江森自控 (JCI) 2012 Q4 法說會逐字稿

Welcome to the Tyco fourth-quarter earnings conference call.

All participants have been placed on a listen-only mode until the question-and-answer session.

(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 thank you for joining our conference call to discuss Tyco's fourth-quarter results for fiscal year 2012 and the press release issued earlier this morning.

With me today are Tyco's Chief Executive Officer, George Oliver, and our Chief Financial Officer, Arun Nayar.

I would like to remind you that during the course of today's 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 that you 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 annual SEC form 10-K in the next several days.

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

Additionally references to our operating margins during the call excludes special items and these metrics are non-GAAP measures.

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

As we discussed in our third-quarter earnings call, our full-year and fourth-quarter of fiscal 2011 included an extra week of results compared to fiscal 2012.

In order to more accurately reflect the underlying organic growth of the businesses, we have adjusted both organic revenue and orders growth to exclude the estimated impact of this additional week as we did in the prior year.

All references to organic revenue and orders growth discussed in today's call exclude the estimated impact of the extra week.

As we completed the separation and subsequent merger of Flow Control with Pentair on September 28, our results reflect the operations of ADT and Flow Control as discontinued operations.

As such, this earnings call will be focused on our continuing operations, which we now report under the following three segments -- North America Installation & Services, Rest of World Installation & Services which when combined represent our direct sales channel, and Global Products which drives our innovation and technology as well as the manufacturing of our Fire Protection, Security, and Life Safety Products for both our internal and indirect sales channels.

Now let me quickly recap this quarter's results.

Revenue in the quarter of $2.7 billion decreased 2.5% year-over-year.

The decline in revenue included a 3 percentage point negative impact related to foreign currency.

Additionally the comparison was negatively impacted by the extra week of revenue in 2011 which offset the additional revenue related to acquisitions.

Organic revenue grew 1% in the quarter.

Our reported segment operating income of $358 million includes a charge of $9 million or 40 basis points for adjustments recorded related to China which Arun will address in a few minutes.

The segment operating margin before special items was 13.1%.

The segment operating margin adjusted for the China impact was 13.5%, which was in line with our guidance.

The loss per share from continuing operations attributable to Tyco common shareholders was $1.36 and included charges of $1.69 related to special items.

These charges primarily relate to the redemption of debt in anticipation of the separation, other separation-related charges, and restructuring charges.

Earnings per share from continuing operations before special items was $0.33.

Now let me turn the call over to George.

Thanks, Antonella, and good morning, everyone.

It is my pleasure to be speaking to you today as the Chief Executive Officer of the new Tyco.

Overall this has been a very good year for the Fire & Security businesses as we continued to grow the topline both organically and through strategic acquisitions as well as expand segment operating margins while successfully completing the separation of Tyco into three companies.

The separation marks a key strategic milestone for the new Tyco.

As a focused Fire & Security Company, we can now leverage our portfolio of Fire & Security product and service solutions in our global scale of operations to enhance our position in the industry and drive operational results to outperform the market.

Before we get into the results for the quarter, I would like to quickly recap the three-year strategy we laid out at our investor day back in September.

It is helpful to keep these priorities in context as we go through our fiscal 2013 guidance, which we will cover later on in the call.

Our strategic focus is centered on three main areas.

The first two are really the underpinning of our growth strategy.

First, we plan to accelerate our organic revenue growth, which will be driven by continued strong growth in products, accelerated service growth, and further building upon our presence in high-growth markets.

Second, we will focus on the execution and successful integration of middle of the plate bolt-on acquisitions.

A disciplined acquisition strategy will be a key growth platform for us over the next few years as we seek to strengthen our geographic footprint as well as accelerate innovation and technology.

While the pace of acquisitions is not necessarily linear, we expect based on the opportunities we see today, these acquisitions to range in price from $50 million to $200 million.

Recent acquisitions have added about $400 million of revenue on an annualized basis with good returns on invested capital.

The third strategic area we discussed is delivering a net benefit of $50 million annually through productivity initiatives.

By executing on our strategic sourcing initiatives, cost rationalization, and rolling out our Branch-in-a-Box strategy, we have significant cost-saving opportunities that are under our control and independent of the global macro environment.

We expect these three initiatives will accelerate organic revenue growth and expand segment operating margin to 15% to 16% in 2015.

Now let me give you a feel for the business environment in each of the segments.

Then Arun will provide you with more detail regarding our quarterly performance.

Starting with our North America Installation & Services segment, we are well underway in the integration process of our commercial Fire & Security businesses.

As we discussed at our investor day, we are deploying a strategy of project selectivity in our Commercial Security business.

This is a disciplined process focused on getting the right installation projects with long-term service potential.

We have had a lot of success doing this in SimplexGrinnell, our North America Fire business, and we're going to continue to use those same methodologies in the Security business to improve the installation performance while driving service revenue growth.

A key part of executing this strategy is having the right leader.

As of November 1, Mark Vandover is the President of Tyco Integrated Security, our North America commercial security business, reporting to Brian McDonald, Chief Operating Officer of Installation & Services.

Mark has held key senior roles in Tyco since 2000, most recently as President of Security Products.

With his extensive experience in the security industry and proven track record of operational performance, Mark is the right person to lead our Commercial Security business in North America.

In rest of world Installation & Services, service revenue in the quarter grew 4% year-over-year with growth across Europe, Asia Pacific, and South Africa.

In Installation, project activity in the high-growth markets is being more than offset by a decline in the mature markets due to project selectivity in the non-residential construction market which continues to bounce around the bottom.

Lastly, Global Products continues to perform very well, with strong organic revenue growth and operating margin expansion.

We continue to see our growth investments in R&D and sales and marketing provide good returns on the capital we have deployed.

Additionally we are benefiting from the acquisitions we have made by both leveraging our existing global footprint as well as expanding distribution channels to pull through additional Tyco products.

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

Thank you, George, and good morning, everyone.

I would like to echo George's comment that it is my pleasure to speak to you today as the Chief Financial Officer of the new Tyco.

Before I get into the details of our business segment performance, I want to spend a couple of minutes on our Security results in China.

We disclosed in our press release on September 17 that we expected to record additional reserves in the range of $40 million to $60 million in the fourth quarter due to the aging of certain receivables in China.

Since then, we conducted a thorough investigation and have concluded that revenues related to certain security contracts had been improperly recorded for periods going back to 2008.

As such, we have adjusted the results of our rest of the world Installation & Services segment in all periods since 2008, the earliest year impacted.

As disclosed in our earnings release, the cumulative impact was a decrease to revenue of $164 million and a reduction of operating income of $51 million.

The impact on the fourth quarter of 2011 was a $16 million reduction of revenue and a decrease to operating income of $3 million.

For the fourth quarter 2012, operating income was reduced by $9 million.

We do not expect to record any further adjustments related to this matter.

With that as a backdrop, let's now focus on the business results.

I will first provide an overview of our financial performance for the year and then give you a more in-depth review of this quarter's results.

Beginning with our full-year results, organic revenue grew 2% with products growth of 10%, service growth of 3%, and a 2% decline in our Installation revenue.

Orders increased 7% year-over-year, with about half of that growth coming from acquisitions.

Backlog increased 7% on a year-over-year basis to $5.1 billion.

In total, segment operating margin before special items expanded 70 basis points with a solid margin expansion across all three segments -- 100 basis point expansion in Global Products, a 70 basis point increase in North America Install & Services, and a 30 basis point increase in rest of world Install & Services.

Overall, this was a very good year for Tyco and I want to recognize and thank our employees around the world who made this possible.

Turning to our quarterly results, organic revenue growth of 1% in the quarter was led by continued strength in our Product businesses, which grew 9% organically, and our Global Service business, which grew 2% in the quarter, highlighting the resiliency of our recurring revenue base.

Growth in these platforms was partially offset by a 4% decline in our Global Installation business driven by the nonresidential construction market.

Orders were up 5% year-over-year with the majority of that growth coming from acquisitions.

Segment operating margin before special items expanded 50 basis points year-over-year despite a 40 basis point headwind related to the adjustments recorded for our China business and an additional 20 basis point headwind related to the benefit of the 53rd week in the prior year.

As you can see on page 13 of the earnings slides, excluding the impact of these items, segment operating margin improved 110 basis points in the quarter, driven by a higher mix of service revenue, leverage in our products businesses and the benefit of productivity initiatives.

Now let me get into the details for each of the segments.

Starting first with North America Installation & Services, revenue in the quarter of $1 billion declined 1% organically, driven by a 2% decline in Installation revenue.

Service revenue was relatively flat on an organic basis as the decline in Security offset Service revenue growth in the Fire business.

As George mentioned, we have initiated a strategy of being more selective on the projects we pursue in the Security business in North America.

While this will impact our organic growth rate well into fiscal 2013, we expect to see a benefit to our operating margins related to project selectivity as we move forward.

Service orders in North America increased 4% year-over-year while Installation orders declined 6%.

Typically our results are operationally stronger in the summer months due to the seasonal construction cycle and availability of customer locations to do refurbishment and upgrade work especially in universities and schools.

Backlog of $2.5 billion increased 5% year-over-year and due to normal seasonality declined 1% on a quarter sequential basis.

Operating income before special items was $128 million and the operating margin increased 70 basis points year-over-year to 12.3%.

The positive benefits of an increased mix of higher-margin service revenue coupled with productivity improvements was partially offset by increased investments in sales and marketing and the benefit of the 53rd week in the prior year.

Moving to the rest of the world Installation & Services segment, revenues of $1.1 billion declined 1% organically.

Service revenue increased 4% in the quarter, highlighting our ability to continue to drive growth in this strategic area.

Installation revenue declined 7% driven largely by the number of projects -- the number of completed projects in the prior year.

Service orders increased 2% while Installation orders declined 4% year-over-year.

In aggregate, orders declined 1%.

Backlog of $2.4 billion increased 8% year-over-year and due to normal seasonality declined 3% on a quarter sequential basis.

Operating income before special items was $135 million and the operating margin was 12%, a decline of 60 basis points year-over-year.

Adjustments related to certain projects in China that I had mentioned earlier negatively impacted the operating margin by 70 basis points.

Additionally, the benefit from the extra week in fiscal 2011 impacted the operating margin by 40 basis points year-over-year.

As you can see on page 8 of the earnings slides, collectively these items negatively impacted the rest of the world operating margin in the quarter by 110 basis points.

Excluding these items, we improved the operating margin 50 basis points year-over-year, driven by a higher mix of service revenue.

Moving to Global Products, revenue grew 15% in the quarter to $558 million.

Organic revenue grew 9% with positive growth across all three platforms led by Security products, which grew 24% organically as the benefits of R&D investments continue to drive new product introductions.

Product orders increased 31% year-over-year with about half the growth coming from recent acquisitions.

From a profit perspective, operating income before special items was $95 million and the operating margin improved 220 basis points to 17%, with margins improving across all three platforms.

Productivity continues to fund innovation and technology investments, which in turn is driving volume growth and expanding the operating margin.

Now let me touch on a few other important items.

First, Corporate expense before special items was $103 million in the fourth quarter, bringing our full-year Corporate expense to $331 million.

The Corporate expense number for the quarter and the full year also includes costs associated with supporting the operations of the ADT and Flow Control businesses as these costs are not eligible to be reported in discontinued operations.

As a result, Corporate expense will not be comparable year-over-year as we move through each of the quarters of fiscal 2013.

In line with our previous guidance on Corporate expense for the new Tyco, we expect Corporate expense in fiscal 2013 to be approximately $225 million with first-quarter expense of approximately $55 million.

Next, our effective tax rate for the quarter before the impact of special items was 28.4%.

The tax rate in the quarter was impacted by the amount of Corporate costs allocated to continuing operations as no tax benefit is recognized for these costs.

We expect our effective tax rate for fiscal 2013 and for the first quarter to be in the range of 19% to 20%.

We expect net annual interest expense in fiscal 2013 to decrease to approximately $100 million given our reduced debt balance of $1.5 billion.

Lastly, let me quickly touch on restructuring and separation costs, both of which will be excluded from our guidance for fiscal 2013.

We continue to see opportunities to streamline our businesses particularly related to the integration of our field offices as well as our key strategic operational initiatives.

As a result, we expect restructuring costs in 2013 to approximate $50 million.

As we mentioned on our investor day, we expect to incur separation costs of about $65 million in fiscal 2013 related to rebranding our North America Commercial Security business and separating our monitoring centers from the ADT.

Again, these costs will be excluded from our guidance as the timing of the expense is uncertain and can shift from quarter to quarter.

Now let me turn things back over to George to wrap up this morning's call.

Thanks, Arun.

Let's turn now to our earnings guidance, starting with the full year of fiscal 2013.

We expect revenue to increase to approximately $10.6 billion to $10.7 billion.

Embedded in this guidance is year-over-year organic revenue growth of 1% to 2%, which excludes the impact of foreign currency acquisitions and divestitures.

Given the productivity initiatives we laid out at our investor day, we expect the revenue increase to leverage quite nicely.

This benefit will be partially offset by the dis-synergies related to separating our commercial business in North America from ADT.

These costs are expected to impact operating income by approximately $35 million in fiscal 2013.

As we progress over the next few years, we expect these costs to be offset by the benefits of field office integration and sourcing initiatives.

As a result, we expect segment operating margin to increase 20 to 50 basis points to 12.9% to 13.2% including a 30 basis point headwind related to the dis-synergies.

This represents a $0.10 to $0.15 increase in earnings per share solely from segment operations, driven by increased volume and the benefits of productivity.

As we continue to deploy project selectivity in our Commercial Security business in North America, we expect that overall growth in our North America Installation & Services segment will decline approximately 2% to 3% organically year on year.

Again, the operating margin will be impacted by $35 million of dis-synergies, which will result in an expected operating margin similar to last year.

In Rest of World Installation & Services, we expect revenue of approximately $4.5 billion with 2% to 3% organic revenue growth and operating margin expansion of 40 to 60 basis points year-over-year to approximately 12%.

In Global Products, we expect revenue of approximately $2.3 billion with organic revenue growth in the mid-single digits and an operating margin of approximately 18%.

Based on these items and the specific guidance Arun provided for Corporate expense and below the line items, we expect earnings per share from continuing operations before special items for the full year to be in the range of $1.75 to $1.85.

When compared to a normalized 2012 EPS of $1.60, our fiscal 2013 guidance represents a 10% to 15% increase in earnings per share.

As in prior years, we expect our earnings per share to be stronger in the second half of the year due to the normal seasonality of our businesses.

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

Starting with North America Installation & Services, we expect growth in Service revenue to be partially offset by a decline in Installation for overall organic revenue growth of approximately 1%.

Due to the impact of the dis-synergies I spoke to earlier, we expect the operating margin for the first quarter to be approximately 10.5%.

Turning to Rest of World Installation & Services, continued nice growth in Service revenue is expected to be more than offset by a decline in Installation revenue.

We expect total revenue of approximately $1.1 billion with an operating margin similar to last year.

In our Global Products business, we expect to see year-over-year organic revenue growth in the mid-single digits, driven by the continued momentum across Fire Protection, Security, and Life Safety.

As incremental investments in both R&D and sales and marketing will increase in the first quarter by approximately $15 million, we expect an operating margin in the range of 16% to 16.5%.

We expect sequential operating margin expansion each quarter in fiscal 2013 and again expect the full-year operating margin to approximate 18% as incremental investments will continue to drive volume growth.

Overall for Tyco, we expect revenue in the first quarter to be in the range of $2.550 billion to $2.600 billion with a segment operating margin of approximately 12%.

This coupled with our expectations for Corporate expense and below the line items we expect earnings per share from continuing operations before special items in the first quarter to be about $0.39.

On a normalized basis, this represents an [8]% increase in earnings per share.

With that, let me turn it over to our operator to open the line for questions.

(Operator Instructions).

Jeff Sprague, Vertical Research Partners.

Thank you.

Good morning, everyone.

Good luck on the new start.

Two questions, George, one for you and then one for Arun.

George, first when we think about kind of the project selectivity and how that plays through your results, can you -- it sounds like we saw some of that in this quarter although this wasn't a new Tyco quarter yet, rather reflects the legacy company.

Can you give us some sense of what the selectivity impact was on orders in this quarter and how that plays out over the remainder of 2013?

I would go back and start by just -- when we deployed project selectivity in Fire Protection, we saw 200 or 300 basis points of an impact initially, but that was then making sure that we are focused on the right projects that ultimately led to service and the way that we are operating now across our Fire businesses, we are actually growing in line or above the market rates where we are competing.

And so when we look at now the Commercial Security business as we discussed during our investor day, we are deploying the same strategy, making sure that we are focused on the projects that will lead to that recurring revenue.

And so when we look at our orders, the order impact overall for Installation, we saw about a 5% in total orders and Tyco about a 5% decline in the fourth quarter.

North America was driven with about a 6% decline which a lot of that was attributed to the project selectivity as well as the current market conditions.

So there is a few -- a couple, 300 basis points that I would say because of the strategy that we are deploying that now is being impacted in the business.

But as you know, you have seen the progress as we now become more selective driving projects that ultimately get to the service, we have seen a nice pick up in the overall margin rate within that segment of the business.

So you would say at this point margin and backlog is developing in line with a way that would give you actually fairly high confidence in those margin targets for the year?

Absolutely.

As we discussed with the productivity when you look at our overall productivity initiatives, whether it be the sourcing, what we are doing with Branch-in-a-Box with the Installation business, looking at our real estate footprint, and then looking at the project selectivity and how we are now contracting these projects, that all supports the ability to be able to deliver on that operational improvement for the year.

Then just for Arun, to the balance sheet, does the balance sheet we see here reflect the new Tyco balance sheet?

The cash was actually a bit higher than I expected, but is this all attributable to newco?

Jeff, that's right.

The balance sheet is the new balance sheet and the cash that you are seeing, which is a little higher than we expected, is really driven largely by the spillover of some of the separation costs that we expensed in 2012 that will be settled in 2013.

And in addition to that, we also have a legacy tax payment as part of the settlement with the IRS that is due sometime in 2013.

Can you roughly size those for us?

Yes, the tax payment is about $140 million and when you think of spillover of separation, there's a couple hundred million dollars related to just separation.

Than just taking that a little bit farther though, I still struggle with getting to $100 million of interest expense on a touch less than $1.5 billion in debt.

I know there's some higher cost stuff in there but is there some room in that interest expense number?

Jeff, unfortunately the interest expense number is pretty much fixed because all our debt, the $1.5 billion debt, is term debt with fixed coupons on it, so it's really a result of the coupons that are outstanding on the debt that is there today.

Okay, great.

Thank you very much.

Steven Winoker, Sanford Bernstein.

Thanks and good morning.

So just to clarify again, that Corporate number in terms of the quarter that you just had, if you went pro forma, I know your normal run rates you are saying $55 million or at least for the first quarter.

Does that mean that your pro forma Corporate on this past quarter, would that have been shaved off about $48 million or would the number have been something different?

That's correct, Steve.

The pro forma number would have been closer to the $55 million that we are talking about for Q1.

Then what you are seeing in the numbers that's in the financials that we laid out in the release.

It's really simply driven by the fact that the rules that we have did not allow us to -- really asked us to put the full Corporate expense of the old title in our Corporate expense number, which included the Corporate expense related to the ADT and Flow Control businesses, so you're right, the pro forma number would be closer to the $55 million that we expect in Q1.

Arun, is the same thing true for the tax rate as well?

Yes, the tax rate, exactly.

There is some legacy stuff in that Q4 tax rate that drives it to the 28.4% and as we kind of go forward like I said in my comments, we expect the tax rate for 2013 and for the first quarter to be in the 19% to 20% range.

But the tax rate would have been 19% to 20% for this quarter otherwise?

That is correct, yes.

Okay, I was just trying to get to that.

On the guidance front when you look at the rest of the world growth, you are talking about $4.5 billion, 2% to 3% for 2013, a little bit higher than I was thinking and just maybe a little bit of color about what gives you that confidence?

Yes, we're looking -- the focus there has been continuing to really accelerate our service growth so the service growth is coming through very nicely.

The backlog when we look at our backlog year-on-year, the backlog at the end of the year was up 8% year-on-year, which supports the guidance that we've provided.

And then when you look at the total growth for the year because we do have some acquisitions that roll into 2013, the actual total growth is about 4%.

All right, maybe just lastly, on the rebranding in North America, there are a lot of horror stories out there of companies attempting to rebrand very well-known brands.

How are you guys or how are you getting comfort to minimize and mitigate that risk this year?

I would -- let me touch that.

We have been very disciplined when we look at all of our separation costs to make sure that we are getting the benefits and it is ultimately required to separate from ADT and we are getting the benefits for what we are executing on.

And I would say that with that we have been -- and with the focus we've had with the rebranding launch that we have made, number one is the Tyco brand is very respected not only in the industry but more broadly.

And that with the Tyco integrated security brand and the way that that has been deployed, it has been very well received, very well received by our customers, by our colleagues across the business.

And like I said, we've been very disciplined in how we are actually spending those resources to make sure it's ultimately required to maintain the base that we had as we were branded with ADT.

Now recognize we still have use of the ADT brand for the first two years and are transitioning off that brand during that time period.

Are you doing it geographically or -- evolution or big bang or how is that going to work?

Well, we have been working on this since the separation was announced and we believe -- we think we are kind of through with the initial phases.

Now it's about making sure that all of our trucks are branded correctly, making sure that all of our colleagues out in the field have all of the new branding materials.

But like I said, we're accelerating this as fast as we can to ultimately get the new brand which is Tyco Integrated Security out into the market and try to drive that conversion from ADT as quickly as we can.

Again, Steve, this is just the North America Security business that's being rebranded.

Right.

Thanks, George.

And we are also leveraging the work that we've done in North America, which has gone very well, we are now leveraging that branding activity globally which is really strengthening now as we think about an operating company with a combination of businesses that we have with our pure play position, leadership position in the industry, that's going to play out really nicely.

Great, thank you.

Nigel Coe, Morgan Stanley.

Thanks, good morning.

Congratulations.

Great, so just wanted to -- if you look at your backlog trends up 5% year-over-year in North America, up 8% in Rest of World, I think you said orders were up 5% organic in the quarter yet your 1Q revenue guidance is calling for low single-digit organic growth.

I'm just trying to square that circle.

I think the key thing here, Nigel, one is we are very pleased to have the backlog built up, obviously.

Second is that we see the backlog filtering through -- some of these projects do not necessarily reflect themselves in the first quarter but are reflected in our full-year guidance as both in North America as well as in the products business.

Nigel, one thing to add to that when you think about the timing of it, as George mentioned, overall for the full year we expect North America's organic growth to actually be a decline but yet you see growth in Q1 and that's because of the timing of the backlog flowing through Q1.

Now in Rest of World, it is a little bit different although for the full year, we are expecting growth of 2% to 3%.

There is actually a decline in the first quarter and that goes back to Arun's comment in regards to the timing of that backlog because some of the projects in their are a little bit more longer-term.

So it's really more the timing of install and the way kind of it flows through the year.

Understood, then on the selectivity of project in North America, can you maybe just scale -- maybe quantify or maybe even in a qualitative way just talk about how the margin in the North American backlog maybe how that's trending compared to maybe last year or last quarter.

Are we seeing that margin improvement in the backlog?

What I would start by when you look at North America, it's really made up of SimplexGrinnell, which is about half of the North American segment, which is our Fire business, and then the Commercial Security business which we picked up from ADT.

And so when you look at the two businesses, we've got SimplexGrinnell that's growing nicely both Installation services and from an operating standpoint, continues to be able to expand margins.

We've taken the same strategy and we deployed that now within the Commercial Security business.

So when you're looking at the results, you are looking at the combined businesses of SimplexGrinnell fire business would now be the Commercial Security business which we've branded Tyco Integrated Securities.

And so when you look at the total, there is as we look at the Security business as we are taking on a much better mix of projects that lead to service that ultimately is pressuring some of the projects that didn't have service attached in the short term and we believe for the year even with that decline in revenue in total for North America we can maintain our margin rate.

And then we will be positioned with a nice backlog that we can execute going forward that not only we'll be able to maintain our relative position in the market from an installation standpoint but also get the service revenue that's recurring with those projects over the life cycle.

How it will show up, Nigel, in the financial projections that we are kind of making here is if you normalize the fiscal 2012 results that we printed to take care of the dis-synergies if you were to compare apples to apples, the margin rate would be closer to 10.5% in 2012.

And we expect to see about a 70 basis point improvement just on an apples-to-apples basis in 2013.

So the benefit of this project selectivity is coming through in the margin rate.

And that is with an organic revenue decline of 2% to 3%.

That's really helpful.

Then maybe one more.

Nigel, when we think about the productivity initiatives that we have under way, when you think of the footprint that we had in both of those businesses in North America, that gives us a nice opportunity to be able to really synergize the business processes and how we support our field operations.

And so we are going to -- we are beginning to see some of that benefit offsetting some of the dis-synergies but going forward there's going to be a lot more opportunity.

Okay, great.

That's helpful.

Can you maybe just touch on the Chinese investigation?

I am just wondering -- I know you do have some long tailed projects.

Is it normal in your business to have receivables relating to sales booked in 2009?

And secondly, how confident are you that this is a Chinese problem and are you looking at other areas to see if there's any other problems in other regions?

Nigel, let me just say first that we have done a very deep review of all our internal controls across the world and very confident that they are all working effectively.

With regards to the China, it's a series of contracts, it is not just the one contract there.

There's a series of contracts that we looked into.

And when we dug deeper into it and did our investigation of these aged receivables, what we actually found was some falsification of documents and as a result -- and we found that the revenues had been improperly recorded as a result of that.

Now one thing we've done is we've done a very thorough investigation there in China.

It was restricted to just the one district in China.

China is a big market for us.

This particular incidence were taking place in just one district and we have gone broader than just China.

We've gone into Greater China and Hong Kong and Taiwan and then also into the rest of the world just to make sure there are no similar things out there.

We are very confident that we have addressed the issue, we addressed it quickly, and it's behind us and we are moving forward with our plans to expand our business in China.

Thanks, guys.

Good luck.

Ajay Kejriwal, FBR.

Thank you, good morning.

So in the rest of the world Service business you are seeing nice growth.

Maybe if you can talk about what's driving that, how much of that is pricing versus subscriber growth and then the sustainability.

Yes, when we look at our Service growth, we look at it holistically across all of our commercial operations.

So what I would say is it's really driven by as we talk about driving productivity to free up resources to be able to reinvest, we've put a lot of investments back into our sales force, into our services sales force across the globe, and we are seeing the benefits of that.

So it's twofold, not only the capabilities within our sales force and being able to drive service sales, but also expanding our footprint to be able to capitalize on more of the installed base.

That's pretty much what's driving it.

And then there's a big focus on the high-growth markets.

And so as we have discussed back in the Investor Day, we've put a lot of our reinvestment back into the emerging markets.

They represent a significant opportunity for us to be able to expand our base and be able to drive service growth.

That has been the focus of the strategy, and I believe it's playing out nicely.

I think for 2012, Ajay, we grew -- in what we call our growth markets we grew by 17%, and that's consistent with what we had spoken to at the Investor Day as well.

Got it.

Some of this will be helped with the acquisitions that we are making, the strategic acquisitions, bolt-ons has also given us a footprint within the new markets that gives us a base now to build and really drive service growth going forward.

Good.

Then could you maybe update us on the consolidation of sourcing, what's the progress there?

You talked at the analyst meeting about the four commodities where you saw near-term opportunity.

So any updated thoughts there would be helpful.

Yes, we are making tremendous progress.

If I reflect back on the Investor Day, we talked about a $9.3 billion cost structure, of which $4 billion was what we bought through our procurement organization.

Historically, we have operated out of like I would say 12 to 15 different organizations across the globe.

What we have done is now we've reorganized that under one leader.

Vivek Kamath is our global sourcing leader.

And what we have seen now is although we were doing a good job in isolation across the globe, the ability now to be able to aggregate that entire buy and be able to now negotiate with our supplier base as well as leverage a more global supply base, we are seeing some really nice savings.

And so as I said, the ones -- the commodities that go along with seeing double-digit savings and we're going to continue to make sure that we've got the resources in place commodity by commodity to be able to generate these savings because this is ultimately what's going to enable us to do the reinvestments in R&D and sales and marketing which supports the organic growth commitments we've made while we are expanding our margins and delivering $50 million to the bottom line.

So you have already started seeing those savings, or is that more you ramp-up over the next several quarters?

We will continue to ramp.

This is something that we are putting the structure in place.

We are consolidating the resources that we have today deployed across the globe that are doing sourcing activities.

We're putting that into one organization.

We've got targets set.

We've got budgets that are set to what we have guided to but also we are stretching beyond as we try to accelerate the initiative thinking about 2014 and 2015 but we feel really good about the prospects that we are going to be able to generate a lot of savings here.

Got it, thank you very much.

Deane Dray, Citi Research.

Thank you.

Good morning, everyone.

Just a follow-up on Ajay's question on the $50 million of productivity savings.

You have given us three buckets -- sourcing, cost outs, and the Branch-in-a-Box, how does that $50 million get apportioned across those three initiatives?

What I would say there's a number -- it's easy to kind of highlight the three big ones but there's a number of productivity initiatives that are taking place across all of our functions, all of our businesses, and what we do is align -- the big focus is around those three and so it's not just that it's driving those savings but what I could tell you is that we do have plans in place and budgets established across the globe with those three to be able to generate the savings, but we don't separate it like that, Dean.

I think the one good thing actually that you brought that up to remind everyone of is when we talk about $50 million that is a net number so the growth savings related to those three items that you spoke to is much higher than the $50 million.

We net that with any commodity increases or compensation inflation that in addition to that, some of its going back to being reinvested in the businesses and the $50 million that George is speaking to is the net number that pretty much drops to the bottom line.

Yes, that's why when we think of the total savings it's closer to over $100 million of savings that's offsetting the headwinds on escalations on any commodity headwinds that we feel.

And then the benefit -- and we invest about half of that back into the R&D and sales and marketing and then deliver the $50 million benefit to the bottom line.

So it's hard to segment the $50 million benefit into any one of those categories.

It's really inclusive of all of those initiatives.

Great, that clarification helps.

Then over on the businesses and global products, one of the numbers that jumps out is that 24% organic revenue growth in Security Products.

Just give us a sense of what was driving that.

Is that all new products?

Is it an easy comp?

It just looks outsized.

As you know, over the last three or four years or probably four or five years, we have been increasing our investments double-digit within our product businesses continuously.

And I think what you are seeing is with the performance in our product businesses you are seeing those investments play out.

Now specifically within the Security business, we have put a lot of investment into our intrusion business and this is developing the capabilities for the interactive market.

We are now taking the wireless technology that we acquired from Visonic, which is industry leadership and we are now incorporating that into our intrusion platform.

So when you look at these investments, we are now opening the market-to-market in intrusion is about a $2.5 billion market.

Today we are roughly about a 15% share and there's a real opportunity there now as we develop our new technologies to expand the served part of the market that we have the capabilities for.

So we've been expanding very nicely in line with the investments that we've been making here over the last two or three years.

And just to add to that, George, we also have been getting the panels now for the ADT dealers in North America, which has been a big part of expanding the introduction of that product.

Correct.

Deane, also I think one of the things we talked about, we talked about the organic growth in products being mid-single digits.

Also what's helping the products business is the acquisitions that we have made and so when you look at the total growth in profits for the quarter, will be somewhere around 13%.

And then for the total year it will be about 9%.

That is with the acquisitions that were already done last year that now will roll over to 2013.

So what I talked about earlier was that we are seeing the benefit of not only getting the new product into our current distribution, but then getting what you would call our core products now into that new distribution that we have acquired and so we are seeing that pick up on both sides of the equation, which has actually helped our growth very nicely.

Great, that's helpful.

Just last one from me is some commentary on the guidance for next quarter.

Just the idea that we are seeing a single point EPS guidance number, there are some companies that do that.

Maybe, George, just give us a sense of how you would like analysts to view that single point number.

Is that at least 39 or better or just you typically would see a range and so maybe comment there.

We are already in mid-November, maybe some comments on October would be helpful.

I think the way we think about this is it's an approximate number of $0.39, that's what we say and if you move up and down a penny or so it would be where we would come up with an approximate number.

Tyco, historically sometimes in the quarter we do give a point estimate.

Again to your point, we are more than halfway through the quarter, which gives you a little bit more visibility to get closer to one point estimate better than range for the quarter.

That is what we did.

I think when you look at the total, when you normalize the year and in our ability to be able to really on a normalized basis year on year, we will deliver from the $1.60 to if you go to the midpoint of the $1.80, the $0.20 there, that's driven by operations, which is offsetting the dis-synergies that we are going to incur in North America.

And so when we look at the quarterly splits, we are about where we need to be as far as the 22% on our earnings are delivered in the first quarter, the $0.39, it is about an 8% improvement year on year.

We're in the early stages now of some of these activities that we've launched as a new company and we have every bit of confidence that we're going to be able to continue execute.

We're going to start to see acceleration to be able to be positioned to deliver the total year.

That's helpful, just any surprises in October?

Any surprises in October?

We are seeing about the same level of activity that we saw coming into the quarter here, so it's pretty consistent with what we have seen been seeing the past quarter.

When you look at our Install business, our Install business is lumpy historically and so the way you need to look at that, when I look at Install in total, it's roughly flat for the year of 2012 and that's consistent with what we've seen from an economic standpoint across the globe.

And so what is important is to focus on the continued Product growth with the investments we are making and the Service growth.

And then as the Installation business starts to come back or we hope starts to come back because we do see some positive indicators, the ABI Index is now trending positively, if that were to happen we are not banking that in our forecast but that would certainly help us going forward.

Great, thank you.

Shannon O'Callaghan, Nomura.

Good morning.

A couple questions on the products business, so it was up 9% organically and then I guess the orders were up like 15% ex-acquisition and currency, but you're talking about mid-single digits I guess for 1Q and for the year.

What's the slowdown there?

Overall when you look at the total growth, the total orders for the quarter were up closer to 30 for the quarter.

I think the big thing is just the rollout.

The way it's going to play out, it is the comment is very -- just Antonella had mentioned in her comments earlier, it's just how the backlog is going to rollout between Q1 and Q2.

What we talked about is for the full year -- the full-year guidance is in the mid-single digits as well but that's where you are going to see because we're going to lap now the acquisitions.

Most of the acquisitions that we brought in came into our fold in starting second quarter and so --

Right, but organically your orders -- half of the 31 this quarter was acquisitions, but organically you were up like 15 or so.

Right?

Next year its mid-single digits for both the first quarter and for the year, so --

We have had some -- when you look at some of the project delays, typically it is a shorter cycle business but there has been some projects that we have orders for that have been pushed out.

They will still be completed.

That is going to have some impact so there's a little bit of timing there.

But overall I think when you look back at the order rates and then ultimately what we achieved in revenue, there's pretty good correlation from orders to revenue.

Yes, I think, Shannon, just to further comment on that point, the 15% orders growth, we did have very nice growth in the quarter.

That was nine, not at the 15.

You will see some of those orders roll into Q1 and you will see some of those orders roll into Q2.

And by the end of Q2, most of those orders kind of have been processed and then it is really in the second half of the year new orders that are coming in that is driving the full-year organic.

All right, so then when you think about going from kind of 1% to 2% organic this year to the 4% to 5% three year CAGR, the selectivity thing is a weight this year that I presume gets better.

What are the other things you were kind of counting on to -- those other two years that will have to be sort of above the range?

So gets you from A to B in terms of end markets or other things?

So when you look at the guidance, we guided the 1% organic growth but for the total year in fiscal year 2013 we'll be 3% and that did include the acquisitions that were already completed prior to the investor day that we communicated.

So we will actually be about 3% in 2013 in total revenue.

Now when you look at the strategy that we have deployed, it's continuing to accelerate our service revenues going from the 3% that we achieved in 2012, continuing to expand that over the next three years to about 5%.

It's continuing to execute on getting our footprint into the high-growth markets so that we can not only create the installed base but then again be positioned to really capitalize on the service over the lifecycle.

And I think when you look at Install, the Install has been negative but as the recovery does happen, then we will start to see a positive impact with the Install business contributed at much higher margins given the project selectivity strategy that we've deployed in the Commercial Security business.

So we -- even with the current environment that we are in, with the guidance we have provided, we feel very good about being able to deliver on that three-year plan to be able to accelerate our revenues, to achieve a 4% to 5% CAGR in the topline as well as be able to position and deliver on the margin of 15% to 16% by 2015.

So just the organic assumption then in the 4% to 5% for three years, it includes the ones you did last year but does it include future things?

No.

that's a good question.

It does not include any additional acquisitions that we will make, and as we discussed during the investor day, we are pursuing strategic bolt-on acquisitions, which is a priority for our capital deployment and they have turned out to be very nice with the -- from an overall growth standpoint so we are going to continue to do that.

That would be in addition to the CAGR that we communicated during the investor day.

Okay, great.

Thanks.

Operator, I believe that was our last question.

Thank you, this concludes the question-and-answer session.

I would like to turn the call back over to the speakers for any closing comments.

There are no further comments, thank you.

Thank you.

This does conclude today's conference.

Thank you very much for joining.

You may disconnect at this time.