江森自控 (JCI) 2011 Q1 法說會逐字稿

Welcome to the Tyco first-quarter earnings conference call.

All participants have been placed on a listen-only mode.

(Operator Instructions) Today's conference is being recorded, and if you have any objections please disconnect at this time.

I will now turn the call over to Antonella Franzen, Vice President of Investor Relations.

You may begin.

Good morning and thanks for joining our conference call to discuss Tyco's first-quarter results for fiscal year 2011 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, Frank Sklarsky.

Just a reminder 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 statement that we have included there.

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

The press release issued this morning and all related tables as well as conference call slides can be found on the investor relations portion of our website at Tyco.com.

Please also note that we will be filing our quarterly SEC Form 10-Q later today.

In discussing our segment operations, when we refer to changes in average revenue per user, backlog, and order activity, these figures exclude the impact of foreign currency.

Additionally, references to our operating margins during the call are excluding special items, which is a non-GAAP measure.

Again, these non-GAAP measures are reconciled in the schedules attached to our press release.

Before discussing our operating results, I just want to remind you of the segment realignment we completed this quarter.

We have created an integrated global fire segment which combines the fire suppression and life safety platforms of our former Safety Products segment into our Fire Protection segment.

Additionally, the electronic security products platform within our former Safety Products segment was integrated into our Security Solutions segment, which includes ADT.

Now let me quickly recap this quarter's results.

Revenue in the quarter of $4.4 billion was up 5% year-over-year with organic revenue growth of 4%, including a 1 percentage point contribution from the Electrical and Metal Products business.

Earnings per share from continuing operations attributable to Tyco common shareholders was $1 and included $0.25 of benefit from special items primarily related to the gain on the sale of a majority interest in the Electrical and Metal Products business.

Earnings per share from continuing operations before special items was $0.75 compared to our previous guidance of $0.65 to $0.67, driven by strong operating growth in our Security and Fire businesses.

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

Thanks, Antonella, and good morning, everyone.

2011 is off to a good start with both improved top-line growth and enhanced operating margin performance.

Our results for the quarter were driven by improved market conditions in most of our product and system installation businesses around the globe, as well as the continued benefits from our restructuring and cost-containment actions.

Additionally, the continued growth and our service and recurring revenue businesses, which represented 43% of our total revenue, also contributed nicely to our performance in the quarter.

Operating income before special items increased 19%, and the operating margin improved 130 basis points year-over-year.

Now, let me give you a quick overview of ourselves for each of our businesses; and then Frank will provide you with more details in a few minutes.

Security had a strong start to the year.

Organic revenue grew across all businesses and all geographies.

Our key metrics continued their positive momentum, and the synergies we expected from the Broadview acquisition are playing out as we planned.

On a global basis, Security's operating margin improved 240 basis points year-over-year, driven by increased volume in our commercial and product businesses, growth in our higher-margin recurring revenue business, and the continued benefit of restructuring and productivity initiatives.

Turning to Fire, revenue was about what we had expected.

The turnaround in order activity we saw over the last few quarters translated into positive organic revenue growth in SimplexGrinnell, our North America service and contracting business.

Additionally, our product businesses, which are Fire Protection and Life Safety, which comprise about 30% of Fire's total revenue, continued to grow nicely.

From an operating margin perspective, our results in Fire exceeded our expectations.

The continued benefit of restructuring and cost-containment initiatives and the selectivity of project work drove solid year-over-year operating margin improvement.

In Flow Control, the organic revenue decline continued to moderate, and the order trends have been encouraging.

Valves & Controls, which is by far the largest piece of the business, has seen positive year-over-year order activity for the last three quarters.

As there is a six- to nine-month order-to-revenue conversion cycle for Valves, we expect to see this part of the business return to positive organic revenue growth in the second half of the year.

We have also seen our earlier cycle actuation and instrumentation orders grow significantly over the past few quarters, and this historically leads our Valves business by six to nine months.

The operating margin performance in the quarter was impacted by a charge related to a project in a business that we retained as part of the 2008 divestiture of the Earth Tech business.

Excluding this charge, the operating margin was about what we had expected.

The improvements we have made in a business over the last few years as well as the pickup in order activity over the last few quarters is expected to improve our operating performance in the second half of the year.

Now I would like to comment on a few key areas of focus for 2011 -- growth opportunities, productivity improvements, and capital allocation.

First, we will continue to pursue growth opportunities in our three core platforms of Security, Fire, and Flow.

These investments will include initiatives that drive top-line growth such as the continued investment in our subscriber and dealer channels in ADT; incremental investments in R&D, which we plan to take up for the third year in a row; and increased spend related to sales and marketing.

We will also pursue bolt-on acquisitions to further strengthen our global competitive position.

Second, we will continue to focus on productivity.

We are seeing the benefits of past actions in our operating margin performance and have identified additional opportunities to further reduce our cost structure.

Third, capital allocation.

Our balance sheet is strong, and in early December out credit rating was upgraded by Fitch to A-minus, which follows a similar upgrade by S&P.

Over the last few months, we received almost $1 billion of divestiture proceeds and we ended the quarter with $2.1 billion of cash.

We will deploy our cash to fund our internal growth initiatives as well as productivity and restructuring plans.

Excess cash will then be invested in the areas that we expect will generate the best return for our shareholders, including additional bolt-on acquisitions as well as returning cash to shareholders.

Since November, we have repurchased 19 million shares for approximately $800 million of cash under the current $1 billion share repurchase program.

We recently announced a proposed dividend increase to $1 per share that our shareholders will vote on at our Annual General Meeting in March.

The proposed dividend represents about a 20% increase.

With that, I am pleased to turn the call over to Frank Sklarsky, Tyco's new Chief Financial Officer.

Frank joined the Company on December 1, and I am delighted to have him on board.

Some of you have already had the opportunity to meet Frank, and I know that he's looking forward to meeting our investors and analysts in the coming months.

Frank?

Thanks very much, Ed, and good morning, everyone.

With respect to our results for the quarter, let me start with Security.

Revenue of $2.1 billion reflected overall growth of 10% in the quarter, with organic revenue growth across all regions and businesses totaling 6%.

Recurring revenue, which now represents 57% of Security's total revenue, continued to perform well with 4% organic growth in the quarter.

Nonrecurring revenue, which includes product sales, system installation, and service revenue, represents the remaining 43% of Security's revenue; and this portion of the business grew 7% organically in the quarter, with a nice turnaround in the North American and EMEA regions, which grew for the first time in almost three years.

Nonrecurring revenue also benefited from strong growth in our security products business.

From a profit perspective, Security's operating income before special items in the quarter was $352 million and the operating margin was 16.7%.

Higher sales volumes across the globe, improved operational performance in the commercial business, and the continued benefits of restructuring on productivity initiatives drove a 240 basis point operating margin improvement year-over-year.

From a regional perspective within Security, nearly 90% of our North American residential and small-business revenue is recurring.

This recurring portion grew by 32% including the impact of the Broadview acquisition, and organic growth was 5% for the quarter, while our operating margin remained strong.

Year-over-year, our North American residential account base grew 31%, primarily reflecting the impact of the Broadview acquisition.

Growth in average revenue per user was 1% year-over-year and was impacted by the addition of Broadview accounts, which have lower monthly average revenue.

Heritage ADT sounds grew average revenue per user by 3% year-over-year mainly due to the favorable impact of higher monthly revenue rates from new accounts.

Our residential attrition rate of 13% improved 30 basis points year-over-year and was flat on a quarter sequential basis.

Touching on the Broadview acquisition, we have completed our ADT branding, financial, and HR process integration.

Looking forward, our near-term efforts are focused on completing field integration; and we continue to consolidate our branch office footprint to drive improved productivity and improved customer service.

Overall, the Broadview integration is progressing as planned, and we are on track to deliver on our synergy and earnings accretion targets.

Turning to our North American commercial business, the mix of revenue is very different from residential and small business.

65% of commercial revenue is driven by nonrecurring system installation and service, while 35% is recurring revenue.

After 12 consecutive quarters of organic revenue decline, our North American commercial business grew 6% organically in the quarter, and the operating margin improved 190 basis points year-over-year.

Our attrition rate improved 120 basis points year-over-year and 30 basis points on a quarter sequential basis to 12.8%.

Additionally, we now have three quarters of year-over-year growth in orders, with 13% growth in the first quarter.

Next, in the EMEA region we saw positive organic revenue growth for the first time in almost three years, with 1% growth in the quarter.

The operating margin in EMEA improved 600 basis points year-over-year to 11.6%, reflecting the continued benefits from restructuring and cost-containment initiatives.

In the Asia-Pacific and Latin American regions, where revenue is predominantly commercial in nature, organic revenue grew 8% with an operating margin in the low teens.

Turning to the key metrics for our overall global recurring revenue business, our worldwide account base grew 20% year-over-year, or 2% when adjusting for the accounts acquired as part of the Broadview acquisition.

Average revenue per user for our heritage ADT account base grew 2% year-over-year on a global basis.

As the mix in our account base has shifted more to residential with the Broadview acquisition, our global average revenue per user of $45.17 declined 2.5% year-over-year.

Our worldwide attrition rate of 12.7% improved 10 basis points on a quarter sequential basis.

Finally, Security products, which includes intrusion, video, and access control, had organic revenue growth of 21%.

Improved operating margins were driven by higher sales volume and continuing improvements in the operational performance of the business.

Let me now turn to Fire Protection, which now includes the fire protection products and life safety businesses realigned from the former Safety Products segment.

Overall, revenue in the quarter was $1.1 billion with organic revenue growth of 1.5%.

The largest piece of Fire Protection, our service and system installation business, is comprised of 55% service and 45% contracting.

In this part of the business, total revenue of $801 million declined 1% organically in the quarter.

Growth in our service revenue of 1% was more than offset by a 3% organic revenue decline in system installation partly due to project selectivity.

The remaining portion of our Fire Protection business, fire products, which includes both fire and life safety products, had revenue of $299 million in the quarter with organic revenue of 9%.

Overall, Fire's operating income before special items was $127 million in the quarter and the operating margin was 11.6%.

The 190 basis point improvement in margin year-over-year was driven by increased volume in fire and life safety products along with project selectivity in our service and contracting business as well as the continued benefit of restructuring and cost-containment initiatives.

Total Fire backlog of $1.2 billion increased 1% on a quarter sequential basis, excluding the impact of the deconsolidation of a joint venture.

Moving to Flow Control, revenue was $826 million in the quarter and the organic revenue decline moderated to 2%.

Organic revenue growth in Thermal Controls of 8% was more than offset by a 5% decline in Valves and 2% decline in Water.

As Ed mentioned, we expect to see growth in the Valves business in the second half of the year.

The organic revenue decline in Water will, however, accelerate as we have essentially completed the Australian desalination project in the first quarter.

Operating income before special items in Flow was $100 million and the operating margin was 12.1%.

Included in operating income is a $5 million charge related to a project in a business we retained as part of the Earth Tech divestiture in 2008 which adversely affected the operating margin by 60 basis points.

We expect to see improved operating margins in the second half of the year as volume continues to improve and the benefits from previous restructuring activities and ongoing productivity initiatives are realized.

Overall, orders in the quarter increased 7% year-over-year, the fourth consecutive quarter of year-over-year order growth, with 6% order growth in Valves & Controls driven by strength in oil and gas, and strong bookings in Thermal, offset by an order decline in Water.

Backlog of $1.5 billion increased 3% on a quarter sequential basis, and the book-to-bill ratio was 1.05.

Let me briefly touch on the quarter's results for the Electrical and Metal Products business.

Revenue of $347 million increased 15% organically, mainly driven by higher selling prices for both steel and copper products.

Operating income before special items was $13 million and the operating margin was 3.7% as increased selling prices were more than offset by higher material costs.

Lastly, we have closed on the previously announced sale of a majority interest of Electrical and Metal Products.

Total cash received from the transaction was $713 million, and we recorded a pretax gain on the sale of $259 million.

Beginning with the second quarter, we will report the earnings from our remaining minority ownership under the equity method, meaning a single after-tax number will appear in our P&L in the Other Income and Expense line within continuing operations.

For the remainder of 2011, we continue to expect that our equity interest post-closing will result in a P&L loss of approximately $[15] million, with a $10 million loss in the second quarter due to non-cash purchase accounting adjustments such as the writeup of inventory, as well as previously anticipated interest expense.

Let me now touch on a few other important items.

First, corporate expense before special items was $97 million in the quarter, which is about what we expected.

For the second quarter, we expect corporate expense of approximately $105 million.

Additionally, we incurred $53 million of net interest expense in the quarter.

For the full year we expect net interest expense to be approximately $225 million.

Our effective tax rate for the quarter before the impact of special items was 17%.

For the second quarter we are planning for a tax rate of approximately 18%.

We exited the quarter with an average diluted share count of 492 million shares.

Based on our expected share repurchase activity we expect an average share count slightly below 480 million shares in the second quarter.

I also want to quickly touch on restructuring activities.

To date, we have incurred approximately $37 million of restructuring and integration charges compared to our previously communicated estimate of $150 million for the year.

As Ed mentioned, we have identified additional cost-saving opportunities, and we now expect that our full-year restructuring charges will be approximately $200 million.

These restructuring actions will provide a very attractive payback, with the majority of the savings expected to be realized in fiscal 2012.

It is these types of actions that have significantly helped us reduce our cost structure, achieve productivity improvements, and make our operations more efficient.

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

Thanks, Frank.

Before we open up the lines for questions I want to spend a few minutes on our guidance for the second quarter and our expectations for the second half of the year.

Based on our current order rates and backlog, we expect organic revenue growth of 3% to 4% in the second quarter, with total revenue in the range of $3.95 billion to $4 billion.

From a business perspective, we see year-over-year organic revenue growth of 5% in Security.

We expect a sequential decline in operating margin to approximately 15.8% due to a normal seasonality we see in the business, particularly in retail, which traditionally yields higher revenue and operating income in the first quarter.

In our Fire business we expect the top line to be similar to the first quarter, with operating income before special items of approximately $125 million.

Moving to Flow Control, we expect revenue to be similar to Q1, with operating income before special items of approximately $105 million.

We fully expect Flow to be a larger contributor to earnings in the second half of the year as we exit the low part of the cycle by the end of the second quarter.

Lastly, as Frank mentioned, we expect to record a loss of $10 million related to our retained ownership interest in the Electrical and Metal Products business in the second quarter.

Remember, this compares to an operating income of $13 million in the first quarter, representing a headwind of $0.04 per share on a sequential basis.

From an earnings perspective, this is expected to result in second-quarter earnings per share from continuing operations before special items to be in the range of $0.64 to $0.66 per share.

As we look to the balance of the year, there are a few items that we expect to be tailwinds in the second half of the year as compared to the first half of the year.

First, Security and Fire have seasonal increases in revenue and income in the third and fourth quarter, and we expect this trend to continue.

As I mentioned, we expect Flow Control to increase its earnings contribution in the second half of the year, based on order activity over the last few quarters.

Given our first-quarter results, current order activity, and our business expectations for the remainder of the year, we are a increasing our full-year earnings per share guidance excluding special items to a range of $2.93 to $2.98 from our previous range of $2.85 to $2.95.

Thanks for joining us on the call, and operator, if you could open up the lines for our questions.

(Operator Instructions) Steve Tusa, JPMC.

Hi, good morning.

Just a question on the guidance.

What is your new organic growth assumption now for the year?

Steve, I think our organic is going to be up a point from where we were before.

Our guidance going into the year was 2% to 3%; I think we will be up more towards the high 3%s to maybe 4%.

But let me also point out, as Frank mentioned, it doesn't help us on the revenue line as much in upping the total revenue in the Company because we are deconsolidating a JV.

Because of new accounting rules it takes about $100 million of revenue out of the business for the year, so that mutes that number a little bit.

But I do expect the organic to be higher.

The first quarter I take Electrical and Metal out of it, because it won't be there the rest of the year.

Our organic was 2.8%; and now we are thinking we are about 4% in the second quarter.

So I think if you average out the year we will be high 3%s, around 4%, something like that.

Right.

So I mean if things aren't getting worse, and it sounds like they are getting better at Flow and maybe some of the other commercial-related businesses, why wouldn't that be at least a tick higher?

You should be exiting the year at a little bit of a better rate here in the fourth quarter.

Is there something that you are worried about in the back half of the year?

Is there something in the Water business that drops off dramatically?

Or is this just a momentary uptick in revenues?

It just seems like if you are doing this kind of growth rate in the first half of the year, things should be better here in the back half, especially at Flow.

So I am just curious as what are you worried about as something that drops off.

Yes, you know, Steve, look, I think overall the results in the quarter from an order standpoint were very positive for us -- and I'd say surprisingly positive on the commercial side of the business.

As you can see, we saw an uplift on the commercial orders in ADT across all regions, and it was double digit in all regions.

So I would say that was one of the pleasant surprises in the quarter.

Really, Steve, it comes down to phasing for us.

We are seeing nice trends in the order rates in our businesses.

But let me give you a couple particulars.

Flow Control orders were up about 7% this quarter, but when you really look at the phasing of our backlog -- and that is what I stressed last quarter -- we really are going to see a lot of that benefit as we go into fiscal 2012.

Remember, we are in our fifth month of our fiscal year already.

So as we look at phasing it does phase up in the third quarter; it phases up more in the fourth quarter in Flow.

But the real benefit starts accruing towards the end of the fourth quarter and into the first quarter of next year.

There is one thing that mutes our number a little bit in Flow.

You really have to look at the pieces.

We do have a very tough order compare over the remainder of this year through the second, third, and fourth quarter.

And that compare in Flow on the Water side goes away as we go into fiscal '12.

So that is the one thing I would say mutes us a little bit on the Flow side.

But the underlying trends obviously look very, very good in the business, what we are seeing on the order side.

So yes, I do think by the way, by the time we get to the fourth quarter our organic rate might even be higher than that.

But when you take a 2.8% in the first quarter, a 4% in the second quarter, it'd average out to a 4% for the year.

We probably will uptick a little bit more; but no, I would say there's no trends we are seeing that are concerning us.

If anything we are feeling very, very good about what we saw this quarter.

What is the source of the tough order comp?

It seems like there is always some sort of project -- something kind of comes out of the blue here.

I don't recall last year being that dramatically good for Flow.

So what is the source of the tough order comp?

By the way, Steve, we did highlight this I think almost every quarter in our remarks.

We had a very large des water project in Australia last year, and we highlighted it when we had it because we knew it was a, one-time, big, nice order; and that is a compare problem right now.

So by the way, let me give you the detail behind that so you can see the order comparison here.

When you take our results for the first quarter in Flow, let me give you a few numbers here I think will put this in perspective.

Our total orders in Flow were up 7%.

Let me read totals for you for the last five quarters to give you the trending here.

First-quarter 2010 was minus 13%, so that was the real bottom.

Second quarter was plus 3.6%.

Third quarter was a plus 4.3%.

Fourth quarter was a plus 5.3%.

Then this quarter we just ended was a plus 7%.

So you can see it trending nicely.

So that is total Flow.

If you look at the pieces -- and let me give you the first quarter that we just ended.

When you look at the pieces, Valves was up 6.2%.

But Water -- and this is the compare problem we are going to have through the year -- Water was down 23%.

And that is the desal project we were booking and then shipping last year.

Then Thermal was up 43%, which gets you to the 7% total.

Let me also point out to you the Valve orders which turned later than Thermal have gone from the third quarter of a plus 2%, the fourth quarter was a plus 3%, now it is to a plus 6.2% in the first quarter.

And I hate to always give one month because this is a lumpy business, but January our Valve orders were up 9.5%.

So I think you can see underlying trends very positive.

But for the next few quarters we will have a tough compare on Water.

But that does not negate the fact that our revenues and bottom line are going to pick up starting in the third quarter in Flow; but maybe not to the extent you would expect until we get to the first quarter of fiscal '12.

Then just the buyback; you guys are almost done there on -- you guys have eaten through a lot of the authorization.

You guys have cash.

Would you continue to buy back more stock beyond the $1 billion at some stage of the game?

Yes, Steve, I feel very good about what we have just accomplished, because we spent $800 million; we averaged out a little over $41 a share.

So yes, to your point we have $200 million left on the authorization.

I would expect -- and by the way, this is clearly a Board conversation we will have.

But I would expect that we will be looking at another authorization.

But let me just mute that a little bit by -- we have not done an acquisition now since Broadview, which is about eight months ago.

We are close on a couple acquisitions that could total about $500 million.

We're also looking at a couple others, so we are going to take that into account along with the pace of share repurchase.

But having said that, I would expect as we are getting closer to the end of this we will be studying the share repurchase to look at what we do moving forward.

I would also point out, since I mentioned these acquisitions, I think you will find if we can get these done they are very strategic; they are right down the middle of the plate.

One is in our Security business and one would be in our Flow business if we can get them done.

Great.

Thanks a lot.

Jeff Sprague, Vertical Research Partners.

Thank you.

Good morning, everyone.

On the investment front, Ed, also you called out investing in the core dealer business, etc.

I am just wondering how much higher that goes, if there is another level of activity there.

I think if you go back to maybe where, when ADT repositioned its model to today, you've actually had a doubling of dealer acquired accounts.

Does that number continue to go up?

Is there bandwidth out there to take that number up?

Yes, Jeff, I don't think the dealer will keep going up here.

I think we are up maybe $50 million this year over last year; but I think that is about the range we are in.

I would model that pretty consistent moving forward.

I think -- and by the way, part of that this year, we are just ramping up our dealers with training and all to be launching the whole Pulse platform.

If you remember when we talked last quarter we were introducing it with our direct sales team; and now we are doing very heavy training on the dealer side.

So that is really the big push with the dealers during this fiscal year, to get them up to speed.

I would expect by the time we get into the third quarter, the dealers will be starting to ramp on the sales effort on the Pulse side, the interactive platform.

But the real investment, Jeff, that we are focused on is increasing the direct channel more.

We are presently increasing the number of direct salespeople that we have selling for us.

When we closed on Broadview, we were down about 200 salespeople from where we wanted to be because of some attrition, uncertainty, people joining the Broadview sales force in that period of time.

Now we are about 100 above that combination from when we started.

And we have told our team -- they are planning right now, for instance, of hiring 200 more people on the sales team.

We will track how we're doing.

If we are doing well there we told them to go hire another 200 people.

So that is where you're going to see the investment going in.

And as you know, I think you have modeled this pretty well for us.

The internal channel is a very high return on invested capital channel.

So we would like to be able to crank that one up on a percentage basis.

Right.

Interesting.

Okay, and then on Security commercial, you now have EMEA over 10% and actually not too far off of merging with where North America commercial is now.

Is there room in those numbers still?

I mean, given the labor and hours element of that business, do we think about that, those margins, going sideways from here?

Or is there some operating leverage per se as we come off a low revenue base?

Yes, well, Jeff, as you just pointed out, we got to 11.6% margins this quarter.

I would point out to you there is truly no anomaly in that.

That is truly a solid operating result.

There is no one-time opportunities there.

I would expect that this quarter we are in, just to make the point, the second quarter will be above 11% in the business also.

So I guess the punch line is I think not only did we hit our 10% goal, but I think we are nicely in the 11%s right now.

I am not going to put a target on it, but there is clearly more opportunity in the business.

I would point out, although our orders picked up double digit in EMEA in our ADT commercial, our revenues have not yet.

That will now come in the future.

So we will get some opportunity on the revenue line.

So all this margin improvement that you saw was clearly restructuring and productivity moves.

So I really consider us at that baseline with opportunity moving forward to increase it some.

Just on Flow, clearly the revenue should start to inflect relative to the orders, as you pointed out.

One of the dynamics we have seen with a lot of later-cycle businesses is in this low revenue ebb, actually people had some decent price stuff coming out of backlog but had been booking less than ideal stuff into backlog over the last year or so.

Just wondering actually, as you begin to convert this order pickup into revenues, is there -- should we have anything in mind relative to incremental margins or anything?

Thinking about the mix and price dynamics that might be going on in those orders?

Yes, Jeff, the good news is when we analyze our backlog there is really no price degradation going on.

I know that was a question the last couple quarters because I know one of our significant competitors had mentioned some backlog issues with pricing and margin.

And by the way that was only one competitor, if I looked across the whole universe.

But we are not seeing that.

I think with these kind of orders, the way they are picking up, I don't think that is going to be an issue obviously as we move forward.

By the way, I would point out one other indicator which I consider a leading indicator here.

That is that about 10% of our portfolio tracks to some of our other competitors in the business, which I would call even earlier cycle than our Valves.

That would be actuation and instrumentation, the process stuff.

Those orders have been up for the last two quarters, very nicely up in the 20-plus-% range.

So the real leading indicator has been higher for a couple quarters, and now we finally are seeing nice turn on the Valve orders, as you are seeing.

Again, we will have it muted somewhat when you look at the total Flow results by the Water compare problem until we get into '12.

Then finally, maybe this last time ever, just on TEMP, aren't profits supposed to go up when raw materials are going up?

The way the leverage on -- the accordion on price-cost there, why were profits down?

It was inventory coming out a little bit slower that was high-cost inventory.

You know, Jeff, it is always -- it's cost out through that quarter with what we have in inventory and pricing.

So pricing did go up not quite as much as expected, and the costs were a little higher, and you get that leverage there.

But to your point, we are starting to see -- and in the second quarter profits are going to be up in that business.

Although remember, our results are muted by the accounting issues from closing the transaction here.

But yes, we will see that dynamic in the second quarter.

Thanks a lot.

Just another point for maybe just market indicators.

The true actual unit volume in the TEMP business was up about 10% year-over-year.

So again remember, it dropped about 50% in the trough year; and now we are starting to see a slight lift up, about 10%.

Great.

Thanks a lot, Ed.

Nigel Coe, Deutsche Bank.

Thanks, good morning.

Yes, first of all, just wanted to follow-up on the guidance.

It looks like typically high-end guidance by about $0.03 to 2.98.

Yet I think you beat on the 1Q by $0.08.

Looks like the second, 2Q to 4Q, is down by $0.05.

Is that phasing, Ed?

Or is there anything changed in your walk from 2Q to 4Q that we should be aware of?

No, Nigel, no.

I would say, look, we took the bottom end of guidance up by $0.08, so that is how I look at it also; and the top end up some, to your point.

Look, let's see.

We have had one nice quarter, a lot of order pickup here in our late-cycle stuff.

Let's see how orders look when we get to the end of the second quarter; and we will upgrade on guidance.

Again, we're not -- there is nothing we are feeling bad about, I think you can tell here.

But it's just by the time you look at our backlog in Flow, we just saw the increase in commercial orders hit this quarter, by the time you look at the phasing of that -- which we will get some benefit in the fourth quarter.

But when you really look at it I truly think we are transitioning for -- as long as things continue here with the global economy -- we are really transitioning into a very, very nice fiscal '12.

Part of it is just the timing of how much do we get this year, considering we are in our fifth month of the year.

So that's all.

Let's see how this quarter looks, and we would certainly upgrade guidance again and look at it, see where we are at the end of the second quarter.

Understood.

Then talking about 2012, you mentioned getting the payback on the restructuring in 2012.

I took that to assume you get the $2 million of cost-outs in '12.

Is that correct?

Well, the payback on that is about two years, and that is what we have been doing on restructuring.

So we are going to do about $200 million of restructuring this fiscal year.

By the way, when we gave you guidance going into the year we said about $150 million.

It is now $200 million with some other opportunities we have with good paybacks which will benefit '12.

Frank, do you want to make a comment?

Yes, and remember that $200 million is the amount of the charges; and obviously that represents the kinds of things you have to incur in terms of positions and things like that.

That does not necessarily represent the totality of the cost opportunity, because there are certain things in the nonlabor category and other items that should accrue.

So what we are planning on doing is incurring all that $200 million this year, getting some of that -- a modest amount of that -- toward the very tail end of the fiscal year, and then having a really nice run rate in 2012 with a less than two-year payback for all the charges.

Then some of the things won't require charges.

They will just be cost-outs in the nonlabor category, and that will also accrue to us in 2012 for the full year.

Okay, understood.

Then finally on the Pulse initiative, do you have a better read on the profiles of the customers?

In particular are there any people signing up maybe weren't traditional Security customers?

Any color you can give there would be great.

Yes, let me just give you a few of the statistics on this also that I think are interesting.

By the way, I do think, although I don't have -- I have I would say subjective comments around this; and I think maybe, Nigel, another quarter I will actually be able to put something specifically around your direct question.

But we do think we are signing up some customers that maybe would not have taken it if it was just the traditional Security package.

We really believe from what we're hearing we're going to expand the category some, with more of this, quote, lifestyle capability.

Quite frankly, Nigel, it is just getting out there.

You're starting to hear the hype around it; so I don't think the general consumer yet sees this, but they are beginning to with the TV advertising.

We are doing some of the talk out at the CES show, and a lot of things going on.

So I do think it will expand the category.

Hopefully we will be able to put some numbers around that soon.

But we are still running again with only our direct sales team.

About 15% of our customers are taking Pulse and about 85% of them are taking the first tier of the package.

We do feel we are going to be able to work those percentages up on the higher packages over time.

We didn't go back and re-train the sales team.

We did one big blitz on training.

We will go back and work the training on how to walk people up and market them up the packages.

So that will help.

Then as I said, by the time we get to the third quarter you will see the dealers kick in on selling the Pulse product also.

But by the way, I think this is interesting to note on -- this is how we work the ARPU over time.

I will give you four numbers on the ARPU side that I think are interesting.

Remember, Broadview accounts that we just put into our base have the lowest ARPU at $33 on average a month.

The heritage ADT base is $36 a month.

The new accounts that we are generating, so the new accounts we generated during the first quarter, are about $43 a month.

And that is being helped because the Pulse customers we are getting, which are now 15% of the new adds, is about $50 a month average.

So that is the four numbers that we look at it as we look at increasing ARPU month-to-month, quarter-to-quarter.

That's very helpful.

Thanks.

John Inch, Bank of America.

Thank you.

Good morning.

So the $0.64 to $0.66 guidance, just to be clear, does that include the TEMP charge of $10 million?

Yes.

Yes, and by the way, John, if I just kind of -- it may be simple math here, piece this together sequentially for you.

We just did a $0.75 quarter.

Now remember, we are always seasonal from first to second quarter because mostly a lot of weather related.

We do a lot of service system install in the summer, especially colleges, universities, etc.

etc.

So if you go back the last three years of new Tyco, this is a very, very typical trend for us that we drop anywhere from 10% to 12% sequentially on EPS.

This year we are saying we are going to drop 13% sequentially in EPS, and it is totally relate to your point, which is TEMP.

So if I look at the numbers high level, we did a $0.75 first quarter.

Tax and corporate will be a headwind of $0.02.

TEMP will be a headwind of $0.04; that is the $13 million we made this quarter to a $10 million loss.

Then mostly ADT but even a little bit of Fire, even though we are holding the bottom line of Fire similar to the first quarter, but normally you have seasonality in Fire and ADT.

But in total seasonality is about $0.04.

And that is what gets you to that first to second quarter.

Then very typical in Tyco we ramp in the third and fourth quarter.

Yes.

No, I just thought it was interesting that you are including what appear to be one-time TEMP charges; but you exclude the $200 million of restructuring of which is likely to spill into other years.

So I just wanted to be clear on that front.

John, it's very consistent to how we handled Broadview as well, because our purchase accounting charges, so those are included in our number just like for the Broadview transaction they were included in our number as well.

Yes.

No, that's a good point.

Can I ask you about the ADT commercial business or the install business?

Maybe a little color insofar as what you think, given you are a bit of a bellwether for a lot of nonresi activity in the US and Canada.

I am just curious what you think the implications are.

Is this a catch-up?

Or is this a bit of a new install because of new activity going on?

Or do you think nonresi markets are beginning to turn here?

Just what is your sense based on the numbers that you have read?

Yes, you know, John, we have put a lot -- we have dug into this a lot because this was really a turn in order rates for us.

By the way, I would point out the orders not only were double-digit in every region of ADT on the commercial side, but half of our Fire business on the commercial side -- which is the North America footprint, SimplexGrinnell -- that was also up 15% on orders this quarter.

Now by the way, what muted the order rate in Fire was Europe because we are rejiggering our whole sales effort there.

When you hear us talk about project selectivity, we are really moving very aggressively away from what I would call more commoditized contracting on the sprinkler side and moving to much more key verticals like we have in North America.

So I think Europe is still soft anyway; our numbers are even softer on the order side there because we are going through a rejiggering here over the next couple quarters.

But that will improve also.

So what really impressed me this quarter was North America Fire picked up real nice for the first time and all of ADT commercial picked up.

I look at it, John -- and you really go through the details, it is almost exactly what you would expect would happen.

We are seeing on the ADT side and Fire side a lot of retrofits and upgrades.

So for instance on the Fire side at Simplex, when you dig that big order growth, it is not new construction related.

We are seeing a very small uptick in new construction, but people are upgrading their electronic panels because there is a lot of new features and software capability.

Technology, it's got kind of a five-year lifecycle to it.

So in the last three years no one has done anything.

So what we really are seeing is a lot of retrofit and upgrade there.

Then what we are seeing that is still soft, and we are purposely making it even softer, is the contracting side -- which is more of our international businesses on Fire for instance is more contracting of sprinkler install.

That business is still down because sprinklers are good for 20 to 30 years.

So you need to see new construction pick up to start seeing that part of the business pick up.

So I think it is typically what you would expect.

I don't know if this is all true, but as you read the architectural building reports, when you look at nonresi construction reports -- and by the way, you look at our steel number as maybe a sliver of an indicator -- new construction is starting to pick up off a very bad bottom.

But I don't think it helps us till fiscal '12 in any significant way.

Yes, you've got keep in mind, especially in Fire, when new buildings go up a lot of our products go in right before the dry wall goes up.

So it is towards the end of new construction type projects.

Yes, that is what I would have anticipated.

So is your quote activity and that stuff, is it ramping higher than the activity -- I'm sorry, than the results that you have seen this quarter?

Well, I don't know.

These are pretty robust order rates.

I'd say the teams, as we poll them, are feeling good about order activity moving forward.

For instance, that would be the case as we talk to all our teams in every region on the ADT side.

So it feels good as we move forward.

But again as we start booking some of this does not hit us, as Antonella said, because we are a little later in the building.

But remember, what we are mostly seeing right now is not new construction.

It is a lot of retrofit and upgrade.

Keep in mind too on SimplexGrinnell on the upgrades as well as the product business, the life safety and the fire protection products businesses, the ones that are growing now are of a higher margin nature than would be, say, sprinkler or contracting.

So some of this is project selectivity in the contracting, but then the mix of the business is also what is helping the margin, and we expect that to continue.

Yes.

No, that makes sense.

Let me ask you maybe just a broader question, Ed.

This quarter, ITT Industries announced that it was going to dismantle into three companies.

You guys have been down this road before.

There has been some speculation that their fluid business, which is mostly pumps, might be something of an attractive opportunity for Tyco, which obviously doesn't have pumps.

Now I think in the past you have said that the pump market really isn't an area of attractiveness or opportunity for you based on Valve and geography and so forth.

Is that speculation somewhat unfounded?

Or are you still sticking to that view that as you build out Flow -- or does ITT maybe create an opportunity in some regard, either directly or indirectly?

Well, first of all, I am not going to comment on any other company specifically or what we would look at specifically.

But to clarify, John, I think when I have made these comments in the past what I have always said is there is a lot of fragmentation still in the valve marketplace.

And I think it would be incumbent upon us, as I look out strategically, to really fill in some key strategic areas in the valve business both -- whether it's geography or product that would be important to our portfolio in the future.

So as I look at prioritization I look at a couple moves we would make that are strategically directly down the middle of the plate.

That doesn't mean at some point we wouldn't look at something that was contiguous and tightly contiguous like some pump business and all that.

But for instance the opportunity we think we are close, on a bolt-on acquisition, would be a very nice positioning for us directly on the Valves side of the business.

The acquisition we did about a month ago, the two acquisitions we did in Brazil, were directly down the middle of the plate on the Valves side.

So it is just more of a prioritization of some things we know we can fill in directly there.

But clearly if there is something smart, contiguous, we would take a look at it.

Of a bolt-on nature, I am presuming, right?

Yes, unless if there was something slightly bigger than a bolt-on, like Broadview that made a lot of sense for us and we could make the numbers work very quickly, we would certainly look at it.

Just to be clear, the $500 million, is that what you would pay for it?

Or is that the revenues?

I think you called out a couple of $500 million deals.

(multiple speakers) would represent about $500 million of cash we would use to purchase them.

Okay, so less than the revenue front.

Thanks very much.

Scott Davis, Morgan Stanley.

Good morning, guys.

A couple things to clarify, and I understand everyone's confusion with guidance.

There is a lot of moving parts.

But when -- I believe a good chunk of last year we were talking about benefits of restructuring offsetting a chunk of the TEMP issues.

Shouldn't restructuring, if my math is right at least -- and tell me if it's wrong.

Shouldn't restructuring be helping by about $0.10 or so this year?

Yes, I mean I don't know the exact math on that.

But look, but when you go to the detail of the number -- let me maybe give it to you this way.

When you look at the numbers in aggregate for the year, we are telling you that we are going to have high teens operating margin improvement in the businesses, of which -- if you go back and look at the restructuring we did the year before and say, how much of it do you get in this fiscal year?

You get about $100 million of improvement from the restructuring we did in '10 that benefits the bottom line of '11.

I would also say the restructuring that we will do this year will benefit us a good $100 million next year, because it is kind of that two-year payback type area.

Remember the two things that are headwinds in this year's numbers when you look at it macro.

So macro we will give you almost 20% improvement on the operating line.

Then you have a headwind of TEMP and you have a headwind of tax from where our rate was last year.

That is kind of a the three high-levels.

There's other moving pieces, but that would be the three big things.

Okay, that makes sense.

One of the items you really haven't talked about is what corporate expense will look like once -- on a pro forma basis, let's say.

Does corporate expense come down at all, just given the relative size of the Company drops a bit?

Is there any -- were there any costs attributed to Electrical in your $400 million plus that can come out?

Yes, Scott, look.

I think there is a little bit more opportunity there; but remember we are bringing corporate down this year.

We are guiding to $400 million to $420 million.

I am hoping we hit towards obviously the lower end of that range.

But remember, in corporate you do get some items in there that sometimes you have to book during the year.

But remember, last year corporate was $444 million, $445 million.

So we are reducing it another $30 million, $40 million depending where we end the year.

Now is that reduction between because of TEMP or a reduction because of other actions?

Well, I wouldn't -- mostly not because of TEMP.

But I will say to you when TEMP leaves the numbers we all sat around as a management team and said we have got to lower corporate more.

So it was probably an instigator, if I could say it that way.

But nothing came out corporate-wise because TEMP left the business.

So it is just a lot of other actions were taken to reduce the corporate line.

And you have to remember corporate has a lot of our corporate functions in there such as treasury, such as our tax department; and those things obviously completely stay intact with the --

Yes, well, I would assume you could cut your auditing bill a little bit since there is less to audit.

That's right, but it is things like that.

You go around and you can get things out.

Yes.

But hopefully we will hit towards the lower end of that range this year and that will be a nice move year-over-year.

Sure.

Were you disappointed at all with the attrition rate in North America, it didn't come down a little bit more?

13% is -- I mean you have been moving in the right direction obviously over the last several years.

But when I think about in terms of here we are, deeper into the economic recovery, assuming people can pay their bills, there appears to be less mobility among homeowners.

People aren't moving.

So were you a little bit disappointed that that number didn't come down?

Scott, I don't know.

I guess I need to think about that one maybe a little bit more.

Remember I don't think -- I was pleasantly surprised that our attrition really didn't actually go up that much in the downturn.

Otherwise I think we would see a quicker ramp down.

We had a 100, 130 basis point uptick which, considering the severity of not only the recession but specifically housing, I never saw the big uptick that I thought would have potentially hit a little bit more there.

So I think one key point you make is absolutely correct.

People aren't moving as much.

So despite how bad housing was I think that probably helped us a little bit.

So considering that the housing market is still as rough as it is out there on that side, I don't feel bad about it.

And globally we did bring it down a little bit.

I'd tell you where I was pleasantly happy was the big move on the commercial side we saw.

I was not expecting that.

That attrition rate improved 120 basis points year-over-year and 30 basis points sequentially.

So it seems like there is some stability on the commercial side; and let's see how the resi piece goes.

I do feel it should trend down here over time now.

But let's see how the next couple quarters go.

Okay, I would hope so.

But thank you, guys.

Operator, we have time for one more question.

Steven Winoker, Sanford Bernstein.

Good morning.

Thanks for taking me.

Just a couple questions here.

First, I know ADT is the 800-pound gorilla in this area and cable companies are certainly not known for their service levels.

But you're in a unique position here.

Time Warner Cable this morning said they were going to start trialing a home security monitoring product in a bunch of markets early this year with a broader rollout later in the year.

I think Verizon also talked about a product like that over FiOS at their analyst day.

You obviously are familiar with Comcast.

This is nothing I had been concerned about in the near term, but what is the vulnerability on this front at this point?

Are you partnering?

How are you thinking about this?

Yes, Steven, as I mentioned I think last quarter, I would expect some of these players to market a security product.

As I think I mentioned, we compete now in 20, 25 of our key market presently with cable companies.

I do think they will launch interactive in those markets and expand maybe into some other markets.

Actually my feeling has been all along that this is going to lift all boats.

If that does happen there is going to be more advertising, more awareness.

By the way, it was interesting; I think I mentioned this last quarter.

When Brink's was going through their double advertising I would call it, because of their brand change, we saw lead generation increase for ourselves.

So I think that is what will occur here.

I also think over time -- and this is -- I don't think any of this happens quickly.

But over multiple years I think if a couple of these cable guys or a phone guy markets more security than they are now, I think over time it is at the expense of the smaller local players; and the big branded players will do very, very well in that environment.

You have to remember that only 19%, 20% of the homes in North America are penetrated with security.

My belief -- and again, this is multiple years -- is that this is about a 40% penetrated service.

And I do think interactivity helps that percentage get there eventually because, to a question earlier, I think more people are going to be attracted to the service because of the opportunity to do more things.

So look, we have 25% North America market share with thousands of others having the other 75%.

I have always been a believer this industry will consolidate.

If it consolidates around a few players, I think we do very, very well in that environment.

We will do well in that environment.

I will also point out that this is not that easy to do for everybody, because one of the reasons the local little player actually does well is that they have a sales force like we have a sales force.

Between our dealers and our direct sales team, we have almost 9,000 sales people in North America.

And 90% of the sales that we close, we sit in the home with the homeowner to close the sale.

It is not like cable; it is not like getting a phone service where people -- it's an automatic; you are going to get it; it is a utility.

This you have to go in and market, so there is a lot of nuances here; and I think we do very, very well in that environment.

I will just comment to a part of your other question.

We talk to all the players.

We talk to all the cable players.

We talk to the phone guys.

We are very close to them.

I am close to a lot of them just because of my background.

And if there is opportunity that makes sense we will look at it as we get down the road.

You don't think they are playing on price?

Well, look, I think experience of these players -- and again I know what they do very, very well.

They maintain very nice margins in their industries.

They are very good at packaging, just like we have gotten very good at packaging.

We all package, advertise certain levels; and then we are very good, as cable guys are, at walking people up to a higher price point.

At the end of the day, most people don't take the introductory prices you hear.

90-some-% take something higher.

That is exactly what we do, by the way.

That is exactly what satellite does.

That is exactly what cable does.

And we all end up in a very nice place from a -- where we should be, I think, for the value we give the consumer.

We end up in a good spot.

Okay, great.

By the way, just remember we already compete with them in many, many key markets.

Just squeezing in a Flow question, so you peaked at 15%, adjusted margins at $3.5 billion to $4 billion.

You look at it -- can you just give us a little more detailed sense for rooftops out?

Things that are the real productivity initiatives in Flow, specifically that are -- that really could I think drive a lot better operating leverage than you have had before in that business?

Yes, look, we have continued to restructure the footprint some during this whole downturn to much more efficient facilities.

We've streamlined our back-office some more, and we streamlined our distribution footprint some more.

So I think as we get volume we get very good leverage in this business, Steve, because it is a fixed cost base.

So we are going to get fall through on this incremental sales that we get, in addition to the fact that we did restructuring in the downturn.

Now, obviously, the last three quarters you haven't seen any of that because this is truly the trough and the second quarter will be end of the trough, and we will start to lift out of it.

Okay, great.

Thanks, Ed.

Operator, that concludes our call.

Thank you.

This does conclude today's conference.

Thank you for participating.

You may disconnect at this time.