel spreads is expected to result in full year operating income before special items of approximately $120 million.

For the first quarter, we expect revenue of about $300 million, and the operating income before special items of about $20 million.

Before I turn the call back over to Ed, let me touch on a couple of other important items.

First, from a cash flow perspective, we had a strong finish to the year.

Our free cash flow for the fourth quarter was $614 million, and included $84 million of payments for restructuring and legacy legal matters.

For the full year, free cash flow was just over $1.2 billion, and included $261 million of payments for restructuring and legacy legal items.

For our cash flow performance is partly attributable to the strong focus on working capital.

We aggressively managed inventory levels, working the balance down over the course of the year, and the quality of of our Accounts Receivable remained solid.

Next, corporate expense in the fourth quarter, excluding special items, totaled $149 million.

This is somewhat higher than our previous guidance, due mostly to a one-time payment made to some of our employees whose salaries were frozen earlier in the year.

Our full year corporate expense including(Sic-see presentation slides) special items was $447 million, a 13% expense reduction.

As we look ahead to 2010, we expect corporate expense for the full year to approximate $430 million, with about $110 million of that expense in the first quarter.

Turning now to interest expense, we had $64 million of net interest expense in the quarter.

Given current interest rate environment, we issued $500 million of long-term debt in October, with a 4.125% coupon, resulting in incremental net interest expense of about $3 million per quarter.

Full year net interest expense in 2010 is expected to approximate $270 million.

Next, other expense in the quarter of $19 million is primarily related to a reduction of tax liabilities for periods prior to the separation of Tyco into three companies.

As these tax liabilities are governed by a Tax Sharing Agreement, we decreased the receivables due from Covidien and Tyco Electronics.

This resulted in $18 million of expense, which is reported as other expense.

This was offset by a favorable benefit reflected in our income tax line.

Turning to our income tax rate, our GAAP tax rate for the quarter was 9.9%, adjusting for special items our tax rate for the quarter was 14.6%, bringing our full year tax rate to 15.7%.

For 2010, we are expecting an annual tax rate of 19 to 20% due to more income in higher tax jurisdictions.

I also want to touch on pension expense for a moment.

Our year-end pension valuations and related discount rate will result in increased pension expense in 2010 versus 2009 of approximately $0.05 per share.

We do not expect a significant impact on our cash contributions.

Finally, our weighted average share count for fiscal 2009 was 475 million.

Normal option dilution is expected to increase the share count to 480 million shares, I'm sorry, in 2010.

Before I turn the call back over to Ed, I want to quickly explain the impact of currency translation on our 2009 results, and our assumptions of the impact currency may have on our results in 2010.

As you know, more than 50% of our revenue is generated outside of the United States.

The strengthening of the US dollar in fiscal 2009 reduced our reported revenue by 7.5 percentage points.

With the recent weakening of the US dollar, and assuming the exchange rates at the end of October remain constant, we expect translation to favorably impact our 2010 full year revenue by approximately 5 percentage points.

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

Thanks, Chris.

Let's turn now to what we are seeing on our order activity.

Orders improved 4% on a quarter sequential basis, primarily related to a new Pacific Water project.

Excluding the Pacific Water project, orders were relatively flat sequentially, which is similar to the last few quarters.

Although we continue to see a pickup in quoting activity, this is not yet translated into a meaningful change in order levels.

While order conversion is different from business to business, it typically takes three to six months for an order to convert into revenue.

We currently expect our order activity in the first half of the year to be similar to the last few quarters, and we are assuming just a modest improvement in the second half of the year.

From a revenue perspective, this will result in organic revenue decline in the first half of the year in the low double digits.

Where the year-over-year comparisons are more challenging.

We expect much smaller organic revenue declines in the second half of the year, with the possibility of positive organic revenue growth in the fourth quarter, if economic conditions improve somewhat.

Let me also comment on a few other items that will impact our results in 2010.

First, we expect incremental savings related to our 2009 restructuring actions to generate a year-over-year tailwind of $175 million.

While most of these savings may be needed to offset absorption issues driven by lower organic revenue, a portion of these savings will fall to the bottom line.

Second, improving steel spreads in Electrical and Metal Products should generate incremental operating income of approximately $100 million year-over-year, based on our current estimate.

Next, as Chris mentioned and based on our current exchange rates, the US dollar could be a tailwind for us in 2010, and is currently estimated to favorably impact our full year revenue by 5 percentage points.

Finally, we have assumed that our cash continues to be invested in short-term deposits, our guidance does not assume using our cash for acquisitions or share repurchase activity.

Based on these assumptions, we are planning on a year with organic revenue down 4% to 6%, which could be fully offset by currency translation.

This would result in total 2010 revenue of approximately $17 billion.

Despite the organic decline, we expect Tyco's overall operating margin to improve 40 to 60 basis points over the 9.3% operating margin before special items we had in 2009.

When combined with the other below the line items Chris updated you on, this is expected to result in full year 2010 earnings per share from continuing operations before special items in the range of $2.30 to $2.50.

We are planning on restructuring actions in the range of $100 million to $150 million in 2010.

As the timing of when these restructuring charges will be incurred and the exact amounts of these charges is difficult to forecast, these charges are excluded from our guidance.

We will, however, continue to provide you with all other restructuring details on a segment by segment basis.

Now let me give you some thoughts on 2010 from an operational perspective.

In ADT, our recurring revenue grew almost 4% organically in 2009, with growth in our account base and average revenue per user.

Our outlook is for recurring revenue continuing to grow in the 3 to 4% range in 2010.

On the other hand, systems installation and service revenue declined 11% organically in 2009, and 14% in the fourth quarter.

Although we have seen a stabilization in orders, we expect systems installation and service revenue to decline organically in the 10% range in 2010, with the largest decline in the first quarter, given the tougher compare with the year ago.

So for all of ADT, we see positive growth in recurring revenue, offset by a revenue decline in systems installation and service.

This is expected to result in a full year organic revenue decline of approximately 2 to 4%, with a year-over-year improvement in ADT's operating margin before special items.

Next, our Fire business was still in a positive growth environment in the early part of 2009.

We expect to begin the first fiscal quarter of 2010 with an organic revenue decline around 10%, which should moderate during the remaining quarters, resulting in a full year organic decline in the mid to high single digits.

We expect that the actions we have taken this year to reduce our cost structure will partially offset the revenue decline, resulting in an operating margin before special items in the range of 7.5% to 8%.

Next, Flow Control is where we expect the most significant year-over-year change, due to the strong first half of 2009.

While order activity has remained flat over the last several quarters, it is the near term timing of deliveries that impacts revenue.

Based on our delivery schedule, we expect a sequential revenue decline of approximately $100 million in the first quarter, and this decline is expected to result in an operating income before special items of approximately $110 million.

For the full year, we expect to see an organic revenue decline in the high single digits, which would adversely impact the operating margin by 100 to 150 basis points, due to volume deleveraging.

Lastly, our Safety Products business had a seasonally strong fourth quarter.

However, we expect the economic environment pressure, our performance particularly in the first quarter where the impact of seasonality on revenue coupled with volume deleveraging is expected to result in operating income before special items of approximately $40 million.

For the full year, we expect organic revenue to decline in the upper single digit range, with an operating margin before special items similar to 2009.

Now let's shift to guidance for the first quarter.

We anticipate an organic revenue decline of 11 to 13% for total Tyco.

Partially offsetting this decline will be the currency tailwind which we are currently estimating to be about 5% of revenue.

This will result in total revenue for the quarter of approximately $4.1 billion.

This is about a $300 million sequential revenue decline, which is typical, given our fourth quarter is our strongest seasonal quarter.

We are expecting a normal volume pickup throughout the remaining quarters, which is built into our full year outlook.

We expect our earnings per share from continuing operations before special items in the first quarter to be between $0.48 and $0.50.

Thanks for joining us on the conference call this morning, and operator, if you could open it up for questions.

Thank you.

We will now begin the question-and-answer session.

(Operator Instructions).

One moment, please, for our first question.

Our first question comes from Scott Davis with Morgan Stanley.

Hi.

Good morning, guys.

Good morning, Scott.

I understand you've been very conservative on guidance the last two years and you've successfully beaten guidance quite nicely.

Can you give us a little bit of a -- maybe a frame of reference on what kind of macro environment you're looking at for 2010, how you view the quarters sequentially getting better because your first quarter guidance certainly I think is probably below consensus, looks a little conservative at least based on our model and given the currency tailwind that you'll have, incremental currency tailwind and not much of a pension issue, you just put up a $0.68 number, seems a little bit conservative.

Maybe just a little bit of color around that.

Let me mention the first part of your question on kind of the macro picture to make that clear.

We have assumed that the current environment tips well into the year and as we said in our prepared remarks with some modest, and I emphasize modest, pickup in order activity in the second half of the year.

So I don't know if we're being conservative there, but we're not seeing the order pickup yet.

We are seeing the quoting activity picking up.

But we're making that as an assumption.

So assuming kind of orders stay at these levels.

As far as the first quarter guidance goes, you know, when you look every year kind of our fourth quarter to first quarter, we clearly have seasonality because our service volumes drop off from the higher activity we have in the summer months.

And if you look at that, we're expecting our revenue will drop $300 million to $320 million, which gets you to that $4.1 million, and you kind of just do the math on the detrimental margins off of that $320 million of revenue, you get $0.17, $0.18 of earnings, of volume deleveraging there and then there's a little bit higher tax rate, interest and pension which is another $0.04 or $0.05.

If you kind of take that off, $0.68 or $0.70 in the quarter we just did, and you kind of back that down, that's that seasonality you get that gets us into that guidance range we just gave.

Our revenue will pick up as the year goes and with all the cost actions we've taken, Scott, we should get very nice leverage off of that to improve our bottom line as the year goes.

Okay.

Can you talk --

We'll see more of the restructuring benefits as we get ask in the second half because we were back weighted in our restructuring actions as well.

We did a lot in the fourth quarter.

So we'll get some of that benefit as Chris said.

That was going to be my second question, really, is how much of that cost out is structural versus how much of it is going to come back into the system?

I think we mentioned this last quarter also, that kind of two-thirds to 70% of it is structural change.

That's why we mentioned in our remarks, we've been very focused on back office consolidation, manufacturing, and distribution center consolidation and although we have done the staffing reductions on what I'll call our variable overhead businesses, that will come back.

That's the 30% that will come back as volumes pick up.

But what I feel really good about is we really focused on what is the structural changes we can make that will last for us and, for instance, the comment Chris mentioned, we consolidated a few facilities in our Safety Products business from what I considered semihigh cost regions into one very low cost center and we're already seeing the benefits.

We're going to continue to put more volume into that low cost facility.

So it's that type of thing that's more permanent.

Just a quick cleanup item.

You mentioned the Australia Water project.

What's the timing of kind of deliveries there and the revenue recognition?

Mostly -- it mostly ships, I'd say 80% of it, 90% of it ships in fiscal 2010, which is good.

And the order was approximately $120 million.

We're giving you the numbers with and without it in, so you can kind of see, we don't say order activity across the board has picked up, quoting.

Flow Control is a business where you get one-time nice orders.

It's a real order and it's going to ship this year.

Okay.

Thanks, guys.

Thanks, Scott.

Next question comes from Jeff Sprague from Citigroup.

Good morning, Jeff.

Good morning, everyone.

Ed, the absence of the use of cash in the guidance is a bit conspicuous, certainly the playbook you mentioned for use growth and restructuring and deals and share repurchases is kind of the same refrain.

But I just wonder, given how liquid you are at this point, do you actually see an increase in deal opportunities and at what point if deals don't materialize, do you start thinking about share repurchase?

Jeff, I think you asked the question while -- we like to add on clearly onto our Fire flow or security platform.

With some bolt-on opportunities.

And I think there's the potential that there could be a couple things that are there during the year.

I would say, though, overall you know we bought shares back in significant quantities in the past and I'm not going to put a time frame on it.

But we're not going to sit on gobs of cash for long periods of time.

There's no need to do that.

But we are balancing a couple different opportunities here between share repurchase and some bolt-ons and the things we're looking at I consider right down the middle of the plate for us that we could execute on with low risk and good returns to our shareholders.

So you know, we're going to play that out for just a little bit.

Just to add to that, Jeff, again, we're in a solid cash position.

Our balance sheet is really strong as we go into 2010 and again, given the current economic climate and state of the financial markets and opportunity, potential opportunities that we see out there, we also want to maintain that flexibility and as we said, we look at share repurchase opportunities all the time, but I would not expect any in the first quarter.

Jeff, I would also point out just cash going through 2010, that as we always talk about in this portfolio, there's no big blips going to occur in our spending here.

We are going to restructure maybe another $100 million to $150 million this year.

That would be good structural changes for us.

So we'll spend some money there.

And we're going to continue to spend on the dealer side and you saw we ramped that up nicely this year because we're getting good economics there and better economics in this past year than we had in the prior year even and we expect that to continue.

So -- but having said all that, with no big blips coming, we should have consistent cash performance again.

And, you know, the only thing that would maybe knock us off of kind of approximating net income, which we should be able to do again, we might build working capital during the year and that would be a nice problem to have.

Could you just elaborate a little bit on the dealer spend?

So it sounds like you're seeing some increased opportunities to do some bulk buys.

Are those distressed, smaller players?

What's behind that?

And is there a lot of that type of opportunity in 2010?

Yes, again, we're building both our internal sales force and there are two aspects of this.

One, our dealers as well as our internal sales force, we ramped up our marketing programs, our training programs for our sales force, so both our internal force as well as our dealer network are becoming more productive and had a very solid year in bringing more accounts in.

In addition to that, as you said, we have seen some increased availability of accounts and I think it's a number of things there.

I think some of the smaller players in the environment that we're in have had some economic issues and wanted to be able to monetize some of their accounts, and there aren't many players out there with the size, scale and balance sheet that we have to be able to take advantage of it.

So we were able to do some of these bulk -- what we call bulk account purchases at a much more favorable term.

So I think it's the economic environment, it's the lack of competitive activity in these that have made these available to us at much higher rates of return that we've seen historically.

Thanks.

We did about $150 million of bulk account purchases this year.

And our dealer spend was up.

And our dealer spend was also up.

So again, increased productivity, plus the availability of some very good accounts at lower rates.

And just I guess one finally, if I could squeak it in, just ADP Europe does look better.

You cited seasonality which certainly helped.

Where are you at in the process of kind of addition by subtraction, trying to get out of some of the secondary and tertiary cities which I know hit the margins.

You'll probably see in the near future, some announcements on some exits right to your point that are not going to be scalable for us or the profit targets that we want going forward.

We're still doing the back office restructuring, as the number one initiative, and clearly 1A is exiting some of these locations and keeping our core of Europe together and you'll see some of that very shortly.

We're making good progress, but nothing that's been public yet.

Thank you very much.

I would expect, though, that as we're looking at our volume in Europe and particularly in the first quarter and first half, we're going to see continued sort of double-digit organic revenue declines which will continue to put pressure in the near term on those margins in Europe.

So we're likely to see it a decline from Q4 to Q1 in that margin we saw in Europe.

Thanks.

Thanks, Jeff.

Our next question comes from John Inch from Merrill Lynch.

Good morning, John.

Good morning, everyone.

Can you hear me?

Just fine.

So just trying to sort of put together some of the pieces of your overall guidance, starting from the 235 you earned this year.

Restructuring by your numbers is about a $0.30 tailwind and I think you said operations, which I'm assuming includes the temp improvement, that looks to be about $0.10 based on the $17 billion.

So offsetting that, pension a little bit, a little bit of interest, but I don't know.

I mean, I'm not coming up with something that would even have a flat number in the range.

Could you help me?

What am I missing?

Also, is the entire tax increase, that is a function of temp?

It wasn't entirely clear.

On the quick one, on tax, obviously the -- having less income in the US with high jurisdiction, high tax jurisdiction, that has an impact as we've said all along of about 2 to 3% so on a full-in basis, we had a tax rate this year of about 17%, when I take that other income, other expense item we had in Q4 and you add the 2 to 3%, that's how you get to that rate.

I think the one thing you're missing, I'll ask Ed also to comment on this, on just that year-over-year, it's the deleveraging impact that we have of the organic revenue decline on our manufacturing businesses, and so while we do get a tailwind from FX, it doesn't cover that kind of a tailwind.

So Ed, you also want to comment?

Yes.

And John, let me just comment.

Chris made a good point.

We're saying that our organic revenue will be down 4 to 6% this year from the prior year.

If do you the math on that, we're going to -- you'll deleverage kind of decremental margins 30, 35% on that.

So you can pick a midpoint and do the math.

And then you get the tailwind, it gets you back to the $17 billion of revenue on currency but you kind of get 10% bottom line help out of that so you've kind of got a 20% detrimental margin negative headwind which eats up a lot of -- we need all of that restructuring to offset that.

So that's a piece of the math.

Maybe let me walk you through a way to look at it from 2009 to 2010, putting that aside, because you've got to take that into account.

You know, we did $2.36 this past year.

We're telling you that -- and again, these are swags, because you never know with Electrical and metal but we think that's $120 million of profitability this year, you get $0.18 of earnings from that that you didn't have the year before.

And then all the items that Chris mentioned, corporate, pension, other below the line items, you lose $0.17, so you're kind of still sitting at $2.37, about what we did in 2009.

And then all our other operations excluding temp we're staying with our guidance of $2.30 to $2.50, you're either a little below $2.37 or you're somewhat above $2.37 to get closer up to $2.50 and the two things I would mention to you there is we expect some headwind as we mentioned from flow.

That might be conservative in the second half of the year but that's our assumption.

And we expect security to be positive to us.

So you gate little positive or negative off that $2.37.

Okay.

That makes sense.

Maybe shifting gears a little bit, emerging markets, Ed, that you mentioned, are you going to be -- if you look at the CapEx budget for next year, what is it?

And are you anticipating materially spending up in some of these emerging markets either on a hiring basis or a physical plant basis or something like that?

We do expect to spend more money.

We're very focused on the emerging markets.

By the way, four of them, the big ones, Brazil, Middle East, India and China specifically, as far as our infrastructure goes.

And by the way, of note, we added significantly in our Fire and security business in China.

We doubled the number of offices that we have because there service locations around different markets in China as an example and we would expect to add to that again this year.

Maybe the good news to that is that does not really cost a lot of money in the scheme of Tyco's numbers.

These are not big facilities that you spend $100 million on.

They're a lot of locations.

Some R&D centers.

We're opening up service centers and then we pump our products through those.

So we are definitely adding.

To us, it's a lot of activity.

But then when you sit back and look at the dollars, it's really not a lot.

So that's the activity going on.

And I would expect -- Chris, you could comment a little more on the CapEx, but on the dealer side, and the bulk purchase side as Chris mentioned, if the opportunities are there at the right economics, we'll spend whatever we can spend to get those accounts and on the CapEx side, I don't see much of a change from where we've been running.

I think our CapEx will remain relatively stable and again, we'll flex up or down based on the market on the dealer spend.

The other thing I'll mention, John, around emerging markets is obviously we'll also look at acquisition opportunities that could help build our presence in certain of those markets as well.

Lastly, Ed, you were pretty excited about the generation of these interactive services for ADT.

I think some of the stuff was in a beta test.

Would you expect any kind of official launch in 2010 or maybe just a little bit of an update there.

I would think we do launch in 2010.

I won't say it will be a full-bore roll-out across all regions, but I would expect we would be out of beta test and into some type of a roll-out, and clearly that would be in the second half of the fiscal year.

I won't get into all the details, but we are still feeling positive about it, the technology is working nice.

There is a certain part of the market that's going to want this type of product.

What we're still testing is where are those price points, what's the tradeoff between volume and percent of customers you can get and the price you charge for it and we're still working our way through that in trials but we're feeling good about that, and it will be a second half of 2010.

Great.

Thanks very much.

Our next question comes from Steven Winoker from Sanford Bernstein.

Good morning.

Good morning, Steve.

First question, just simple on pricing and cost relationship, pricing across Flow, Fire, ADT, what trends are you seeing now?

What are you building into your expectations for next year?

Steve, we are seeing some pressure.

I mentioned this last quarter.

I'd say we're maybe seeing a little bit additional pressure in a little bit in Flow, some on our system installation side and as I mentioned last quarter, we see some of our sprinkler business itself, actually the first area we saw it.

However, having said that, as you've noticed, we've been working very hard on the cost side of the house on our lean side, our Six Sigma and maybe even more important, it's the environment with our suppliers.

We've been very direct dialogues, if we're seeing a little bit of pain we need you to be our partner here.

We're together long-term.

And we've been able to kind of mitigate any of that as you can see across all four of our platforms, Electrical and Metal, by holding our margins flat year-over-year.

So a little bit of price pressure, nothing that has me alarmed but we are seeing some and I think it's just the longer that the downturn kind of stays and orders don't pick up you would tend to see a little bit of that, but we've been able to offset that with good actions with our vendors.

I think I heard you say that decrementals you were expecting in the 20 darn-was it the 20% range volume line?

30 to 35.

Okay so.

In the fourth quarter, what my numbers showed decrementals were about 18% net across all the businesses.

But upwards of 37% of the E&P and lower numbers elsewhere.

Is that not consistent with what you think you did?

Have to go through the numbers with you, Steve, just to verify.

The only reason I'm saying that is if it was 20% in the fourth quarter and you're looking at 30% plus decrementals next year, what are you expecting to get worse?

The one thing that is more of a pressure point as we mentioned -- and again, it might be just the first half of the year.

We don't know yet.

Is Flow Control, because it's a good margin business and it's a fixed overhead business.

Okay.

So we held the market flat, exactly flat year-over-year, which I thought was a very nice accomplishment by the Flow Control team.

And I compliment them on that.

But that gets harder and harder to do if you continue to see the softness so I would think that's the one area.

And we point that out.

We think the margins are going to drop 100 to 150 basis points in the forward guidance that we gave you.

Our first quarter is always our seasonally lowest quarter, just to point to that.

So again, the revenue decline, the absolute revenue decline is going to impact the margins in Q1.

Steve, that's where we did refer -- Ed referred to the 30% really only for the first quarter because as Chris just pointed out, there is a big seasonal change north of $300 million in terms of revenue and that's just a temporary, if you will, deleveraging.

Okay.

So that -- those decrementals are for the first quarter.

Correct.

That happens every year on our volume.

There's some years we've been down 250.

There was a year we were down in the 400s.

It's very typical of of our seasonality.

That's where we see it.

Two more questions, just quickly.

The 70%, two-thirds to 70% of the structural costs that are out, for the part that comes back, are you anticipating that I assume, given the current climate, not in 2010; correct?

Well, the way -- yes, the assumptions we made is that that would not come back because we're saying we don't see volumes picking up much at all and certainly not on the systems installation side.

We're kind of assuming that stays flat where it is.

When it does come back, though, a lot of that will be kind of the feet on the street, it's the men and women out in our vans doing a lot of the service, the systems installation work, so that's where you get that kind of of variable add-back.

Although we would bring a chunk of that would obviously be in permanent employees coming back, we will be careful and flex that with some third party work so we don't -- you know, we're very cautious as we bring it back on as we did in the past.

Okay.

And then --

That increase would not negatively impact margins.

And then finally, on the top line, the biggest swing factors at least in the first quarter that you're looking at affecting the top line, positive and negative?

Well, the big one would be flow, where we expect $100 million reduction in volume from a billion to about $900 million.

That would be the single biggest piece.

Electrical, metal, we give you the exact number on that.

Is going to be down and Fire as well.

And Fire seasonally down and ADT will keep the same dynamic it's had, recurring growing systems down a little.

Any place you could see a positive surprise?

I don't know if we want to say a positive surprise.

Again, I think we're not seeing a big uptick in the orders but we're seeing some quoting activity, so as we get into the second half, again, if we saw some of that come through, with some of our additional restructuring savings, but we're sort of estimating sort of business as we see it right now.

Thank you.

The two big things will be what Chris mentioned.

We are going to do another $100 million to $150 million of restructuring.

Can we get some benefit of that in the second half of the year.

And then, do orders pick up at all.

I think for a lot of our peer companies, if orders pick up some, we're all going to get nice leverage here.

But again, not counting on much.

Thank you.

Our next question comes from Deane Dray from FBR Capital Markets.

Thank you.

Good morning, everyone.

Good morning.

Just to follow up on your last comment there regarding the restructuring expectations, what would drive you to either the low end or the high end on restructuring plans for 2010?

Good payback programs.

We're analyzing some now.

We've got some more coming in from the team.

As you can see, we got good leverage on the dollars we spent.

So we've really stressed the team that we put certain parameters around the paybacks that we want on it.

If we get $150 million in with the right payback, we're going to do it.

If it's a little less than that, that's where we're end up.

The other thing is just volume.

If we see continued pressure on the volume side that we don't see coming back, we'll have to continue to take cost out.

So as we -- if we see volumes start to pick up in the second half, then there might be less of it.

I will -- by the way, I will point out, Deane, and we made this comment for everyone, we've been very careful not to cut what I would call our growth initiative spend.

I'm really pleased, with we did that through 2009.

Our R&D headcount was up in 2009.

We expect it to be up again in 2010.

And as can you see, we're not skimping on our capital spend or our dealer or bulk spend, however you want to look at that.

By the way, as I mentioned in my prepared remarks, I won't get into the details on numbers because of competitive issues but we are adding headcount to our sales force on the residential side of ADT.

As you shift into what's now the second year of the restructuring activities, what changes in terms of the expected payback?

Some of the low lying fruit has been picked up.

Are you going to see a longer payback period on these projects?

It really depends on where it is, Dean.

I think that we generally have about a two year payback on these and we haven't seen a big differential.

Obviously, if we get into more manufacturing consolidations, they tend to have a longer payback.

But they can also be offset, depending on the mix of business, by the quicker payback in our variable cost businesses.

Great.

And then I may have missed these data points but did you say that the 2010 savings is now 175?

Was the previous number 150 and what's driving --

Yes.

What's driving?

In the second half of this year.

We expect as we move into 2010, particularly the second half, we'll get some benefits over what we did in Q4.

And then last data point on this restructuring, what's the expectations for the first quarter?

Did you say how much you might be doing?

No, we have not.

We haven't broken it out by quarter.

As we indicated, sometimes timing in a particular quarter is oftentimes difficult, depending on certain milestones that have to be met.

Away from the restructuring, on backlog, within Flow and Fire, any comments on pushouts, cancellations, just -- you said order activity, or quote activity seems high, but talk about specifically the pushouts and anything along those lines.

Very little on the pushout side.

Let me just give you the two data points again, our backlog in Fire was down 7% and our backlog basically held in flow, which by the way, to me was somewhat of a positive sign.

I thought we would eat into that a little bit in the quarter but that remains about flat.

We're not seeing the pushouts.

What we're seeing on the Fire side is the new stuff is down, the systems installation business is down, but not dropping any more but staying at those levels and the one thing we have seen, although we've seen this for a couple quarters, some people are holding off what I call some of our a little more recurring business in Fire on the service side and they're delaying some of their service work.

Not the contractual part of what they need to do with us if they have a maintenance agreement but those that normally would do a little more on the service side are holding off.

I sense you can't do that for too long because it's a Life Safety product.

You've got to be really careful there.

But as you notice, we did see 4 to 5 points of organic decline in that part of the business the last couple quarters and I've got to think that doesn't last too long but the systems installation part I think could potentially drag out a little bit longer here.

And the flow side is where we've seen even more of the quoting activity and I noticed a couple of the peer companies in that space have also said the same comments.

I think it's pretty universal at some point you would think that's going to convert into some additional orders but, you know, some of these are big projects.

People have to fund them.

They're multi billion dollar projects.

Our assumption is lets' just assume it doesn't happen much this year and how do we plan around that.

We need to move on to some other folks.

I'll follow up with you offline.

Operator, next question.

Our next question comes from Nigel Coe from Deutsche Bank.

Good morning, Nigel.

Good morning.

Nice and short.

Do you call out what your dealer account acquisitions, what's in your guidance for 2010?

We did not.

But as Chris indicated, we would expect -- obviously depends on market environment, particularly with respect to the bulk activity, the opportunistic purchases, but not ill logical to think that your spending in 2010 could be very similar to 2009.

We can't count on those big bulk account purchases, so again, we'll look to that but that's the swing factor.

We had about $150 million of those.

So could it be $50 million?

It could be 50.

If we can get another 100, we'll get another 100 if they're the right economics.

Every $100 million delta, given you're assuming cash at whatever it is, 1%.

Getting pretty good returns on dealer counts.

If you spend an extra $100 million, does that have a material impact on EPS?

Depending on the time of year you do it, but it wouldn't have a great impact in the first year.

Okay.

I could take you through the math offline.

But you're right, these are -- they're quite profitable in terms of if we can find the accounts with the right credit scores and able to get the right kind of a transaction where, again, we usually have a holdback where if the accounts go bad in the first year or so, we put them back to the seller.

So if we can still do those kinds of deals, we'll do them.

Okay.

And as you know, what it does is it adds -- continues to add to the solid recurring revenue base which has done well in this environment.

Okay.

Great.

Two quick ones for me.

First, on electrical and metal, you predict $20 million for 1Q and $120 million for the full year.

I'm trying to understand the sequential decline from 4Q '09 to 1Q 2010 there.

It's about the same.

We don't really --

okay.

But why is it flat?

Why wouldn't we see an expansion in the EBIT, Q on Q, given that the spreads are widening.

Spreads widened in the fourth quarter compared to the third quarter but we're really not in an environment now where unless prices increase from where we are today, spreads will widen further.

So it's really our guidance for the first quarter is really a continuation of what we saw in the fourth quarter of 2009.

Now, obviously, market conditions in the steel market move around and can move around quickly if we see an expansion in price, that obviously would be helpful to our spreads and helpful to our numbers.

We're not in this environment, as we indicated in our remarks, indicating any uptick whatsoever in volume so it could only be spread and spread could really only come based on where we are today from better price.

Paper products, you talked about the margin uptick there being primarily mix.

Did we see any production uptick, though, Q on Q?

We said production -- you mean volume?

Volumes through the factories.

No, no.

In fact, organic revenue has continued to decline and so we're expecting that again in Q1.

Some of that is the seasonal mix.

We're going to -- I'm going to give you one last one then we're going to move along and I'm happy to follow up offline on any other ones.

I'm good.

Thanks.

Next question comes from Shannon O'Callaghan from Barclays Capital.

Good morning, guys.

Good morning, Shannon.

On the recurring revenue mix, sort of at ADT, are we seeing a shift in the drivers there?

I mean, the account basis is now accelerating in terms of growth and the ARPU is kind of decelerating down to 1%.

Is they more juice left in the ARPU or are we seeing a shifting gears here?

Shannon, let me make a quick comment and Ed or Chris may want to jump in.

I think one of the things that's important to recognize with respect to the ARPU is that that ARPU that we're giving you is total ADT-wide ARPU, both residential and commercial.

And in the environment that we're in right now, we're adding accounts on the residential side but the commercial side, given what's going on in the economy, has actually seen some modest loss of accounts.

And so when you think about that, you're losing a commercial account.

It's something in the 80 to 90 range in terms of monthly revenue.

You're bringing in a residential account at much lower, maybe in the 35 to 40 range.

That puts if you will a little bit of a structural headwind on your ability to grow ARPU at a much faster rate.

So that's one of the things that is kind of keeping that where it is in this environment.

I think, look, that's the big point and maybe point out one comment that Chris made in his comments.

I'll use North America as an example.

Our ARPU in north -- our counts grew 5% and our arrest you pew grew 3%.

That's right at our point.

We're actually keeping the ARPU moving along but it's being offset when we give you the number lumped together just because of the commercial.

Just think about the strip mall kinds of shops.

Those are the ones that are hurting the most.

That makes sense.

One more quick one.

Just on the Fire services point, of that services part of the revenue base, how much of that would you characterize as this kind of more discretionary stuff that you can defer if you want to?

Well, the service -- as we look at it, the traditional service, maintenance contracts and things like that, was relatively flattish but total service was down 5.

And I think that the difference between those two numbers was really this discretionary spend.

It's really small jobs that are done on site by our service organizations.

That's really where we've seen a slowing over the last couple of quarters and in particular in the fourth quarter.

Okay.

All right.

Thanks.

Okay.

Operator, we're well past the bottom of the hour.

We're going to try to squeeze in two more questions here.

The next question will come from Terry Darling from Goldman Sachs.

Good morning, Terry.

Good morning.

I'll keep it to one here and quick.

Chris, how do we translate the FX tailwind to the EPS level?

Does it take the Company average margin and go from there?

Is it anything more complicated than that.

It's not a whole lot more complicated but I would say our margins outside the US are slightly below that overall than what they are in the US, particularly when you think about the US ADT residential business but that's essentially how you do it, yep.

The reconciliation on Shannon's earlier question, the kind of pieces of the puzzle to walk from this year to next year, did that include --?

Yes, it did.

So that offsets partially, just partially the absorption and deleveraging of the organic revenue decline.

So it was sort of in the ops piece of the puzzle.

Yes.

Thanks very much.

Thanks, Terry.

Last question.

Our last question comes from Steve Tusa from JPMorgan.

Good morning, Steve.

Hi, thanks for fitting me in here.

Yes.

Just what was the ultimate incremental restructuring benefit for this year?

For 2010?

For 2009.

It was probably around $150 million, I would say.

So that compares to $175 million.

Actually, maybe a little bit more, between --

Incremental $150 million?

Yes.

Okay.

Great.

And then just looking at the -- just one last quick one on Flow.

I understand that there's a little bit of a mix impact from ForEx but the decremental margin on that revenue decline looks pretty severe, losing 100 to 150 bips on a high single digit revenue decline.

I know ForEx helps out.

Is there anything else going on here?

Maybe you could talk specifically to price cost in Flow Control?

I think when you say high single digits, what we're looking at, again, in the first part of the year it's going to be more significant than that.

We're doing some restructuring activities that we've gotten under way that should help us in the back half.

But again, we have a large manufacturing base, a type of business that flow is, a lot of manufacturing operations around the world and so as that volume declines, that's the deleveraging impact that can have a fairly significant impact which is why we think it's going to be 100 to 150 basis points.

But I mean, you guys had a 10%, pretty dramatic decline this quarter and the decrementals were only like 10%.

So that would tell you that there's maybe something else going on in this number other than just volume deleverage.

Look, I think that we did a really nice job getting costs out during the year and I -- hopefully we'll do better but it gets harder to get as much cost out next year after what we did this year.

That's what we're a little nervous about.

So the incremental --

We took enough cost actions on a fixed cost business to hold our margins this year on an almost $600 million drop in revenue.

That was a lot of quick, hard, costs action work.

Can't do it forever.

There's not as many easy ones sitting on the table.

So the 175 that you're going after, there's less of a focus on flow in that 175 than there was in the 150?

Well, no, it's going to -- we will focus just as much on flow but I will say to you, those projects to get them done and get the benefit are longer because it's bricks and mortar.

All right.

So it's not price?

No.

No.

No, it really isn't.

And again, 80% of that business is outside the United States.

So what happens when you have to do these projects in a business like flow in terms of restructuring, the time frame is much longer.

You're dealing with the workers councils outside the US and manufacturing environments.

So it's a longer term process.

All right.

Thanks a lot for the color.

Okay, guys.

So we're going to wrap up the call here.

We tried to get to as many of you as we possibly could.

I recognize there may still be some people on the line.

We're happy to follow up with you offline.

Thanks for joining us today.

We look forward to joining you again right around the first of February to discuss our results for the first quarter of fiscal year 2010.

Thanks for joining us.

This concludes today's conference.