江森自控 (JCI) 2011 Q3 法說會逐字稿

Welcome to the Tyco third-quarter earnings conference call.

At this time all participants have been placed on a listen-only mode.

(Operator Instructions) Today's conference 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.

Good morning and thanks for joining our conference call to discuss Tyco's third-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.

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

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

Let me quickly recap this quarter's results.

Revenue in the quarter of $4.3 billion was up 10.5% year-over-year, excluding the impact of Electrical and Metal Products; and organic revenue grew by 4%.

The benefit of foreign currency concluded 6 percentage points to our overall revenue growth.

Earnings per share from continuing operations attributable to Tyco common shareholders was $0.76.

Earnings per share from continuing operations before special items was $0.85, representing an 18% increase year-over-year.

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

Thanks, Antonella, and good morning, everyone.

Overall this was a solid quarter for Tyco.

Our results were strong in almost every area, and we continued to strengthen our three core platforms while returning excess cash to shareholders.

On a total Tyco basis our organic revenue growth picked up from the previous quarter.

This, combined with productivity initiatives, resulted in a year-over-year operating margin improvement of 170 basis points.

On a quarter sequential basis we saw revenue growth and operating margin expansion across all business segments.

The steady growth of our recurring revenue base, coupled with a 7% increase in orders and our continued focus on cost, gives us confidence that we are well positioned for future growth.

Year-to-date we have announced strategic acquisitions across all three of our core platforms.

Most recently we announced an agreement to acquire Chemguard, a leader in developing and manufacturing specialty foams and other fire-suppression chemicals.

Chemguard is a nice tuck-in to our Fire Protection Products business and further expands our product and service offerings in the fire-suppression market.

Additionally, we further increased our R&D efforts and ramped up our investments in sales and marketing.

Year-over-year we have increased our R&D spend by 18% and our sales and marketing spend by 7% in the third quarter.

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 had another solid quarter.

Growth in recurring revenue was driven by higher average revenue per user, coupled with continued growth in the customer base, which now exceeds 9 million accounts.

On the nonrecurring revenue side, we have now lapped a year of quarterly organic revenue growth and continued to see good top-line expansion despite the tougher compare.

Security's operating margin continued to expand year-over-year with improvement in all geographic regions.

Turning to Fire, organic revenue growth accelerated in the quarter, driven by increased service and product revenue.

Stronger sales, selectivity of installation projects, and the continued benefit of restructuring and cost-containment initiatives resulted in very strong operating margin performance.

In Flow Control, organic revenue turned slightly positive in the quarter after two years of organic decline.

Order activity within our Valves and our Thermal businesses continues to be robust.

The recent increase in orders for Valves is now converting to higher revenue, and we are seeing the expected leverage of 35% reflected in our operating income.

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

Thanks, Ed, and good morning, everyone.

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

Starting with Security Solutions, overall revenue for the quarter grew 13% to $2.2 billion with organic growth of 4.5%.

Recurring revenue, which represents 57% of total revenue, continued its positive momentum, with 5% organic growth in the quarter.

Growth across the globe was led by the North American residential and small business operations.

We're also pleased that the EMEA region grew recurring revenue organically for the second quarter in a row.

On the nonrecurring revenue side, organic growth first turned positive a year ago after eight consecutive quarters of decline.

During this year's third quarter, nonrecurring revenue grew 4% organically with contributions from each geographic region.

From a profit perspective, Security's operating income and margin before special items also improved and were slightly above what we had expected.

Operating income before special items was $358 million, and the operating margin increased 170 basis points over the prior year to 16.5%.

The improvement was due to growth in recurring revenue, including the benefit of the Broadview acquisition, the continued benefits of restructuring and productivity initiatives, and increased volume in the commercial business.

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

Organically, recurring revenue in North America grew 5% in the quarter driven by an increase in the number of accounts and higher average revenue per user.

The operating margin improved year-over-year as incremental investments in sales and marketing were more than paid for by the increase in recurring revenue.

Our North American residential account base now stands at 6 million customers, a more than 1% increase from the prior year.

Average revenue per user grew just over 3% year-over-year, mainly due to the favorable impact of higher monthly revenue rates from new accounts, including Pulse.

Our residential attrition rate of 12.8% improved 20 basis points year-over-year and 10 basis points on a quarter sequential basis.

In our North American commercial business, organic revenue grew 4% in the quarter driven by increased activity in nonrecurring systems installation and service, which comprises about 60% of the commercial revenue.

Orders increased 7% year-over-year driven by retrofit and upgrade work.

In the EMEA region we continued to see modest top-line growth.

The benefits of past restructuring actions and cost-containment initiatives drove the 11.8% operating margin in the quarter.

In the Asia Pacific and Latin American regions, where revenue is predominantly commercial in nature, organic revenue grew 8% on a combined basis, with continued improvement in the operating margin year-over-year.

Turning now to some of our key metrics for our overall global recurring revenue of Security business, our worldwide account base grew 2% year-over-year to over 9 million accounts.

In addition to growing our account base, our global average revenue per user also increased to $46.30, representing a 3% increase year-over-year excluding currency effects.

The average revenue per user has been steadily increasing as a result of our broader product offerings.

Our total worldwide attrition rate of 12.7% improved 20 basis points year-over-year and remained steady on a quarter sequential basis.

And finally, Security Products, which includes intrusion, video, and access control, had organic revenue growth of 6% in the third quarter.

I would like to point out that this piece of the business is where much of our security technology is developed, and over the last few quarters we have been increasing our investment in R&D.

We plan to continue to increase our investment in technology to provide an even more extensive portfolio of Security Product offerings.

Let me quickly comment on Broadview and Signature Security.

We have now lapped the one-year anniversary of the Broadview acquisition and are pleased to report that we are tracking to the synergies we expected to achieve.

Signature Security closed during the third quarter; and the integration plan, which is similar to Broadview's, is well underway.

Although purchase accounting adjustments are a bit dilutive to earnings initially, we have identified cost synergies that will enable this acquisition to become accretive in the near term.

Let me now turn to Fire Protection.

Overall, revenue in the quarter was $1.2 billion with organic revenue growth of 5%.

Our service and systems installation business, which is the largest piece of Fire Protection, reported total revenue of $859 million.

Service revenue grew 5% organically in the quarter.

Systems installation was relatively flat on an organic basis as growth in North America and Asia-Pacific offset a decline in EMEA due to selectivity of installation work.

The remaining portion of our Fire Protection business, Fire Products, which encompasses the Fire Protection Products and life safety businesses, reported revenue of $341 million in the quarter with organic revenue growth of 11%.

I would also like to quickly comment on the acquisition of Chemguard that we announced last week.

This acquisition expands our fire-suppression offerings and provides greater penetration into certain end-markets, particularly the petrochemical and oil and gas verticals.

From a financial perspective, Chemguard is a very attractive acquisition with a purchase price reflecting a mid-single-digit multiple.

Similar to the other parts of our Fire Products business, Chemguard also has a strong operating margin profile.

And this, along with several synergy opportunities that have been identified, will allow this acquisition to be quickly accretive to earnings.

The Chemguard transaction is expected to close by the end of the calendar year, subject to antitrust clearance and other customary closing conditions.

Turning back to the results of our overall Fire segment, operating income before special items was $158 million in the quarter and the operating margin was 13.2%.

As we discussed with you last year, the operating results in the prior-year third quarter were positively impacted by an $8 million benefit related to certain pension plan changes which increased Fire's operating margin by 80 basis points.

Adjusting for this prior-year pension benefit, the year-over-year operating margin increased 140 basis points.

Increased leverage from higher volume in the Fire Protection and life safety product businesses, along with an increased mix of service revenue across all regions, drove the year-over-year operating margin improvement.

Year-over-year year order growth of 2% included 5% growth in Service, 9% growth in Fire Products, and a 5% decline in systems installation, which was related to the project selectivity.

Total Fire backlog of $1.26 billion was flat on a quarter sequential basis.

Moving to Flow Control, revenue of $928 million was slightly better than we expected.

This was driven largely by the Thermal business, where a few large customers accelerated the installation phase of their projects during the third quarter; and this more than offset a shortfall in Water revenue.

Operating income before special items was $106 million, and the operating margin was 11.4%, which was a little short of our guidance due to lower-than-expected operating margin in Water.

Valves & Controls, which comprises about [60]% of Flow Control's annualized revenue, grew 8% organically in the quarter, a very good improvement from the 1% growth we saw in the second quarter.

The sequential increase in revenue to $575 million leveraged at the anticipated 35% incremental profit.

This drove a 200 basis point sequential improvement in Valves & Controls' operating margin.

Orders in Valves & Controls also continued to accelerate in the quarter, with 15% year-over-year growth, indicating strength in all end-markets, particularly in oil and gas and power.

In Thermal Controls, organic revenue growth of 23% was driven by strong project activity during the quarter.

We continue to see strong project activity in Thermal, as orders grew 30% year-over-year.

In Water, organic revenue declined 31% with more than half of the decline attributable to the completion of the Australian desal project earlier this year.

In addition, the current absence of large-scale pipeline projects has reduced margins in Water to the mid-single-digit range from a historical range in the mid-teens.

We are, however, pursuing several large projects which are currently in the bidding phase and for which Tyco is a strong contender.

We have made a deliberate decision to maintain our infrastructure of expertise and manufacturing capabilities as we look to book these projects beginning in the second fiscal quarter of next year.

This should result in improved operating results in Water in the second half of fiscal 2012.

Overall, Flow orders in the quarter increased 12% year-over-year.

Backlog of $1.75 billion increased 4% on a quarter sequential basis.

Now let a spend a few minutes on our expectations for Flow Control in the fourth quarter.

As noted on slide 10 of the review materials, we expect Flow Control revenue, before the contribution from the KEF acquisition, to be approximately $1 billion, a 6% organic revenue increase year-over-year.

From an operating income perspective we expect the sequential revenue increase to drive 26% incremental operating income for total Flow, as the expected leverage in Valves & Controls and Thermal is partially offset by the previously described near-term dynamics in the Water business.

This will result in a fourth-quarter operating margin, before the impact of the KEF acquisition, of approximately 12.5%.

The acquisition of KEF, which closed at the beginning of the fourth quarter, is expected to contribute approximately $30 million of revenue.

Non-cash purchase accounting adjustments, which are typically higher in the first few months after acquisition, are expected to impact Flow Control's operating margin in the fourth quarter by about 150 basis points.

Flow Control's overall reported revenue is expected to be $1.030 billion, with an all-in operating margin of approximately 11%.

Now I would like to touch on a few other important items.

First, Corporate expense before special items was $102 million in the quarter, which is quite favorable versus our original estimate.

This is mostly due to lower adjustments required for actuarial valuations which were completed in the quarter, as well as the timing of certain project-related expenditures which will be incurred in the fourth quarter.

We expect Corporate expense in the fourth quarter to be approximately $110 million, bringing our full-year expense to slightly below the low end of our previous guidance of $400 million to $420 million.

This revised amount represents a reduction of approximately $50 million or 10% as compared to the previous year.

Our effective tax rate for the quarter before the impact of special items was 13.9%.

The tax rate in the third quarter was favorably impacted by the timing of the resolution of certain pre-separation tax liabilities.

We expect the fourth-quarter tax rate to be about 18% and the full-year tax rate to be approximately 16%.

Lastly, our cash and overall balance sheet remain strong.

This provides us the flexibility to continue to invest organically in our businesses, make strategic bolt-on acquisitions, and return excess cash to shareholders.

Now let me turn things back over to Ed to wrap up this morning's call and then we will move into the Q&A session.

Thanks, Frank.

Now let me turn to our guidance for the fourth quarter and our revised outlook for the full year.

For the fourth quarter, we expect revenue of approximately $4.45 billion to $4.5 billion, with organic revenue growth of 4% to 5%.

The overall operating margin in the fourth quarter should be similar to what we achieved in the third quarter, as the improvement in Security and Fire will be partly offset by non-cash purchase accounting adjustments and sequentially higher Corporate expense.

Below the line, we expect an operating loss of $8 million related to our minority interest in Atkore and, as Frank just mentioned, an 18% tax rate in the fourth quarter.

We therefore expect our EPS before special items in the fourth quarter to be about $0.85.

Based on our fourth-quarter guidance we now expect full-year EPS from continuing operations before special items to be approximately $3.17, which is a $0.10 to $0.15 per share increase from our previous guidance.

Thanks for joining on the call; and operator, if you would open up the lines for questions.

(Operator Instructions) Steven Winoker, Sanford Bernstein.

Good morning, Ed, Frank, Antonella.

Maybe I could just start with the beat in Security and the performance there.

If I recall, when you first closed or announced Brink's.

Sorry, when you first announced the Broadview-Brink's acquisition you were thinking about $50 million, which I recall being about $0.07 to $0.08 at the time, translating additionally in the second year of the acquisition.

I know you commented that you were sort of on track.

But maybe you could tell us how much of the current beat was due to Broadview-Brink's and what you're -- quantify a little bit for us how much -- how you are tracking relative to that.

And then maybe layer on where the additional acquisitions get you.

Steve, let me -- it's kind of high level on Broadview.

We are probably about 75% through after the one-year mark to getting the synergies.

So we got about $100 million operationally that we have got baked in already; it has happened.

If you will remember there was about $50 million of one-time items that improved our numbers also on the synergies, which was the rebranding going away and the royalty payment back to the Brink's parent going away.

So that was about another $50 million.

So that is $150 million that we have already kind of put in the bag.

Then there is the last -- and then there is $50 million on the tax line that we are getting most of it as we get through this year and into the beginning of next year.

So net-net I think by the time we actually end this fiscal year, we will be a good 80%, 85% of the way through the synergies on Broadview; and the rest will happen in the beginning of next year.

As we mentioned, it's EPS accretive to us on a year run rate basis of at least $0.10.

I think we are probably going to come in a little bit better than what we had planned.

Also remember on a cash basis it is more like $0.18 per share accretive.

So I think it is going very, very well, just -- and tracking slightly ahead of where we had projected, both a little bit on dollars and a little bit on timing.

I would mention what I like about the Signature Security acquisition, again much smaller in nature but we are basically using the playbook from the Broadview integration.

It is almost identical.

We bought a security company with accounts, a field sales force installation team, and we are really doing the exact same integration process.

We have actually used some of our North America talent to help structure the synergy roll forward on the Signature piece.

So I feel very, very good that we will get that very quickly accretive to earnings.

But because the size of it, I would say it is a $0.01 or $0.02 when you look at next year on that.

The one where I am really personally focusing on is the KEF acquisition which we just closed on in the Middle East.

We have a lot of cost synergies there as you know, because we are going to load up the foundry with a lot of product to get the absorption rate way up.

So we are just beginning that process.

That is very important that we track on to that one, because that has a lot to do with the cost side of making these numbers work.

But what I am more excited about is the growth opportunity in that market.

We are going to expand with that base into Saudi Arabia during fiscal '12 with our own facility, our own plant and all.

So we are both focused on the cost side of that one and the revenue potential of that one going forward.

I would point out, without the two customer names, we have won two awards over the last 30 to 45 days since people knew we were buying KEF, from KEF relationships where we have won a little over $30 million in orders because of the relationships that they had.

But these were actually orders for Tyco Valve products that we are getting, so that was a nice start on that.

Great.

You also mentioned productivity initiatives in -- a couple of times.

It is nothing you know -- maybe you have been as vocal about historically.

Do you either have a way of -- I don't know if you can quantify that or give us a sense for what kind of magnitude we should be thinking about.

What's different on the productivity front versus what you had been doing or what results you're maybe getting?

Well, let me just give you a high-level.

Last year we did $150-million-some of restructuring.

Two-year type payback, so you can extrapolate that into this year's numbers.

This year our restructuring, by the way, will be a little bit lower, which we'll mention, than we had thought, because we are not going to do some restructuring in the Water business that we were planning on.

So we are going to maybe come in around another $140 million, $150 million this year restructuring again, with about a two-year payback, which kind of rolls into next year's numbers on the upside.

Then the bigger issue, Steve, is I think we mentioned this on the last call.

We are looking at a three to three and a half year project to take about another $500 million of cost out of the Company.

It mostly comes out of the G&A line.

As you can see we are ramping up R&D; we are ramping up sales and marketing.

But our G&A structure, we are going to make the last big push here over the next few years.

That is where we will get a lot of this productivity.

It is mostly back-office functionality, being tied together in the regions around the world.

So that is our big focus as we enter 2012.

Now, by the way, when we get that $500 million, this is not exact, but the way I look at it -- a good half of that will drop to the bottom line of the Company just from taking the cost actions.

The other half of that money will probably be spent on growth initiatives.

However, they should also have a nice payback to them or we wouldn't do them.

So that is the way I would look at that.

And Steve, the one thing I would just add to that, when you think of this $400 million to $600 million of savings and all the restructuring that we have done over the years, if you take a look at in the past a lot of the restructuring has been within the segments and individually within the segments, in improving the operations there.

And now this kind of stretches across all three platforms.

The only other point I would add on those productivities specifically is, when you look at what has happened with the nice accretion in the EMEA margins in Security and with the accretion in the margins in the Fire business, a lot of that is attributable to some of the productivity and efficiency initiatives, along with some of the mix we talked about in terms of adding additional components of service and so on.

Great.

Last question for me is one I have raised on prior calls.

A little different this time, which is -- a lot of the guys, the CEOs at our conference and elsewhere from some of the cable and phone companies have been talking increasingly aggressively about their security monitoring plans.

It is different now than it used to be just in terms of how public and much louder they are being about it.

Has your perspective on that changed at all?

No, it hasn't.

Nothing is happening that we weren't thinking was happening, and there is no new news to us.

But obviously, remember, we are in the business and we talk on a weekly basis with people we compete with, people that we partner with, and people we might partner with.

So we are in constant dialogue with everyone.

But, no, Steve, I feel the same way about it.

I have always, as I said, been a believer that we will have a couple entrants here that are going to give a go at this.

I think we do very well in that environment.

I will point out to you that we have been competing with a couple very big brand names for almost a year now in markets that they have really been trying to see how they can do in these markets.

We track ourselves in those given markets, and our metrics are no different in those markets than how they are tracking across North America.

And by the way, a little bit how I would view it also is -- we had a big branded player that we competed with before, which was a phenomenal name in Brink's.

And to some extent a little bit of extra advertising in the market and someone else talking about security and advertising and all is not a bad thing.

I will also add, we constantly talk to people about should we partner, should we not?

There's a lot of conversations going on in the industry that could potentially be interesting.

But no other news besides that comment at this time.

Okay, and since you mentioned those test markets, there is no pricing, major pricing deterioration from those other players?

No.

When you look at it, you have seen maybe some people talk about their pricing.

Remember when you look at it you got to get it apples-to-apples.

And when you get it a true apples-to-apples the pricing is very close for everyone that has at least talked about pricing.

I will give you one little tidbit, for instance.

In our pricing on our Pulse package, we put in there our Quality Service package as standard, where in the past we always just made that an option.

That happens to be $5.00 per month that we get in the package.

But some of the other people that have talked about their pricing, that is not there.

So, I think what you will see over time is a little bit like what I would call the satellite and the phone and cable guys.

They all do introductory prices, and then they talk you up.

Here, do you want this in your package?

Do you want this?

My gut is we will do more and more of that.

Quite frankly, we have been doing that, but we will do more and more of that to get people interested at certain price points, and then move the packages up like we do now.

Great, thanks.

I will hand it on.

Scott Gaffner, Barclays Capital.

Good morning.

Just to follow up on ADT, could you give us a little bit of an update on where we stand on the take rate on the Pulse packages?

Some of that commentary you provided down at EPG on take rates and which package customers are going for?

Let me read you across the three quarters here since we launched, again.

We had a 14.5% take rate for Pulse in the first quarter of this year.

We had 15.5% take rate in the second quarter.

We had a 19.5% take rate in the quarter we just ended.

July is running a little bit over 20% right now, but we are only a few weeks into it.

But what is interesting here, let me give you quarter one and quarter three on mix.

I will just give you two of the packages.

The introductory package, which is Select, that is the lowest level package, in the first quarter it was an 84% take rate.

And the Premier package, which is the high one, was a 10% take rate.

In the quarter we just ended, Select was a 74% take rate, so 10 points lower; but the Premier is a 23% take rate, up from 10%.

So you can see the mix is skewing also to some extent to the higher end.

By the way, as I have said for the last few quarters when we talk, that is just the majority of the sales force, learning how to move people up the food chain, understanding how to market it and sell it.

So that puts our average still just around $50 a month on ARPU for our Pulse accounts versus our new accounts, ex-Pulse, are about $43 as we bring them on.

And our heritage base, installed base, is $36.

So just to give you a feel for this.

So just to remind me, is the dealer network actually selling ADT Pulse now?

No, they're not.

A couple of them have just begun offering the Select package, and we are just being very cautious, making sure they are trained well.

I would just ballpark you that by the time we get to the end of our fourth fiscal quarter we will maybe have a third of them up and running.

By the end of the calendar year, a high percentage of them.

So, just to clarify, these numbers are just for the internal sales force (multiple speakers)?

Yes, and the way I would maybe look at that, Scott, is -- because just by pure numbers, that is about half our sales force.

Okay.

Then just one last question on the orders.

Hard to argue with a nice 7% order growth in the quarter.

But you put the April number up, previously up 10%.

Can you just walk through what happened in the last few months of the quarter to bring that order rate down?

Yes, let me actually see if I can pull the exact number, because I know -- April was higher; May was a little lower; and then June was up again if I remember.

But I want to get the exact number for you here.

Scott, I would just remind you that when we started off the previous quarter it was kind of along the same trend as well.

So I wouldn't focus any too much on any one particular month within a quarter.

Yes, just to give it to you -- but when you look at this, I really do put Antonella's point out.

It depends on the lumpiness and flow, by the way, because of the way you get the orders.

But we were 10% in April; we were 4.3% in May; and we were like 6.5% in June.

Some of that, of course, has to do with the absolute amounts from the previous year.

So when you look at the absolute order rate they are still very strong through the quarter.

Yes, and let me point out, three weeks through July our orders are attracting right about 7%, which is the same as the last two quarters of orders, as you can see on the chart we put in the package.

Thank you.

Appreciate it.

Jeffrey Sprague, Vertical Research.

Thank you.

Good morning, everyone.

Can you elaborate a little bit more on how and when you go after this $500 million of cost benefit?

You have been talking about it for a few months.

Are you still trying to evaluate how actually to attack it?

Can you give us a sense of -- is it a complex ERP effort?

Is it -- what are the one or two kind of bigger things that are the challenges that you are trying to get right there?

Yes, Jeff, you're right on the point; this is an ERP consolidation across the platforms to bring it down to literally a few in the Company.

Let me just take you back to -- I guess around the time of separation into the three Tyco companies -- I know these numbers will sound staggering, but we worked our ERP systems down globally to about 300 at that time.

We are now down to 130 ERP systems.

We are going to go down to about five.

So that, the 130 down to the five, is the next three-year progression.

The other big piece of that, Jeff, is we are putting in a consolidated HR IS system.

So the two big pieces are ERP and the global HR systems.

We are taking that down to a single platform.

Then when we do all that, or as we do all that, we take the G&A structure of the Company down.

The only other thing I would add to that is we have got a lot of legal entity complication from the legacy.

That has already been reduced by several hundred.

We have another few hundred legal entities to come out.

When you do that, you can consolidate locations, hub-and-spoke approach, and center of excellence approach on some of the shared services across HR, IT, and finance.

So we have a really good location consolidation opportunity; a legal entity opportunity, which by the way reduces administrative cost in the area of tax filings and other administrative costs -- all of that is a big piece of this.

So it is three functions.

It is ERP, it is legal entity, it is consolidation tools, and leveraging the horizontal pipes across the organization.

So we are underway now.

It will accelerate as we get into 2012 in some of the activity.

Yes, Jeff, maybe to punctuate that, to put the burden on us, this is a topic we presented to our Board at our last Board meeting and told them that we are committed to these numbers.

You can track us against them, and this will be a launch for fiscal 2012 for the next three years.

Then I understand some of this, although it overlays Corporate, does back up into the segments.

But just thinking about the Corporate expense line which we all can clearly see, should we take it to mean that that number permanently at least has a 3 handle on it now and is --?

Yes, I would say yes, we are in the high 3s run rate now.

As you can see from like $450 million the previous year.

And if I -- and again I am just gutting this right now; we haven't pinned down the exact numbers.

But there is another $10 million or $15 million that we are going to try to get out of the Corporate number.

Then just finally for me -- appreciate it, thank you.

It was just on deals it does seem like things are picking up.

None of them are particularly large, so it is kind of what you were saying previously about size.

But can you -- some color on what we (technical difficulty) going forward what the pipeline looks like, what kind of things you're looking at?

You mean as far as bolt-on acquisition?

Yes, bolt-on acquisitions.

Look, we have earmarked $500 million from the last earnings call that we had three months ago.

We had done $500 million or so the year before.

The Chemguard one we just announced is a piece of that new $500 million.

So give or take, my gut is we will do three or four deals during the year that would bring the total to about the $500 million.

We are really looking, as you can see what we just did during the last months, we really are looking across all three platforms.

I would say the thrust is maybe the two areas, if you want to look at it this way.

One is technology that we might want to bring in that fills in something in the portfolio; and geographic reach, mostly emerging market like the KEF deal that we did.

All right.

Thank you very much.

John Inch, Merrill Lynch.

Thank you.

Good morning, everyone.

So just to be clear, you thought that about $20 million of Australian flooding revenue was going to come this quarter.

It sounds like that didn't actually happen.

Or did it?

I am just curious what --?

Yes, about two-thirds of it, John, did come through in the quarter.

But when you look at Flow, we did put a chart out; I think it was page 10 in the package this morning.

That piece of it did come back, but we did fall a little bit short on the Water side during the quarter.

So maybe to your question it is maybe hard to see, but we did get those shipments; we missed on some other things on the Water side.

By the way, what I would point out on that chart when you look at it, as Frank said on the call, we made a very deliberate decision in the third quarter to hold on to our overhead in the Water business.

It is the only part -- if you look at Flow, the Valves are really booming right now and we are getting fall-through.

We are getting very solid business opportunities in Thermal, which look really good over the next few years.

As you can see our orders were up 30%.

It is a good margin business.

Our only weak spot here was Water.

And what we were going to do in the third quarter was downsize in the business, but we have been waiting and waiting because we now have three large Water projects that are on the horizon here.

We are actually feeling very good about our position on these three projects, and they are three fairly decent-size projects that would last for multiple, multiple quarters.

So we made a decision just to hang on the overhead.

Because a lot of this is in Australia.

It is a tight labor market.

We can't get rid of the people and then do a ramp on these three major programs.

So we think those orders start hitting in the second quarter.

So we have made a decision to eat through a little bit of pain on the Water margins for a couple quarters here to get the real benefit for multiple quarters going forward.

So I would say that is the dynamic there.

By the way, in any given quarter where we are off just a little bit on the revenue side in Water versus the estimate, sometimes it can be nothing more than site readiness or the cadence over which the shipments make it to the site and then are properly revenue-recognized.

And that was a piece of what happened on third quarter versus where we thought we were going to be just a couple months ago.

It sounds like the restructuring that you had contemplated was overhead purely, right?

This was not some sort of capacity issue.

Because that wouldn't make sense, if you're actually seeing the business improve.

Right, no, it was overhead.

But when you look at it, it is a lot of technical expertise, field installation expertise.

Remember, when we win these big Water projects, besides valves and other products we lay a lot of pipe.

Which we like that business, and so you can't get rid of all this infrastructure and then think you are going to ramp on three major programs quickly.

So that is the decision that we made.

What is the outlook for the TEMP business, Ed or Frank?

Just all else -- I realize you don't -- you have sold off a part of it.

But just thinking about the dynamic of the non-resi construction markets today and the tie-in there.

I think we had been expecting some sort of an improvement in the coming quarters.

I am just wondering; has your thought process changed a little bit toward that expected contribution?

No, not at all.

In fact, I still chuckle about it.

Last quarter they had great spreads going on.

Spreads now are contracting a little bit, which is why we will see a little bit of this loss when we put the fourth-quarter guidance out.

But just going back to the underlying point, this business is very non-resi-focused.

And that market from its peak is down darn near 65% to 70%, so that is still bouncing along a bottom.

But as that picks up, the TEMP business obviously will improve very nicely off of a very significant bottom.

So they can make decent money even in this environment, as we showed, and they did last quarter.

But that is still based on no activity really on the new construction on the non-resi side.

And by the way, just as an overall comment to Tyco, since we have exposure to that, the commercial markets, as we said last quarter we are not counting on any lift whatsoever from new construction in North America or Europe to hit until the middle of next year.

That is how we have planned.

So the orders we are seeing right now, the momentum we are seeing is really a lot of retrofit and upgrade work.

Then I think the last late cycle for us to come back, which is really late cycle obviously here, is this commercial piece.

Right, that makes sense.

Remember too, on the TEMP business, as the non-resi markets do recover, those same conditions will also tend to increase the commodity prices.

So you'll get the benefit of the non-resi recovery and the spread on the steel at the same time.

So there will be a lot of tailwind when it inevitably happens.

Just lastly, I had heard an ad on the radio, dialing a 1-866 number for ADT, offering free equipment installation if you sign a three-year contract.

I have heard a couple of these.

It is not clear to me.

Is this a dealer or is this Tyco doing this?

Because I thought you guys had actually suspended that program.

Yes, it is probably one of the dealers, John.

We are not doing that in our ads.

You're not?

That is what I assumed.

Okay, great.

Thank you.

Just remember also, when you do see ads also you get a lot of calls in.

And the sales thing is -- hey, here is what you really want in your package.

So that is the goal.

There's industries that have proven very successful in that, as we have; and you end up at very different price points.

But you don't absorb any of those costs in any way, I am assuming.

Right?

Not at all.

Okay, great.

Thank you.

Steve Tusa, JPMorgan.

Hi, good morning.

Just to clarify a couple of the numbers here, so the Electrical and Metal losses and then the dilution from the deal, that equals what?

Like $0.04, something like that?

In which quarter?

In total?

For Q4?

For fourth quarter?

Yes, (inaudible) about between $0.03 and $0.04, yes.

Okay, okay.

Then the revenue guidance for the fourth quarter, if you strip out -- you have given us Flow Control; and if you look at the sequential increase at the low end of the range, at least, 2% seems pretty low.

You did 4% ex-Flow in the fourth quarter of '09 and 7% in the fourth quarter of 2010.

Is there any reason why the seasonality would be incrementally weaker here in the fourth quarter?

No, no, and we don't think it will be.

Our organic growth rate, Steve -- maybe we will go through this off-line with you also -- but is in the 4% to 5% range, which is slightly above what we did in the third quarter.

So no, we are expecting that improvement.

By the way, I would just point out, Steve, this might actually go to both your questions and the one right before it.

When you just look sequentially from the third to the fourth quarter, maybe to do the math, the operations are improving by $0.08 sequentially.

Then we have the offset as we mentioned on tax being a little bit higher sequentially, and Corporate and Other.

And by the way, and the purchase accounting is in there also because of the deal.

So we did $0.85 in the third quarter.

We were guiding to approximately that for the fourth quarter.

But in there the operations are having a nice lift and then bottom line offsets.

Right, and your point on Corporate from before is that even though it was maybe a little bit lower than expected this quarter, that is a sustainably low number that is going lower.

So that is not a one-time benefit so to speak?

Right, right.

Steve, I think -- I know we bounce around below the line on items the way you've got to account for things.

But when you look at the macro issue, Corporate came down $50 million this year and we are saying we can ease it down a little bit more, so the run rate is coming down.

And we have had great tax work this year.

So I know tax bounces around also, but now when you look what we are guiding to the full year at, we are guiding -- you can see -- with an 18% in the fourth quarter.

It puts the full year at around 16%, which is very nice progress.

Hey, you guys should spin out the tax department.

They do a great job.

They'd probably get a high multiple.

(multiple speakers) Going to have to give them all a raise now.

Just on the segments here for the fourth quarter.

Maybe just give us an idea of -- you are basically saying flattish margins, so that would be -- and you have given us Flow.

That would be implied for the other two.

There is nothing bouncing around in the other two segments, right?

On Security and Fire?

No, no.

I think what you will see -- you know, similar margins in Security, maybe slightly better than where we were.

And slight improvement in Fire also sequentially.

Okay.

By the way, that is off of a higher number that we did in the third quarter.

We had a very nice third quarter as you can see in Fire.

So you will see a little bit of momentum on the margins in those businesses as you move in the fourth quarter.

And with Fire, the good story there is this gradual improvement will be enabled by this continued mix shift to service.

So we talked about the selectivity in installation business.

As they focus a lot on service, that typically carries a higher margin and is more sustainable over time.

That trend will continue over time.

That is right.

When we have given you the mix I think it is important to look at that.

The aggregate Fire orders is one thing; but over the next year still you are going to see this shift that you are seeing where, if you look across the year, there is no growth in systems install because we are walking away from some verticals we don't want to participate in from an install standpoint.

So we are muting our overall growth a little bit.

But when you look you can see nice growth in service, nice growth on the product businesses.

And that whole mix shift Frank just mentioned is really playing out in that margin progression that we are having.

Okay.

One more question just on Flow.

You gave us the sequential incremental margin of about 26%.

If you start to get some of these bigger Water projects and you cover a little bit of that overhead better, should we think about 25% as the baseline type of conversion for Flow as we look forward into the next year or so?

And then that maybe could even improve as the Water margin begins to come back?

Yes, Steve, it is hard to say on a quarter by quarter basis.

Because you have got to remember 60% of Flow's revenue is a project based business.

So it could be choppy from quarter to quarter.

But on average I would say it is not a bad way to think about it.

But it is not going to be an exact number every quarter.

But a large project could have a 2 handle on it in terms of incremental drop to the bottom line, depending on the project.

But clearly as we said in the script, as you get into mid next year, once we book some of these large orders hopefully in the second quarter, you will start to get that accretion from that mid-single-digit rate back up to where we are trying to get historically.

So that should play out.

The good thing right now that -- believe me we are watching it every day; I am not naive to what other people were talking about on their earnings calls.

But when I look at the Flow business right now, we are seeing as you can tell nice order momentum.

And to Frank's point, that doesn't count any of our frame agreements that we are working on that could be pretty substantial for us.

I think I mentioned on the last earnings call we expected we would book one or two of them in a six-month window, which is now a three-month window.

And I do think that is an accurate comment still.

So, that can layer in on this to really -- could be very nice for us going forward.

Yes, so really the best is yet to come at Flow, it feels like.

You are still accelerating pretty nicely.

Yes, absolutely, I think.

The orders now have built for six quarters in a row in the business.

By the way, the leverage we got on the Valves was exactly 35%.

I was very impressed with our forecasting capability.

So that's very nice, and obviously that plays into next year with the momentum we are seeing.

All right.

Thanks a lot.

Ajay Kejriwal, FBR.

Thank you.

Good morning.

First, just on ADT margins, last couple quarters seemed very solid improvement, helped by ARPUs and all the good work you are doing on costs.

But maybe update us on the R&D and SG&A there.

What are your expectations as you ramp Pulse?

And how should we think about margins from here?

You will still see margin expansion in the business, but that margin expansion comes from I would say three big buckets.

The continued improvement in the mix on the resi business, right, as we keep bringing ARPU up and therefore our IRRs are going up in the business.

So that is one spot.

Continued recovery in the end-market in the nonrecurring.

Remember my comment a minute ago about the steel business.

We are seeing a pickup, but that has nothing to do yet with any real new commercial construction.

So, you got to think at some point as we are in next year we see a little bit of lift that helps us on that and just the continued improvement in that business.

And then the third big bucket is the point about the restructuring that we are on, the $500 million or so.

A big chunk of that obviously would fall in Security, because of the size of our Security business.

So to me it is a -- drive the resi business hard; that continues to improve margins.

Drive the growth rate of the commercial business and really that whole mix issue there.

And then drive the restructuring and simplification initiative are the three big buckets.

Yes, this goes back to what I was saying before in terms of taking savings on the G&A categories and reinvesting them into we'll call it S, or selling and marketing, and R&D.

That is exactly the dynamic that we are going to be seeing over the next couple quarters and we have seen in the Security business, where you see op expense, pure kind of general and administrative expense, coming down by a couple percentage points.

And that is being redeployed and will continue to be redeployed on a quarter sequential basis in R&D and in selling.

The selling and marketing is paying back right away for us.

The R&D will continue to pay back as we stay at the top of the food chain on the technology side.

So we want to keep that model going.

Got it, so it sounds like even though R&D and SG&A could go up from here, but there are lots of other tailwinds that would help margins.

Yes.

Look, the way I would look at it is the growth rate in the products businesses in Security are picking up very, very nice.

We model out, obviously -- our Vitality Index I guess you would know it as, new products introduced, how much of revenue is that?

And our percentages are picking up very nicely in both Security and Fire on the product side.

I think if you compare us to anybody else that is putting data points out there, our growth rate right now on those products businesses has been pretty nice.

And a big part of that is a lot of these new product introductions.

Good.

Maybe just one question on deal valuations in the Security space.

We have seen over the last couple months some very, very high multiples of revenues, deals taking place at those valuations.

So I'd be curious to hear what you are seeing in terms of valuations in the space; in terms of your pipeline.

Has that influenced how say private equity or other strategics are thinking about the Security space?

Yes, well certainly it has influenced us because we're not going to do any acquisition that doesn't make good financial sense with very quick accretion for us.

So I think what you're alluding to -- I know there were two decent-sized companies in the last month that got announced they were being acquired.

One by private equity, one strategic.

They both had 14 times multiples on them, which is up there.

You can make -- form your own opinion.

But I think our Fire and Security commercial businesses is a world-leading business.

So they are probably -- I kind of like seeing those multiples out there; but we would obviously be very cautious buying something at those type of multiples on it.

You could notice we were not in the bidding on those couple projects.

I like seeing those multiples too.

All right.

Thank you very much.

Operator, we have time for one more quick question.

Gautam Khanna, Cowen and Company.

Yes, I may have a couple if you don't mind.

But, Ed, you mentioned you see some larger projects at Flow that could hit in the next three months.

Could you also talk about the pipeline beyond that?

If you are looking out six to 12, do you see some other big ones out there on the back of the near-term ones?

We do.

Gautam, the only thing I see slowing this thing down is if the world had another credit crunch.

Because it's availability of money to obviously do a big new project.

Again, none of that is in our backlog at this point in time.

But when I look at these big projects it is a lot of greenfield.

People are going to build a new refinery, for instance.

So as long as the world is clicking along here, I see -- it just looks like a multiyear good feeling in this space.

Again, unless a credit crunch hit.

To that point, you mentioned the July orders thus far are still pacing well.

But are you seeing any sort of change in customer behavior with respect to some of the shorter lead-time item orders?

Are they slowing down given all the noise in the world right now?

Yes, you know, Gautam, believe me we are looking at this every day.

Our orders feel good.

As you can see we are about 7% -- again I don't want to read too much into three weeks in July; but the fact that we are running around 7%, it feels good.

And I don't see any different pattern by geography either as we look across our businesses.

The only place we have seen a little bit of softness -- but we tend to see this a lot from time to time in this business -- is in retail.

I think we are seeing some softness on orders in North America and EMEA, but not in the rest of the world.

So in aggregate it is not bad in retail, but I do think we saw some softening there that I would maybe relate to the retailers being a little soft this last quarter or so.

So I think that would be an accurate statement.

But besides that, we are not seeing anything else.

Okay.

Just a last one to clarify, given the Water dynamics at Flow and the earlier comments on incrementals at Flow.

When now do you expect to see the 14% reported margins at that business?

Is it -- are we going to see it in fiscal '12?

If so, is it Q3 or Q4?

Yes, let me just say this because we are not giving guidance yet.

You will see it next year in the fiscal year, but I will talk more detail about that when we talk next time.

Thanks, guys.

Operator, that concludes our call.

Thank you.

This does conclude today's conference.

Thank you for participating.

You may disconnect at this time.