江森自控 (JCI) 2013 Q4 法說會逐字稿

Welcome to the Tyco fourth-quarter earnings conference call.

(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 2013 and the press releases 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 releases and read through the forward-looking cautionary informational statements that we've included there.

In addition, we will use certain non-GAAP measures in our discussions.

And we ask that you read through the sections of our press release that address the use of these items.

The press releases issued this morning and all related tables, as well as the conference call slides, which Arun will refer to during his financial section 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 later today.

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 operating margins during the call exclude special items.

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

Now let me quickly recap this quarters results.

Revenue in the quarter was $2.8 billion with organic growth of 1%.

As the net benefit of acquisitions and divestitures was fully offset by changes in foreign currency, total revenue also grew at 1%.

Earnings per share from continuing operations attributable to Tyco common shareholders was $0.34, and included charges of $0.18 related to special items.

These special items related primarily to restructuring and divestiture activities.

Earnings per share from continuing operations before special items was $0.52.

Now, let me turn the call over to George.

Thanks, Antonella.

Good morning, everyone.

This was another very good quarter and a solid finish to our first year as the new Tyco.

We have made tremendous progress over the last year to develop our capabilities as an operating company.

I'm extremely pleased with what our employees have achieved this year.

Their dedication and hard work has helped improve our global leadership position, and gives us a strong foundation as we enter fiscal year 2014.

While we have made tremendous progress, there is still a lot of opportunity ahead.

Focusing on this quarters results we delivered both top-line growth and strong operating margins across all of our segments.

Organic revenue growth in the quarter of 1% included service growth of 4% and products growth of 8%, both of which represent the highest growth quarters we have seen this year.

The momentum in top-line growth was offset by installation revenue which declined 6% organically, as results continued to be impacted by weak global construction activity in the comparisons versus the prior year related to project selectivity in North America.

Top-line growth, which includes a 2% addition from acquisitions, along with improved operational performance, resulted in an 11% year-over-year increase in segment operating income before special items on a normalized basis.

These improvements also drove a 130 basis point expansion in segment operating margin, and 16% EPS growth versus prior-year normalized results.

Additionally, order growth accelerated to 4% this quarter, which gives us good momentum going into fiscal 2014.

Before turning it over to Arun to go over details of the quarter's results, I just want to reflect on our first year as the new Tyco.

A little over a year ago, we communicated a plan to achieve compounded annual EPS growth of 15% over a three-year period by improving our segment operating margins to 15% to 16% and accelerating our growth momentum.

We're off to a great start.

Before special items, EPS grew at 13% year over year, and segment operating margins expanded 80 basis points versus fiscal 2012 normalized results to 13.3%, all without any meaningful improvement in our end markets.

Our performance this year highlights that we have the right strategy.

We are executing successfully and we feel we are well positioned to achieve our three-year earnings per share target.

Our strategy has two fundamental principles -- disciplined growth and continuous operational improvement.

Disciplined growth is focused on service acceleration and innovation.

This requires making the right decisions around installation projects, as well as making smart investments in R&D, sales and marketing, and growth markets.

We accelerated organic service revenue growth rate by 80 basis points to 3.5%.

And maintained the growth rate in global products with 6% organic revenue growth, and an additional 3 percentage points of growth attributable to investments in acquisitions.

We also increased revenue 15% year over year in our growth markets while expanding our presence in these markets with the acquisition of a majority interest in Beijing Master Systems.

In addition, we are also strengthening our leadership team to accelerate our growth execution and to align and optimize our world-class global commercial sales force.

To that end, we will bring Brian Young on board as Senior Vice President of Enterprise Sales reporting directly to me.

Brian will be responsible for global sales and will lead the development of our commercial excellence model, which will better align our commercial structures and continue to develop common processes.

Brian was most recently with 3M where he led global sales operations.

His extensive operational and sales leadership experience will advance our sales capabilities to further accelerate our growth.

We are supplementing internal growth with strategic bolt-on acquisitions.

In fiscal 2013, we committed about $260 million of capital for acquisitions.

And earlier this morning announced the acquisition of Westfire, a design, installation and services business in the fire protection industry in the US and Latin America, with approximately $80 million in annual revenue.

The Westfire acquisition is right down the middle of the plate.

It improves our service footprint, expands our recurring revenue base, enhances our vertical market capabilities, and expands our position in our growth markets.

Our acquisitions over the past year, including Westfire, are expected to add about $300 million of revenue on an annualized basis, with good returns on invested capital.

We continue to have a strong pipeline of additional bolt-on transactions, all expected to be highly accretive to long-term shareholder value.

Turning to the second part of the strategy, continuous improvement.

The combination of our commercial security business with our fire business has positioned us to drive operational improvements to fund investments in organic growth and to deliver significant margin expansion.

As we previously laid out, when you combine the sourcing initiative, the work we are doing to simplify the infrastructure within our installation and service business, as well as the transformation that is happening across our functions to develop on operating company, we are positioned to deliver the $150 million of gross savings annually.

These savings are expected to be somewhat offset by inflation costs and the increased investments for organic growth initiatives, leaving a net benefit to the bottom line of $50 million.

In fact, in fiscal 2013, we realized gross savings in excess of $150 million, and were able to deliver net benefits of $60 million related to these initiatives.

Fundamental to our strategy and an important operating framework is the Tyco business system, or TBS, which is an enterprise approach for aligning, simplifying, and accelerating our value-enhancing activities.

I have recently appointed our President of the Asia Pacific region for Installation and Services, Phil McVey, to lead the Tyco business system reporting directly to me.

In this new role, he will be responsible for the implementation of TBS across the enterprise to support our operating company structure.

Phil brings significant operational experience to this role, having been in various leadership positions across Tyco since 1995.

As we implement TBS across the Company I am confident it will become a competitive advantage for us.

Overall, I am very pleased with our performance this past year.

We delivered strong results.

We have significantly improved our business fundamentals and are right on track executing on our strategy.

Now let me turn it over to Arun to go through the details of our performance.

Thank you, George, and good morning, everyone.

You can follow my comments on our financial performance starting with slide 5. Beginning with our full-year results, revenue of $10.6 billion grew 1% organically.

As George mentioned, organic service revenue growth was 3.5% and products growth was 6%.

Installation revenue declined 4% on an organic basis due to weak commercial activity in Europe and Australia, as well as project selectivity in North America.

In total, the segment operating margin before special items expanded 80 basis points on a normalized basis.

Leading the margin improvement for the year was North America installation and services which expanded margins by 170 basis points on a normalized basis, despite our revenue decline in the commercial security business.

For the full year, orders increased 3% year over year, including a 4% decline in North America, primarily due to project selectivity.

Orders growth in rest of world was 6%, and 11% in global products.

Now focusing on the quarter, please turn to slide 7. Revenue grew to $2.8 billion with organic revenue growth of 1%.

Global products continued to lead the way with 8% organic growth while service revenue grew 4%.

Growth in these platforms was partially offset by a 6% organic decline in our global installation business, driven primarily by project selectivity in North America and weakness in non-residential construction markets, particularly in Europe and Australia.

Segment operating income before special items was $392 million.

And the operating margin was 14.2%, which is a 130 basis point improvement over the prior year on a normalized basis.

Higher service and product revenues improved installation performance.

And the benefits from sourcing, productivity, and restructuring initiatives once again led the operating margin improvement.

Overall, this drove a 16% increase in earnings per share before special items versus normalized fourth-quarter 2012 results.

Moving to orders and backlog, orders in the quarter grew 4% year over year, with 5% growth in products and 5% growth in service.

Installation orders increased 3%, driven by strong double-digit order growth in Asia and our other growth markets.

This is the first time we have seen positive installation orders on a global basis since the third quarter of fiscal 2012.

Backlog of $5.3 billion increased 5% year over year, and due to normal seasonality declined 2% on a quarter sequential basis.

Now let's get into the details of each of the segments.

Starting first with North America Installation and Services on slide 9. Revenue in the quarter of $996 million was down 4% on a reported basis and declined 2% organically.

Organic service revenue grew 5%, partly attributable to an easy compare with the prior year.

Installation revenue declined 10% organically due to tough compare in both fire and security, the continued weakness in the non-residential construction market, and project selectivity.

Operating income in the quarter before special items was $133 million.

And the operating margin of 13.4% increased 130 basis points sequentially and 200 basis points year over year on a normalized basis.

A greater contribution from higher-margin service revenue, improved installation margins, as well as sourcing and productivity savings drove the operating margin improvement.

Overall, order growth in North America Installation and Services was slightly positive year over year, with service order growth of 5% offset by installation decline of 5.5%.

As we have now lapped project selectivity from an orders perspective, we expect installation orders in fiscal 2014 to be more in line with market activity.

Total backlog of $2.4 billion declined 2% year over year due to project selectivity, and declined 1.5% sequentially due to normal seasonality.

We are very encouraged by the current installation backlog in our commercial security business, which is at its highest point since the first quarter of fiscal 2013.

And the backlog margin is up about 150 basis points over last year.

Turning to slide 10.

Rest of World Installation and Services revenue of $1.1 billion increased 1% on a reported and organic basis.

Organically, growth in service revenue of 3% was partially offset by a decline in installation revenue of 1.5% due to continued weakness in Europe and Australia.

A 2% benefit from acquisitions was offset by changes in foreign currency exchange rates.

Operating income before special items was $137 million.

The operating margin of 12% was in line with the prior year.

The benefits of productivity and restructuring initiatives were offset by lower than expected revenue due to the timing of project activity, as well as unexpected tax-related charges of approximately $7 million primarily related to our joint venture in Latin America.

The tax charges negatively impacted the operating margin by 70 basis points.

We continue to see positive momentum in order activity.

In the quarter, orders increased 8% year over year, including 2.5 percentage points attributable to acquisitions.

Service orders increased 5% and installation orders increased 12%, driven by strong double-digit growth in Asia as well as our other growth markets.

As I mentioned on last quarter's call, orders in the installation business are lumpy and can skew the year-over-year comparisons.

During the fourth quarter, we were awarded a large fire project, which contributed 5 percentage points of installation order growth in rest of world.

It is important to keep in mind that installation projects tend to have a longer lead time, particularly on the fire side.

We expect to see the impact of the increased installation orders in the past two quarters to benefit installation revenue in the second half of fiscal 2014.

Backlog of $2.7 billion increased 11% year over year, and due to normal seasonality declined 1% on a quarter sequential basis.

Turning to Global Products on slide 11.

Revenue grew 12% in the quarter to $627 million.

Organically, revenue increased 8% with solid growth across all three platforms.

Operating income before special items was $122 million with an operating margin of 19.5%, which is a 180 basis point improvement over the prior year.

The margin improvement was driven by solid operating leverage and the benefits from sourcing and productivity initiatives.

This was a very strong finish to the year, delivering on the 18% full-year 2013 operating margin commitment that we had made at the beginning of the year.

Product orders increased 5% year over year.

It is important to recognize that our 11% order growth in the third quarter included a 3 percentage point shift from the fourth quarter.

This shift came from a last chance order opportunity in our Scott Safety business related to the current generation Air-Pak self-contained breathing apparatus in anticipation of new standards from the National Fire Protection Association.

Once the new standards become effective, manufactures will no longer be able to ship NFP certified products that do not meet the new requirements.

We have developed and are excited about our new Air-Pak X3 which is designed to exceed these new standards.

The approval of this Air-Pak has been delayed primarily due to the government shutdown.

And we now expect approval in mid December.

We are seeing strong demand for the new 2013 model.

In fact, we already have a number of X3 orders that we will begin shipping as soon as our product is approved under the new standards.

During the quarter, we closed the Exacq acquisition and are integrating the business into our security products unit.

Exacq easy-to-use and install network video management solution is a great complement to our existing video business.

While we expect to have about a 30 basis point full-year headwind in Global Products related to non-cash purchase accounting items in fiscal 2014, the integration is going very well and we have already seen nice order activity since the closing.

Now let me touch on a few other items on slide 12.

First, corporate expense before special items was $63 million for the quarter and $236 million for the year.

Looking ahead to fiscal 2014 we expect corporate expense to be approximately $225 million to $230 million, in line with prior years.

We expect corporate expense to be a little higher in the second half of the year compared to the first half.

Next, our effective tax rate before the impact of special items was 18.8% for the quarter and 18.3% for the year.

We expect the effective tax rate for the first quarter and full-year 2014 to be in the range of 18% to 19%.

We continue to generate strong cash flow.

For the year, we generated free cash flow of $445 million which included $381 million of cash paid for special items.

Adjusted free cash flow of $826 million represents a conversion rate of 95% of income from continuing operations before special items.

Finally, let me give you a quick view on our capital plan, as well as restructuring, repositioning, and separation costs for 2014.

We expect to increase our debt by $500 million during the year, which should increase our annual net interest expense in fiscal 2014 to around $100 million.

These proceeds will be used primarily to resolve various legacy obligations.

During fiscal 2014, we expect to continue converting income to cash at a rate of 90% to 100% before special items.

We expect to use this cash to fund acquisitions and return capital to shareholders.

To support this, our Board has approved a 13% increase to our annual dividend, subject to shareholder approval at the annual general meeting in March.

Additionally, we will continue to repurchase shares under the existing share repurchase authorization.

The ultimate amount of repurchases, as well as the pace throughout the year, will depend upon our acquisition activity.

With a strong pipeline of projects being executed to simplify our operations, we expect restructuring and repositioning costs in 2014 to approximate $100 million.

We also expect to incur separation costs of about $40 million to support the remaining separation activities from ADT.

As we are still in our early years as the new Tyco, making significant changes to our structure, the timing of these charges is difficult to predict.

Therefore, these costs will continue to be excluded from our fiscal 2014 guidance.

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

Thanks, Arun.

Let's start with guidance for the full year of fiscal 2014.

Given recent order activity and our backlog at year end, we expect revenue to increase to approximately $10.9 billion to $11.1 billion, with organic revenue accelerating to 2% to 4% from the 1% growth we saw this past year.

Organic growth will start out a bit light as project selectivity will impact the year-over-year compares in the first half of the year, but you should see the growth rate pick up in the second half of the year.

Included in our full-year revenue guidance is the net impact of acquisitions and divestitures of approximately $90 million.

Going through our expectations for each of the segments, let me start with North America.

Based on the backlog we churned through in the first half of last year, and the resetting of that business through project selectivity, we expect organic revenue to be down in the first half of the year, and growing in the second half, resulting in flattish overall organic growth for the year.

As for the North America Installation and Services operating margin, we expect to continue to see strong operating margin expansion in the 100 to 130 basis point range.

In Rest of World Installation and Services, we expect organic revenue growth of 3% to 6%.

The operating margin is expected to improve by 100 to 120 basis points year over year.

In Global Products, we expect organic revenue growth in the mid single digits.

We expect the operating margin before special items to be in the range of 18.5% to 18.8%, including the 30 basis point headwind related to the non-cash purchase accounting Arun discussed.

Overall, we expect the segment operating margin, before special items, to increase 90 to 110 basis points to 14.2% to 14.4%, well on our way to the 15% to 16% segment operating margin target in fiscal 2015.

This represents about a $0.28 increase in earnings per share solely from segment operations, driven by increased volume and the benefits of sourcing, branch simplification and other productivity and restructuring initiatives.

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 $2.05 to $2.15 based on a weighted average share count of 470 million shares.

This represents an 11% to 17% increase in earnings per share versus fiscal year 2013.

Consistent with 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.

Overall, we expect revenue in the first quarter to be approximately $2.6 billion, with a segment operating margin, before special items, of approximately 13%.

It's important to keep in mind that our toughest quarterly compare in regards to revenue growth in North America Installation and Services in fiscal 2014 will be in the first quarter.

As a result, growth in service revenue should be more than offset by a decline in installation revenue due to project selectivity.

In total we expect organic revenue to decline 2% to 3% year over year.

The organic revenue decline should moderate in the second quarter.

And we expect to begin showing organic revenue growth in the second half of the year.

The decline in North America is expected to offset organic revenue growth in Rest of World and Global Products.

In total we expect overall organic revenue growth in the first quarter to be slightly positive.

Additionally, the net impact of acquisitions and divestitures is expected to offset the negative impact of changes in foreign currency exchange rates.

We expect earnings per share from continuing operations before special items in the first quarter to be in the range of $0.43 to $0.45.

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

(Operator Instructions)

Nigel Coe from Morgan Stanley.

Thanks, good morning.

Just wanted to dig into some of the guidance items.

And obviously you're forecasting pretty good growth in North America.

I'm just thinking that with the backlog margins up 1.5 points, and you've got this nice mix impact particularly in the first half of the year, I'm actually wondering if you could maybe even think about doing better than your guidance there.

Yes, when you look at the 2014 guidance that we have for the total year, and you really have to start with the impact that the North America business has on our total-year guidance, we're going to be down in the first quarter, as we said, 2% to 3% in that business.

And that's really tied to -- the way that I think about it, Nigel, is when you look at our order rates, our order rates that we saw last year, the total order rates in North America were down 4%.

Installation was down 11%.

So that order rate is what we saw, which really drove the decline in the third quarter, and then the toughest compare that we had in the fourth quarter.

And we'll see -- again, a little bit of a tough compare in the first quarter.

That's what's driving the first-quarter revenue number as we look at 2014.

Now, with that all being said, with the backlog that we have in margin we're going to continue to expand the margins across all of the segments in the first quarter.

And then when we look at the sourcing initiatives and all of the other productivity and restructuring, we'll be positioned for the total year to be able to deliver on the 100 basis point improvement in margins across the Company.

So, the way that we think about it, the first half is typically -- the second half is stronger than the first half.

And because of the issue we had this current year with the revenue in the third and fourth quarter was actually down, and then next year the revenue in the first and a little bit in the second is down, we have a little different compare year on year.

Right, okay.

And then you obviously mentioned during the prepared remarks that you're bang on track for the 2015 targets.

I'm just wondering if you could maybe just talk about some of the specific initiatives you have there -- sourcing, Branch in a Box, sourcing, field office, et cetera.

Could you just maybe talk about what progress you're making in each of those initiatives, and whether you're on track or ahead of plan in each of those specific buckets?

Sure.

When we looked at the three-year plan -- let me go back to our Investor Day -- we did say that our ability to be able to deliver on the EPS commitment, the 15% CAGR on EPS over the three years, was pretty much within our control with the combination of businesses that came together, and our ability to be able to drive the margin expansion tied to not only project selectivity.

But then being able to integrate the businesses into an operating company structure.

That being said, in the first year, as you look at our first-year numbers, on the top line, we're a little bit behind.

But that was mainly driven by Europe and Australia being down a bit from what we originally expected.

Now, within that performance we're able to expand our margins better than what we initially expected.

As we look at the next couple years, we're now gaining momentum with the Branch in a Box activity, simplifying our infrastructure, being able to free up resources to not only reinvest in the business to accelerate growth but be able to continue to be able to expand margins by 100 basis points.

And so what I would say is, within all of those initiatives, as we put the business system together, we're driving to entitlement of all of our key business processes, which then, as we look at the enterprise, gives us a lot of confidence with the projects that are being worked to be able to deliver on those margin commitments over the next two years.

And those margin commitments support being able to deliver the 15% EPS CAGR that we had committed.

Okay, thanks, George.

That's very helpful.

Jeff Sprague with Vertical Research.

Thanks, good morning.

Just, first, what legacy expenses are you talking about settling with this $500 million increase in debt?

And when does that happen?

Jeff, primarily there are two buckets here.

One is relating to a tax settlement that we had reached with the IRS back in 2012, where the cash is going to go out this year in 2014.

We do not know the exact timing of it but I expect it's going to be some time in the first half of the year.

The second big bucket is relating to a settlement on the Yarway bankruptcy that we had started last year, we had talked about it, relating to asbestos litigation.

And we expect about $100 million or so to go out from there.

Those are the two big buckets that's coming out of the $500 million.

And where does that leave you relative to IRS?

Do you see any other significant settlements or cash outflow related to that beyond this?

Yes, absolutely, Jeff.

The 8-K that we filed last quarter with regards to our position with the IRS on the 1997 to 2000 audit cycle, that still is open.

And we have not reached any conclusion with the IRS on that.

We feel our position is very strong with regards to the dispute that's there.

So, that remains open.

And just to be clear, on the increase in interest expense it sounds like you're doing that on an annualized basis as if you took that leverage on actually October 1, which sounds like hasn't happened.

Is that correct?

That's the annualized?

Yes, Jeff.

The assumption is that the $500 million incremental debt would happen in Q1 of fiscal Q1.

Okay.

And then, just finally, George a little bit what Nigel was just asking -- I just wonder, you said you got 60 basis points net out of your activities this year.

Is there anything in particular that's standing out where you are running ahead of what you thought?

Is that upside related to productivity or is it related to less gross spending?

Where is it really coming from?

Jeff I'm going to turn it over to George but just to clarify, it was $60 million of net benefit, not 60 basis points of margin.

Versus the $50 million net that would hit the bottom line it was the $60 million.

Right, that's right.

I misspoke, thank you.

Yes, so that goes back.

When we looked at all of our initiatives, when we looked at the cost structure when we started the new Company, sourcing was a big bucket of cost.

And the work that we've done there, as we said in earlier calls, that we're able to get roughly about $0.05 of EPS expansion because of the sourcing initiative in the past year.

And when we look at the Branch in a Box and then the transformation of our functions that really are tied to what we call the Tyco Business System now, and how we're driving our process improvement, we're beginning to see very nice benefits being derived from that.

And so it's hard to say any one bucket is actually contributing to the total.

But as we look at all of our projects that are tied to driving to entitlement of our business processes that we define within our business system, is really how we're driving the benefits which is contributing to the margin expansion.

And we have complete confidence based on now creating the operating company structure, with the business system we have in place, and the initiatives we're driving, to be able to continue similar type performance in spite of what the revenue growth will be, and being able to deliver on the margin expansion.

Great, thank you.

Steve Winoker with Sanford Bernstein.

Thanks, and good morning.

Just trying to continue to get a better idea of how you guys are thinking about project selectivity in North America, and then whatever related actions have taken place in the rest of the world, on the North America side, as you think about -- we know you're anniversarying this but it wasn't an all-in one, one-quarter phase in.

It took awhile, right?

-- for the sales force to run the stuff through.

How are you thinking internally about the idea that all of a sudden the headwinds that have presented themselves phase out?

Just maybe a little more clarity would be helpful.

The way that I would describe this, if you go back to when we started project selectivity in North America, which was at the beginning of the new company, the impact that that had -- and we projected this and it pretty much played out as expected in the first year -- we saw install order decline of about 11% in the first year.

Now, recognize, Steve, when we started the year we had a very large backlog, a probably less attractive backlog, going into the year, which the revenue came through in the first half.

And then we saw the impact of project selectivity beginning in the second half in our revenues.

And so we saw a decline in third quarter, we saw our toughest compare in the fourth quarter, as Arun talked about, and we'll see a little bit more of a tough compare in the first quarter.

What's important is that when you look at our backlog, and when you look at the backlog and then just the sequential volume of orders that are taking place, we feel very good about the orders that we're putting into backlog.

And now with the increasing orders as we look forward, it's going to create the ability to be able to get nice growth in the second half of 2014.

And so the margin backlog on the installation side, as Arun also said, we see margins in backlog up about 150 basis points.

And this is typical of when we implemented project selectivity across a number of our businesses over the last three to five years, this is about right in line with what we would have expected based on the improvements.

And I think we'll get to a situation where, in the second half of 2014, across the board, we'll show performance at that or above the market across all of the business segments.

And then with the investments that we're making we'll begin to see acceleration of that growth tied to the investments.

Okay.

And then the rest of the world, I know in terms of related activity sometimes you've referred to it, are they already, you think, at the point where their selectivity actions have already taken place so there's really less impact or no impact there?

All of our order activity, when we talk about disciplined growth, all of our order activity, that's incorporated into all of the orders.

So we're very disciplined with the type of projects that we take on, how we leverage our technology, the depth and breadth that we have to be able to create value for our customers.

For instance, the acceleration of order growth that you see in Rest of World, that order growth is actually being achieved because now we're leveraging our combined capabilities, we're creating solutions that create more value for the customers that we're serving, and we're winning some big orders.

And these orders have been developed with the same discipline that we've used across all of the other businesses where we've implemented project selectivity.

And so we feel very good.

For instance, in Rest of World, we're a little bit light on the revenue in the fourth quarter.

But when you look at our order rates in Rest of World, we were 9% in third quarter, 8% in the fourth quarter.

Our backlog year on year, when you look at the total backlog Arun talked about it was up about 11%.

That positions us very nicely to be able to deliver on the 3% to 6% growth that we're projecting in Rest of World in 2014.

Okay, great.

And just a little color on maybe anything you're seeing in construction.

And then as it relates to that, on the new acquisition of Westfire you mentioned their focus in on mining and some other verticals there.

Just your thinking on the timing of that one too.

Yes, when you look at the macro environment, Steve, we're seeing somewhat of a pick up, especially as it relates to non-residential.

And I think what's important is, as I go through each one of the segments and give you a perspective, when you look at our product businesses, our product businesses continue to perform very nicely.

We continue to invest.

We are continuing to perform above the market.

And I see that continuing, as I said, mid single-digit organic growth in 2014.

And that's not necessarily tied to non-resi.

That's because we're developing new products, we're gaining market share, and the like.

Service, as we've talked about, it isn't directly tied to non-resi, it's where we've been expanding our footprint and our capabilities to really capitalize on more of the service opportunity that exists in the market.

And you might recall, if you go back a couple years, we have been accelerating service over the last 3 years, starting out somewhere around 1%.

This year we're about 3.5%.

And we're well positioned to get to the 5% service growth by 2015.

And that's not necessarily tied to the economic environment but that's a big part of the overall portfolio.

Now, install is where about 35% of our revenues are tied to the non-residential market.

And I think it is important that we go through the regions.

In North America, we are seeing a slight pick up.

And we are beginning to see the activity on the front end of our business.

And we're getting opportunity to be able to now develop and quote on projects at the front end.

And I'd see that helping us in the second half of 2014.

When you look at Europe, we are beginning to see somewhat of a recovery.

I would say that our performance in 2013 was very good in spite of the economic decline.

In the fourth quarter our products continued to perform very well.

We saw service growth.

And that was somewhat offset by the decline in install.

But we do see a recovery there.

So instead of being down, I think, 2% this year, we'll be somewhat flat, maybe a little bit positive, in 2014.

And then the other big market for us, as we've talked about, is Australia.

We've got a great business there in mining.

And we've seen, based on that we saw the decline in 2013.

That seems to be stabilizing, as well as there was a little bit of softness in the commercial market.

That's getting a little bit better.

So we see, from a decline that we saw this past year, we see slight maybe single-digit growth there next year.

So I think what's important to understand is that our installation revenue was down 4% -- I think Arun talked about it -- in 2013.

Based on what we see and what's going to happen predominantly in the second half of next year, our install now will be positive for the year at 1%.

So we go from minus 4% in 2013 to positive 1% in 2014.

Does that help, Steve?

Yes, it does, thanks.

And maybe a little more clarity sometime in the call on the Westfire side.

Thank you.

On the Westfire side, right down the middle.

It will be about $80 million in revenue.

They've got some tremendous strength in some key verticals for us, which is mining, power gen, data and telecom centers.

It complements our current capabilities.

And the combination we see as being a tremendous add to the Company and will position us to be able to accelerate within those regions.

What we like about it also is two-thirds of the footprint is in Latin America, which is a good market for us, and one that we've been expanding very nicely over the last couple of years.

And the other one-third is in the United States.

So that's how we'll be reporting it, Steve -- two-thirds in our rest of world and one-third in the US.

Great, thank you.

Gautam Khanna with Cowen.

Good morning.

Thanks for taking the question.

You guys were talking about the sourcing initiative being about a $0.05 tail wind.

But then it reminded me of Atkore, which this year is in a $0.05 to $0.07 hit.

Can you talk about what your expectations are in your guidance for the TEMP business in 2014?

Yes, we have assumed about the same level, a little bit less but in the same zip code, Gautam, as what we have in 2013 in our guidance for 2014.

Okay.

Is there anything you can do about it?

Are you looking to exit that at any point?

Or what's the plan going forward on TEMP?

When we went into that structure, obviously we went in with an exit plan assuming that the non-residential space was going to recover.

And as you all know, that that has been delayed.

But certainly that's still our plan for that business going forward.

Okay.

In terms of, you mentioned the quoting activity picking up on some of the North American projects.

Could you talk about maybe relative to last quarter where you gave us some color by verticals where are you seeing incremental strength and perhaps any incremental weakness?

Yes, I would say North America because you've got a mix of fire and security.

So there's been some impact relative to the security side, but now that's improving also.

I would say the commercial space, if you look at any of the reports, that's been expanding pretty nicely.

And we are starting to see some of the activity there.

The installation space has been a little bit slower in the recovery, but we have been able to continue to be able to drive service growth pretty nicely.

Specifically to the end markets, I would say in the institutional space, hospitals and universities are still good.

We have a strong position there and we're leveraging that position.

Oil and gas right now seems to be pretty strong for us.

And that also allows us to be able to leverage our technology in our products to make sure that we're going to be positioned with the best solution.

Those are some of the key ones that are driving it.

Okay, and just on the North American margins in the quarter, they were really strong.

I understand Q4 has a seasonal lift generally.

But was there any one-time items or any mix-related benefits in the quarter?

Because it looks like, if we roll forward to next year, I don't see why Q4 couldn't be north of 14%.

Do you expect to get north of 14% in any quarter next year?

If you could just talk about what happened in this quarter that made it so strong.

Gautam, as you know, when we separated the Company, it required just about $35 million of dissynergies.

And we very quickly put together a plan to really drive synergies and the combination of our businesses in North America to try to offset that as quickly as possible, and then be able to then drive a business system that really gets to the entitlement of our cost structure within North America.

I would say that we have performed very well in North America given where we started and where we are today.

And that improvement is all driven by operational improvement, with the project selectivity, with the continued productivity and service, with the continued rationalization of our cost structure across North America has been really good execution.

Now, we're going to continue that, like we said.

We'll be positioned to be able to expand again over 100 basis points in 2014.

But that is being driven by just strong operational improvements.

Okay, I appreciate it.

Thanks a lot and good luck.

Deane Dray with Citi Research.

Thank you.

Good morning everyone.

The guidance for next year, Arun commented on the $40 million of separation expenses expectation.

But using the word remaining.

Is there implication that that will run its course for 2014?

Dean, absolutely.

When we laid out at the Investor Day we had said the split of the separation cost will be $65 million in 2013 and $45 million in 2014.

That's the way we had laid it out.

And it's pretty much playing along the same lines.

So in 2014, we'll see the end of separation-related costs.

So, would the plan be a pay as you go restructuring on a go-forward basis?

Costs associated with the separation, which is the IT cost, the facility cost, the rebranding of the TIS, which is our Tyco Integrated Security business, those are the primary buckets of those separation-related costs.

And we hope to have them concluded by the end of 2014 this year.

Got it.

And then on the Westfire acquisition, can you comment on the exit from the armored guard business in Australia?

And is that it on the armored guard business for Tyco?

If I can just say this, that the one way to think about it, Dean, is that we had about an $80 million business in New Zealand, which is a guarding business we got rid of -- low-margin, non-core business.

And what we have acquired is part of our core strategy in our future growth.

And it's a business that's in the right markets, serving the right end markets, and a higher margin business.

So, we have taken $80 million out of revenue in the New Zealand guarding business and added $80 million of the higher-margin business.

Good.

That makes sense.

And just the last one for me, on the pace of M&A, George, you came out of the blocks with five deals, if I got the count right in the first year.

Is that a normalized pace?

Was there some pent-up demand when you were part of old Tyco, you may not have had the range to do as many deals?

But what's the normalized pace and the outlook for 2014?

Yes, Dean, as I said, we have a very strong pipeline of opportunities.

These are strategic bolt-on acquisitions.

And if you go back historically, even during the separation period, we've done about $300 million of these type of strategic bolt-ons on an annualized basis over the last, I think the last three years.

And so, based on the pipeline that we see, this would be what you would expect during the course of the year.

But we have some very attractive acquisitions that we're pursuing that will be extremely accretive to the overall Tyco going forward.

And, Dean, the other thing with regards to the acquisitions, I do want to reiterate the fact that these are very attractive, not just from a strategic perspective but from the pricing that we are paying on these acquisitions, the price we are paying.

It sounded like you paid less than one-time revenues for Westfire?

That's correct.

The acquisitions that we've done, we've been very disciplined in getting them at a very attractive multiple for us as a buyer.

Thank you.

Ajay Kejriwal from FBR Capital Markets.

Thanks, good morning.

Just wanted to dig in on Global Products a little bit.

You've had a very nice year this year, good top-line growth.

Not much help from end markets.

So, obviously the work that you're doing in new products, innovation are helping.

I'm just trying to tie that with your outlook for next year.

So, the mid single-digit growth, is that just based on share gains and new products or are you baking in any improvement in the macro at all?

Yes, in our forecasting here we haven't built in any significant uplift from the macro.

As I said, I think in the second half of next year we see a pick up a little bit in the non-resi space.

And that's probably going to contribute about 1 percentage point to our total growth.

So, when we project the business, it's really within a similar type environment that we've been operating within.

I would say that with the investments we're making, the combination of the acquisitions that we've made with the investments we're making has positioned us very well.

And if you look at the performance on these product businesses over the last three years, it's been pretty strong, where we've delivered close to double-digit growth three years in a row.

We've got very strong margins.

We're getting good leverage.

We're making good acquisitions which is helping us accelerate.

And that's the plan so we're going to continue to do that in 2014.

Right.

And that on that topic of margin and leverage, last couple quarters you've had record margins 19.5%-plus.

I know there's some seasonality.

How should we think about the margins for next year?

Are you being conservative in that goal or is it macro dependent on the top line that's better than your mid single?

Could we see margins better?

I think one thing, Ajay, on this is the 30 basis point headwind that we're going to be facing just from the pure purchase price accounting.

Which is non-cash but it does impact the margins by 30 basis points.

So, if you add that back, then you're getting close to 100 basis point improvement in the margins.

And I would say, Ajay, that there is -- we have three product businesses, they all operate in a similar margin space -- there is a little bit of, like in the last quarter, we've got nice leverage.

There was a little bit of a different mix between the product businesses, and then within the business.

But across the board we're seeing similar type margin improvement across all three of the business segments.

And I think, based on the continued productivity drive from the sourcing initiative, as well as the transformation of our functions, positions us well to continue to make the reinvestment that's required to be able to continue to support the growth while we're continuing to expand the margins -- which we have.

So, when we give the guidance on the margins, that includes pretty significant reinvestment also within the business over the next 12 months.

Got it.

That's very helpful, thank you.

Thanks, Ajay.

I'd like to turn the call over to George for some closing comments.

Okay, just to wrap up, I want to thank everyone again for joining our call this morning.

As you've heard I feel very good about our first year as a new Tyco.

The strategy that we've outlined, disciplined growth and continuous improvement, really does position us well to be able to achieve our three-year EPS growth target of 15%.

So on that, operator, that concludes our call.

Thank you.

This concludes today's conference.

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