江森自控 (JCI) 2011 Q2 法說會逐字稿

Welcome to the Tyco second-quarter earnings conference call.

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

(Operator Instructions).

Today's call is being recorded.

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 second-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.

As you are aware, there have been recent reports speculating about the possibility of a transaction involving Tyco International.

I would like to take this opportunity to make clear that it is Tyco's policy not to respond to inquiries from the news media or others regarding rumors or speculation on transactions which may involve the Company.

We do not intend to make any further comment about this matter today.

I would also like to remind you that, during the course of the call, we will be providing certain forward-looking information.

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

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 exclude special items and this metric is a non-GAAP measure.

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

Now let me quickly recap this quarter's results.

Revenue in the quarter of $4.0 billion was up 6% year-over-year, excluding the impact of Electrical and Metal Products and organic revenue grew by 3%.

The benefit of foreign currency contributed 2 percentage points to our overall revenue growth.

Earnings per share from continuing operations attributable to Tyco common shareholders was $0.67.

Earnings per share from continuing operations before special items was $0.73, representing a 26% increase year-over-year.

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

Thanks, Antonella and good morning, everyone.

This was a good quarter for Tyco on a number of fronts.

We continued to strengthen our competitive capabilities in our three core platforms of Security, Fire and Flow Control.

We returned excess cash to shareholders and operationally we saw strong operating margin improvement year-over-year.

Service revenue, which includes recurring revenue, represented over 45% of our total revenue and continued to grow nicely in the quarter.

More importantly, systems installation and product revenue, which represents about 55% of our total revenue, continued to see improved year-over-year order flow.

If we take a look back, orders first turned up positive on a year-over-year basis in the third quarter of 2010 and since then have continued to trend upwards.

Year-over-year orders improved 3% in the fourth quarter of fiscal 2010, 6% in the first quarter and now 7% in the second quarter.

Although we are still early into the third quarter, April orders are off to a good start, coming in with year-over-year improvement of about 10%.

We are very encouraged by this continued improvement in our late-cycle businesses and expect this trend will help to fuel our growth in the latter part of this year and into 2012.

Before we jump into each of the businesses, let me start with a few general comments.

From a capital allocation perspective, organic investments will continue to be our first priority.

The investments we made in our businesses throughout the economic downturn have not only benefited our operating margin, but have also positioned us well for the recovery in our late-cycle end markets.

Year-to-date, our capital spending levels have increased 7% on a year-over-year basis with a high percentage of our capital directed toward growth investments.

We also continued to fund engineering and product development, increasing our year-to-date spend by 15%, mainly in our emerging market R&D centers.

As we move into the second half of the year, we plan to further increase our R&D efforts around the globe and ramp up our investments in sales and marketing, particularly in our ADT North America residential business.

As I have previously mentioned, we plan to supplement our organic growth initiatives with strategic bolt-on acquisitions.

During the quarter, we announced two acquisitions, one in Security and one in Flow Control, that strengthen our leadership position in key markets and provide incremental returns to our shareholders.

Frank will walk you through the details of these two deals in a few minutes.

From a balance sheet perspective, our cash balance was about $1.8 billion at the end of the quarter, $500 million of which will be used for previously announced acquisitions.

As you know, our free cash flow generation is historically much stronger in the second half of the year, which provides us the flexibility to fund growth investments, as well as restructuring and efficiency initiatives.

Additionally, we are evaluating a few other bolt-on acquisitions that could utilize an additional $500 million over the next 12 months.

After funding these actions, we will still be in a strong position to continue returning cash to shareholders through dividends and share repurchase.

Over the last 12 months, we have repurchased about 10% of our outstanding shares, or $1.9 billion, at an average price of $39.35 a share.

And this morning, we announced a new 1 billion share repurchase program.

Now let me give you a quick overview of our results for each of our businesses and then Frank will provide you with more details.

Starting with Security, we continued to see good revenue growth in the second quarter.

Year-over-year expansion in the account base and higher average revenue per user drove the organic growth in recurring revenue.

On the nonrecurring revenue side, growth was fueled by the turnaround in order activity we saw last quarter, which continues to remain strong.

Year-over-year Security's operating margin expanded nicely with improvement in all geographic regions.

Turning to Fire, revenue was about what we had expected with improving organic revenue growth in our service and our product businesses.

Additionally, order activity gained momentum in the quarter with a year-over-year increase of 5%.

From an operating margin perspective, results in Fire were very solid.

Stronger sales, selectivity of project work and the continued benefit of restructuring and cost-containment initiatives drove the 190 basis point improvement in operating margin year-over-year.

In Flow Control, revenue and earnings fell short of our expectations.

Severe weather conditions and flooding in Australia persisted throughout the second quarter, which significantly impacted our Water business.

However, Valves, which is by far the largest piece of our Flow Control business, has turned the corner with positive organic revenue growth in the quarter.

As we look out over the next few quarters, we believe favorable market conditions will continue to bode well for increased order activity and flow.

This coupled with our backlog should improve our overall operating performance as we exit this year and enter fiscal 2012.

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

Thanks, Ed and good morning, everyone.

As Ed indicated, we were pleased with the Company's second-quarter performance on a number of fronts.

Revenue has improved, the benefits of better operating leverage have become apparent and the continued focus on cost and productivity have contributed to an improved operating margin.

Operating income before special items, excluding the Electrical and Metal Products business, improved by 26% on a corresponding 6% revenue increase and the momentum around order conditions gives us greater confidence that the revenue and earnings will continue to show good year-over-year comparisons.

Let me review our results for the quarter for each operating business.

Starting with Security Solutions, overall revenue for the quarter grew 12% to $2.1 billion with organic growth of 5.5%.

Recurring revenue increased from 55% of Security's total revenue in last year's second quarter to 58% this year, primarily due to the Broadview acquisition.

Organic growth of 4.5% in recurring revenue was driven by our North American residential and small business operations.

We also continued to see good recurring revenue growth in Asia-Pacific and Latin America and for the first time in almost two years recurring revenue growth turned positive in the EMEA region.

Nonrecurring revenue grew 7% organically in the quarter, driven by strong order growth over the last couple of quarters in all geographic regions.

Operating income before special items was $335 million and the operating margin increased 170 basis points over the prior year to 16.1%.

Growth in recurring revenue increased volume in the commercial business and the continued benefits of restructuring and productivity initiatives drove the year-over-year operating margin improvement.

From a regional perspective within Security, let me start with our North American residential and small business where nearly 90% of the revenue is recurring.

This recurring portion grew 33% year-over-year reflecting the positive impact of the Broadview acquisition.

Organically, recurring revenue grew 5% in the quarter.

The operating margin remained strong despite incremental investments in sales and marketing.

Our North American residential recurring account base now stands at 5.9 million customers.

Year-over-year, the account base has grown 31% driven largely by the impact of the Broadview acquisition.

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

Excluding acquired Broadview accounts, average revenue per user grew 3% year-over-year mainly due to the favorable impact of higher monthly revenue rates from new accounts.

Our residential attrition rate of 12.9% improved 20 basis points year-over-year and 10 basis points on a quarter sequential basis.

Focusing on the Broadview integration for a moment, we are nearing the one-year anniversary of the acquisition and are pleased to report that we are tracking to the synergies we expected to achieve at this point, as well as the cost to achieve these synergies.

Let's move on to our North American commercial business where the mix of revenue is very different.

About 60% of the quarter's revenue was derived from nonrecurring systems installation and service and 40% from recurring revenue.

The momentum in top-line growth we saw in the first quarter has continued with 7% organic growth in the second quarter.

The operating margin improved 80 basis points year-over-year as a result of this increased volume.

Additionally, orders grew 22% year-over-year in the second quarter.

In the EMEA region, we are clearly seeing the benefits of past restructuring actions and cost-containment initiatives.

Year-over-year, the operating margin improved 570 basis points and 40 basis points sequentially to 11.8%.

In the Asia-Pacific and Latin American regions, where revenue is predominately commercial in nature, organic revenue grew 10% on a combined basis.

The operating margin, which is in the low teens, also improved on a year-over-year basis.

Turning to the key metrics for our overall global recurring revenue Security business, our worldwide account base grew 20% year-over-year to 8.9 million accounts, or 2.5% when adjusting for the accounts acquired as part of the Broadview acquisition.

Average revenue per user, excluding acquired Broadview accounts, grew 2% year-over-year on a global basis.

Including the accounts from the Broadview acquisition, which shifted the mix in our account base more to residential, our global average revenue per user of $45.72 declined 2% year-over-year, excluding currency.

On a quarter sequential basis, average revenue per user increased slightly as new accounts were added to the base at a higher rate partly attributable to our new Pulse offering.

Our worldwide attrition rate of 12.7% improved 40 basis points year-over-year and remained flat on a quarter sequential basis.

And finally, Security products, which includes intrusion, video and access control, had organic revenue growth of 14% in the second quarter.

The R&D investments we have been making in this business should position us well for future growth.

I would also like to quickly comment on the acquisition of Signature Security that we announced in February for approximately $170 million.

As Ed mentioned, this acquisition is right in line with our strategy to focus on bolt-on acquisitions.

With its attractive customer base of recurring revenue, Signature allows ADT to broaden its sales, installation and service capabilities in the Australian and New Zealand markets and solidifies ADT as a leading electronic security provider in that region.

Several areas of opportunity have been identified to realize cost synergies over a two-year period.

The nature of these synergies positions this acquisition to become accretive in the near term.

Let me now turn to Fire Protection.

Overall revenue in the quarter was $1.1 billion with organic revenue growth of 4%.

Our service and systems installation business, which is the largest piece of Fire Protection, reported total revenue of $804 million.

Organic revenue growth of 4% in service was partially offset by a decline in systems installation revenue of 1.5% as a result of project selectivity.

The remaining portion of our Fire Protection business, fire products, which includes the manufacturing arm of the fire business, reported revenue of $305 million in the quarter with organic revenue growth of 11%.

Overall, Fire Protection's operating income before special items was $135 million in the quarter and operating margin was 12.2%.

The 190 basis point improvement in operating margin year-over-year was driven by increased activity in our North American SimplexGrinnell business, as well as our Fire Protection and Life Safety products businesses, which are seeing good leverage as volume picks up.

Increased service revenue, project selectivity in our systems installation business, as well as the continued benefit of restructuring and cost-containment initiatives also contributed to the improvement in operating margin.

We are also encouraged by the year-over-year order growth of 5% driven by our North American SimplexGrinnell business, mostly due to increased demand for retrofit and upgrade work, as well as increased orders in the products business.

Total Fire backlog of $1.25 billion increased 2% on a quarter sequential basis.

Moving to Flow Control, severe weather conditions and flooding in Australia, which persisted throughout the second quarter, significantly impacted shipments to customers.

In addition to the shipment impact, these external conditions also resulted in lost productivity in the Water business, which together had a negative impact on operating income.

Overall, these factors reduced revenue by approximately $30 million and operating income by approximately $13 million, about half of which we recovered in subsequent quarters.

Adjusting for these conditions in Australia, revenue and operating income in the quarter were about what we had expected.

Overall Flow Control revenue was $804 million in the quarter representing an organic revenue decline of 5%.

Valves, which comprises about 60% of Flow Control's annualized revenue, has recovered from the trough and grew 1% organically in the quarter.

More importantly, orders in Valves continued to recover in the quarter with 11% year-over-year growth primarily driven by demand in oil and gas and solid growth in our process and mining end markets.

Water revenue declined 31% organically in the quarter, partially due to the severe weather and flooding that I mentioned earlier and the tough compare with the prior year quarter, which included the Australian desal project.

Organic revenue growth of 5% in Thermal Controls was driven by strong sales of products during the winter season.

Typically, Thermal Controls product revenue is seasonally stronger in the first and second fiscal quarters as product sales are driven by the colder weather.

Operating income before special items in Flow was $91 million and the operating margin was 11.3%.

As we have mentioned, we expected that the second quarter would be our trough quarter and results were further impacted by the factors I previously described.

Overall, total Flow orders in the quarter increased 8% year-over-year.

Valves were up 11%, Thermal increased 8% and Water orders remained flat.

Backlog of $1.65 billion increased 5% on a quarter sequential basis.

Based on our current backlog and order activity over the last few quarters, we expect to see a sequential improvement in third quarter and an even more significant operating income increase in the fourth quarter as we benefit from increased volume in Valves.

As we have said previously, volume improvement in Valves in this part of the cycle typically results in about a 35% flow-through to operating income.

Let me spend a few minutes on our expectations for the second half of the year in Flow Control.

Information in this regard is included on page 10 of the slide deck.

In the third quarter, we expect Flow Control revenue to grow to approximately $900 million reflecting growth in Valves, as well as the recovery of a portion of the Water shortfall from the second quarter.

We expect Flow Control's operating margin in the third quarter to be approximately 12% as the benefit of volume leverage in Valves is partially offset by approximately $15 million of a quarter sequential reduction in earnings in Thermal Controls due to normal seasonal reductions in heating product sales and increased lower margin installation revenue.

For the fiscal fourth quarter, we expect Flow Control revenue of approximately $950 million, predominately driven by growth in Valves and to a lesser extent Thermal.

We expect Flow Control's fourth-quarter operating margin to be about 14% as we benefit from the volume leverage in Valves and the expected normal seasonal mix improvement in Thermal Controls as distributors restock product ahead of the coming winter season.

These estimates exclude the impact of the KEF acquisition, which is expected to close in the fiscal fourth quarter.

Once again, we are very encouraged by the orders we are seeing in Valves, Thermal and in Flow Control overall.

This gives us a high degree of confidence that revenue will continue to improve resulting in attractive leverage to the operating margin line.

Given the typical lag time associated with converting orders into deliveries and recognized revenue, this improvement will be most evident as we get further into the back half, most notably in the fourth quarter and of course, as we enter fiscal 2012.

Clearly, this business is now gaining momentum.

Before we move to other items, let me spend a minute on our announced acquisition of a 75% stake in Dubai-based KEF Holdings.

The Middle East is a key emerging market for us and this acquisition provides us with a strategic presence in this growing region.

KEF is the region's only fully integrated Valve business with local manufacturing.

This will allow us to better serve both local and global customers predominately in the oil and gas industry.

We have had a long-standing business relationship with KEF, which has provided castings to some of our Valve facilities for the past 14 years.

The synergies around this acquisition are a bit different than the typical cost-outs.

We plan to significantly increase utilization of KEF's world-class foundry facility to provide castings for our Valves in addition to KEF's existing customer base, which in turn should provide us significant operating leverage.

Just as important, this region has and will continue to experience a disproportionate amount of worldwide capital spending in the oil and gas sector.

Additionally, the combination of Tyco's well-known Valve brands and KEF's strong growing reputation in the region positions us very well for some large revenue opportunities in the Middle East and beyond.

It is also important to keep in mind that KEF is in a tax-free jurisdiction in a growing emerging market.

We expect the benefits of volume leverage in KEF's foundry, along with the large regional project opportunities, will make this acquisition accretive in the near term and should provide Tyco an attractive long-term return on investment.

Let me now touch on a few other important items.

First, corporate expense before special items was $86 million in the quarter, which is favorable to the full-year run rate mostly due to the timing of certain expenses.

As many of you know, corporate expense tends to be higher in the second half of the year due to the timing of certain expenses and a number of actuarial evaluations that we perform annually.

As a result, we expect corporate expense for the third quarter to be in the range of $130 million to $140 million and we continue to expect that our full-year corporate expense will be in the range of approximately $400 million to $420 million.

Other expense of $6 million in the quarter primarily relates to our 49% minority interest in the Electrical and Metal Products business, which is now known as Atkore.

We expect that our equity interest in Atkore will be negligible in the third quarter and slightly negative for the year.

Our effective tax rate for the quarter before the impact of special items was 15.4%.

As we have discussed in the past, the timing of the impact of certain tax items can cause the rate to move from quarter to quarter.

We expect the tax rate to be approximately 18% for the third quarter and for the full year.

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 third quarter and full year.

We expect revenue for the third quarter to increase to approximately $4.2 billion, a 5% sequential increase over the second quarter.

In terms of bottom-line results, improving business conditions will result in a nice sequential improvement in our third-quarter operating results in all three businesses.

However, this will be more than offset by an expected increase in corporate expense and a higher tax rate.

Let me comment on a few of these moving pieces.

First, as Frank mentioned, we expect a sequential improvement of Flow Control operations as we leverage increased volume in Valves and begin to recover lost shipments in Water.

Additionally, the seasonal nature of our Security and Fire businesses also benefit the second half of the year.

This operational improvement in Security, Fire and Flow is expected to increase our earnings by approximately $0.06 on a quarter sequential basis.

Second, our proportionate share of the earnings of the Electrical and Metal Products business should shift from a $6 million loss in the second quarter to breakeven in the third quarter.

This should add $0.01 per share to earnings on a quarter sequential basis.

Third, the expected increase in corporate expense to $130 million to $140 million in the third quarter, which compares to $86 million in the second quarter, is expected to cost us about $0.08 per share.

And finally, we are forecasting an 18% tax rate in the third quarter.

Given the lower tax rate we had in the second quarter due to the timing of certain items, this is expected to result in a sequential headwind of $0.02 per share.

When combined, these items result in a net reduction of about $0.03 per share on a quarter sequential basis.

With an expected average share count slightly above 470 million shares, we expect earnings per share from continuing operations before special items in the third quarter to be about $0.70.

Based on our year-to-date performance and our guidance for the third quarter, we are increasing our full-year earnings guidance to a range of $3.02 to $3.07 per share compared to our previous guidance of $2.93 to $2.98 per share.

Our full-year guidance incorporates a share count of just under 480 million shares.

We now expect full-year revenue of approximately $16.9 billion to $17 billion, including the $347 million of revenue generated from the Electrical and Metal Products business in the first quarter.

Lastly, we feel good about the operational improvements we have made in our businesses and are very encouraged by our increasing order activity.

These items along with the recovery of our late-cycle businesses should position Tyco for a solid 2012.

Thanks for joining us on the conference call this morning and with that, operator, let's open up the lines for any questions.

(Operator Instructions).

Steve Tusa, JPMorgan.

Hi, good morning.

I just wanted to get a little more detail on the third quarter.

What do you think about ADT sales and margin there?

You talked a little bit about Flow.

Maybe just a little color on ADT or the Security Solutions business.

We are expecting, Steve, margins to be about the same as they were in the second quarter, but continued lift on the revenue line, as we talked about.

Okay, so growth, organic growth kind of in line with what you saw in the second quarter?

Pardon me?

Organic growth about in line with what you saw in the second quarter?

Yes, about in line and Steve, one of the points I would make, as I mentioned in our prepared remarks, we are putting in some incremental investment both on the Security product side in the third and fourth quarter.

Actually we started it in the middle of last quarter and we are ramping up on our sales headcount.

And that takes a couple quarters to kind of get the productivity out of that.

So I specifically want you to hear there is investment going in both on the Security side of the business and the Fire side in the third and fourth quarter of the year.

But again, we expect a good benefit from that a couple quarters down the road.

Okay, great.

And then one last question, can you just talk about -- philosophically, you have obviously been a part of a couple of interesting corporate events over the last 10 to 15 years.

You sold your business, joined Motorola back in the '90s and obviously split up Tyco in 2007.

I guess I just want to -- given we haven't talked about this in a while, you guys have been operating pretty steady state, but what is your philosophy on corporate actions?

Strategically, how do you kind of look at portfolios and opportunities to create value?

And just to remind us of some of the synergies you have in your portfolio and why Tyco, as a standalone in this form, was better able to create value versus Tyco in its former form?

Well, a lot of angles to that.

But when we split up the Company three, four years ago, first of all, I would say if you go back and do the math, the combination of the value created from that I am very proud of.

With the Dow where it is versus where it was then, Tyco, when you recombine it all, is at an all-time high stock price, if you look at the three.

And I would also point out when we did that, we always, as a management team and as a Board, always look at how do we create long-term sustainable shareholder value, which is exactly what we looked at when we did the split-up of the Company the last time.

We were not looking for an overnight pop in the stock price or anything like that.

It was what is the best thing for the long term.

And I would point out, many of our investors have said this to me over the past year, all three companies are really focused on their core platforms and all three of those Tyco companies are doing extremely well and I think they are all positioned well for the future.

So I think it played out pretty much how we would have wanted it to play out.

Kind of more to the current look, as you have heard me say many times, I love the status of the Company now.

I love the mix of businesses we have.

I think they all have great dynamics coming over the next 5 to 10 years.

They all play out nice in the emerging markets.

We just have nice growth opportunity coming and clearly Fire and Security, we can do a lot of things together because of the nature of the customer base, but as we have pointed out to you, we are looking at some pretty neat enterprise selling opportunities based around actually the Flow Control customer base where we can sell in a lot of Fire and Security like oil and gas refinery platforms, mining platforms, etc., etc.

So I like where we are at, but, look, I will say to you, as I always talk about, we always, as a management team, present to our Board and talk to them about all the alternatives you can have to create long-term sustainable shareholder value.

We look at every analysis, the shape of the Company, what should it look like, what should it be and we will continue to do that as we move down the road.

Okay.

And then lastly just on the Valves business, you are going to exit the year at a double-digit growth rate.

Is there anything with regards to project compares that makes that a less relevant indicator for what we should expect over the course of kind of the next -- over the course of 2012?

No, look, I think what happens here, I think that's why we have been looking at 2012 I call it the comeback year for the Flow Control division and by the way, you are starting to see it here in the second half of the year.

But when you look at the trending of the orders we are now booking, it really hits us in the fourth quarter nice.

And we start getting out of these compare [problems].

For instance, the last really bad compare quarter for Water is this actual quarter we are in now, the third quarter and that reduces very significantly in the fourth quarter.

It is still a negative compare, but it is in single digits and then that compare problem goes away as we enter fiscal 2012.

And Thermal should run very solid in 2012.

Remember, as we mentioned, we do have seasonality in that business.

You get a stronger first and second quarter, a weaker third quarter.

Then you build back up in the fourth and then you get a little higher in the first and second.

So you're always going to have that seasonal trend there, but the Valve piece, the way we are seeing these orders come through and I would say more importantly, as I keep talking, the sales pipeline of projects we are working on feels very robust.

One thing I would point out, we have not booked what I would call one of the big elephant deals yet.

This is kind of the day-to-day business picking up and there are projects -- I heard our competitors talk about the same thing -- we are all bidding on a few big projects that are out and I'd say kind of in that next six-month timeframe that make you feel good about the order trends as we move through 2012.

So you are not going to have a lot of these anomalies on compares that we had during this year except seasonality of Thermal.

And then, Steve, this is Frank.

Just the only thing I would add to that, I know you asked about Valves, but Thermal, we are also seeing strong order activity coming through in Thermal and we also have large deal opportunities there also.

So that is another real gem as part of the Flow portfolio that we haven't talked too much about.

Okay, thanks a lot.

Steve Winoker, Sanford Bernstein.

Good morning.

So just maybe a couple of more business-specific questions.

One on Fire Protection in the emerging market progress that you are making there.

Can you talk a little bit about your acceleration of growth, particularly on maybe the product side?

Give us a sense for how quickly you are progressing that business.

Yes, Steve, as you heard us mention quite a few times, we are very focused on emerging markets.

And as I pointed out in my comments, that is really where we are putting -- continuing to put a lot of our increased R&D efforts.

So we are really ramping up, for instance, in our China Center of Excellence as one example.

It is very important to us that we get market position in the key emerging markets.

And the four big ones for us are -- there is many more than this obviously, but the four big ones for us, because of the nature of our businesses and what we do, is the Middle East, Brazil, India and China.

I will give you a number here to point out because we are feeling really good about this.

Our Fire revenue in all the BRIC countries, the emerging market countries, so it is more than those four, but it is basically the BRICs, our revenue growth in the second quarter was 22%.

So if we can keep rates -- and just to give you the first quarter, it was 20%.

So if we can keep these type of run rates up as the rest of what I call our mature markets are recovering now, which we have been seeing now for about a quarter and a half, that should bode well for the growth rate of the Fire business.

And Steve, (inaudible) already mentioned a bit of it is also about localizing the products for the specific regions.

So you may have heard us talk about previously the fire panels.

That was made specifically for the China market being a single panel versus a double panel, as well as in Life Safety, the breathing apparatus masks that were made specifically for the China market as well.

So a lot of it does revolve around localizing products.

Yes, and that was the key, Steve, to putting in the Centers of Excellence in the emerging markets.

Obviously, they are doing some work on our global platforms and our global software capabilities, but a very high percentage of it is what Antonella just said.

It is localizing products for their features, their market, their cost structure and therefore price points that they want.

And we are seeing nice benefits and we are going to continue to.

(inaudible) of local manufacturing.

And are you also making progress more globally in Fire and Security in sourcing products that are currently produced by third parties, large third parties?

Yes.

A lot of the peripheries that we use in actually many markets around the country, including North America, are not all our own.

So we have relationships with three or four very key partners, for instance, in China where we buy product from them.

And not to just mention China, I would point out when we are looking at our strategic bolt-on acquisitions just like the KEF one we announced, we are looking at a couple of opportunities that could be very strategic for us along the lines you are just mentioning.

Okay, and then finally maybe you could just give us an update on Pulse and the rollout, what has been the latest penetration ARPU rates coming in?

Where are you in the rollout and how has your expectation been changing for it?

Yes, Steve, I am feeling very good about this rollout.

Our internal sales team, which is about actually half of the sales people because the other half is in our dealer network, they are being -- they have all been trained to some extent, but different regions are at different stages of what I would call kind of maturity of the training process.

But that, as we exit this quarter, that will be pretty much completed where the initial training has all been done and all that.

Now, by the way, we have a lot of experience at this.

This kind of takes a year to get the right traction you want because of just learning to sell, getting the confidence to sell the product and all that.

So we are going to track this obviously kind of weekly and monthly.

We are getting about, as we mentioned, about 15% of our new sales are taking the Pulse package.

I will tell you, as we were going into the back half of the quarter and into April, that is starting to move up and I don't want to exaggerate this.

If I look at the numbers and lump the last 30 days together, I would say the 15% is now about 18%.

So a little bit of traction occurring there.

And the other thing we are gaining a little traction on, and this doesn't surprise me, it just takes time and confidence and training, is that initially we were getting 85% of the people that were taking the first level package.

And now it is down to 80% taking the first level package and therefore, 20% either taking the second or third tier package.

We are averaging right around $50 on ARPU and I would point out, as I think I mentioned last quarter, that compares to ARPU that was new accounts up until Pulse, we were up to $43.

The heritage ADT base is at $36 per month and the Broadview base is at $33.

So it is $33, $36, the new accounts ex-Pulse $43, with Pulse $50.

So we are more excited here, not only getting this thing rolled out, but the next step for us is to get the dealers trained up in the second half of the year.

So by the time we get into '12, they are cranking along.

That would be the other half of the salesforce and then we are putting our plan together to go back to our installed based, this $33 base and $36 base and look to remarket to them the Pulse product.

So that's kind of where it's at.

And by the way, I would point out, which we track very closely, the IRRs are higher on the new Pulse accounts than they are on the underlying accounts we generate normally at ADT.

And the other thing that we think is going to be a positive dynamic over time is, because a lot of the higher-end Pulse offerings are going into custom home installations where folks have a little bit higher disposable income, and plus the fact that the customers in Pulse will have a little more skin in the game, we think this is going to help our attrition rates.

It will be a stickier product offering and help attrition rates over time and a higher attrition rate at a higher ARPU is going to be very accretive for the business over the long term.

Great.

And you still are looking at the economics justifying rolling trucks for your installed base when you get to that?

Yes, yes, we do and we are looking -- we haven't made final decisions on some of this, but we are looking at things like should we sign the account up for a new three-year contract when we go do this installation.

All those things are potentially very doable in this scenario and it goes right back to Frank's point.

It really helps on the ARPU side.

So the economics definitely work for us and as you know, this is the first time we have had the economics really work where we can go back to the installed base.

And oh, by the way, when we are there, we will try to sell them some of these other items like carbon monoxide and fire and flood protection and cellular backup, all the things we have been selling in our packages very effectively the last few years that did not make sense from a return standpoint to go do, but we would also be offering that as we go back.

And water pipes too at this point I'm sure.

All right, thanks a lot.

Jeff Sprague, Vertical Research.

Thank you, good morning, everyone.

Hey, just maybe a little more color on Flow if we could, Ed.

I don't think price ever really got that tough in Valves.

Obviously, it softened a bit, but can you speak to what you are seeing now on price on new orders?

Is there some positive price inflection now that the order book is starting to tighten up a little bit?

Yes.

Jeff, as we mentioned, I know one of our competitors mentioned price, but I think they really clarified that the last couple of quarters.

They took a couple bigger projects at lower margins, and I think they are going through their pipeline right now.

And none of the rest of us really, at least I haven't heard anybody else mention it, and we clearly haven't seen much pricing pressure.

We saw some, but we had it covered with other cost initiatives and all that at the business.

So it was very, very modest for us.

By the way, the only headwind we have and I think every other industrial talked about at this quarter is commodities.

And our two big commodities are steel because of the Flow company.

And the other big one for us is oil and gas because of our massive fleet that we have around the world, both in our fire and security business.

So that is kind of -- if you say what is hitting you that say is a headwind, that would be a headwind.

By the way, we have approximated that that commodity headwind is about $0.60 -- or $60 million in the second half of our year, which is about $0.06 of earnings.

And a high percentage of that we have offset with our own cost actions and things like that.

By the way, we probably haven't covered a little bit of it, but then we are hitting an FX help in the second half of the year.

So I kind of neutralized those out.

I would say we are about where we thought we would be.

And by the way, excuse me, that $60 million, I said that is about $0.10 headwind the second half of the year, not $0.06.

But I think we have got two-thirds of that covered and kind of the third we don't have covered is kind of covered through the FX help that we are getting.

So that would be the one headwind.

But, Jeff, as I look out at more specifically I think to your direct question, the projects that we are bidding on are about where our margins are, our gross margins are at.

So we are not feeling pressured to low ball pricing to win projects.

And as we look at some of the bigger projects, I don't feel any different about them either.

We have got good unique products for these applications and so it is not a price war out there and I think, as you are seeing, with this kind of demand starting to pick up, I would think that question will be off the table at some point.

There is just so much demand it looks like sitting out there.

And we are starting to see it come in in the order book.

And just taking that a step further, if we think about exiting Q4 with 14% margins, obviously there is going to be some of the seasonality through the quarters of '12 kind of along the lines of what you are talking about in '11.

But can we think about that 14% as something we can build upon if we kind of think about incremental margin construct and the like?

Yes, Jeff, when you look at the detail, what you are seeing, as we have pointed out, and my answer is yes, but let me give you the detail behind it.

You are seeing the nice fall-through and let me use the fourth quarter.

You are seeing a very healthy fall-through on the Valve business as the volume picks up.

And as Frank said, we estimate that in the mid-30% level and clearly the Valve revenue is going to pick up because look at the backlog we are building there and the order rates.

Thermal starts to pick up and do all that.

So yes, I think that is a nice baseline to plan from.

I would point out one item for you.

We will have 14% in the fourth quarter on a run rate basis, but the timing of when we close KEF could hit us just a little bit on purchase accounting adjustments and all that, but I don't know when that is.

So when we said 14%, it's probably something in the fourth quarter, but that is also kind of one time in nature.

So I think that is a good plan to build off of, Jeff.

And just one cleanup if I could.

The impact from Australia, $30 million in revs, $13 million in OP.

That is kind of an implicit margin in the 40%s.

Yes, I will let Frank take that one.

Yes, on the face, it is, but I would add that there are probably a few million dollars in that $13 million, upwards of half of that, which is really associated with productivity.

So not direct margin with the $30 million, but you have some folks that are on the site, or ready to go to a site, ready to install and your absorption, your productivity just isn't what it is because they are waiting for the storm to end, they can't lay the pipe because the ground is too wet and so on and so forth.

A lot of that is just straight productivity.

So it is not -- I wouldn't interpret it as a 40%er there, but a good chunk of it is margin and then a good chunk of it is just one-time productivity loss.

Jeff, so look, the way I would look at that is we will gain the revenue back and we will gain about half the OI back in the second half of the year.

And then to Frank's point, we are not going to gain the other half of the OI back because we literally just lost productivity with all our install people and all that.

And Jeff, --.

So that's the way I would look at it.

And Jeff, just to add to that, our sites and our folks were not impacted necessarily by the weather conditions that happened.

What it was really is that our customers' sites were very impacted.

They were not able to receive shipments nor was, as Frank mentioned, there able to be some install work that was done.

Thank you very much, guys.

Nigel Coe, Deutsche Bank.

Thanks, good morning.

I just wanted to get a few more details on the guidance.

So looking at 3Q and then obviously an implied 4Q, we got a big step up from, about $[0.30] in 3Q, to upwards of $0.89 in 4Q, which is obviously a lot greater than we normally see in terms of Q on Q.

I can see the flow, I can see the corporate expenses, but is there anything else that would cause that kind of skew in earnings?

Yes, you just mentioned actually the big ones.

Between kind of tax and corporate, it looks like it is a big lift.

But if you kind of neutralize those other items -- maybe the way I would look at it is the third quarter is more like $0.75 if you neutralize the swings in corporate and tax.

So you are building kind of off of a $0.75 and you are looking at, if you go to our guidance, you are looking at our low end being in the fourth quarter an $0.84 quarter to the high end being an $0.89 quarter.

So you mentioned a lot of them.

You get a nice move in the Flow Control business, but do remember also that the fourth quarter is our seasonally strong quarter for both Security and Fire.

And it is the seasonality of our business because of -- all the weather when we do our work and our install at our colleges, our universities and all that and a lot of our service work.

So they trend up so revenue trends up in those businesses.

So, Nigel, as Ed mentioned, Q3 really if you adjust for that corporate expense, you are at $0.75, which then would make Q4 be a little bit more in the $0.80 to $0.85 range if you neutralize for the corporate expense.

Right.

All three segments are going to see improvements in operating income.

So there is a $0.10, $0.15 driver in that range of OI increase just in segment operations.

That includes corporate expense, I should say.

It includes a couple of cents of corporate expense.

Okay, that's really helpful.

And then core growth of 3% came bang on plan in 2Q, but obviously we have seen some good news on the orders.

I think you mentioned 10% orders in April, I think 8% in 2Q.

How does core growth track over the balance of the year?

What will be baked into your guidance?

Well, let me give you our organic because we really don't see that begin to lift until the fourth quarter, especially because of (inaudible), which we have kind of described that to you.

So our fourth quarter -- again, this is very preliminary because we are not in the fourth quarter yet -- but our organic growth in the fourth quarter should be between 5% and 6%.

And then I think that tees up going into '12.

I won't get into quite a number, but that is not an anomaly that we would start to see the 5% to 6% in the fourth quarter.

So we have been kind of running right around 3% organic, but when you look at everything we just said, and you look at the order rates, we get up to that range in the fourth quarter.

And please do remember we didn't drop as much as a lot of companies in the downturn because of the defensive nature of these sets of businesses.

So we didn't have the big drivers down, but that is about it.

Let me give you on the order side because then you can kind of extrapolate this out I think as you are planning, as you're looking at 2012 and the way I would look at this is, remember, 45% of the Company is the service and recurring business, which you kind of know where we are running that at and it is very stable.

Hopefully, that picks up a little bit more from where it is because of an improving economy.

And then if you look at the total Company orders and by the way, I will read you back maybe six months or so of orders because I think this kind of gives you the story.

Total Tyco, which is ex the of 45% of the Company that is recurring and service, the other 55%, if you go back to the first quarter of 2010, our orders were down 11%; the second quarter 2010, they were down 3%; the third quarter, they turned positive at 3% approximately; the fourth quarter of 2010 was 3%; the first quarter of this year was 6%; the second quarter was now 7%; and our April orders for total Tyco were 10%.

So that maybe gives you a little bit of phasing how you can look at it.

That's a good trend.

I like that trend.

And then just finally switching gears going back to Flow, sorry, to Pulse, as you look at the customers, the customer profiles, any evidence to suggest that Pulse is attracting a profile customer that wouldn't necessarily be attracted to the basic intrusion service?

And then secondarily, the improving fundamentals in the US business, does that make expanding the European franchise more attractive?

We know that we are getting some accounts, Nigel, and I am not going to quantify this yet because our team is kind of doing the work behind it.

But anecdotally, we know, and we have talked to a lot of our sales managers out there, they are getting a percentage of accounts they think we are pulling in because of the attractiveness of the new features.

And by -- it is very interesting because, as I just mentioned, 80% of them are actually still taking the first level of package.

So the people really like the remote capability of this on your iPhone or your iPad, the capability you have, especially if you have kids and things like that and we think we are pulling in a set of people that it is interesting them more.

You can see we have really cranked up our TV advertising.

I hope you see that out there.

And we feel we are getting leads that we would not have gotten.

But we are going to try to get that quantified here over the next kind of two, three months and get our arms around that.

And the other thing we probably won't have for a little bit of time, but is very interesting for the future pitch on Pulse, is for us to be able to really quantify the savings that people can get if they use the system properly from energy efficiency in their home.

I am not going to get into these numbers yet.

We have some examples we know of.

We are actually working with a couple of the energy companies who are verifying all this with us, but the attractiveness of the cut you get on your insurance rate for having security, in addition to the energy savings you can get can become a very attractive number relative to what this service costs on a monthly basis.

So there is a lot more info going to be coming out that we will be able to use here in the future.

And then does the Pulse make expanding the European franchise, the resi franchise a bit more attractive?

Well, I don't know if -- sure it will to some extent, but what would be interesting on Pulse, and we are not at this point yet, is how can Pulse play out more in our commercial base and our small business base and our mid-tier business base over time.

That is actually one of the things we are intrigued by.

And as you know, Europe, Asia, Latin America is more of a commercial base than it is a resi base.

And that is something that we are really working on, but obviously nothing to talk about launching.

Okay, thanks, Ed.

John Inch, Bank of America-Merrill Lynch.

Thanks, good morning, everyone.

First, just a clarification, is Signature Security, the revenues and profits in your guidance because it is going to close this week, right?

Yes, it is expected to close shortly.

It is -- in our full-year guidance, yes, it is in the numbers.

So I would say that it is built in there.

Remember, we will only have about a quarters worth of it in our results.

We do expect that there are some purchase accounting related to it, but with that said, we do expect it to pretty much be neutral to earnings for the year.

It kicks in nice going into next year, but, yes, neutral because of some of the closing, purchase stuff and all that we get.

Yes, no, makes sense.

The acquisition of KEF, I mean I get the strategy.

I guess I am having a little bit of trouble understanding what is the return framework.

I mean if you take say $100 million of revenue and kind of teens cash returns, it is still sort of only gets you kind of a mid-single-digit return on invested capital on the $300 million.

So maybe you could help me a little bit with how you're thinking about the return on invested capital framework for that deal and sort of when the payback gets to double digit.

John, one of the things I think that is hard to see -- first of all, the revenue in this business is growing on a percentage basis very nicely.

So there is a nice ramp going on in this business and projects out very nicely over the next few years.

The piece that is maybe hard for you to get your arms around is, remember, they have got one of the largest foundries certainly for this type of business in the world.

It is a huge facility over there that we have and it is underabsorbed right now.

Other customers use their casting facility.

We use the casting facilities that they have and we have a very detailed plan laid out to really get that thing absorbed and really cranking.

And by the way, a lot of that will be with our own existing products that we will pump into there in addition to our third-party customer base.

So you have got to realize you have got this huge fixed cost base with this huge foundry there and we really lever that thing up to get advantage out of that.

And as Frank mentioned, we are also in a tax-free jurisdiction.

So anyway, when you add all that together, you end up with a business that, by year two, we are at our cost of capital and we are above that by year three.

On an ROIC basis, by the time we are at year three, we are kind of around a 12% and we grow from there.

So it is a lot quicker than I think people realize, but it is because of the leverage we get, the volume build of this business, the tax-free nature of the business and oh, by the way, when I put all that aside, it is probably the most strategic region to make sure you have a very big presence in for our Flow Control company for the future.

Ed, just so I understand, does it mean that you are going to run casting volumes that you currently procure in other parts of the world through KEF?

Is that what is happening?

Or these are just incremental revenue synergies?

We are taking off some of our Valve casting volume and we are moving it into our own facility.

And when you play out those numbers, that is totally within our control.

I don't need anything in the market or third party to help us do it.

When you just run those numbers, that really leverages this thing.

And it is --

By the way, we didn't buy it for that reason.

It just protects the nice returns of this business.

By the way, it is good for us because that is extra profit to us by bringing it in house.

The reason we bought it is for the strategic future in the region, but it is a real nice way to make the numbers work.

So you are also -- as you mentioned, this is heavy stuff.

So obviously you are getting the cost down on a per unit basis.

You're also saving a ton of transportation cost because of the leverage you get from having it within the region.

That makes sense.

Just lastly, I want to go back to sort of the perspective the first questioner was asking.

There is this view that if somehow someone doesn't make a bid for Tyco, you're going to monetize your Flow business in some manner.

That would seem to be pretty inconsistent with everything you have articulated up until this point.

But I guess my question is does the book value in some way prohibit you from selling the business because of tax linkage or could you theoretically -- and this is down the road; I'm not talking about anytime soon -- but could you theoretically, if you came to a decision to monetize Flow, could you perhaps structure the deal in a way that you did with [Kemp] to say avoid the tax leakage?

I'm just curious what your thoughts are around that?

Look, John, as I mentioned, we like the portfolio how it is.

Let me mention again also, we always look at all the other alternatives to see if something makes more sense to create long-term shareholder value with it.

I am not going to get into all the details of this or that, but there is always ways to structure things in a creative way and all that that help benefit you.

By the way, it is just like we did with Electrical and Metal, as an example.

We did have some tough cost basis issues there, but the way we were able to structure that deal, we had very, very little leakage at all.

So in other words, if it made sense down the road to do it, we shouldn't think of taxes as some sort of a barrier to realizing that value?

Well, I am not going to maybe jump on that, but tax is never, I don't think, an issue when you look at structure of things in something like this.

Thanks very much.

No, that's great.

Thank you very much.

Operator, we have time for one more question please.

Gautam Khanna, Cowen & Company.

Yes, hey, thanks I have a couple.

Since the last quarter, obviously, oil prices had a big move up and you characterized the Flow pipeline as including some elephants that you have yet to book.

I mean could you just talk about kind of how the RFP pipeline may have changed given the move up and how large some of those opportunities might be and when you might actually start to, A, order them and B, convert them into revenue?

I would think a couple of these bigger deals are in kind of the six-month window.

I wouldn't say they are in the next -- I would say they are in the three to six-month window, somewhere in there.

Look, I think with oil moving up, it just reinforces some of the projects we are already working on.

A for instance, there is a couple big potential new projects in the oil sands in Canada.

Oil was already at the price points a year where, hey, these are attractive projects to do.

And as you know, the oil sands, it is a much higher cost to extract, but oil was already there.

The fact that oil is just moving more I think just makes it more appetizing that those projects are, hey, let's get going, let's get building, let's get this thing moving.

It just kind of helps it a little, but they were going to happen anyway at this point.

Okay.

But when we get -- what is the sense of size here on those opportunities?

When we talk about a big deal, I will ballpark you one without a name, you are talking about a $300 million opportunity that ships over a few years.

And if you start nailing down a few of those, it starts becoming pretty nice.

You guys have spent a lot on restructuring over the last couple years and fiscal '12 has come in pretty close.

I mean how should we think about kind of annual structuring needs and how should we think about the cost opportunity that you have on the back end of it?

This is over a multiyear period, but as we look at our back office and our infrastructure, we still think over a multiyear period, we have got $400 million to $500 million of inefficiency in the Company that we want to work on.

So that is kind of the prize that we keep kind of chipping away at.

I would tell you that, and this is not firm, let me change my opinion a little bit over the next few months, but I would be surprised if our restructuring costs are over $100 million next year.

I think they are going to be less than $100 million.

I don't know how much less, but I would look at it in that kind of light.

And I would tell you the stuff we are looking at, because it is back-office rationalization and efficiency, it is G&A expense and it is less costly to get out than bricks and mortar, so we will get a good payback on it, which will still be less than two years, which is kind of one of our benchmarks.

Okay, and you mentioned I think overall orders up in April 10% year-on-year.

What was it for Flow?

Flow --

About the same range.

I think they were right about 11% in total.

Yes, and it will be more than that for Valves and Thermal and obviously a little bit of a decline on the Water side, but about the same range, about 10% overall.

And there was nothing in the compare last year that just made -- I mean this is also a sequential uptick I should interpret that as?

Yes, there are no anomalies here.

If there were, we would let you know like we do on desal and all that.

Fair enough.

Those percentages that we quote for orders are year-over-year increases in (inaudible) just to be clear.

Agreed, no, I understand.

And just on M&A, you mentioned $500 million as a bogey over the next 12 months.

Can you talk about -- I mean how close are these and where would they be focused?

Yes, the $500 million is not close close.

One is it could be less than $200 million, but when I say close, in the next three to four months.

I would really look at it, because you never know timing of these, I would really look at it truly over the next 12 months.

Nothing I don't think you will hear from us in the next two to three months.

But some very interesting bolt-ons we are looking at.

I will give you two leanings.

We like looking at a couple of technology things we like and we like a couple things that are in emerging markets that would really give us really extra oomph.

Maybe the example like KEF that we just did in the Middle East.

Okay.

Should we think -- when you say technology-oriented, are we talking at ADT or are we talking at Flow?

It would be a combination, but don't view it all being Flow just because of the deal we just did in KEF.

We are looking at an interesting one or two that are either Security or Fire in emerging markets.

Okay, last one, you have had a big move up in the stock price.

You announced a $1 billion buyback.

I mean how should we think about the execution of the buyback in terms of timeframe?

Yes, I mean, look, I think, first of all, you know when we announce one, we do it, so we are not announcing it and just drag it out, but I want to point out to you, the last two that we did that added up to the $1.9 billion, we had obviously two motivators.

First of all, we liked where our share price was to be buying them back.

Number two, we wanted to get the Broadview dilution shares out of the marketplace, those 35 million, because that deal made a lot more sense the way we structured it with some shares, but we didn't want to leave those shares on the market.

And then we had the proceeds from our Waterworks business in [temp] and again, we liked where the share price was, so we spent that money fast.

The way I would look at it, we have some of these bolt-ons we are looking at, so we will gauge it against that, but I think we will move at a nice pace, but probably not at the pace you watched us do the last 1.9 billion at.

Fair enough, thanks, guys.

Thank you.

Operator, that concludes our call.

Thank you.

This does conclude today's conference.

Thank you for participating.

You may now disconnect.